Glenn Britt - Chairman, Chief Executive Officer and President
Tom Robey - IR
Landel Hobbs - Chief Operating Officer
Robert Marcus - Chief Financial Officer and Senior Executive Vice President
John Hodulik - UBS Investment Bank
Bryan Kraft - Evercore Partners Inc.
Vijay Jayant - Citadel Securities, LLC
Richard Greenfield - BTIG, LLC
Benjamin Swinburne - Morgan Stanley
James Ratcliffe - Barclays Capital
Jason Bazinet - Citigroup Inc
Stefan Anninger - Crédit Suisse AG
Douglas Mitchelson - Deutsche Bank AG
Thomas Eagan - Collins Stewart LLC
Jason Armstrong - Goldman Sachs Group Inc.
Craig Moffett - Bernstein Research
Time Warner Cable (TWC) Q3 2010 Earnings Call November 4, 2010 8:30 AM ET
Hello, and welcome to the Time Warner Cable Third Quarter 2010 Earnings. [Operator Instructions] Now I will turn the call over to Mr. Tom Robey, Senior Vice President of Time Warner Cable, Investor Relations. You may begin.
Thanks, Candy, and good morning, everyone. Welcome to Time Warner Cable's 2010 Third Quarter Earnings Conference Call. This morning, we issued two press releases, one detailing our 2010 third quarter results, and the other announcing our share repurchase program and the declaration of our regular quarterly dividends.
Before we begin, there are several items I need to cover. First, we refer to certain non-GAAP measures, including operating income before depreciation and amortization or OIBDA. In addition, we refer to adjusted OIBDA and adjusted OIBDA less capital expenditures. 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 or our trending schedules.
Second, today's announcement 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 statements herein due to various factors, including economic, business, competitive, technological, strategic and/or regulatory changes that could affect our business.
These factors are discussed in detail in Time Warner Cable's SEC filings, including its most recent annual report on Form 10-K and quarterly reports on Form 10-Q. 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.
And finally, today's press release, trending schedules, presentation slides and related reconciliation schedules are available on our company's web site at timewarnercable.com/investors. A replay of today's call will be available beginning approximately two hours after the call has ended and will run through midnight Eastern Time on August 9.
And with that covered, I'll thank you and turn the call over to Glenn. Glenn?
Thanks, Tom, and good morning, everyone. We had a good third quarter, in which we grew revenues and adjusted OIBDA roughly 5% and 6%, respectively. ARPU growth was strong. In fact, total ARPU per customer relationship increased almost 7%. Our Commercial Services and Advertising businesses continued to accelerate with year-over-year revenue growth rates of approximately 22% and 23%, respectively.
Consistent with our comments during the quarter, subscriber net adds grew weaker than we've seen before. These results reflect the weak economy, with continuing high rates of unemployment and housing vacancies, as well as a very competitive marketplace. The impact wasn't uniform. Some services fared better than others. Our high speed data product performed the best on a relative basis and our customers continued to choose faster speeds.
In terms of the bottom line, we generated $1 of EPS in the quarter for the first time since becoming a public company. And through the first nine months of the year, we have generated more than $1.6 billion of free cash flow.
When we went public three and a half years ago, we had set out to build a company that is consistent, transparent and shareholder-friendly. We followed through in a series of steps, starting with our separation from Time Warner Inc. and our payment of a $10.9 billion special dividend. Since then, we've been steadfastly committed to a leverage target of 3.25x adjusted OIBDA and we've been consistent in our public statements that as we delevered below 3.25x, we would return capital to our shareholders. In keeping with this strategy, we announced regular dividend this last January with the yield at announcement of 3.7%. Despite strong appreciation of our stock price in the intervening nine months, our yield remains well above our cable and satellite years.
As a result of our continuing progress, we're now positioned to return even more capital to our shareholders. This morning, we announced that our board has authorized a $4 billion share repurchase program. This repurchase program, in conjunction with our regular dividend, once again reflects our confidence in the strength and stability of the company's free cash flows.
In operations, we are redoubling our focus on the customer experience to further improve our competitive position. A number of very exciting products and services that have been in the incubation process are now poised for release. These new capabilities support our 4 Anys framework, that is the notion that our customers want access to any content any time, anywhere and on any device.
