Time Warner Cable Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Charter Communications, (CHTR)

Time Warner Cable (TWC) Q4 2013 Earnings Call January 30, 2014 8:00 AM ET


Tom Robey

Robert D. Marcus - Chairman, Chief Executive Officer and President

Arthur T. Minson - Chief Financial Officer and Executive Vice President

Dinesh C. Jain - Chief Operating Officer

Philip G. Meeks - Executive Vice President and Chief Operating Officer of Business Services


Benjamin Swinburne - Morgan Stanley, Research Division

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Laura A. Martin - Needham & Company, LLC, Research Division

Amy Yong - Macquarie Research

Bryan D. Kraft - Evercore Partners Inc., Research Division

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

Craig Moffett - MoffettNathanson LLC

Vijay A. Jayant - ISI Group Inc., Research Division


Hello, and welcome to the Time Warner Cable Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Mr. Tom Robey, Senior Vice President of Time Warner Cable, Investor Relations. Thank you. You may begin.

Tom Robey

Thanks, Candy, and good morning, everyone. Welcome to Time Warner Cable's 2013 fourth quarter and full year earnings conference call. This morning, we issued 2 press releases. One, detailing our 2013 fourth quarter and full year results and the other announcing an increase in our regular quarterly dividend.

We also had posted 3 presentations to our IR website. The first, detailing our 2013 fourth quarter and full year results; a second, outlining our 3-year plan; and a third, presenting a side-by-side comparison of Time Warner Cable and Charter Communications on some key metrics.

Before we begin, there are several items I need to cover. First, we refer to certain non-GAAP measures. Definitions and schedules setting out reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and trending schedules. Second, today's conference call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations and beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to various factors, which are discussed in detail in our SEC filings. Time Warner Cable is under no obligation to and, in fact, expressly disclaims any such obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Third, the quarterly growth rates disclosed in this conference call are on a year-over-year basis, unless otherwise noted as being sequential. And finally, today's press releases, trending schedules, presentation slides and related reconciliation schedules are available on our website at twc.com/investors.

With that covered, I'll thank you, and turn the call over to Rob. Rob?

Robert D. Marcus

Thanks, Tom, and good morning, everyone. Let me start my first call as Time Warner Cable's CEO by saying that I am honored and thrilled to lead this great company, the premier pure-play cable company in the United States. I couldn't be more enthusiastic about our future, and I look forward to building on our long tradition of delivering great experiences to our 15 million customers and maximizing value for our shareholders.

In a few moments, I'll spend some time on our customer-focused view of the world but, before I do, I want to reconfirm our long-standing commitment to you, our shareholders. Since our separation from Time Warner a little less than 5 years ago, Time Warner Cable has generated total shareholder returns of over 450%, far exceeding the indices. We have focused on building shareholder value, both through operations and through capital allocation. I want to make it very clear this morning that as CEO, I remain totally committed to maximizing shareholder value.

Clearly, today's call differs a bit from the typical earnings call. As all of you know, 17 days ago, Charter Communications made a public unsolicited bid to acquire our company for $132.50 per share. This was the third in a series of bids that our board has unanimously rejected as not in the best interest of our shareholders. As I said at the time and I'll say it again today, Charter's most recent bid to acquire Time Warner Cable substantially undervalues our company. The headline value of the Charter proposal equates to roughly 7x our forward adjusted OIBDA and is substantially below the multiples at which recent cable transactions have been completed.

Moreover, as we'll make clear this morning, the value offered by Charter falls well short of the value that we can create by executing on our current operating plan. In short, we have terrific assets, a world-class team and a well-architected operating plan. And we are confident in our ability to drive growth and create more value for our shareholders.

In light of the circumstances, we're going to do things a little bit differently this morning. You'll notice that, in addition to our normal earnings-related documents, our press release, Q4 presentation slides and trending schedules, this morning, we posted 2 other presentations. The first prevents -- presents a side-by-side comparison of where Time Warner Cable sits relative to Charter on some key metrics. Some of the comments made by Charter management implied that TWC is somehow behind Charter in terms of operating metrics and level of investment. This slide presentation should set the record straight. The facts are that, in almost every regard, whether that's residential, video and high-speed data penetration, number of HD channels offered, Wi-Fi hotspots, commercial buildings on our network, you name it, Time Warner Cable is better positioned than Charter, reflecting years of innovation and investment. And that certainly provides a very strong foundation for our go-forward operating plan.

That leads me to the second additional presentation that we made available this morning. That presentation lays out our 2014 to 2016 operating plan. We'll go through that plan in quite a bit of detail this morning. So here's the drill for the call. We'll start with a brief review of our fourth quarter and full year results, then I'd like to spend most of our time together walking you through our plans for 2014 and beyond. Dinni Jain, our new COO, will share some initial observations on the state of our business, our strategy and our operating plan. Then Phil Meeks, our COO of Business Services, will put some flesh on the growth plan for business services. And finally, Artie will pull it all together and walk you through the plan and provide guidance for 2014.

So let's start with our Q4 and full year results. We told you about our Q4 subscriber metrics at an Investor Conference a few weeks ago. And I think it's fair to say that the financial results we reported this morning came in a little ahead on almost every metric. Artie will get into the details, but I want to call out some of the highlights of the quarter.

First, and I'm very pleased about this, after a challenging year of sub-losses, we finished the year with really good momentum in our residential business. There's solid evidence that the foundational work we did throughout 2013 to fine-tune our offer strategy and to improve our retention capabilities are paying off. Customer relationships net adds improved sequentially in each month of the quarter and, in December, we're solidly higher than they were a year earlier. That positive momentum has continued into January of this year, so we're starting off the new year strongly.

Second, we had 2 noteworthy enhancements to our video product during the quarter. We accelerated the deployment of our first-generation, cloud-based guide, which features a graphically rich user interface and advanced search functionality. As of today, the guide is on close to 3 million set-top boxes. The feedback on the new UI has been phenomenal.

In addition, during the quarter, we further enhanced our TWC TV app, adding more content, both linear and VOD, and expanding the portfolio of platforms on which the app is available. The latest being the Kindle Fire. At this point, our IP video product is available on more platforms than any other MVPD app. And usage continues to grow. In December, our customers used the TWC TV app more than -- on more than 1 million IP devices.

Third, we continue to make progress in customer service. The various initiatives we've been implementing over the last year to improve customer care and technical operations, including 1-hour windows and better customer education, are yielding real improvements in customer satisfaction.

Fourth, we continue to deliver outstanding results in business services with year-over-year revenue growth of more than $100 million yet again in the fourth quarter. We're on track to reach at least $5 billion of annual business services revenue by 2018.

And last, but by no means least, we reached a milestone in capital returns. By the end of 2013, we had repurchased more than $7.5 billion of Time Warner Cable stock since the inception of our buyback program in 2010. That translates into a 25% reduction in shares outstanding over the last 3.25 years.

Before I turn it over to Artie, I just want to point out that this morning, we announced that our Board had approved an increase in our regular dividend to $3 per share on an annualized basis. That's a 15% increase. I know you've come to expect these annual increases, but I think it's important to point out that they don't just happen. They really are a reflection of our continued confidence in the business and our ability to generate free cash flow.

So with that as an overview, let me ask Artie to briefly cover the key takeaways from our fourth quarter 2013 results. Artie?

Arthur T. Minson

Thanks, Rob, and good morning, everyone. Process-wise, I'm going to limit my initial remarks to Q4 performance. I will then come back later in the call and walk you through our 3-year operating plan, including a detailed discussion of 2014 and related guidance.

Let me walk you through the key Q4 highlights. I will start with residential subscriber performance. As I noted in my remarks at an investor conference a few weeks ago, about halfway through the fourth quarter, our residential subscriber performance began to improve meaningfully, with HSD and phone net adds of 58,000 and 18,000 in December, respectively, and our video losses cut meaningfully compared to earlier in the quarter. I'm happy to report that this year-over-year trend improvement has accelerated into January.

