Cablevision Systems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Cablevision Systems Corporation (CVC)
by: SA Transcripts

Cablevision Systems Corporation (NYSE:CVC)

Q4 2013 Earnings Conference Call

February 26, 2014 10:00 AM ET

Executives

Bret Richter – Senior Vice President, Financial Strategy and Development

James L. Dolan – President and Chief Executive Officer

Gregg Seibert – Executive Vice President and Chief Financial Officer

Wilt Hildenbrand - Senior Advisor, Customer Care, Technology & Networks

Tad Smith - President, Local Media

Analysts

Jason Boisvert Bazinet – Citigroup Global Markets Inc.

Michael McCormack – Jefferies LLC

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Brian Wayne Russo – Deutsche Bank Securities, Inc.

Craig Moffett – MoffettNathanson LLC

Stephan E. Bisson – Wells Fargo Securities, LLC

Amy Yong – Macquarie Capital Inc.

Benjamin Daniel Swinburne – Morgan Stanley & Co.

Philip Cusick – JPMorgan

James M. Ratcliffe – The Buckingham Research Group, Inc.

Alexander James Sklar – Raymond James & Associates, Inc.

Vijay Jayant – ISI Group Inc.

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cablevision Fourth Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session (Operator Instructions) Thank you.

I will now turn the call over to Bret Richter, Senior Vice President, Financial Strategy and Development. Please go ahead, Sir.

Bret Richter

Thank you. Good morning, and welcome to Cablevision’s fourth quarter 2013 earnings conference call. Joining me this morning are Jim Dolan, President and CEO of Cablevision; Gregg Seibert, Vice Chairman and Chief Financial Officer; and Kristin Dolan, President of Optimum Services.

Following a discussion of the Company’s fourth quarter 2013 results, we will open the call for questions. If you don’t have a copy of today’s earnings release, it is available on our website at cablevision.com.

Please take note of the following. Today’s discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ. Please refer to the company’s filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The company disclaims any obligation to update the forward-looking statements that may be discussed during this call.

Please note that 2012’s reported fourth quarter and full year results included a number of items that affect the comparability to our 2013 results including items related to the impact of Superstorm Sandy. On Page 4, today’s earnings release, we have provided details related to these items. Please be aware that all periods of period comparisons of financial results discussed on this call reflect adjustments to these items unless specifically noted.

I’d also like to note that as a result of the Company’s routine process of evaluating reportable segments, we’re now reporting Lightpath separately from our cable operations. Finally, let me point out that on Page 7 of today’s earnings release, we provide consolidated operations data and a reconciliation of adjusted operating cash flow, or AOCF, to operating income.

I would now like to introduce Jim Dolan, President and CEO of Cablevision.

James L. Dolan

Thank you, Bret, and good morning. In 2013 Cablevision’s transition continued. We began the year in the wake of Superstorm Sandy, an event that had a severe impact on the greater New York area and on our Company. As we emerged from the storm, we focused on improving the Optimum customer experience. We improved the quality of our system and made our operations more efficient. We also took a number of steps to strengthen our financial profile and our fourth quarter results show our progress.

Fourth quarter total company net revenue increased by more than 2% and AOCF increased by 7.5% from the prior year period. We saw a sequential improvement in customer metrics in the fourth quarter. For the full year 2013, the Company gained data and voice customers while overall customer relationships and video customers declined. As I mentioned during our last call, we have been more disciplined in our pricing, especially with regard to repetitive promotional discounts. That discipline will continue.

Our fourth quarter capital expenditures were $211 million and free cash flow was $107 million. We continue to balance investments in our products and network with our overall financial objectives. This includes returning capital to shareholders which continues with the dividend we announced today. Additionally in 2013, we sold our Optimum West and Clearview Cinemas businesses. We also received the final VOOM litigation settlement and refinanced a significant portion of our debt.