Consistent with the anywhere and anytime aspects, we have launched our Remote DVR Manager to much of our footprint including New York City and whole home DVRs available in some systems and will be broadly available by year-end. We're proud to be the first multichannel provider to offer ESPN to our customers via TV Everywhere capability. Last week, we debuted authenticated access to ESPN3 and the ESPN linear feed for customers who subscribe to a video tier that includes ESPN. In the near future, we plan to offer access to ESPN2, ESPNU and the new ESPN goal line and the ESPN Buzzer Beater through the same process. This gives our customers an unprecedented level of access from multiple locations and devices to great live sports content. We plan to add more content from a wide range of networks to our TV Everywhere capability in the near future.
In addition, we are on the cusp of harnessing the power of consumer electronics products in the home. In the not-too-distant future, our customers will have the opportunity to use their iPad as a remote control. And we're working on infrastructure that could enable customers to enjoy our entire video product on any IP-connected device in the home.
On a different front, we've been very pleased with our signature home offering in Charlotte. Signature home is a feature-rich, triple-play offering targeted at high ARPU customers who want all of our best-in-class products and who demand a much more personalized service experience. It's been rolled out across much of our footprint in the coming weeks. In addition, we're planning to complement this high-end suite of services with a budget-oriented video offering, consistent with our belief that some customers would like a smaller package.
In summary, the company is doing well. We're introducing important new offerings that we think will give our customers control in ways that are simple and easy. We are performing well financially despite the economic and competitive climate, and our efforts are paying off in the generation of strong free cash flow. And all of these makes it possible for us to return a large amount of capital to our shareholders through regular dividends and the share repurchase program that we announced this morning.
Next, Rob will give you additional details on our financial performance.
Thanks, Glenn, and good morning, everyone. As usual, I'll start with the third quarter highlights on Slide 3. Third quarter revenues grew over 5% year-over-year as residential subscription revenues increased 3.5% and Commercial and Advertising revenues each jumped about 22%. Despite the tough economic and competitive climate which negatively affected subscriber growth in the quarter, our ARPU per customer relationship rose 6.6% year-over-year to more than $109.
Adjusted OIBDA grew almost 6% in the quarter, reflecting our strong revenue growth and improved margins. Through the first nine months of the year, adjusted OIBDA less CapEx increased almost 20% and free cash flow was up over 8%. EPS of $1 marked a record since becoming a public company. With three quarters of the year behind us, we are on track to meet or exceed all of the elements of our full year guidance. I'll provide some updates on the guidance as I walk through the financials. And last but certainly not least, as Glen discussed, we are very pleased that our board has authorized a $4 billion share repurchase program.
Before we review our operating results, let's turn to Slide 4 so I can provide some color on the share repurchase plan. As we've been saying, since our separation from Time Warner, our target leverage ratio is 3.25x. At quarter end, we were just under 3x and going forward, our strong free cash flow and OIBDA growth would reduce our leverage even further absent additional returns of capital to shareholders. So in the interest of managing to our leverage target, we are initiating a $4 billion share repurchase program to complement our regular dividend. We showed you a chart like the one on Slide 4 about nine months ago when we announced the initiation of our regular dividend. At that time, we pointed out that our initial dividend yield of 3.7% was much higher than the average dividend of dividend-paying S&P 500 companies, and was among the highest yields of companies initiating a dividend in the last five years. Similarly, as the chart shows, our buyback authorization is large. At $4 billion, the program provides us the capacity to repurchase up to almost 20% of our total market Cap at today's stock price. That's higher than our peers and larger than nearly 95% of the more than 600 share repurchase authorizations announced in the first nine months of this year. We're not announcing a timeframe for completing the repurchase program as the timing of our purchases will be dictated by market conditions, as well as other factors. We'll obviously be reporting our monthly share repurchase activity each quarter and that will provide you a good indicator of the pace of which we're buying.
So getting back to Q3 performance, let's look first at our Subscriber results. During the quarter, we continued to grow our high-speed data subscribers and take share from the telcos. We increased total HSD subs by 104,000 bringing our total HSD subscriber base to over 9.7 million, a 5.9% year-over-year increase. At quarter end, 35.6% of homes passed took our HSD products. We also continued to see a shift in the mix of our residential HSD subscriber base to our higher-speed tiers. Customers taking our Turbo offering increased by 123,000, and subscribers taking our Wideband or DOCSIS 3.0 tier grew by 4,000. About 13% of our residential HSD subscribers now take either the Turbo or DOCSIS 3.0 product. Commercial HSD net adds more than doubled year-over-year to 9,000. We added 34,000 Residential and Commercial digital phone customers during the quarter, bringing our total voice subscriber count to over 4.4 million, approximately 16.5% of homes passed and a 7% increase from the end of Q3 '09.