On the residential side for January, we added approximately 25,000 customer relationships, which compares to a loss of 28,000 customer relationships in January 2013. The improved customer relationship trends translated into PSUs being up over 100,000 year-over-year for the month of January, making this the best January from a residential subscriber perspective in the last 5 years. I'm also confident that this momentum will continue.

So what has caused this momentum shift and why am I confident that it will continue? Put simply, the initiatives we invested in last year are beginning to take hold. As a result, we are seeing a combination of reduced churn from the meaningful improvements in our retention efforts and we're also seeing improved connect and migration trends as we continue to enhance our marketing efforts to both new and existing customers. We are currently executing on a number of very specific initiatives that I'm confident, as we move into 2014, will continue to improve our results. For example, the residential team is currently executing very specific plans to improve our yield and inbound sales and amongst in-market movers and, on the retention side, the team has renewed efforts on improving retention in our retail stores and non-paid performance. At the same time, we are also continuing to improve our performance in our dedicated retention centers.

The residential team is very focused on and making good progress toward the goal Rob outlined on the last earnings call to add 500,000 DSL subs over the next 18 months. Our Everyday Low Price light HSD product provides a sustainable way to attract the most price-sensitive DSL customers. On top of this, we've demonstrated our ability over time to upgrade customers to higher value, faster tiers. Reality is that while price is still the most meaningful variable in getting a DSL subscriber to change platforms, once we have a customer on our HSD platform, we have been very good at upselling them. For example, we're seeing an average of 20,000 upward migrations a month from our basic and light tiers of HSD to our faster tiers of HSD service.

These upward migrations lend credence to our view that today's light customer is tomorrow's Turbo customer. This is probably best reflected in our tier trends as subscribers to our Turbo and above tiers are now above 30% of the base, up from 24% of the base a year ago.

On the video side, we are maniacally focused on improving our performance, and we saw improved trends in the latter part of Q4, which has continued into Q1. Our goal is to get back to video subscriber growth and we're very focused on achieving that goal.

Let me spend a minute addressing the quality of the subscribers we are bringing in on the connect side. I'm very pleased with our results here. We're still seeing strong monthly recurring revenue performance from new connects. MRR for new connect was still up in Q4 as compared to last year, a trend we have seen for all of 2013. So we're seeing a balance of nice volume improvements while maintaining healthy growth in ARPU. So net-net, I'm very pleased with our subscriber trends. Those of you who know me well know that I'm a straight shooter, so trust that I recognize that last year's residential subscriber performance was dismal. Yes, there were some external factors that impacted us, but that doesn't change the result. However, I want you to know that we have made significant progress in turning the ship on the subscriber side and we are entering the year with a renewed focus and great operating momentum.

Let me spend a few minutes on business services, which continues to grow rapidly with another quarter of revenue growth of over $100 million. We continue to invest organically in the business as we added over 16,000 buildings to our network in Q4, and these buildings increased our annual revenue opportunity by approximately $225 million. We also closed DukeNet at the end of the year, which looks to be a great acquisition for us. So we're entering the year with business services at over $2.5 billion annual run rate, and Phil is going to join the call today to talk a little bit about our strategy and operating plan to exceed $5 billion of annual business services revenue by 2018.

Let me spend a few minutes on the Q4 P&L before I turn it back to Rob. Compared to consensus, our financial results came in better on revenue and adjusted OIBDA as recent subscriber trends and ARPU benefited revenue and we continue to be vigilant on expenses. We're also better than expectations on free cash flow and adjusted EPS.

Margins were essentially flattish year-over-year, despite an approximate $50 million reduction in political revenue and increase in sales and marketing as we continue to invest in our business services sales force and an 8% increase in programming costs per basic video sub, which came in better than expectations.

Offsetting these expense increases were the ongoing reduction in our voice costs, as voice costs were down approximately $45 million year-over-year as we continue the migration to our own platform. We are over 95% complete with our phone migration and expect to complete it in Q1. The rest of the expense improvement was very tight expense management, which you should expect more. Over the last 3 quarters, we have reduced year-over-year expense growth from north of 3% to under 2%.

As I have mentioned, we restructured a number of areas in 2013. In Q4 alone, we eliminated approximately 1,000 noncustomer-facing positions, which should save us approximately $75 million a year. My expectation is we will continue to identify areas that can be more efficient in 2014. We know our costs will increase this year in a few areas, such as programming and business services, but I feel very good about our long-term margin prospects, and I'm personally very focused on getting us back to margin expansion. I'll talk a little bit more about this later.

Finally, you saw we did complete the $2.5 billion buyback that we guided to for the full year. I can tell you we're in the market at the highest levels of stock traded in Q4. As noted, I'll come back to talk about our 3-year plan, with specifics around 2014, a little bit later in the call. With that, let me turn it back over to Rob.

Robert D. Marcus

Thanks, Artie. I'm really encouraged by the progress we made in Q4 and the significantly better trends we're driving as we enter 2014. Of course, there's much more work to do, which leads me to my thoughts on the future of our company.

Given the circumstances, we thought it was important to spend some time this morning on Time Warner Cable's 3-year operating plan. A plan that we worked -- we've been working on for quite some time and that we presented to our Board back in December as part of our annual budget process.

Before we turn to the plan itself, though, I'd like to start with some broad principles. Our success going forward is dependent on some very basic elements: great people, a winning culture, a solid operating plan and a relentless focus on execution.

As a result, I've spent the time, leading up to my becoming CEO, focusing on these foundational elements. I firmly believe that we are only as good as our people; that means the right people in the right roles. Early in 2013, we reorganized our management structure to better align our organization around our customers, facilitate standardized business practices, streamline decision-making, enhance efficiency and drive accountability.

Organizational change is never easy, but the really hard work is now behind us, and we're seeing the benefits of the new, more centralized structure. Starting in May, we began to fill in key gaps within our leadership team with world-class talent from outside the company. First, adding Phil Meeks to lead our Business Services team, then recruiting Artie Minson as CFO and, most recently, bringing in Dinni Jain as Chief Operating Officer.

Let me say just a couple of words about Dinni, who I believe is well known to many of you. I couldn't be more pleased to have him here. He's been in the business for more than 20 years, has a stellar track record and is very much in sync with my strategic vision for Time Warner Cable. With Phil, Artie and Dinni on board, I'd argue that our leadership team is as talented and experienced as any team in the industry.

Let me spend a minute on culture. I am intent on building a customer-centric, performance-oriented, values-based culture at Time Warner Cable. A culture in which we put customers first, in which we set challenging goals that hold ourselves accountable, in which we are passionate about winning, in which we do the right thing. This is not rocket science, but I believe that all large companies need to refocus on the fundamentals every so often, and I'm convinced that having the right culture is essential to our future success.

Consistent with my vision of creating a performance-oriented culture, we have fundamentally changed our incentive compensation structure to ensure that every employee has specific and measurable goals directly related to how he or she will contribute to achieving our plan. And we will hold all of our employees, including me, accountable for reaching these goals.

As we laid out our 3-year operating plan, I thought it was critical to identify several key operating and financial priorities for our new leadership team. Chief among our priorities is to significantly improve reliability, quality and customer service. These attributes drive customer satisfaction, and customer satisfaction is critical to subscriber growth.

Also among my top priorities is to distinguish our products in ways that really matter to customers. We can't chase every shiny new object. We need to focus on product enhancements that move the dial like better navigation, even better TWC TV apps, ubiquitous Wi-Fi and ever-faster HSD speeds and, of course, we have to continue to invest with an eye to the future. This is not a sprint. We want to set ourselves up for future growth, whether that means investing to fuel continued growth in business services, to accommodate future increases in traffic on our network, or to enable promising new revenue streams like IntelligentHome and cloud computing. These priorities drive our plan for the next 3 years.