These actions enhanced our liquidity and strengthed into our balance sheet. In addition to our financial progress, the transformation of Optimum continues. As I said before, we are focusing on delivering superior value through improved products, unmatched service and expanded connectivity. We continue to improve the capacity, performance and reliability of our network. These investments are the foundation of the Optimum experience.

During the past year, we improved our customer experience with several new products and product enhancements. We completed the full deployment of our Onyx platform including the updated Optimum program guide.

This platform now features a consistent interface across all devices. We enhanced our Multi-Room DVR product by tripling the storage capacity and enabling customers to record 10 shows at one, more than any other DVR in the marketplace. We significantly expanded are On Demand library. We introduced faster broadband speed to better meet the growing data needs of our customers, and we began the rollout of our in-home WiFi smart router. We also expanded our TV to GO offerings from 16 to more than 70 networks and introduced a new low price international calling plan.

In addition to product improvements, we also strengthened our network operations and dramatically changed the way we interact with our customers. New customers now experience a more effective installation and on-boarding process. We also launched a new version of Optimum.net and the Optimum Channel. Both of these efforts provide customers with easy access to information about our products and services. We also enhanced our network monitoring. Now when an outage occurs we reach out to our customers proactively, so they know we are already working on the outage. These types of initiatives contributed to a substantial decline in both costumer service phone calls and trouble call related truck rolls in 2013.

Lastly, one of our core goals is to provide customers with the most expansive and reliable connectivity available. To that end, we have greatly expanded our WiFi network within our footprint and doubled our total WiFi user sessions since the fourth quarter of 2012. We want to provide the highest quality connectivity in the places that matter most to our customers. To-date, we have deployed more than 100,000 WiFi access points and we’ve expanded our service with the rollout of our in-home WiFi smart routers. With those new routers, we are on track to reach approximately 1 million access points by the end of this year.

Two years ago, we set out to fundamentally change our relationship with our customers and we are pleased with our progress. Today, we remain committed to being the best service provider in the industry. I want to thank our employees for their ongoing focus and dedication. Their efforts will drive our continued success.

In summary, we like the course we’re on. But we also know there is more to do. In the year ahead, we will focus on building even stronger relationships with our customer base and continuing our progress.

And with that, I will now turn the call over to Gregg Seibert.

Gregg Seibert

Thank you, Jim and good morning. During the fourth quarter, we gained 6,000 net high speed data customers. Voice customers were flat. Customer relationships declined by 7,000 during the quarter, and video customers declined by 18,000. Our decision to tighten our retention practices and curb repetitive promotional discounting appears to be having the desired effect as we’ve not experienced a noticeable increase in voluntary disconnects.

Overall, our customer metrics also reflect the net impact of a series of other factors including our operational improvements, our highly competitive marketplace and the overall economy. Average revenue for customer was $147.34 in the fourth quarter, a $6.43 increase as compared with the prior year period.

Average revenue per video subscriber was $166.66 in the fourth quarter, an increase of $9.65. These increases were principally related to our 2013 price initiatives, certain video tier migrations and our more disciplined retention policies.

As compared with the prior year, total cable revenue for the quarter increased by 2.6%. This increase principally reflects the impact of our price initiatives and higher advertising revenue which were partially offset by fewer customer relationships.

Fourth quarter cable advertising revenue also increased by 2.6% over the year-over-year due in part to higher spending by broadcast and cable television, consumer electronics and gaming. This was partially offset by the expected decline in the political advertising market in the fourth quarter of 2013.

Notably, non-political advertising revenue increased 20% in the fourth quarter as compared with the prior year period. Cable AOCF increased 5.3% in the fourth quarter as compared with the prior period. This primarily reflects revenue growth and a decline in certain operating expenses offset by continuing increases in programming costs.

The continuing increases in programming costs were partially offset by the decline in video customers. The decline in all other operating expenses was driven in part by the success of our recent service initiatives, including the decline in trouble call truck rolls and customer service calls that Jim referenced earlier.

