Cablevision Systems' (CVC) CEO James Dolan on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Cablevision Systems (CVC)

Cablevision Systems (NYSE:CVC)

Q1 2014 Earnings Call

May 08, 2014 10:00 am ET

Executives

Bret Richter -

James L. Dolan - Chief Executive Officer, Director, Chairman of Executive Committee and Chairman of Madison Square Garden

Gregg G. Seibert - Vice Chairman and Chief Financial Officer

Kristin Aigner Dolan - Chief Operating Officer and Director

Brian G. Sweeney - President and Director

Analysts

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division

Craig Moffett - MoffettNathanson LLC

Stephan Bisson - Wells Fargo Securities, LLC, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

James M. Ratcliffe - The Buckingham Research Group Incorporated

Thomas William Eagan - Telsey Advisory Group LLC

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

Tuna N. Amobi - S&P Capital IQ Equity Research

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 First Quarter 2014 Earnings Conference Call. [Operator Instructions]

I will now like to turn the conference over to Bret Richter, Senior Vice President of Investor Relations. Please go ahead, sir.

Bret Richter

Thank you. Good morning, and welcome to Cablevision's first quarter 2014 Earnings Conference Call. Joining me this morning are Jim Dolan, CEO of Cablevision; Gregg Seibert, Vice Chairman and Chief Financial Officer; Brian Sweeney, President; and Kristin Dolan, Chief Operating Officer.

Following the discussion of the company's first quarter 2014 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. Let me point out that on Page 5 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, CEO of Cablevision.

James L. Dolan

Thank you, Bret, and good morning. Our first quarter results demonstrate the continuing transformation of the optimum customer experience and the positive impact of our investment and initiatives.

As we discussed on our fourth quarter earnings call, 2013 was an important year for Cablevision. We deployed a number of new products and product enhancements, we invested in our network, improved overall service quality and we dramatically expanded our Wi-Fi presence, both within and outside our customers' homes. We believe these continuing efforts all contributed to our strong first quarter performance.

In the first quarter, total company net revenue increased by more than 4% and AOCF increased by nearly 25% as compared with the prior year period. Gregg will discuss the main drivers of our first quarter growth in a moment. In a competitive marketplace, we gained data and voice customers in the first quarter, while overall customer relationships and video customers declined.

First quarter capital expenditures were $186 million and free cash flow was $98 million. Consistent with our focus on returning capital to shareholders, we announced our quarterly dividend today.

Our efforts to enhance every aspect of the Optimum experience continued in the first quarter. First and foremost, we are investing in the capacity, performance and reliability of our network. We also continue to expand our product offerings. During the first quarter, we increased our TV to GO offerings to more than 100 networks. We launched Wi-Fi access for New Jersey Transit customers at numerous train stations and we enhanced our Spanish language and sports and entertainment packages with the addition of beIN SPORTS and its extensive coverage of international soccer.

In addition, in April, we enhanced our Multi-Room DVR service to allow customers to record up to 15 programs simultaneously. We also continue to advance the rollout of our Wi-Fi smart router. With these new routers, we remain on track to reach approximately 1 million Optimum Wi-Fi access points by the end of the year. We are seeing significant growth in our Optimum Wi-Fi usage, as total data path has more than doubled in the last year.

We also continue to be disciplined with regard to repetitive promotional discounts. In fact, we believe that our overall approach to pricing and promotional discounting is contributing to the lower voluntary churn that we are experiencing. We are making other adjustments to our pricing strategies as well. For example, in March, we announced the $2 increase in our sports programming surcharge.

We're continuing to make service and reliability key differentiators of the Optimum experience. We are transforming every touch point with our customers. We have improved our processes and systems, and we are investing in new applications and tools. We are also improving how we recruit, hire, train and develop our employees.

Our comprehensive approach is resulting in a rapidly improving Optimum customer experience. We see this through the substantial declines in both customer service phone calls and trouble call-related truck rolls.

In April, we announced that Brian Sweeney has been named President of Cablevision, and Kristin Dolan has been appointed Chief Operating Officer. Brian and Kristin have nearly 50 years of combined experience and they have each played critical leadership roles in the ongoing transformation of Optimum. I'm confident that our customers and shareholders will benefit from their ongoing efforts.