The first element of the plan is to revitalize residential services by focusing on 3 company-wide initiatives. First, we build on the success of the company's recent subscriber acquisition and retention efforts to drive much stronger and more stable subscriber trends. I like what I'm seeing, but there's plenty of room to drive more connects and fewer disconnects.

Second, we significantly improve reliability and customer service. We're already hard at work remediating those portions of the access plant that don't meet our new performance standards. Simply put, this should make our products work better: better pictures, more consistent Internet speeds, fewer customer issues. In addition, we're going to make service a differentiator. We'll continue to make it easier to interact with us, eliminate unnecessary truck rolls by solving more problems over the phone or online, and really emphasize first-call resolution. I recognize that this may be viewed as a long putt, but the fact is that no one in the communication services space gets great marks for service. We intend to be the first.

And third, we continue to roll out our next-generation video products. We'll expand availability of our cloud-based guide to 6 million set-tops by year-end and begin deployment of our even more advanced navigator on new 6 tuner DVRs. We will expand our VOD capacity to 75,000 hours nationwide. We're also planning to make our industry-leading IP apps even better on still more platforms. This much more competitive video product is key to our effort to meaningfully improve video subscriber performance.

We'll build on top of these company-wide initiatives with the launch of TWC Max this year in New York City and Los Angeles, our 2 largest cities. Essentially, TWC Max is a reinvention of TWC. TWC Max means much faster Internet speeds. We'll more than triple the speeds enjoyed by our standard tier customers to 50 megabits per second, Turbo customers will get speeds of 100 megabits per second, 5x their current speeds, and we'll take Ultimate customers all the way up to 300 Meg. Those ultrafast speeds, coupled with even better Wi-Fi both inside and outside the home, really mark a quantum leap for our HSD offerings. I think our customers are going to be blown away.

TWC Max also means more reliable, better quality video, all digital signals and better, newer HD set-top boxes. And TWC Max means a new brand for Time Warner Cable services, which will signify all the great new elements of what it means to be a Time Warner Cable customer. Stay tuned for the big reveal of the new name later this year, as we make more progress toward our launch date.

After we complete Los Angeles and New York this year, we will transform most of the rest of our footprint with TWC Max in 2015 and 2016. We fully expect that our plans for the residential business will drive real subscriber growth. You should know that I've challenged the team to add 1 million residential customer relationships over the next 3 years. I'm confident that we can do it and I'm also confident that we'll start with positive residential customer relationship net adds this year.

The plan's second element is business services. We will continue to invest in business services as we execute against our plan to make that at least a $5 billion business by 2018. Phil is going to review business services in more detail, so I won't steal any of his thunder.

And the third element is cost management. Artie will hit this in a moment, but we'll continue to pursue operating efficiencies in order to offset continuing programming cost pressure.

I will note that the plan contemplates that we will invest meaningful more -- meaningfully more capital in the business than we have over the last several years, both to enhance the residential customer experience and to grow the serviceable opportunity for business services.

To summarize the plan, we're planning for top line growth of 4% to 5% and adjusted OIBDA growth of 5% to 6% this year, with both revenue and OIBDA growth accelerating by the end of the plan period in 2016.

I will close by noting that we just held our senior -- our Annual Senior Management Meeting at our New York City headquarters. There was a gathering of our 150 top leaders to kick off the new year and align around our priorities and our operating plan. It was an energizing and inspiring couple of days. We are geared up to manage this company for the long haul. We've got the right assets, a talented, passionate, motivated team aligned around a thoughtful plan and we're already executing better than we have before.

With that, I'll turn it over to Dinni.

Dinesh C. Jain

Thanks, Rob, and good morning, everyone. Though my official start date was only a couple of weeks ago, my involvement with the team here began shortly after I was announced in early December. Since then, I've spent a lot of time getting to know the company. And overall, what I've discovered has pleasantly surprised me.

My primary objective today is to review some of what I've learned and why it's changed my sense of the opportunity here. In order to do that well, let me start with a bit of background.

I've been in the cable industry for 20 years, splitting that time almost evenly between 2 companies. A company formerly called NTL based in the U.K. and Insight Communications here in the U.S. I was part of NTL from day one, as the first employee in a company which eventually grew to almost 30,000 employees throughout the U.K. and Europe. Our sales and marketing playbook at NTL allowed us to grow to over 50% market share in our early markets, whereas our peers rarely even got to 30%.

And with intensive focus on driving customer satisfaction through reducing error rates and call volume, we also created a new standard for low churn in an industry in which churn hovered around 3% per month. For more than 4 years, our churn rates rarely broke 1%.

For an almost 7-year period, our growth was spectacular, fueled primarily by our abilities in operations. During that time, we consolidated much of the U.K. cable industry. I led the operational due diligence on 9 of the companies we acquired and I help integrate them after the deal was closed.

Those experiences taught me how to quickly diagnose issues within cable companies and, more importantly, how to fix them. Over and over again, we hear the same things from the companies we acquire, "Yes, we get what you're doing, but it just won't work here." And yet over and over again, it always did. That's the strength of our playbook. Of course, unrelated to operations, the NTL story didn't end well because the company overreached, increasing its leverage too much and completely diluting its management team.

In 2003, I became COO at Insights and, along with a few of my colleagues from NTL, we set out to replicate our operational success. And we did. Using the NTL playbook, together with best practices from U.S. cable companies, we increased Insights' overall customer satisfaction by 39%, distancing ourselves from our peer group in the U.S. cable industry. And we brought down our internal error rates considerably as well, thereby increasing our operating margins and significantly reducing churn. Most of all, we proved it was possible to grow video customers. For 4 years, from 2006 to 2009, we grew our video base between 2% and 5% a year in an industry which was consistently losing customers. Indeed, even after signing a deal to sell Insight to TWC, we grew our video base almost 2% in the 12 months before it closed and at a time where no other cable operator was growing video customers.

And that brings me to Time Warner Cable. Framing my observations on TWC to have credibility, I must now cop to the fact that I've never been a big fan of the larger cable companies in the U.S. The larger cable companies, including TWC, seemed to lack the competitive spirit, the passion for winning and the willingness to adopt new ways of doing business that were so critical to our success at both NTL and Insight. As a result, it took Rob quite a while to convince me that he was serious about changing the culture here and that I could make a meaningful contribution.

What ultimately persuaded me was the alignment I saw in everyone with whom I met. Every conversation focused on becoming more customer-centric. Every conversation accepted what needed to change. And more and more, I saw that many of the changes were already well underway.

This is not the company I thought I knew. It's neither broken nor dysfunctional, far from it. This is a new Time Warner Cable, one with considerable drive and momentum, which they've been creating for many months now. This is also a company which has been almost entirely rebuilt. To the outside world, TWC seemed more like a loose confederation of cable companies rather than a cohesive whole. Over the last couple of years, however, this team has completely refashioned TWC into a highly centralized company, standardizing many critical business processes.

This was a bold move, entailing many risks. Indeed, as I've learned, these changes did cause considerable disruption and were a meaningful part of the disappointing operational performance in the recent past.

But from my perspective today, that pain is now stunt cost [ph]. What I'm inheriting is a platform in which most of the hard and risky work has already been completed. It took us several years to get to a similar point of standardization at Insight and, to be honest, we never fully achieved this speed at NTL.

At TWC, we're now in a position to take advantage of our scale because of how things have been standardized. In particular, the technology group, the heart of all cable companies, has been remade from top to bottom and organized in a far more delivery-oriented manner. This is now a highly motivated and capable team. The residential business, too, has been completely redesigned and augmented.

Most impressive to me is the recently deployed retention group, which is already showing very promising results. Newly created teams to drive customer loyalty also show promise. Plus, the residential group had a determined focus on all the right areas within customer service, in particular, on reducing call volume and truck rolls.