Cable’s fourth quarter AOFC margin was 32.8%. This result was up from the prior year period comparable margin of 32%. Cable capital spending in the fourth quarter was $176 million, a $34 million decline from the same period in 2012. This decline principally reflects lower CPE purchases and lower spending on WiFi and support capital. As expected, total company 2013 capital spending was lower than the comparable full year 2012 level.

Lightpath’s fourth quarter revenue increased 3.8% and AOCF increased 7.9% over the prior year period. These increases reflect revenue growth on our more profitable Ethernet based services, partially offset by the continuing decline in legacy TDM based services. In addition, fourth quarter AOCF reflects a higher overall gross margin due in part to lower third party circuit fees in the fourth quarter of 2013 compared with the prior year period.

Moving to our other segment, revenue decreased 5.1% and the AOCF deficit decreased 12.4%. These results principally reflect lower operating costs including the decision to reduce our annual investment in MSG Varsity; this is partially offset by lower advertising revenue at Newsday.

Finally, our fourth quarter total company operating income reflects $24.1 million restructuring charge; this charge principally reflects expenses associated with the elimination of certain positions in connection with the strategic evaluation of the company’s operations; this charge is excluded from our definition of AOCF.

Looking to 2014, we’ll continue to focus on improving the customer experience and successfully executing our initiatives. While we expect AOCF growth in 2014, we are not providing full year guidance at this time. In the first quarter, we expect to report high single-digit to low double-digit year-over-year AOCF growth. While this growth is a result of numerous factors including steps taken to improve efficiencies in the business, it is heavily impacted by the continued flow through of our 2013 rate events. As a result, we do not expect similar rates of AOCF growth over the remainder of 2014. Please note that 2013 first quarter adjusted AOCF was approximately $348 million.

Now turning to the company’s financial position; the company’s fourth quarter consolidated cash position was $702 million and net debt was $8.2 billion. We had $1.43 billion undrawn and available under the $1.5 billion revolving credit facility at CSC Holdings as of the end of the quarter.

During 2013, the company successfully executed $4.8 billion refinancing transaction that extended debt maturities, increased our borrowing capacity and reduced our overall cost of capital.

During the fourth quarter, Newsday made a $160 million voluntary repayment of its term loan which will generate cash interest savings in 2014. In addition, during the fourth quarter, we used our cash on hand to repurchase $38 million principal amount of Cablevision's senior notes. We continue to be opportunistic during the first quarter of 2014. Today we have repurchased an additional $28 million of Cablevision senior notes.

As stated previously, we remain focused on reducing leverage and plan to continue utilizing a portion of our investable resources to strengthen our balance sheet while maintaining a strong liquidity position.

In calculating our total company leverage ratio, AOCF is determined using the latest quarter annualized AOCF. As a result, our leverage ratios are more sensitive to changes in quarterly AOCF than they would be if our leverage was measured based on trailing 12-month AOCF.

At December 31, the company’s consolidated net leverage ratio was 4.5 times. The CSC Holdings Restricted Group bank leverage ratio was 3 times. We did not repurchase shares of Cablevision stock during 2013. We have approximately $450 million of remaining stock repurchase authorization.

Finally we know the issue of cable consolidation is on all of your minds and certainly understand the reasons for that. However this call is intended to discuss our fourth quarter and 2013 results. We will not be entertaining any questions related to industry consolidation today.

Operator, we’d now like to open the floor for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) And your first question from Jason Bazinet of Citi.

Jason Boisvert Bazinet – Citigroup Global Markets Inc.

I just had one question on the upcoming Supreme Court ruling on Aereo. To the extent the Court paints with a broad brush and says that the RS-DVR is illegal as well, is there any sort of financial implication of that potential ruling as we think about 2014 or 2015 CapEx? Thanks.

James L. Dolan

I don’t know. David, you want to comment?

Jason Boisvert Bazinet – Citigroup Global Markets Inc.

I referred to David Ellen of course.