In summary, we are making substantial improvements to our service and product offerings. The Optimum experience continues to evolve, and customers are taking notice of the positive developments. We are pleased with our first quarter results and believe that our investments will enhance our long-term performance.

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

Gregg G. Seibert

Thank you, Jim, and good morning, everyone. During the first quarter, we gained more than 8,000 high-speed data customers and nearly 8,000 voice customers. Customer relationships declined by 2,000 and video customers declined by 14,000.

Average revenue per customer was $148.22 in the first quarter, an $8.42 increase as compared with the prior year period. Average revenue per video subscriber was $168.34 in the first quarter, an increase of $12. These increases were principally driven by our 2013 price initiatives, which were only partially reflected in our first quarter 2013 results. They also reflect the impact of certain 2014 price initiatives, higher advertising revenue, certain video tier migrations and our more disciplined retention policies.

As compared with the prior year, total cable revenue for the quarter increased by 4.5%. This growth principally reflects the increase in revenue per customer, which was partially offset by fewer customer relationships. First quarter cable advertising revenue increased by 17% year-over-year, reflecting significantly higher spending by the gaming sector, as well as gains in banking and finance, domestic auto and certain other categories. These gains were partially offset by declines in telecom, furniture retail and foreign auto.

Cable AOCF increased 17% in the first quarter as compared with the prior year period. This primarily reflects the growth in revenue per customer and a decline in certain operating expenses, partially offset by the impact of fewer net customers and higher total programming costs.

The decline in other operating expenses was driven in part by the success of our recent service initiatives, which resulted in a decline in trouble call-related truck rolls and customer service calls. We also had lower legal fees. First quarter growth also reflects the impact of Superstorm Sandy-related items.

Cable's first quarter AOCF margin was 31.3%. This is up from the prior year period comparable margin of 27.9%. Cable capital spending in the first quarter was $145 million, a $54 million decline from the same period in 2013. This decline principally reflects lower CPE purchases and lower spending on Wi-Fi and support capital.

Lightpath's first quarter revenue increased 5.2% and AOCF increased 10.4% over the prior year period. These increases continue to reflect revenue growth in our more profitable Ethernet-based services, which were partially offset by the continued decline in the legacy TDM-based services.

During the first quarter, Lightpath introduced the 100 Gigabit Optical Transport Service, which is available throughout the Lightpath footprint. Larger enterprises are beginning to outgrow their 10 gigabit services, and Lightpath is well positioned to meet this emerging need.

In our other segment, revenue decreased 1.7% and the AOCF deficit decreased 28.1%. These results principally reflect lower advertising revenue at Newsday and higher advertising revenue at News 12. AOCF also reflects lower operating costs, including the impact of our decision to reduce our annual expenditures at MSG Varsity.

Overall, our first quarter AOCF results exceeded our expectations for a number of reasons. After a difficult January, our subscriber results improved and we have higher revenue than anticipated for the quarter. In addition, certain marketing activities planned for March were moved into the second quarter, and we recorded an insurance recovery related to Superstorm Sandy. We also had lower expenses than expected, including lower legal fees and customer service costs. The customer service cost savings were largely a function of our trouble call-related truck roll and service initiatives.

Looking forward to the balance of 2014, we expect full year 2014 AOCF growth in the mid to high single digits, as compared with full year 2013.

Now turning to the company's financial position. The company's first quarter consolidated cash position was $768 million and net debt was $8.2 billion. In addition to our cash on hand, we have $1.43 billion undrawn and available under the $1.5 billion revolving credit facility at CSC Holdings as of the end of the quarter.

As I noted on our year-end earnings call, we repurchased $28 million of Cablevision senior notes during the first quarter. As stated previously, we remain focused on identifying opportunities to reduce leverage, and we plan to continue to utilize 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 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 a trailing 12-month AOCF measure.

At March 31, the company's consolidated net leverage ratio was 4.7x. The CSC Holdings Restricted Group bank leverage ratio was 3.1x.

We did not repurchase shares of Cablevision's stock during the first quarter of 2014, so we continue to have approximately $450 million of remaining stock repurchase authorization.

And again, we know the issue of cable consolidation continues to be on all of your minds, but this call is to discuss our first quarter results. We will not be entertaining questions relating to industry consolidation today.