Of course, there's much work to be done. And here are a few things that I'm thinking about. While we're working on many of the right things, we need to minimize the friendly fire and let the changes that we're working on in residential and business services take root and flourish. Although we're trending in the right direction, I want to study our connect machine and further improve its performance. And while the process to centralize is now largely behind us, we must leverage the new organization and drive it for greater speed and execution, particularly for getting new products to market.

And lastly, everywhere I go, I see ways in which our products and services are better than our competitors, but I think we need to tell that story better. This company has a lot to brag about. And these are just my observation from the residential line of business. The business services group is just as impressive as any as I've -- that I've been a part of. And I'll be turning it over to Phil to discuss that shortly.

Overall, I came to TWC thinking I was facing a rather difficult turnaround. To my delight, I'm finding something quite different. I'm finding a company that has already begun the major changes necessary, I find a senior management team with whom I am philosophically aligned and I find an opportunity which I can draw on my experience to build a world-class, customer-centric operation. And that makes me very excited about our future.

With that, let me turn it over to Phil.

Philip G. Meeks

Thanks, Dinni, and good morning, everyone. As Rob mentioned earlier on the call, I joined TWC 8 months ago after spending the past 5 years running Cox Business and, prior to that, 18 years at MCI. I share this with you because, after spending virtually my entire career in the commercial telecom industry, I have a strong appreciation for the market opportunity available to us.

As you may recall, MCI had a reputation for speed and aggressiveness in the marketplace. As a result of that experience, I have a high propensity for moving quickly and will not waste a single day that might help us realize our potential. It is important that I instill a deeper sense of urgency and a deeper culture of action that moves at greater velocity, which I define as speed plus focus.

Business services is a high-growth line of business with a very compelling value proposition. We offer flexible and affordable products, delivered by dependable local teams via our reliable next-generation, fiber-rich network and data centers. Without question, a network with higher reliability and availability is critical to the businesses we serve and we make significant investments to properly scale and fortify the network ahead of customer demand.

We offer best-in-class products, bundled to offer value to our business customers. These products span a wide range, including Internet, data, voice, video and cloud services, with solutions and pricing that is appropriately targeted for the segments we serve. Best-in-class products, network and reach through our local people and presence, combined with a winning culture, is how we will continue to succeed.

My objectives for Time Warner Cable business services are very clear: exceed $5 billion in annual revenue by 2018 while simultaneously building the scale that sets the stage for many more years of profitable revenue growth beyond 2018.

We have a 3-pronged strategic plan to accomplish this. First, we will scale our successful business to serving small businesses. In this segment, we will continue to expand our network reach, deliver best-in-class reliability and focus on delivering simple product bundles that are specifically targeted for small businesses.

Second, we will replicate that success with mid-market and larger businesses by providing a compelling portfolio of products and solutions designed to meet their needs. Our next-generation Internet solutions, slated to launch later this year; our PRI and SIP trunking services; the cloud computing and managed hosting services we acquired with NaviSite, are all positioned as very well for an even greater success with these larger companies.

And third, we will continue to grow our carrier services business. We hit a milestone in 2013 when we connected to our 12,000th cell tower. Including DukeNet, we are now connected to 14,000 towers. In addition to cell tower backhaul though, we intend to capitalize on the significant opportunity that we have to provide wholesale last-mile access to the enterprise marketplace.

As we execute on our strategic plan, we are operating from a position of strength. At year-end 2013, we had over 600,000 business customers and our network reached more than 850,000 buildings. We connected 55,000 buildings just last year, which increased our serviceable opportunity by an estimated $900 million.

In addition, the DukeNet acquisition significantly increases our network infrastructure by adding over 8,700 route miles to our fiber optic network. To be sure, building out our network to reach more business customers is the capital-intensive proposition, but we are very diligent in measuring and managing our returns on every investment. We are continually focused on improving our capital efficiencies by deploying architectural designs and advanced technologies, which will allow us to strategically lower the cost to connect to our customers.

We also are focused like a laser on harvesting the market opportunities that we expand to. Let me share a snapshot of one example. In the second quarter of 2012, we made an investment of $10 million to proactively connect 801 new buildings to our network. In the 18 months that followed, we've harvested more than 2,500 new business customers in those buildings that, when combined, represent almost $750,000 in high-margin monthly recurring revenue. The good news is this is a repeatable process, and we will continue to build and harvest customers as we aggressively expand our network reach.

We're also investing on our people. Over the past 3 years, we can more than double the size of our direct sales organization. We are currently -- we are supplementing those [indiscernible] reps with sales support, technical support and customer care resources to ensure that as we grow, we continue to provide a premium customer experience.

In order to harness all of our opportunities and support growth prior to efforts for our people, a common organizational structure and standard processes are required. In Q4, we restructured our line of business to a centrally managed organization in order to create more consistency in our approach, while preserving localism where localism matters. Our current focus is on creating a standard operating model, so that the work flows to the business the same way everywhere. This will allow us to drive deeper automation, achieve greater scale and deliver enhanced customer experience.

In conclusion, I'm confident that within the business services' line of business, we have the people, the culture, the plan and the commitment to execution that will allow us to achieve our aggressive growth goals. Being a business unit dedicated to commercial customers means we can deliver what we promise to our business customers, as well as deliver on our commitment to the broader company.

I have full confidence in my team, and I will achieve our 2014 financial targets and deliver on our longer-term commitment to exceed $5 billion in annual revenues by 2018, as well as set us up for continued profitable growth in the years ahead.

With that, I'll turn the call back over to Artie.

Arthur T. Minson

Thanks, Phil. Let me start by spending a few minutes on our most recent 3-year business planning process, which we began over the summer. We completed the process about a month ago with the presentation that we share with our Board of Directors, the details of which are included in the TWC operational and financial plan slides we posted to our website this morning.

I'm not going to go slide by slide, but if you -- as you have heard this morning, our key operating initiatives include the following: one, investing to improve the overall residential customer experience; two, continuing to fund growth investments in business services; and three, continuing to pursue operating efficiencies in order to offset specific cost pressures.

I believe the plan I will share with you today accomplishes all 3 of those operating initiatives while, at the same time, providing for strong growth over the plan period in revenue, adjusted OIBDA and free cash flow and continue the dividend growth and a continued healthy stock buyback program. I believe this will drive meaningful stock appreciation, all while maintaining a solid investment-grade rating.

Let me start here by saying there isn't a patent on how to run a cable company or any company well. It's really all about a relentless focus on execution, as you continually invest to improve your products and services, which leads to happy and loyal customers.

So as we entered the 3-year planning process, we knew there were areas where we wanted to invest to achieve our long-term operating goals. I will start with our network as it is our greatest physical asset. Over the next 3 years, we will invest to harden the plan to improve overall reliability and quality of service. As Rob noted, we will also invest meaningfully in the rollout of TWC Max. Most significantly, that will take the form of CPE, that's D-to-As, new set-top boxes, modems and advanced wireless gateways. And on the business services side, we will invest approximately $500 million a year to connect additional buildings and cell towers to our network to add about $1.3 billion a year in serviceable revenue opportunity.

To achieve all this, we plan to increase total capital spending to $3.7 billion to $3.8 billion a year in each of the next 3 years and to invest an incremental $100 million a year in operating expense in proactive maintenance of the network and Max rollout activities.

Approximately 50% of the increase in capital spending relates to CPE. Thanks, in part, to the new de minimis regulations, half of our additional spend on CPE is eligible for a media [ph] expensing from a tax perspective, which helps from a key -- free cash flow perspective.

We expect these investments to yield a number of operational improvements on the residential side of the business, including better and more reliable products and services, reduced call volumes and truck rolls, increased customer satisfaction, lower churn, better connect volumes and greater upward product migrations, all of which should lead to significantly better subscriber trends, which leads to better overall financial results.