David Ellen

This is David Ellen, General Counsel. We don’t believe the Supreme Court will do anything in this decision to cast doubt on the unlawfulness of RS-DVR. Beyond that, we are not commenting.

Jason Boisvert Bazinet – Citigroup Global Markets Inc.

Okay, thank you very much.

Operator

Thank you. Your next question comes from Mike McCormack of Jefferies.

Michael McCormack – Jefferies LLC

Hey, guys. Thanks. Just thinking about the first-quarter EBITDA commentary or AOCF commentary, can you just, Gregg, walk us through your thoughts on some of the puts and takes there? It would look like coming off the fourth quarter run rate may be starting to look better and maybe some commentary on programming expense and also there has been a lot of storm activity. Do you guys think there will be a hit in 1Q from the winter storms? Thanks.

Gregg Seibert

Let’s go in opposite order on those Mike, I don’t think we’re anticipating – in fact as far as we are concerned this has been one of the easier winter quarters we have had over the last few years from a storm activity standpoint. So we’re not expecting any type of charge or impact from that I think our people did a fantastic job here.

James L. Dolan

Yeah, we really didn’t experience a lot of outages with it I mean compared to other kind of storm events. I think at the most at one time, we probably had 15,000 customers out right during the worst storm. So it’s really nothing like -- not really a major storm event.

Gregg Seibert

And in terms of programming costs, obviously that continues to be an issue for everyone in the industry. In the quarter, our programming costs increased approximately $25 million, or call it rough 6.5% from the prior year quarter. We expect the increase in programming cost in 2014 to be roughly consistent with the experience that we had in 2013.

In terms of the quarter and what’s happening in the first quarter, the so called rate events that I referred to in my remarks are basically the $5 data increase which we put in on January 1 of 2013 and as you know that type of a rate increase when you put it on January 1, it doesn’t mean that you experience the benefits from the rate increase over the entire quarter. It basically cycles in over the course of that quarter as customers go through the billing cycle.

So we have additional impact from that hitting in the first quarter. And then we instituted the support surcharge of, I believe, $2.98 on April 1 of 2013. So there was no impact of that in the first quarter of 2013 at all. So those are two big events in terms of the growth that we’re anticipating in the first quarter. We talk a lot about the truck roll initiatives and the call initiatives and we continue to experience benefits from those initiatives.

Additionally we took $24 million charge as I mentioned in the fourth quarter, basically a restructuring charge against AOCF and we anticipate that’s going to be rolling throughout 2014, not the charge but the benefits of that the efficiencies that come out of that restructuring. It's hard to put a precise number around those, but I would say that impact financially on that is at least two times the charge, the annual impact is at least two times the charge that we took in the fourth quarter.

Michael McCormack – Jefferies LLC

That’s great, thanks guys.

Operator

Thank you. Your next question comes from Jessica Reif Cohen of Bank of America.

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Thanks; a couple of things. First of all, on CapEx, it seems like it is starting to come down. Can you comment on, are you finished now with the growth initiatives? What is the outlook for 2014 CapEx?

Gregg Seibert

I lost a little bit of that in translation Jessica, but I’m going to take the question as how is 2014 CapEx going to vary from 2013. And I think as we look at it now, we are looking at CapEx being roughly the same in 2014 as it was in 2013, but I’m going to throw the caveat out that we continue to run the business for the long-term and that is we see opportunities such as the managed routers that we’re installing in our footprint today and additional WiFi opportunities, we are going to make sure we have the resources to take advantage of those, again continuing to build the business for the long-term.

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

I hope you can hear me. I’m sorry, I am on a cell. But can you also quantify the impact on churn of all the customer initiatives that you put forth in 2013?

Gregg Seibert

Jessica, we don’t separately disclose churn and I think in particular taking a look at 2013 versus 2012, because of the impact of Hurricane Sandy and the distortion that created in the footprint during the fourth quarter of 2012, it’s difficult to give you precise numbers, but churn is improving.