Operator, with that, we'd like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] your first question comes from Jessica Reif Cohen of Bank of America Merrill Lynch.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

Two separate questions. Can you give us any color on what you think CapEx will be for the full year? And is it fair to say, given the decline in the quarter, that the peak spending funding, at least, is behind? Maybe you can give us update on some of the initiatives. And then the second topic is, advertising was obviously a great number. How much of that is targeted or addressable advertising? And how penetrated do you actually -- do you think you are in that segment? And maybe if you can give us an outlook for the rest of the year, at least the second quarter.

Gregg G. Seibert

Thanks, Jessica. I'm going to handle the CapEx portion of that, and I think Kristin probably is the right person to handle the advertising side. On the CapEx front, in the first quarter, we really had -- it was really very much of a timing issue for us. We ended up purchasing less CPE than we had in the prior year. I think the differential there is certainly in the tens of millions of dollars. And we, on our last call, had put out guidance for the year that we thought that our capital expenditures for 2014 were going to be in the same rough general range as our 2013 capital expenditures, and I think that we're continuing to believe that it'll be in that type of a range. So view the first quarter when compared to '13 as being a '13 in which we had some additional CapEx as a result of the recovery from Sandy and view '14 as one in which we didn't make as much CPE purchases as we normally would during the quarter.

Kristin Aigner Dolan

Jessica, it's Kristin. In the future results, of course, we don't have -- we don't give any forward-looking information on that, but advanced advertising is definitely driving a lot of the improvement that you see, but we don't break it out separately. But I can tell you that in first quarter, we had more advanced advertising campaigns than we've had since we've launched it 5 years ago, so it's definitely growing.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

And can you give us any color on Q2 trends at all?

Gregg G. Seibert

No, we can't look forward on the trends. But Jessica, I think as you look back over the last couple of years, you've seen pretty robust advertising growth in this footprint. I think it's one of the things this company excels at.

Jessica Reif Cohen - BofA Merrill Lynch, Research Division

And just one last thing, can you tell us what the insurance recoveries from Superstorm Sandy was in the quarter?

Gregg G. Seibert

Right now, we have approximately $3.4 million broken into a couple of different buckets: $3 million in the cable company, $400,000 that's booked elsewhere. We don't believe that that's the ultimate total recovery. That's what we've -- that's the baseline we're at so far. We're going to look to improve that.

Operator

Your next question comes from Phil Cusick of JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

A couple, if you don't mind. First, the sports increase in March. When did that hit? And did that roll across the whole base?

Gregg G. Seibert

So we love modeling questions, Phil, that really comes across as one. That's a $2 increase. It starts in March and it rolls in, in the same way that the price increases generally roll in for us.

Philip Cusick - JP Morgan Chase & Co, Research Division

And then one for Kristin. The promo discipline, we talked about this on the last call, and it seems like people really weren't actually leaving. What have you seen from trends there in the last couple of months?

Kristin Aigner Dolan

Yes. So we're seeing the same thing. And I think you look at the RPS, that continues to do well, and I think that's evidence of our belief in the success of maintaining our discipline.

Operator

Your next question comes from Craig Moffett of MoffettNathanson.

Craig Moffett - MoffettNathanson LLC

Verizon has been saying that New York is their fastest-growing market, and they apparently have a fairly substantial push now to meet their June deadline. What are you seeing with respect to Verizon in the New York City market specifically? And have the trends there changed? And what have you learned about the best way to compete with them?

Kristin Aigner Dolan

I'll take that one, Craig. Again, we're meeting the competitive challenge every day with our strategy, our advanced video platform, our increased Internet speeds, our Wi-Fi products, of course, our focus on service and also the Netflix experience where we continue to be ranked as the #1 major ISP in the country. The other thing I'd say is that we understand a significant portion of their potential FiOS expansion is in the MDU footprint. And just interesting to note that they don't connect MDUs with fiber to each residential unit, so this is a different market that they're pursuing.

Craig Moffett - MoffettNathanson LLC

Have you seen any quantitative changes in the kind of results that you've been achieving versus FiOS in the last couple of quarters?

Kristin Aigner Dolan

We don't normally break that out.