As I indicated in my opening remarks on Q4, we saw improvements on the connect and disconnect side from the offer strategy and retention efforts we implemented during 2013. As we accelerate investments to improve the customer experience, we expect a compounding effect on future connect and retention trends.

Looking only at net adds mask what is going on with connects and disconnects. Between customer relationship connects and disconnects, we currently do about 8 million transactions combined a year. So 5% changes in either connects or disconnects has a huge impact on the net add number. In 2013, we were on the bad end of that equation but, going forward, I expect very meaningful improvements in the net add number, which mathematically happens even with modest improvements in connects and disconnects.

So to summarize, over the next 3 years, we will build on the foundation we laid in 2013 and make significant investments to improve the overall residential customer experience and expand the number of business customers we can serve. Those efforts should drive ongoing strong growth in business services and a revitalized residential operation.

So given this level of investment, I am sure you are asking what this all looks like financially? Our plan contemplates that over the next 3 years, we will add approximately $3.5 billion of annual revenue and approximately $1.4 billion of annual adjusted OIBDA for an approximate 40% conversion of incremental revenue into adjusted OIBDA which, I believe, is very achievable as we reap the benefits of a mix shift toward broadband on both the residential and business side. That would translate to 2016 total company revenue of approximately $25.7 billion, with approximately $9.4 billion of adjusted OIBDA, with both revenue and OIBDA growth accelerating at the end of the plan period.

In 2016, we expect business services will be growing at just below 20% a year despite a meaningful higher revenue base, as we continue to reap the benefits of the investments we are making in this area.

And on the residential side, we expect residential revenue growth to accelerate from 1% growth in 2014 to approximately 4% growth by 2016. We are also focused on flipping the mix of residential revenue growth, in other words, getting much more of our growth from volume as opposed to rate.

On the cost side, programming and content costs will continue to be an issue over the plan period and we will continue to make ongoing investments in business services. Excluding programming content and business services, all other expenses grow single-digit over the plan aided, in part, by lower residential voice costs.

Given our expectation for accelerated growth in adjusted OIBDA and free cash flow, we expect to create significant balance sheet capacity over the next 3 years. Our current expectation is that over the period, we can generate north of $12 billion of incremental financial capacity, approximately 2/3 from free cash flow and approximately 1/3 from leverageable adjusted OIBDA growth. This financial capacity will cover our dividends as well as leave ample room for aggressive buybacks and opportunistic M&A.

So let me rewind a bit and put a finer point on what we expect for 2014. In terms of guidance, as Rob noted, our current expectation is for reported revenue growth in the 4% to 5% range and adjusted OIBDA growth in the 5% to 6% range, so we'll have margin expansion.

Keep in mind that DukeNet adds about 0.5 point of revenue growth and about 0.75 point of adjusted OIBDA growth.

On the revenue and expense side, there are a few items to note in 2014. We expect approximately $100 million in political revenue and we also expect to have north of $175 million reduction in our phone costs as we complete our Go It Alone migration.

Offsetting those items will be continued increases in programming costs. And I know we have a reputation for being conservative here, but my best estimate at this point is for low double-digit growth in programming costs per sub. In addition, we will have start-up losses in connection with launching the Dodgers network. And as I noted, we expect to incur approximately $100 million in costs related to the rollout of TWC Max and our overall plan-hardening activities.

I noted the $500 million increase in CapEx to $3.7 billion, and we will fund that through increases in adjusted OIBDA, slightly lower cash interest and slightly lower cash taxes due, in part, to the new de minimis tax rates.

So net-net, we expect 2014 free cash flow to be flattish as compared to 2013 at approximately $2.6 billion. To be clear, there would be free cash flow upside in the event bonus depreciation is extended. In 2014, we expect our spending on share repurchase to be in the same zone as in 2013 at approximately $2.5 billion.

From a growth standpoint, we expect 2014 revenue and adjusted OIBDA growth to be back-end loaded due, in part, to the fact that political advertising will be back-end loaded.

So before I finish, I want to answer 2 questions, why did I come back to TWC and what do I think about the plan? There were a number of reasons I came back to TWC, and one of my main considerations was that, in TWC, I saw a company with great assets that I felt were not fully appreciated from a valuation standpoint and, as a result, I saw an opportunity to create a lot of shareholder value.

I saw our business services unit as our end-jewel. This high-growth, high-margin business was hidden within our traditional cable trading multiple, and I saw a great stock upside from this opportunity alone. I also saw our residential business that looked challenged on the outside but was, in fact, much healthier than what the public was seeing and on the cusp of a meaningful operational turnaround.

Why did I think that? Because what I saw was a company that was making its way to a pricing transition that was reducing connect volume to more normalized levels. At the same time, disconnects were trending up because of increased promotional pricing in 2012. So put simply, we had tough comps on both the connect and disconnect side in 2013.

As I looked into 2014 and beyond, however, I saw a meaningful customer and unit net add trend improvements as connect stabilized and eventually grew due to ongoing product improvements, and disconnects were reduced due to our improved retention efforts.

I give this as background because I'm, obviously, not the only one who saw this opportunity. The folks at Charter and Liberty are very smart guys, and they think they see a chance to force a trade before the public realizes what we can achieve with our stand-alone plan. So hopefully, after today, you feel a lot more comfortable about our go-forward plan and the intrinsic value of this company.

So let me tell you in closing that I feel great about our operational trends and that gives me a high degree of confidence in our 3-year plan. Those of you who know me well know that I'm a big believer in playing to win and living up to my commitments. And to be clear, I'm here to win and I'm here to work with the rest of our 52,000 employees to deliver on this plan.

When I joined AOL, no one, and I mean no one, believed we could return it to revenue and adjusted OIBDA growth within 3 years. And through focus and execution, we did. And we made a whole lot of money for shareholders in the process. I plan on doing the same here.

And let me now turn it back over to Tom for the Q&A portion of the call.

Tom Robey

Thanks, Artie. Candy, we're ready to begin the Q&A portion of the conference call. [Operator Instructions].

Question-and-Answer Session


Our first question is from Ben Swinburne, Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I'll limit myself to one, focus on the improvement that you expect on the residential side. Rob, you mentioned more volume than rate. So I wanted to just ask if you could sort of dive into that a little bit more? One of the ways that the industry has been driving better revenue growth is through higher ARPU, particularly putting more equipment in the home and attaching revenue to it. You noted that in some of your presentations around additional set-tops, additional D-to-As. Is that something that you think doesn't make sense going forward for the company? Do you think that's a source of upside to your plan? Maybe speak about how you look at the revenue growth mix over the next 3 years and the potential around pricing?

Robert D. Marcus

Sure, Ben. I'll start, and I'll ask Artie to chime in. Look, we've had -- we've actually had tremendous success over the course of 2013 in driving monthly recurring revenue from our residential customers. In particular, we've had significant increases in monthly recurring revenue per new connect customer. So I think we've done quite well on that front. And that continues to be a focus. Quality of subs and revenue generated by individual subs will always be important. What I've said repeatedly is that we like to see the source of our revenue growth become more balanced. And we haven't generated the kind of volumes that we ideally like to see. So what we're talking about today is a refocusing on generating volumes through better retention, which I think we're well on our way to doing, and amping up the connect machine. So I don't want to suggest that it's an either/or, but I think as the recent past, we've been very dependent upon rate and incremental revenue per customer, and I'd like to balance that out with greater volume. Artie, you want to chime in?