James L. Dolan

Yes Jessica we are not putting numbers on it, but I will have to say that we’re pleased with the impact on subscriber movement inside the base. We think we have happier customers and customers that want to stay with us.

Gregg Seibert

Voluntary disconnects were down.

James L. Dolan

Right.

Gregg Seibert

That’s an important statement.

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

And then one clarification on the programming costs, Gregg. You said Q4 was up 6.5% and then 2014 would be the same as all of 2013. So is that a similar number?

Gregg Seibert

Look at it on an annual basis.

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

So was 2013 roughly in that range as well?

Gregg Seibert

I don’t have that precise numbers in front of me Jessica, I apologize for that. What is happening now is that we’re finding ourselves in a position where the overall rates are going up across the Board, but because of the fact that we have fewer subscribers than we had a year ago, our overall percentage is not going up as rapidly as the rate is going up.

Jessica Reif Cohen – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Great, okay thank you.

Operator

Thank you. Your next question comes from Doug Mitchelson of Deutsche Bank.

Brian Wayne Russo – Deutsche Bank Securities, Inc.

Hi, this is Brian Russo for Doug. Just regarding the cost-reduction initiatives that you guys have put through, is there any sense you can give us for how much more room to improve efficiencies you think there might be in the business?

Gregg Seibert

I think we can get more efficient, but our goal with this wasn’t just to reduce costs and in fact our number one goal was to increase customer satisfaction. What we did in 2013 and I think that we will be continuing to do in 2014 is to make the operation more efficient, but to make it more efficient for the customer too.

So the first time the truck comes to your house, it now has all the tools and all the information necessary to fix an issue inside your home versus having to have to come back one or two times after that in order to complete the job. So did we drive efficiencies and reduce expenses? Yes, we did, but mostly what we did is we made that customer a lot happier and that’s been the formula we have been pursuing and we still think that there is more harvesting of that kind of benefit to the company.

Brian Wayne Russo – Deutsche Bank Securities, Inc.

Thank you.

Operator

Thank you. Your next question comes from Craig Moffett of MoffettNathanson.

Craig Moffett – MoffettNathanson LLC

Hi, good morning. Gregg and Jimmy, can you just talk about your vision of growth? Your broadband growth is now year-over-year a little bit less than 1%, and obviously it’s hard to replicate the kind of price increases that you took in 2013, as you said. So where are the growth engines in the business next? And how do you think about how you grow revenues in the business longer-term?

James L. Dolan

Can I start with the second part of the question? I don’t believe that we said that we have issues on the rate side this year, we’re continuing to be active. In fact, Kristin can probably provide specifics on what’ve been doing in terms of some of the passthroughs etcetera, but we don’t see rate issues in this marketplace at this point in time.

Kristin Dolan

Right.

Craig Moffett – MoffettNathanson LLC

No, I didn’t mean that. I just mean the size of the price increase, as you said, is larger than what it is regularly going to be, presumably.

Kristin Dolan

That was a broadband increase. We hadn’t done one in years. At this point, we haven’t announced any broad based increases on our principal products, but we have taken steps already this year to enhance our revenue. So tax pass through on Optimum Voice, some elimination of grandfathered packages in other areas so we have opportunities to continue to enhance our revenue and I don’t think there is a concern with that.

Craig Moffett – MoffettNathanson LLC

Okay. Do you see unit growth in any area that you think there is a big untapped opportunity there?

James L. Dolan

I think that you will see some unit growth in the data area, but that really just goes to what we have been kind of saying now for a while that we think connectivity is really the most important product to our customers versus what historically has really been the video product. And as we see that continue to evolve, I think that there will be growth opportunities inside of that. I think the company's WiFi strategy is certainly significant and set us apart from our competitors in that area.

And if you went to CES and heard about things like wearables, etcetera you can see that, that the marketplace is moving to more and more and more use of connectivity. So by being the best connectivity provider both in the home and out of the home, we think that is where the growth opportunity is going to lie.