Gregg G. Seibert

And it varies from quarter to quarter, Craig, so it's not something that we put as much focus on as we do on the long-term trends. And I think we continue to believe that we're holding our own.

Operator

Your next question comes from Marci Ryvicker of Wells Fargo.

Stephan Bisson - Wells Fargo Securities, LLC, Research Division

This is Stephan on for Marci. Two questions. The first, the commercial segment is kind of growing for a lot of the cable companies. Do you guys have an estimate as to your total marketplace and how penetrated you are? And then there's been talk as to possibly using the Wi-Fi cable networks to potentially launch kind of the wireless service using a -- the Wi-Fi there. Any thoughts on that?

Gregg G. Seibert

Stephan, on the commercial side, just for a second, we have both our commercial offering, which is in the sort of the SME portion of the cable business. We don't break that out, but that continues to be a significant growth area for us. And as I think we've made pretty clear over the last few calls and at investor meetings, one of our real priorities has been to reinvigorate the growth at our Lightpath division. We have done that. The growth at this point is back in the double digits. And we continue to believe that Lightpath is going to be a substantial grower for us. And I don't believe we see any diminution in the growth prospects in the SME business either, even though we have substantial share in the marketplace.

James L. Dolan

In regards to Wi-Fi, this is Jim, we've been saying for quite some time that the Wi-Fi is a differentiator for the business. And now with the addition of the smart routers and the experience in our footprint and how we reach our customers and the robustness of the network are starting to really blossom out. And with that, I think you're going to see new products, something that we haven't seen for a while. And I think you're going to see some of these products are going to be rather disruptive, most likely to some of the current marketplaces, particularly the wireless data market. Since Wi-Fi, as you know, is essentially an unlimited data service to our data customers, it actually is very well positioned to other wireless data providers. Expect that we will continue to push that trend and that we're going to be aggressive in finding and rolling out new products that ride on that network.

Stephan Bisson - Wells Fargo Securities, LLC, Research Division

Okay. One follow-up. Do you have any MVNOs with any wireless providers currently, and are you looking at pursuing any?

Gregg G. Seibert

Nothing material. We had a small MVNO a couple of years ago, which I believe has lapsed.

Operator

Your next question comes from Ben Swinburne of Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I'd love to hear the company's view on all the chatter out there around Netflix and Interconnect. I don't know if Wilt is on the call, but if he has a perspective on the network relationship with companies like Netflix and YouTube who are big downstream users of capacity and whether the system is sort of working as it is, or if there are changes that need to be made just in light of all the neutrality commentary out there. There's a lot of stuff going on, so I'd love to hear your thoughts, if you have any.

Brian G. Sweeney

So Ben, this is Brian Sweeney. I'll respond to that. So in general, we've embraced -- just on the open Internet stuff, we're not going to offer specific comments on the FCC Internet orders until that's more fully developed. But our focus has always been to provide the best connectivity and services to our customers, both on our broadband network and on our Wi-Fi network. And we've done -- put agreements in place, whether they're peering agreements or whether it's the Netflix Open Connect agreement, which basically reinforce providing the best services to our customers. And we're going to look to continue to do that on a go-forward basis.

Benjamin Swinburne - Morgan Stanley, Research Division

Great. And then, Gregg, was there any other -- you talked about '14 price initiatives in the sports, $2 sports charge. Is there anything else in the quarter? You mentioned revenue is higher than you expected, but I just didn't don't if there's anything else you wanted to call out.

Gregg G. Seibert

No, I think in general, Ben, as I mentioned in my prepared remarks, we just had a rough -- we had a rough January. And as we gained momentum in February and March, we found ourselves in a position where our revenue estimates came in higher than we had anticipated. I think in terms of rate events, we're not being any more specific than the $2 sports surcharge increase, which Jim highlighted in his comments. But we have made other moves on the rate side that leave me comfortable that we're looking at something that has, at least, the impact of a normal -- and I'll put this in quotes, "A normal video rate increase at current [ph] level."

Operator

Your next question comes from James Ratcliffe of Buckingham Research.