We added 12,000 Business Class Phone customers in the quarter for a total of 102,000, an increase of more than 75% since the end of Q3 '09. As we stated during the quarter, our video subscriber performance in particular was negatively affected by the challenging competitive and economic environment, and in particular, high unemployment, high housing vacancy rates and anemic new home information. For the quarter, we lost 155,000 residential and commercial video subscribers. The video sub declines were primarily driven by losses in analog Single Play video customers.
As a result of the video subscriber losses, total Primary Service Units declined by 17,000 for the quarter. The good news, however, is that year-over-year video sub performance and in turn, total PSU performance, did improve in each month of the quarter. August was better than July and September was better than August. So far in the fourth quarter, subscriber performance is looking better than in the third quarter. In fact, we've already added more voice customers in Q4 than we did in all of Q3. Overall though, PSU net adds continued to be below year ago levels.
For the quarter, video and voice gross connects were down versus last year's third quarter while HSD connects were actually up year-over-year. Churn was flat to down year-over-year in each PSU category. Especially given the absence of new occupied homes to sell to, we continue to focus on migrating customers into bundles. As a result, we added 15,000 double play customers and 14,000 triple play customers. At quarter end, over 59% of our customers took more than one PSU, with more than a quarter of our subscribers taking all three PSUs.
Turning to our financial results, let's start with revenues on the next slide. Third quarter revenues increased 5.2% year-over-year to $4.7 billion. Total subscription revenues, residential and commercial combined, grew 4.5%, driven by increased subscribers and a roughly 6% increase in subscription ARPU per customer relationship. Advertising revenues increased 22.5%. In dollar terms, total revenues were $236 million higher than in Q3 '09, with $144 million of that growth coming from our Residential Subscription business, $51 million coming from Commercial and $41 million coming from Advertising.
Let's focus on our Residential subscription revenues on Slide 7. Residential subscription revenue grew 3.5% year-over-year, driven by a healthy mix of price and volume increases. Residential HSD revenues were up 8.5% or $84 million from last year's third quarter, driven by sub growth, as well as a year-over-year increase of over 2% in Residential HSD ARPU. This is the sixth consecutive quarter of year-over-year Residential HSD ARPU improvement as we benefited from price increases, and more subscribers taking premium tiers of service.
Residential video revenues increased $42 million, driven by price increases, and higher digital video and DVR revenues, partially offset by a decline in video subscribers and lower transactional VOD revenues. Our Movies On-Demand business grew 11.5% over last year's third quarter, reflecting increased buys and higher revenue per buy. But our overall transactional VOD revenues were way down by declines in adult and event revenues.
Residential video ARPU increased nearly 5% from Q3 '09. Residential voice revenues grew almost 4%, driven by subscriber growth, partially offset by a year-over-year ARPU decline of just over 2.5%, which was actually the smallest decline this year. On a sequential basis, residential voice ARPU was pretty much flat.
Now let's flip to Commercial revenues on the next slide. Commercial subscription revenue growth accelerated for the third consecutive quarter to over 21.5%, remaining on pace to achieve the better than 20% full year commercial revenue growth that we discussed at the beginning of the year. The growth was balanced across Data, Business Class Phone and cell tower backhaul, with each contributing roughly 30% of the growth, the remainder came from video. Commercial data revenue increased almost 12.5%, driven by growth in shared Internet access, dedicated Internet access and Metro ethernet revenues. Business Class Phone revenues increased nearly 80%, driven by subscriber growth and cell tower backhaul revenues more than tripled versus Q3 '09.
Moving on to Advertising revenues. Our surge in ad sales business continued to drive a disproportionate share of our total revenue growth in the third quarter, rising 22.5% over last year. Advertising revenues per video subscriber increased about 27% to $5.89. The auto category accounted for a about a quarter of total ad sales and about a third of the year-over-year growth. The media
and entertainment category contributed about 20% of the growth and political ad sales were responsible for roughly 15% of the growth. Year-to-date through the end of Q3, we've generated about $32 million of political ad dollars.
Through the first nine months of the year, our Advertising revenues have grown just over 22%. With continued strength in our core Advertising business, and the benefit of additional political spending, leading us to this week's elections, we're on pace to easily surpass our initial estimate of 15% growth for the full year.