Craig Moffett – MoffettNathanson LLC

Andy Jimmy, if I could just ask a follow-up on the WiFi that you just talked about…

Gregg Seibert

Craig before you ask your question, can I just elaborate a little bit?

Craig Moffett – MoffettNathanson LLC

Yes.

Gregg Seibert

Because the other part of the business that continues to grow for us is the Optimum business side of the equation. We have addressed the residential side. But also Lightpath is growing at a nice clip, but obviously from a smaller base. So we do see growth opportunities for the business going forward.

Craig Moffett – MoffettNathanson LLC

And Jimmy mentioned WiFi as obviously one of the truly differentiating things. Is that -- has your thinking evolved as to whether that is something you directly monetize? Or is it an indirect monetization through market share of your broadband product?

James L. Dolan

I think it’s early with that, I think we – what we’re going to continue to do is, we’re going to continue to strengthen that portion of our service offering. How we monetize it. I think we have a lot of different choices in there, we’ll try to be customer sensitive to that and try and provide packages that service all different segments over the market place. So, including as Gregg just mentioned now the B2B market is kind of an interesting marketplace there. As businesses end up using more and more connectivity in order to drive their businesses that again provides another opportunity for a company like ours essentially if they’re using WiFi to do things like connect vending machines and do their business for them. Those are all opportunities for a company that’s really good in connectivity. And that’s what we think we are and we’re going to continue to be.

Craig Moffett – MoffettNathanson LLC

All right, thank you.

Operator

Thank you. Your next question comes from Marci Ryvicker of Wells Fargo.

Stephan E. Bisson – Wells Fargo Securities, LLC

Hi this is Stephan Bisson for Marci. We appreciate the initial additional breakout on Lightpath. Was there a specific reason why you did this quarter?

Gregg Seibert

Not particularly for this quarter. I think that with Lightpath what we’ve done is we’ve gone through a very thorough review of the business making sure that we’re doing everything we can to maximize our growth opportunities there. So, at Lightpath we are expanding in managed services, we are reorienting some of our sales efforts out of the more penetrated portions of our footprint and into areas that have a little bit more growth opportunity. And so, we see the profile of Lightpath over time as being somewhat different and the business dynamics as being different from the cable business. And we just felt as part of our normal annual review that this was the right time to separate Lightpath as a segment.

Stephan E. Bisson – Wells Fargo Securities, LLC

Great. And how big of an opportunity do you see in that kind of business segment in Lightpath?

Gregg Seibert

I think with Lightpath we can continue to grow the AOCF in the business at relatively higher rates than we can grow the residential cable business. And our primary desire with Lightpath is to see a way to try and increase the free cash flow generation out of the business. As you know that’s a very high capital intensity business and we’re working with management to not only improve the growth but to increase the free cash flow conversion.

Stephan E. Bisson – Wells Fargo Securities, LLC

Great. Thanks so much.

Operator

Thank you. Your next question comes from Amy Yong of Macquarie Capital.

Amy Yong – Macquarie Capital Inc.

Thanks. Just continuing on the broadband question, recently in Netflix rankings your speeds are actually ranked pretty high relative to some of your other peers, including FiOS. I was just wondering, are you satisfied with the network at this point? What other investments are needed? And just following up on the other WiFi question, can you just talk about the opportunity over at New Jersey Transit, how we should be thinking about this to drive the incremental dollars and just retention? Thanks.

Wilt Hildenbrand

Okay, hi it’s Wilt. The network is doing exactly what we hoped it would do all along. We have room left to grow on it even with the higher speeds on it with Netflix running on it, it runs a lot of video traffic over the network. Matter of fact it's the highest. I am very happy with the network performance at this point. No stumbling blocks.

Kristin Dolan

I would just throw in on Netflix relationship just to remind you that our Netflix relationship with Open Connect is a caching relationship. It's different than the relationship that you saw Comcast and other people are having, and we actually are number one as far as large broadband providers of Netflix. We continue to be number one and some of our competitors are continuing to decline in their delivery to Netflix. So, we’re really happy with our Open Connect relationship and I believe they are as well.