Arthur T. Minson

Sure. Ben, what I would add about the plan is, obviously, on its face, it's more of a market share plan. And Rob talked about the growth we're expecting, customer relationships. But let me talk about places in the plan that I think are conservative because I'm a big believer in having multiple paths to achieve your overall operating and financial plan. So while we have, obviously, meaningful aspirations in growing customer relationships, I would argue that the PSUs per customer relationship we have in the plan are pretty conservative. And we're also pretty conservative in the plan on the rate side because it's a market share-based plan. I also think expenses, and Tom handed me a note that said that I may have missed a key word in my script when I noted that non-programming, non-business service expenses would grow. It should have said low single-digits; I think I just said single digits. And I will tell you, expenses are going to be a big focus for us in the plan. To put a finer point on expenses, non-programming, non-business services are going to grow in about the 2% range over the plan period. Now you -- we pick up about 1 point because of the reduction in telephony costs so, absent that, it's 3% growth. And you saw this quarter that we continue to reduce year-over-year growth and operating expenses, so that will be a place that we'll be particularly focused on through the plan period and I'd hope to do, frankly, a little bit better than that. In terms of revenue from going all digital and rolling out some of the new devices, we do have some of that in the plan. But I would -- it's pretty de minimis.


Next question, Jessica Reif Cohen, Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Here's my long one question. So on the cloud-based guide, you gave guidance of $6 million by year-end '14, which is just about double what you had at the end of fourth quarter. I'm just wondering why -- I think you started rolling these out in Q4, can you do better? Is there is a gating factor? And what is the expected impact from these guides because they're so much better than anything that we've seen as customers in the past. So if you could just elaborate on what you expect or what you're seeing in terms of churn and usage and how it drives revenue? And my second part of my first question is what are you seeing in terms of overbuild activity in 2013 and expectations for '14? I know Comcast had mentioned that there were 2.3 million new homes built by telcos in 2013. I'm just -- if you could elaborate on that, that would be great.

Robert D. Marcus

Sure. So first, with the cloud-based guide, Jessica, it's -- this is not a pacing issue. The guide works on -- potentially could work on roughly 6 million of our set-top boxes, so we will be fully rolled out. It's not that we can't do it faster. That's the total number of boxes that the new cloud-based guide can work on. One of the requirements is that, essentially, they have a cable modem in them and some of the older boxes just don't have that cable capability to deliver the metadata from the cloud. So actually, I expect to be rolled out to the full 6 million boxes relatively early in the new year. In terms of impact, a little too early to tell. We really haven't heavily marketed the new guide and let people -- let customers know about it. Again, part of what we're doing here is trying to make sure that we have a more fulsome, complete rollout before we make a lot of noise about it. But I totally agree with you. It is light-years ahead of anything we've delivered before. In particular, the VOD portal, with the terrific box art and the advanced search capability, are head and shoulders above the prior experience. And ultimately, what we expect is that it will just increase the overall attractiveness of our video offering and also should allow for greater discoverability of our VOD offerings, and I would hope an uptick in transactional VOD. But it's a little early to tell on both of those, although I'm confident that that's where we're headed. In terms of overbuild activity, if you look at U-verse, I think we're now at roughly 28% overbuild of our entire footprint and, on the FiOS side, about 13%. The U-verse growth is a little bit faster, FiOS has been fairly static in that 11%, 12%, 13% range for some time. It's very hard to judge how many of the FiOS homes that are built to but not yet marketed are in our footprint. I suspect there are some in New York City, although Staten Island is virtually completely overbuilt at this point, so it would be Manhattan primarily where additional overbuild would occur. We've assumed kind of current course for the next year and then it flattens out.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Rob, just follow up on the VOD, on the new guides. Are you planning to offer electronic sell-through because we've heard terrific feedback from the studios? And what does it do? What do the new guides do for targeted advertising?

Robert D. Marcus

Yes. So on electronic sell-through, certainly, some of our peers have embarked on that. And it sounds like a very interesting opportunity, which we will certainly be evaluating. It's -- we can do it on our new platforms. So it's something we're definitely thinking about. In terms of targeted advertising, look, the primary developments we've made advances on in the targeted advertising realm actually are independent of the new guide, and the key area is our ability to dynamically insert ads in VOD content. And we've made great strides in that, cooperating with our fellow partners in Canoe. And it's a long time coming, but it's now a reality. And we have an increasing number of programmers who are actually dynamically inserting ads. It's generating incremental ad dollars for them, but it's also encouraging them to make more content available on VOD, which makes our platform better. So I think it's good all the way around.


Next question, Richard Greenfield, BTIG.

Richard Greenfield - BTIG, LLC, Research Division

When you think about the strategic plan, it seems like a big chunk of it for 2014 is the increase in CapEx to accelerate your growth, both in subscribers as well as retaining current subscribers. And just wondering, how did you come up with that level of acceleration? It seems like a lot of what Rutledge, Moffat and Malone want is a dramatically faster acceleration in CapEx to drive even faster EBITDA growth, more likely like in '15 or '16 from that '14 spend. So I guess it's a long-winded way of saying why did you not pick $4.7 billion of CapEx or $5.7 billion of CapEx this year to do some of this even faster than you're currently doing it? Would love to just hear how you think about that.

Robert D. Marcus

Yes. Let me start and, again, Artie will jump in. I think it's important to level set here. The plan that some of our other cable peers are dealing with is fundamentally different from our -- the state of our plan today. We actually invested lots of capital over a multi-year period, some number of years ago, to implement switched digital video, which actually gave us the ability to deliver industry-leading numbers of HD channels. So our video product really is in the sense that we long ago freed up bandwidth to deliver HD channels, kind of state-of-the-art. The urgency of moving to All Digital, which is the primary capital spend that I think Charter is advocating, it just plays a different role for us. Over time, going all digital makes sense because freeing up spectrum that's currently utilized for the delivery of analog video, so that we can use it for faster HD, HSD speeds, makes a lot of sense. But it's not the same level of urgency in that we already have a competitive HSD product, which is only going to get better. But on the video side, we're well along. Then there are just the practical limitations to how much capital you can spend in any given year. Sure, we could have chosen a higher number, but you need actual human beings to implement the work and you want to get it right. Our primary objective in rolling out TWC Max is to deliver a better customer experience and we wanted to do it in a way that concentrated our efforts in a given city so that the experience actually was different as opposed to kind of spreading out our efforts across the footprint. So the theory here is focus, get it right in New York City and L.A. and then we'll move on from there. And frankly, as we learn, it may be the case that we feel like we can accelerate the rollout in the rest of the footprint. Artie, you want to comment?

Arthur T. Minson

Yes. The only thing I would add, Rich, is financially, our plan, unlike some others, is not based on spending a lot of upfront money on putting a 2-way set-top box on every outlet and then driving revenue and OIBDA growth off of those revenue streams. It's, actually, as we've laid out today, much more of a market share plan. So I think it very much ties into our overall operating strategy. And I think that's really where we started from. We started from an operating plan and the financial plan was an output from that. And so I feel very good about where we stand with that.

Richard Greenfield - BTIG, LLC, Research Division

And then just a follow-up because I think this is important. In terms of setting lofty goals, how is your compensation tied to hitting the targets you put in for both '14 and '16, meaning if you fail to reach these, does it directly impact everyone on those conference calls on your end's compensation if you don't live up to '14 and '16 targets?

Robert D. Marcus

Yes. Well, Rich, we have a very variable heavy compensation structure, both in the form of variable cash bonuses on an annual basis and also the proportion of our total compensation that is in equity which, I think, is reflective of our ability to hit these goals. What's unique about our compensation structure this year is that it's not exclusively based on hitting financial targets, which generally has been in the past, it is based on financial targets, yes. So in other words, we have to hit these '14 numbers to get paid. But it also has components that are subscriber metrics, customer performance, customer satisfaction metrics, rollout of the Max program base metrics, so there are an awful lot of component parts here that we must deliver on in order to earn our variable compensation.

Arthur T. Minson

And Rich, the only thing I would add, on a personal level, is I actually have a reputation for being a pretty conservative budgeter. People around here have heard me say often, in all my time as CFO, "I've never missed the budget." And I feel pretty good about where we stand right now.


Next question is Laura Martin of Needham & Company.