Let's turn to adjusted OIBDA on Slide 10. Third quarter adjusted OIBDA grew 5.7% to $1.7 billion. Our margin improved 10 basis points year-over-year to 36.2%. Total third quarter operating expenses grew 5% compared to last year. Employee costs were up 4% year-over-year, reflecting higher headcount and compensation expenses, especially in our Commercial business, partially offset by lower pension expense. Programming expense increased only 3.5%. That's less than we had anticipated due to video sub losses and some items described in our press release which reduced year-over-year growth by about $20 million. Year-to-date programming costs have grown less than 5%, but we expect growth to accelerate in Q4 and full year programming costs growth should land in the 5.5% to 6% range. Third quarter programming cost per video subscriber increased 6.8% year-over-year.
Marketing expense of $156 million was higher than last year, but in line with the marketing spend over the last few quarters. Voice costs were up 4% due to growth in digital phone subscribers. As we previewed earlier in the year, we have begun the process of in-sourcing various voice support functions. We expected that about half of our voice subs will be migrated by the end of next year, with the balance moving over the following three years. The financial benefits of this move will begin to show up next year and over time, should be pretty meaningful. We continued to invest in our Wireless business during Q3, incurring about $15 million of wireless losses which reduced our adjusted OIBDA growth by almost a full percentage point and our margin by roughly 30 basis points. We are still expecting full year Wireless losses in the $50 million zone.
You'll recall that restructuring is excluded from adjusted OIBDA. Restructuring costs were $44 million through September 30, year-to-date and we anticipate another $15 million or so in the fourth quarter. Based on our year-to-date performance and our outlook for Q4, including higher year-over-year programming, bad debt and casualty insurance expense growth, and larger Wireless losses, we now expect the full year adjusted OIBDA growth will come in around 6%.
Turning to capital spending on Slide 11. Capital intensely declined for the fourth consecutive quarter, as third quarter CapEx came in at $676 million or 14.3% of revenues. Third quarter residential capital expenditures were down more than 15% year-over-year to $563 million, driven by declines in scalable infrastructure, CPE and support capital. Once again, in the quarter, we continued to invest more in our fast growing Commercial business. Commercial CapEx was $113 million, up about 24%, with about half the growth attributable to expanding our cell tower backhaul footprint. Through the first nine months of the year, CapEx was $2.1 billion or 15.3% of revenues, down from over 17% of revenues in the first nine months of 2009. As usual, we expect Q4 will be the highest CapEx quarter of the year. But we're very comfortable that capital expenditures for the full year will be less than $3 billion.
On to cash flow on the next slide. Adjusted OIBDA less capital expenditures for the third quarter was $1 billion, resulting in adjusted OIBDA less CapEx of nearly $3 billion for the first nine months of 2010, a nearly 20% year-over-year increase. Given our year-to-date performance, we continued to expect our full year adjusted OIBDA less CapEx will increase around 20% over 2009. Free cash flow for the quarter was $396 million, driving our nine month free cash flow to $1.6 billion or $4.50 per diluted share. Free cash flow was 8% higher than in the first nine months of 2009 as higher adjusted OIBDA less CapEx and lower pension contributions more than compensated for a jump in cash taxes of $333 million and an increase in cash interest of $159 million.
As you model Q4 free cash flow, remember that the recent Small Business Jobs Act extended bonus depreciation retroactive to the beginning of this year. That should reduce to zero, our fourth quarter Federal estimated tax payment. I'd also point out that we may make additional pension contributions in the fourth quarter.
Turning to the next slide. Diluted earnings per share were $1, an all-time high for Time Warner Cable since becoming a public company and 32% higher than the last year's third quarter. Through the first three quarters, diluted EPS was $2.55, up 19% over the same period last year. Given our EPS performance through the first nine months, we now expect to exceed the high end of the $3.25 to $3.50 per share range that we provided at the beginning of this year.
Finally, moving to the balance sheet. At quarter end, our net debt and preferred equity totaled $20.5 billion, a reduction of $1.1 billion from year-end 2009 despite our having paid out $432 million in regular dividends. Our leverage ratio at quarter end was 2.99x.
Just yesterday, we entered into a new three-year $4 billion revolving credit facility which replaced the $5.875 billion facility that was set to mature in February 2011. We provide more information about the new facility in our 10-Q, but suffice it to say that we're very pleased with the terms. We now have no debt maturities until 2012.
So with that said, let me quickly summarize. We delivered another quarter of solid financial results, with accelerating commercial and advertising revenue growth, as well as stable residential revenue growth. Our free cash flow continued to grow at a healthy pace despite higher cash taxes and interest payments. As a result, we continued to reduce our leverage and create greater financial capacity, enabling us to launch our $4 billion share repurchase program.