Tad Smith

With respect to New Jersey Transit, it is Tad Smith of Local Media on the only thing I would say is that the contract is phased, it’s incremental, it’s a multi-year approach and it’s designed to be a service to them and also make sense for us and we don’t have any more to say other than that.

Amy Yong – Macquarie Capital Inc.

Great. Thank you.

Operator

Thank you. Our next question comes from Ben Swinburne of Morgan Stanley.

Benjamin Daniel Swinburne – Morgan Stanley & Co.

Thank you. Good morning. Gregg, you talked about the fourth quarter operating expenses declining year-on-year. You called out some of the initiatives, but you said it was sort of in part from those initiatives. Anything else in fourth quarter that do you want to highlight either marketing or other G&A items that were down year-over-year and it sounds like that continues that trend into 2014 I just wanted to see if you would add any color there?

Gregg Seibert

Yeah I don’t have a tremendous amount of color to what to add to that Ben, other than we had very specific – couple of very specific items in the quarter in particular, we had lower legal fees and insurance costs, they were more favorable than we anticipated. And our marketing and advertising spend was a little bit lower than anticipated.

But again, what we’re doing here is we’re managing for the longer-term. And we make decisions every quarter that impact results. So it’s hard to extrapolate those items from the fourth quarter into the first quarter. I continue to look at first quarter as being revenue opportunity for us in addition to the continued flow through of truck roll and trouble call initiatives as well as the efficiencies that we ended up getting from our restructuring in the business.

Benjamin Daniel Swinburne – Morgan Stanley & Co.

Got it. And then just maybe sticking with the top line, Kristin, you mentioned a voice passthrough. I don’t know if you could size that for us. Any other things that have already happened on the ARPU front, that you could quantify? Verizon had a bit of a tough FiOS quarter in Q4, at least across their footprint. I’m wondering if you’ve seen them respond at all in the marketplace, or if they’re sort of behaving themselves a little bit better than they had in the last few years on the pricing front?

Kristin Dolan

I’m sorry. Okay, so on the voice passthrough it was about equivalent to what we do on the traditional video increase and we’ll see some additional voice passthrough later this year for areas that we didn’t hit in first quarter. And then, on Verizon they continued to be aggressive in their promotional pricing but, we’re comfortable in having integrity in our pricing and we think the integrity that have is sustainable and we continue to hold our own with them.

Benjamin Daniel Swinburne – Morgan Stanley & Co.

Thank you.

Operator

Your next questions come from Philip Cusick of JPMorgan.

Philip Cusick – JPMorgan

Hi, guys. Thanks. Now Kristin, you just alluded to this, like could you guys expand a little bit about the problem of price discipline? How is that impacting gross adds and churn? I know Gregg, you said you’re not seeing volume disconnects or voluntary disconnects. But do you find that most customers who call up are really just bluffing and they’re not going to leave anyway?

Kristin Dolan

That’s a great question. So, we started in August with getting really strict about not extending the perpetual promotions, so internally it’s been a "no soup for you" strategy when people call. We’re seeing a significant retention five and six month. A significant majority of those customers are still with us five and six months after they’ve called us for an extension beyond 36 months for or even less than that. So, we are really, really pleasantly surprised and very happy with how that’s gone so far.

Philip Cusick – JPMorgan

And with that in terms of people coming back, are you getting a level of people who aren’t returning because they are not giving the promo price on the return?

Kristin Dolan

Yes. I mean, we are seeing the winbacks? Yes.

James L. Dolan

Winbacks are good.

Philip Cusick – JPMorgan

That’s great, thanks.

Operator

Thank you. Your next question comes from Jim Ratcliffe of Buckingham Research.

James M. RatcliffeThe Buckingham Research Group, Inc.