James M. Ratcliffe - The Buckingham Research Group Incorporated

Two, if I could. First of all, following up on Wi-Fi, do you have an idea what share of your customers out-of-home mobile traffic you think you're capturing right now versus the stuff that's going to cellular? And -- or what share of their traffic you could be capturing if they were using the Wi-Fi hotspots everywhere they're available? And secondly, can you help us quantify what degree of the marketing expense that got pushed into 2Q would be?

James L. Dolan

I think the only thing that we've said in regards to the data usage is essentially that it's close to double from last year. So we measure against the usage of our own customers. We don't necessarily compare it to other providers per se. We think that there's a lot more traffic that could move to the Wi-Fi network, and that, as we go out with these new routers, et cetera, we expect that we'll pick up a lot of it. I think the important thing is that Wi-Fi as an architecture is capable of handling it, and that's one of the big advantages of it. So but I don't have any specific data compared to other providers.

Kristin Aigner Dolan

Yes. We can tell you, James, that there were more than 1 million unique households that used Optimum Wi-Fi in the first quarter, and that's a 30% increase year-over-year.

James M. Ratcliffe - The Buckingham Research Group Incorporated

And on the marketing expense?

Gregg G. Seibert

James, I'll take the marketing expense side. And one of the things that we find that we have to deal with when we both provide -- when we provide quarterly guidance is that we have to sort of keep in mind that we're operating the business on a tactical basis during the period of time that, that guidance covers. And what happened in terms of the marketing expense, it was a fairly significant move from the first quarter into the second quarter. I'm not going to get into the dollar specifics of it, but there was a tactical decision made on the operating side that we could use those dollars more efficiently in the second quarter than we were going to in the first, so we made the decision to change. So really, it was just as much a change in an estimate as opposed to necessarily a substantial change in either the marketing program or the way that we approach marketing.

Operator

Your next question comes from Tom Eagan of Telsey.

Thomas William Eagan - Telsey Advisory Group LLC

You mentioned that trend was lower. So with the various rate increases, did you see lower churn across all the services?

James L. Dolan

I think we break that out, do we?

Gregg G. Seibert

No, we don't break it out. But we did reference in the comments or in our earlier response to Q&A that we're seeing lower churn. I think that, that probably -- I know that was based at least on the video side of the equation, and I assume that holds true for data and telephony also. We're just confirming that. I believe that's correct. So it's across all products.

Thomas William Eagan - Telsey Advisory Group LLC

Okay, great. And then also, you seem to add fewer customers year-over-year in the quarter. So if churn was down, does that mean you have fewer gross adds?

Kristin Aigner Dolan

Yes.

James L. Dolan

Yes, it does.

Gregg G. Seibert

Yes, definitionally.

Operator

Your next question comes from Bryan Kraft of Evercore.

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

Just 2 quick questions. One, you said the lighter CPE spend, I know, is timing, but do you, at some point, expect the network DVR to begin bringing CPE investment levels down? And then just secondly on Lightpath, how are you thinking about working on partnerships with other MSOs to coordinate on out of footprint to serve enterprise customers?

Gregg G. Seibert

I'll take the Lightpath portion of that question, which is, we have discussions on a fairly frequent basis about ways that we can partner with others to provide further services. But it's -- so far, those discussions haven't come to fruition. I think people are at different stages or companies are at different stages of the life cycle in that business, and I think we're more -- we feel we're farther along in the life cycle plus we're more penetrated in our footprint than many of our peers are. And at this point, we haven't been able to put anything together, but it would not at all surprise me if over the next few years, particularly as the industry continues to consolidate, that you saw more joint activity intended to keep that traffic within the cable industry's networks.

Kristin Aigner Dolan

And then on your CPE question, the CPE expenditure is usually based more on volume. We will see some savings, but then, the cloud -- the facilitation within the cloud, which gives us the capability, also does come with some expense.

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

Does the storage that you're putting in the cloud, is that hit CPE spend or scalable infrastructure?

Gregg G. Seibert

That's a scalable infrastructure.

Kristin Aigner Dolan

Yes.

Operator

Your last question comes from Tuna Amobi from S&P Capital IQ.

Tuna N. Amobi - S&P Capital IQ Equity Research

Well, actually, my question was asked and answered. So thank you for the opportunity.

Gregg G. Seibert

Operator, thank you. To our investors, thank you. And we look forward to next quarter.

Operator

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

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