With that, I'll turn it over to Landel.
Thanks, Rob, and good morning. From an operational perspective, we're performing well in all areas of our business, residential, commercial and advertising. Over the next few minutes, I'll share with you some of the progress we're making in each of these areas.
We'll start with Residential. On the competitive front, the telephone companies continued to expand their number of homes passed, although in our footprint, the rate of increase, similar to last quarter, has continued to slow. We estimate that at the end of September, AT&T's U-verse product was available to approximately 23% of our homes passed, up from 22% a quarter earlier. Verizon FiOS offering continued to be available to about 10% of our passings. The competitive intensity in Q3 was about the same or slightly more aggressive than in the second quarter.
On the video side of the business, we continued to see very little expansion of multichannel video homes on an industry-wide basis. This is consistent with the ongoing weakness in the macroeconomic environment. Our third quarter video losses were driven primarily by lower connects. In particular, we have under indexed in low-end segments. Most of these households appeared to be going to satellite or leaving the pay TV category entirely. We also saw some increase in disconnects among subscribers who signed up during last year's over the year digital TV transition. By and large, similar to what we saw on the connect side, these subs win our two lowest value segments. On the other hand, we've been performing well in high-end, high-ARPU segments. And by the way, we haven't been able to identify any increase in video cord cutting related to over-the-top video.
A couple of examples. First, as Rob mentioned, our video losses in the quarter were driven by Single Play video customers. And second, our video high-speed data Double Plays actually increased in the quarter. That's the opposite of what we'd expect to see of the remaining for cord cutting. And another example, we look at college towns like Austin, Texas and Columbus, Ohio in our footprint to examine the pieces that video cord cutting among students might have contributed to weaker connect volume this quarter. It turns out that college enrollment is flat this year compared to last and our video connect volumes were also flat. So we'll continue to monitor cord cutting but haven't found evidence where we might expect to see it.
Turning to broadband. We continued to compete very well in Q3. AT&T's promotional pricing of its six megabit per second DSL service at $19.95 a month appears to have reduced the exodus of DSL subs. However, on a footprint-adjusted basis, our 104,000 broadband net additions were around 50% higher than the two big telcos, demonstrating that we continued to take share in Q3. In voice, we continued to take share from the telcos in Q3 albeit at a slower rate than we would like. We recently have adjusted Triple Play bundled marketing and pricing in our East region to good effect. We actually seen year-over-year improvement in digital phone net adds in recent weeks.
With that as a backdrop, let me highlight several initiatives that we expect to further enhance the competitiveness of our products. First, I'd be remiss if I didn't update you on our high definition product. As we indicated last quarter, we completed the implementation of video switching in New York City, and as a result, we now have 156 HD channels in the city. Nationwide, our weighted average is now over 110. This demonstrates the ability of our infrastructure in meeting customer's needs. We've lost Remote DVR Manager across our footprint and it's now available to more than 3 million DVRs. And this week, there's a lot of excitement around our mobile Internet product as we launched our combined 4G/3G wireless service in New York City. It delivers speeds up to six megabits per second, 5x faster than 3G, making it one of the fastest mobile broadband networks available. With our wireline Time Warner cable Internet, mobile Internet and Wi-Fi offerings, our customers in New York City will now have three different ways to access our broadband service with varying degrees of speed and mobility, making it the most complete and flexible broadband offering.
In conjunction with our recent mobile Internet launch, we are offering new packages, including a tier that provides 250 megabytes per month on our for the 4G/3G network for under $20 when bundled with our wireline service. In the coming months, availability of the service will expand further as we launch in Cleveland in early December and LA just after year end. In voice, we've launched VoiceZone in nearly our entire footprint including, as of a couple of weeks ago, New York City. VoiceZone is a web portal where subscribers can manage their home voicemail and phone features anywhere, anytime. It enables them to receive their voicemail as an e-mail attachment and has a number of innovative features including caller ID on the PC.
In Charlotte, we've been very pleased with our signature home, a new bundled offering targeted at our high-end ARPU segments who want all of our best-in-class products and who demand a more personalized service experience. We're seeing a nice ARPU uplift of upgrading customers and we also are pleasantly surprised that substantial amount of the incremental revenue is coming from customers new to Time Warner Cable. The offering looks like a real winner and you can expect to see it arrive in much of our footprint including New York City in the coming weeks.
In the more value- and budget-oriented segments, we've heard loud and clear that customers would like more flexibility in video packaging, particularly in the availability of smaller packages. I want to tease you a bit here because we're not quite ready to make the announcement, but you can expect to see us introduce a video offering that is targeted at more value and budget-oriented segments in the very near future.