Good morning. Thanks for taking the question. First of all, expanding on the competitive environment, can you talk a little bit about how you are doing on a share basis just relatively in areas where there is FiOS versus the majority or portion of your footprint where there isn’t FiOS? And secondly, Gregg, you mentioned, if I heard you correctly, that non-political ad growth was about 20% in the quarter. Just anything particular that drove that? Thanks.

Gregg Seibert

Sure. A couple of things and we actually have Tad Smith here who runs our local media business, and I’m going to let Tad address the non-political advertising side. We obviously had a little bit of an easier comparison than we would have given Sandy last year, affecting the numbers there. Particularly, when you look at our peer group, we really do feel like we knocked it out of the park. Tad would you give us a little commentary on that?

Tad Smith

Yes. I mean the way to think to about it is if you compare the fourth quarter of 2013 to the first quarter of 2013 where we had general advertiser declines that were pretty sharp. I would say the difference in the beginning and the end of the year is a major sense of exactly what Jim was talking about which was to deliver superior value and it comes from starting with an audience measurement newsletter;proselytizing the value of set-top box data changing all the sales tools so the set-top box data permeates all of them improving the quality of the training and putting everybody on a firm foot, so that sales -- the set-top box data is the first thing we talk about with advertisers and agencies. Then rolling it through to creating products such as impression-based selling, matchbacks, conversions on tune-in, all of those things. And then finally, you wrap it up with, once your inventory value gets better, you start looking at it and say: how do we expand the number of inventories. So you light up new networks, you make more of them addressable and all of that is having a beneficial effect.

Gregg Seibert

And James on the FiOS versus non- FiOS, we don’t break that out. We report to our customers in a bucket and the reality is every customer is as important as every other customer to us.

James M. RatcliffeThe Buckingham Research Group, Inc.

All right. Thank you.

Operator

Thank you. Your next question comes from Frank Louthan of Raymond James.

Alexander James Sklar – Raymond James & Associates, Inc.

Yes, hi, this is Alex Sklar for Frank. Following up on the Netflix, would you consider a deal with Netflix in which they would pay you for preferential access? And then also, could you provide us your view on net neutrality following the recent comments out of the FCC? Thanks.

Kristin Dolan

So on the Netflix front, our open connect relationship like I said is a caching relationship. So we have their content directly accessed through our network. So we don’t need to do a different type of scenario, we already have that content locally available to our customers. The second question?

Alexander James Sklar – Raymond James & Associates, Inc.

Net neutrality.

Kristin Dolan

Net neutrality.

James L. Dolan

Well, obviously the – our position on this really hasn’t changed. We don’t throttle our customers and we don’t tell them where to go and et cetera. So we’re kind of ambivalent to the argument.

Alexander James Sklar – Raymond James & Associates, Inc.

Great. Thanks.

James L. Dolan

Operator, we have time for one more question.

Operator

Thank you. Your final question comes from Vijay Jayant of ISI Group.

Vijay Jayant – ISI Group Inc.

Thanks. I’ve got two please. Can you just give us an update you have had very high digital penetration and you don’t know digital subs. Have you gotten -- have you completed the digital transition on the network, are you seeing the benefits of that? Do you still have any sort of an analog offering, or it’s all 100% digital? And second, Gregg, you’re talking about AOCF growth, you have free cash flow, you have extended debt maturities. How should we think about the prospect of buybacks coming back into the equity story? Thank you.

Gregg Seibert

Let me take the second part first which is at this point in time we continue to be focused on – we continue to be focused on debt reduction as opposed to buybacks. We’re in a position where our net leverage is 4.5 times, but our gross leverage is higher than that, because we had the $700 million of cash on our balance sheet or at least we did as of December 31. So, we’re going to be more focused at this point on the return to capital coming from the dividend which the Board has consistently supported and less through share buybacks at this point of time.

Kristin Dolan

I would just finish by saying our network is a 100% digital. It has them for a while.

Vijay Jayant – ISI Group Inc.

Okay, thank you.

Gregg Seibert

Thank you all.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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