Laura A. Martin - Needham & Company, LLC, Research Division

A couple -- I want to focus on cost, Artie, a little bit here. So Artie, at AOL, when you were the CFO, you doubled the corporate margins and then, when they gave you the COO title, you actually really, really slowed the demise of the subscription business. So my question to you, one of the things you did there really well is you guys were investing in the business, that you really cut costs to help pay for that. So I'm interested -- thanks for the guidance by the way on many of the line items -- but on programming costs, one of the really biggest negatives for your sub growth was that Time Warner/CBS brouhaha. And you just gave us guidance on programming costs, up low single-digits. I guess my question is can you really achieve those kind of low growth numbers in the programming side? And are you -- should we expect you to be throwing off more unaffiliated channels like DIRECTV is doing with weather right now in order to keep programming costs? And then related to that, any other areas that we should expect to see you cutting costs out to fund some of this extra investment in business services in the residential product?

Arthur T. Minson

Sure. Let me hit sort of my overall view on expenses. And as I said in my remarks, programming costs are going to continue to be an external pressure on us. And our best expectation at this point is they will increase double-digits next year, and we have an expectation in low double-digits and an expectation over the plan period that, that trend will continue. And not to say we're not going to fight really hard to provide our customers the best value we can and -- but I think what's important when you build the plan is sort of just to build it on based on the reality you're facing, and that's what we're facing on the programming front these days. We also know, frankly, that there are areas we want to invest. Business services, we have invested meaningfully in the sales force and we're going to continue to invest meaningfully in the sales force. And the residential team, as they roll out Max, we know there are areas that they wanted to continue to invest in, whether it was on the care or the tech ops side. So with that as reality, what, really, we have to do is take a step back and look at all other expenses. And I think what you saw this quarter, and you're going to -- should expect to see more of this, we did a meaningful reorganization. We basically eliminated about 1,000 noncustomer-facing positions, and that should provide about a $75 million annual run rate benefit. And costs are going to continue to be a focus for us, but it'll be a balance between areas we know we want to invest in to grow the business and then doing the best we can to, frankly, eliminate those noncustomer-facing costs that we think we can be more efficient in. So that's going to be a way of life here. I think the entire organization is very focused on it, and I'm personally very focused on it.


Next question is Amy Yong, Macquarie Capital.

Amy Yong - Macquarie Research

I just have a really quick question and clarification on the 1 million residential relationships that you plan on adding over the next few years. Can you just talk about what that means in terms of different DMAs and, I guess, the breakdown between more competitive footprints like New York and L.A.?

Robert D. Marcus

Well, Amy, I can -- this builds on a challenge that I talked about on our Q3 call, which was that I challenged the team to win back 0.5 million high-speed data customers from DSL over the subsequent 18-month period, now 15-month period. And we're making good progress on that front. The composition of subs, of customer relationships is a mix. Although admittedly, it is as it -- per our plan, pretty heavy on single plays relative to the past, and that's because of the power we think we have on the HSD front. Artie mentioned that that's a conservative assumption in the plan and we sure like to see us having a higher bundled results than what the plan has, and I think that's doable. So with HSD as a big driver, the DSL markets, the non-fiber overbuild markets, are the most significant contributor to what we hope to achieve. But our game plan is to go full speed ahead in all markets.

Arthur T. Minson

And the only thing I would add there is -- one of the ways we look at that number is if you look at 2013, we had about 500,000 incremental passings. So if you assume that's in the zone for the next few years, we, obviously, take a look at markets, given demographic growth are getting more passings growth. And so we do expect -- obviously, right now, Texas is red-hot, so that's going to be a place we look to. So passings is going to play a part in getting those customer relationships.


Next question is Bryan Kraft, Evercore.

Bryan D. Kraft - Evercore Partners Inc., Research Division

Rob or Dinni, can you talk about what you need to do to meaningfully improve the service levels and reliability in New York City, and how that fits into the operating plan?

Robert D. Marcus

Sure. Look, I think that New York City is kind of representative of the rest of the footprint. I think it starts with reliability, making sure the products work because the best form of customer service is that the customer doesn't have to reach out to us in the first instance for an issue. So we're really emphasizing improving the quality of the plant and the actual in-home customer experience. It also extends to ensuring that CPE is both functional, but also in spec, and we're going through our process of ensuring that all of our CPE is appropriately responding in the network. So it starts there. And then it goes to a very deliberate focus on executing in call centers and amongst our texts to get the problem solved right the first time to eliminating call volume that we create for ourselves, and Dinni will talk about it, and make life easier for customers in how they interact with us. So Dinni, maybe you can add a little bit?

Dinesh C. Jain

Yes. I mean, I think that Rob said all of the major things. I'd just highlight one thing in particular that he was talking about. Within New York City, we know exactly why customers call us. We know the things that are really bothering them the most. And now it's incumbent upon us to just make sure that we get those things prioritized very clearly and start taking them off one by one. And I think that it's kind of a boring answer but, at the end of the day, it's that boring type of execution that delivers better and better customer service.

Bryan D. Kraft - Evercore Partners Inc., Research Division

So there's nothing unique to New York City in terms of hardening the plans that is uniquely challenging because of the buildings in Manhattan or anything?

Robert D. Marcus

There really isn't. We probably talked about this in the past. There, historically, have been issues of relating to older in-building wiring in New York City. But by and large, we've been methodically going through the New York City, the Manhattan footprint, and accomplishing rewiring in buildings where it's necessary. It actually does have the effect of meaningfully reducing customer issues and trouble calls. And as necessary, we'll continue to do that. But it's not -- that's not a new -- it's a not a new function for us. We've historically done it on a regular basis.


Next question, Doug Mitchelson, Deutsche Bank.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Rob, 2 questions on the long range plan. And not to oversimplify the plan, but it was mentioned earlier the focus is to deliver market share gains partly by spending more on CapEx, right? So first, your competitors are now standing still, they're all spending more as well. And I'm sure it is, but is that accommodating your plan that the market is not static? What gives you confidence the pot of gold will be there at the end of the rainbow?

Robert D. Marcus

Yes. Of course, we're -- when we contemplate our plan, we assume that all of our competitors will continue to strive to win customers just like we are. But we feel confident that one, we can stay ahead of them; and two, a place where everybody has talked for a long time but not succeeded is improving that customer service experience, and we really think that that's an opportunity to differentiate ourselves. And try as they may, we just don't think the other guys are going to get there. So we feel very good about our ability to deliver a better customer experience.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

The second part of it is where will the market share gains come from? So when you segment the marketplace, where are the soft spots? Is it the high end, the low end, the middle? Is it -- do you have to win better everywhere?

Robert D. Marcus

I think there are opportunities everywhere. But again, I always point to some -- to say low-hanging fruit maybe trivializes the effort that's going to go into executing on it, but I continue to see a huge opportunity in our video-only base, who I think we can upsell to video HSD given the superiority of our HSD product. We made some good strides upselling video-onlys this past quarter. I think we added something like 100,000 -- we've migrated something like 100,000 customers from video-only to video Internet, doubles and triples. And we'll continue to seize that opportunity. And then generally, in DSL markets, I continue to believe that our share ought to be much higher than it is today on HSD.

Arthur T. Minson

And Doug, the only thing I would add is one of the reasons we added a little bit of color today on the connect and disconnect is just to give a sense in the plan of how it was built because what we expect to see over the next few years in the plan is continued churn improvements, and that will happen as a result of having better products and services and better reliability. And that becomes self-fulfilling and helps on the connect side over time with those better products, with the rollout of our new branding. So as I've said, 5% improvements in the connects and disconnects can have really meaningful impact on the net add numbers. And I think with that investment, that's a very reasonable assumption.

Douglas D. Mitchelson - Deutsche Bank AG, Research Division

Well -- and I guess where I was going, we'll get more details on future calls. But we all understand how you attack the high end and the middle of the market, but the low end is the area where I think it could be really interesting if you could figure out something economical. And if you're going to gain 1 million customers, right, it has to be beyond just the better churn. So...