Turning now to Commercial. In the SMB market, Time Warner Cable competes primarily with ILECs. In some cases, telcos are increasing DSL speeds to compete against our broadband speeds. In other cases, they're offering a low-price promotion to attract customers, but AT&T and Verizon are also incenting businesses to incorporate national wireless voice and data plans as a way to differentiate their bundles from cable. In the midmarket, Time Warner Cable offers a variety of voice and data products across metro networks that compete with both ILECs and CLECs. The telcos are now paying greater attention to protecting this installed base, had introduced their more complex enterprise-class products into the midmarket. In this competitive environment, we're very comfortable with our ability to compete and grow rapidly in both the SMB and midmarket.
On the product front, we've done a very good job in the past two years in building out a comprehensive Internet and phone solution set for small and medium businesses. This quarter, we filled a long-standing need to update our video solution for the hospitality vertical. Our new HD video for hospitality product enables us to deliver a consistent HD video and music lineup across our footprint while maintaining compatibility with a variety of interactive service providers in the space including Loginet. The service are delivered over either fiber or coax and is targeted initially at hotels with room counts above 100. In cell tower backhaul, we continued to do very well. We installed service to almost 500 radios in the third quarter to raise the total installed base to more than 5,000. In addition, we have contracts on a large number of radios that will keep our installation crews busy well into 2011.
Turning next to Advertising. As Rob indicated, we're having a terrific year in Advertising. Revenues are up 22% in the first nine months of the year and we're seeing strength in almost every category. Core Advertising growth, which excludes political, was very strong in Q3, posting growth at 20% year-over-year. I'd remind you that the strong political year we're experiencing currently won't repeat in 2011. Certainly, our strong performance reflects broader industry trends and the midterm elections. However, it also results from investments we made during the recent downturn and building new relationships and growing categories as well as improved execution.
One area in which we're just now beginning to see the fruits of our labors is the use of data. We now have access to and are using anonymized data from set-tops to help advertisers make better decisions about where to place their spots. All of this data is collected and presented in a way that completely protects the privacy of individual subscribers. It's early doing, but I'm pleased to report that our Advertising customers are very excited about the new capability, and frankly we are, too.
With the industry nearing its objective of 25 million EBIF enabled households by year-end, Canoe is closer to its goal of a truly national ITV solution. Six cable networks are planning to employ its request for information capability in the coming months. We continue to be enthusiastic about the value that Canoe can unlock.
Before I conclude, let me say a few words on our identity refresh. You're probably aware that following our spinoff from Time Warner, we considered changing the name of the company. However, after conducting brand research, we recognized there's great value in both the name Time Warner Cable and our pioneer symbol. As a result, we've decided to keep them both. Although we've refreshed and updated the logo, fonts and colors, you'll start to see it over time in all of our communications, especially as you may have may seen it this morning in Rob's presentation slides or when you visited our website for the conference call. But please be assured that we're not buying hundreds and millions of dollars in media and rewrapping all of our trucks overnight. We'll do most of this in the normal course of business and you won't see a huge bulge on our marketing budget.
So in summary, we have performed well, in Residential, Commercial and Ad sales in the third quarter. We're adding some terrific new capabilities to our products which we expect to further enhance our competitiveness.
Thank you. And with that, I'll turn it over to Tom for the Q&A portion of the call.
Great, thanks, Landel. Candy, we're ready to begin the Q&A portion of the call. We would ask each caller to ask a single question so that we can accommodate as many callers as time permits.
[Operator Instructions] We have Doug Mitchelson, Deutsche Bank.
Douglas Mitchelson - Deutsche Bank AG
One, so Rob, I guess I appreciate the guidance on EBITDA for the full year but through the around 6% comment culminating from 0.6% growth in 4Q EBITDA, the 3.5% growth, that's a pretty wide range. So two questions. Are you willing to tighten that up a bit? Should we think middle of that range? And does the margin pressure you see in 4Q change the way you would suggest investors should look at 2011 and beyond or I think the general outlook is flat margins for you in the industry? Is what you see in 4Q is something that we should think about impacting 2011?
Doug, I'm not going to tighten up the range, but I think you're in the right -- the middle of the range is the right zone, but I'm not going to get too much tighter. The drivers of that -- let me go through them because they're all cost driven and they're all or at least several of them are kind of one-time in nature. Let's start with bad debt. You may remember that in 2009, with the economy being what it was, we actually increased our allowance for doubtful accounts. As we closed out 2009, we took a fresh look at that number and actually reversed it. So we have a tough year-over-year comparison on the bad debt front which won't repeat itself. Programming costs, we've talked about this before, but we expect the growth in -- it'll be the first full quarter under our new Disney deal. So that has an impact on programming costs. On casualty insurance, which is another kind of comparison issue, again, we had an adjustment in Q4 of '09 that will cause that to be a tough comparison, again, shouldn't repeat itself. And the last element is that we'll continue to spend on our Wireless business and a lot of the spend is back loaded, so we'll have more spending in Q4 than we did in the other quarters of the year. So I'm not sure I would draw any conclusions about growing forward margins from that.
Douglas Mitchelson - Deutsche Bank AG
As you look forward with programming cost pressure, do you think that something you can manage through on the video side?
It's the same old issue we've always had, Doug. It's hard not to acknowledge that programming costs growth continues to outpace video revenue growth, but there's enough other positive things on the margin side, including a positive shift in revenue mix that we feel good about our ability to manage margins.
Next, Craig Moffett, Sanford C. Bernstein.
Craig Moffett - Bernstein Research
I know you said you couldn't tell us too much about the low-end packages that you teased us with, Landel. But Glenn, maybe you can at least tell us a little bit about what kind of reception you've gotten from programmers as you've tried to introduce lower end packages and kind of how you see that fitting strategically into what you're trying to do?
I think first of all, you've actually written about this a lot, there is certainly a segment of our economy and our population that is under economic duress and we think it's important for this broader industry, meaning programmers and distributors, to be responsive to that. I've been talking about that for a long time. So we have sought in our programming negotiations which are ongoing with all sorts of people to get more flexibility around that. Obviously, going the other way, in the Programming business, their cost tend to be somewhat fixed so if they're facing smaller audiences and/or a smaller subscription, that's a big problem for them. So it's natural for those companies to resist. So there's a balance in this and I would just leave it to say, we have negotiated some additional flexibility beyond what we had a few years ago that will allow us to begin to offer some smaller packages or lower prices. Probably not all the way where we would like to be, but we're moving in the right direction.
Ben Swinburne, Morgan Stanley.
Benjamin Swinburne - Morgan Stanley
Glenn, as you look at the TV Everywhere project rolling out, obviously, with the ESPN, it's a one year feed, but I think a year from now it'll probably be linear On-Demand, remote DVR. There's a lot of functionality that is coming to the product that hasn't existed to the set-top box before. And with devices like tablets, you create the ability to search in a way that's never been available on the set-top as well. So I'm wondering how far away are we from being able to integrate all that to the television set? Because a lot of this stuff today sort of has the -- sort of a PC product, maybe a mobile product and a television product, it seems like the big win and maybe I'm wrong. Disagree with me if you want, but the big win could be for the industry to bring all this to the television, it adds a whole level of interactibility and customization that hasn't been there before. So how far away are we from that? Do you think that's where we're headed?
I think we're right on the cusp of that. And I'll try to give you a short answer because I could talk about this for the whole rest of the time. But there's obviously a lot of new product introduction both from the CE industry and from what used to be the IT industry and sometimes they look the same. And what we need to do is make sure that our services on all the devices take advantage of the functionality. So I mentioned the idea of using an iPad as a remote which we've been working on for a while. There's a clip on YouTube that shows a demo of an early prototype. You are starting to see in the market and I think you're going to see much more robust way TV sets that directly offer IP connectivity. And as I said in my remarks, we want to create the infrastructure so that our video services can be delivered directly to those TV sets in the home. That's not really so dramatic, it's just like going from analog to digital, et cetera. Those TVs to the extent they start having more intelligence, and the first ones may not have a browser, but the later ones will. I think we'll be able to display a lot more interesting program interfaces, user interfaces. Some of that software may be moved back into the network instead of the DS device. But all of this means that consumers are going to get better experience and I think over time, without set-tops, which is an interesting factor also. So that's my attempt at a fairly short answer.
Jason Armstrong, Goldman Sachs.
Jason Armstrong - Goldman Sachs Group Inc.
I know you didn't want to get too specific on the share repurchase, but just conceptually thinking through this, you've got S400 million or so on average in free cash flow after dividends per quarter, and I think incremental leverage capacity based on sort of EBITDA growth times the leverage target that equates to probably another $300 million to $400 million per quarter. So in essence, the buyback kind of has to be in and around the range of $700 million to $800 million per quarter, i.e. 3% to 4% of the share count per quarter just to stay where you are on leverage. I'm wondering if that's a sort of good way to think about the potential pacing?