Robert D. Marcus

Doug, I certainly agree with that. And we've been, I think, industry-leading in terms of our focus on segmenting our potential customer base. We had great success in Q4 with our $14.95, 2-buy-1 HSD service that was designed to accomplish just what you described, which is hit a portion of the market that was particularly price-sensitive. And that was fairly statically connected to their DSL subscriptions. We knew that we had to deliver an affordable, superior offering to what DSL was offering in order to jar them loose, and I think we're making great strides there. So I think you could expect to continue to see us do that type of thing.


Next question, Frank Louthan of Raymond James.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

So looking at the long-term plan here, I see a couple of things make some changes to some outside plant and equipment and some major cultural changes, that in my observation of network industries can take you 2- to 3-year kind of a period. Looks like you're targeting and doing this a little bit faster. What sort of confidence do you have that you can sort of realistically hit those goals and make those changes within an 18- to 24-month period and it won't stretch out longer into 2016, 2017?

Robert D. Marcus

Yes. Frank, I guess, I would very simply start by saying I feel very good about the plan. I think we're realistic about which changes take effect when. So largely, the improvements we're going to see in 2014 in subscriber performance are very much driven by building on the momentum we've got on the acquisition and retention side already underway. The improvements in customer experience clearly takes some time to sink in to have an impact on overall subscriber trends. But that's essentially what we've built into the plan. We contemplate that, that will take a little bit of time to kick in. And that's why you see stabilization of residential customer relationships in 2014, and then you really start to see growth in '15 and '16 when the benefits of our acquisition retention strategies, together with really improved customer experience, start to take hold.

Arthur T. Minson

The only thing I would add, Frank, is when you break it down into its component parts, the incremental spending, I think it's very manageable and we have very exact plans around what we're doing. If you take the incremental $500 million of CPE -- $500 million of capital this year, it breaks down roughly CPE up $250 million. About $100 million of that is in video, about $150 million in HSD and there are specific projects and work streams around that. You then have about $150 million increase in scalable infrastructure as we continue to invest in the plan to increase HSD speeds and, again, very discrete projects with very specific work plans around that. The only other thing I would add, too, is just organizationally, I think Dinni noted, all the heavy lifting has been done. And so really, the teams are set up well and very organized to execute.

Frank G. Louthan - Raymond James & Associates, Inc., Research Division

So is the equipment and plant impacts were felt first and then the cultural change, then your organization kind of following up a little later to finish this off?

Robert D. Marcus

I wouldn't say that. I think cultural change clearly requires an evolution. It starts with the tone that's set from the senior leadership team and I think we're well along on accomplishing that. And that'll continue to permeate the organization over time. I wouldn't set it up as plan first, culture follows. This is something that is all taking place essentially simultaneously.


Next question, Craig Moffett, MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

First, Dinni, congratulations, and Rob, congratulations on officially taking the new role. I wanted to ask about usage-based pricing and your broadband pricing model for a minute. I think you and John Malone have both articulated a view that there's opportunities to move toward sort of more transparent pricing of transport, if you will. But my sense is you've always preferred a more usage-based pricing model and the Malone model seems to be more focused on a two-sided market and charging. In the wake of Verizon, can you give us some thoughts on, now that you're in your new tier, how do you think that's going to play out and how you think Time Warner Cable is going to lead in that area?

Robert D. Marcus

Yes. Let me start by addressing the Verizon decision. I think it's -- at this point, the outcome of the Verizon decision is not going to affect the policy approach that we take towards HSD and HSD pricing. We've never had any interest in blocking or discriminating against any particular content. We're really about delivering the best possible HSD customer experience. So the -- to the extent that the FCC's blocking and nondiscrimination rules were struck down, that's not going to change the way we behave. Our usage-based pricing view has always been that we think that it's an elegant economic model to have customers who use more, pay more, and not have customers who are light users have to subsidize the use of heavy users. And as a result, we felt strongly that it was important for us to get usage-based offerings into the market. And we now have a 5-gigabyte tier and a 30-gigabyte tier offered across our footprint. At the same time, as we felt those models make sense, we also think that an unlimited offering is incredibly attractive to customers. And I think customers have spoken with their actions because, still, the vast, vast majority of our customers take the unlimited offering. In fact, the uptake of our usage-based here is still very small. Will that always be the case? Might it differ as pricing differentials between unlimited and usage-based tiers evolve? Sure, it might. I think our -- we view our mandate as to provide customers with a whole lot of choice. So I expect we'll continue to pursue both models. The idea of charging content companies for some preferential access or for not having bits counted in a lot of the AT&T Wireless sort of 800-number analog, I think it's early to say how all that will play out and whether or not that will pass muster from whatever the FCC ends up doing post the Verizon decision. I think we'll watch those models closely and see where it goes.

Craig Moffett - MoffettNathanson LLC

Does your guidance that you gave today include any meaningful component of usage-based fees from broadband consumption?

Robert D. Marcus

So remember, our view on usage-based tiers has really never been about that being a significant driver of ARPU. We've always viewed it as an opportunity to do a better job at target pricing or segmenting our markets so that we could charge light users a more affordable price and not force them to subsidize heavy users. So to the extent that there were benefits on the revenue side, we always thought that they would come from having happier customers where the price-value equation was more synced up and, therefore, it would create a more stable customer base and less churn. We really didn't focus on this notion of having overcharges because our theory has been that we would always offer an unlimited tier, and then customers who use a lot would always opt for the unlimited tier.


Our final question is from Vijay Jayant, ISI Group.

Vijay A. Jayant - ISI Group Inc., Research Division

Rob, you presented your long-term plan today. But this -- with that in the context, is Time Warner not interested in engaging with Charter at all on a transaction? Or is there like a level that could sort of come out in a win-win transaction if you actually did engage? And just generally, you talked about $160 value. In your mind, is that where you think the stock should trade today based on your long range plan or is that 3 years out?

Robert D. Marcus

Vijay, I'm going to repeat myself, which is we're in the business of maximizing shareholder value. We have said that if, in fact, an offer were presented that exceeds the value that we think we can create by operating the company pursuant to our operating plan ourselves, we would be willing to engage. We said that the price that it would take to transact would be $160, and this is specific to Charter, $100 in cash, $60 in Charter stock. And importantly, the stock component protected by a 20% symmetrical collar because we have concerns about the way Charter stock would trade between signing and closing. So I'm not telling you anything new, but that's a firm position. What I think, hopefully became abundantly clear today, is that we feel very good about our ability to run this business and we think we can create a whole lot of value for shareholders. I'm not going to comment on day-to-day stock trading prices, but we feel very good about our ability to create value at this company.

Tom Robey

Thanks, Vijay.

Robert D. Marcus

Okay. Thanks, everybody. We certainly covered a lot of ground this morning, but before we wrap up, I just want to leave you with some final thoughts. First, the residential business turnaround is well underway. We're committed to enhancing the customer experience, which will drive significant subscriber growth which, in turn, will accelerate our residential revenue.

Second, the robust in profitable revenue growth in business services will continue for years to come. We will continue to invest in this opportunity and we will make this a very large profitable business.

And third, even with the investment required to refuel the revitalization of residential and the continued strong growth of business services, we still have the firepower to engage in opportunistic M&A and return very significant amounts of capital to our shareholders.

We hope you've gotten a sense of the talent, focus and passion we have on the team. And I know I speak from all 52,000 Time Warner Cable employees when I say that I'm confident that our best days are ahead of us. Thank you, and we look forward to talking to you again soon.

Tom Robey

Thanks, Rob. And to give everyone a little advanced notice, Time Warner Cable's next quarterly earnings conference call, which will reflect our first quarter 2014 results, will be held on Thursday, April 24 at 8:30 a.m. Eastern Time. Thanks for joining us.


Thank you for your participation. That does conclude today's conference call. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!