Jason, we're really not going to disclose anything about the timing of our repurchases. As we'd said, the driving force behind this is our balance sheet management strategy and our target leverage ratio of 3.25x. But beyond that, we're really not going into timing.
Next, Rich Greenfield of BTIG.
Richard Greenfield - BTIG, LLC
Several of the premium cable network operators have talked to the fact that Time Warner Cable underperforms pretty dramatically in selling premium channels. We saw that your premium revenues were actually down year-over-year. We're curious just how do you react to that? Is it a conscious decision to not sell premium channels as aggressively as some of your peers? And just kind of curious kind of what we could expect over the course of the next year, especially as we start to see more authenticated services which some of your peers have launched for premium channels but which we haven't seen yet from Time Warner Cable?
Rich, this is Glenn. That is something we will get all the time. And I think, as you know, I've been in the industry a long time and back in the late 1970s or early 1980s, Premium Services are what drove the whole business. We now have many more products and I think the issue for us is, what are we going to sell first in a long list of things we can sell? And quite frankly, we tend to focus on the things that have the highest margins and seems to have the highest consumer demands. So that focus perhaps has led to what you're describing about the Premium Services and we do continually look at whether there's opportunities there. But I would suggest that the margins on those services are not nearly what they are in some of the other products. Landel, I don't know if you may want to add to that?
No, you hit it pretty clearly. The only thing else I would add is we're particularly seeing the economy affect the premium sector as well, Rich. That's the only thing I would add in addition to what Glenn had.
John Hodulik, UBS.
John Hodulik - UBS Investment Bank
Maybe just a question for Glenn, following up on the lower video tier. From a Time Warner Cable perspective, how widely offered and promoted will this tier be? Obviously, I know you don't want to get into too many specifics regarding how this will model out. But do you think over time that it should help slow the video losses? I mean, as look at the losses that you're seeing now, you're saying a lot of this are on the low-end side. Do you think that this sort of helps bend the curve in terms of those trends?
Well, first of all, our plan is to, as we often do, is to try a new service in a few markets and learn from that and then if it seems to work, and we like it then, then we roll it out more broadly. So being an optimist, I think it's something we will roll out more broadly. I think that what we're trying to do is segment our audience. We've been very -- with the growing sophistication in our marketing efforts, a better understanding of different parts of the marketplace -- and this is an industry that traditionally had sort of one-size-fits-all, and what we're learning is that not only the demographics, but the psychographics of different groups are quite different. And it's possible to create an offering that pleases one group that actually angers another group. So this is in that context. To the extent they are -- that these are people who are leaving us and maybe leaving the whole category. I think it should help, but we'll have to see.
Stefan Anninger, Crédit Suisse.
Stefan Anninger - Crédit Suisse AG
My question is related to an earlier question regarding the way you see offering products within the home evolving. Glenn, you mentioned a future in which more and more set-tops perhaps move into the television set. For some time, cable engineers have discussed the world in which cable CPE in the home would be designed such that you would have a stick client or a gateway with thinner clients distributor around the home to push content to different areas of the home. Is that concept becoming outdated? And perhaps, as you look to the future, can you discuss how either of those two concepts could impact longer-term CPE spending?
Sure, it's a pretty complicated subject, but I think that if you go back to why do we have set-tops to begin with, although they've become quite common, they're not something we necessarily started out wanting to have, which I think is somewhat of a misperception sometimes, the. Simple reason we have set-tops is that the consumer electronics devices in general are not capable of displaying all of our services without a set-top. So by and large, the consumer electronics devices are not too way capable. They can't do VOD, they can't do program guides, they can't un-encrypt encrypted services, so there's a piracy issue. Obviously, some of the SEC rules on cable cards have attempted to deal with the encryption problem. But we would be delighted to not have set-top boxes. The thing I left out, too, is the hard drive DVR is in the set-tops. I think the world we're going to -- we spent a lot of time with the big consumer electronics companies, the way we're going to is one where these devices will be more intelligent and more easily networked, so that we can envision a world with at least where people buy new TVs, where we might not have to set-tops. I think it may move to a gateway device because the old TVs will live for a very long time, so we'll need some sort of interface and some place for the hard drive. Quite frankly, moving the DVR functionality back into the network which we pioneered with Maestro and Cablevision has been working on, that's a better engineering solution. But given the stance of the company right owners, it might not be one that we can do on a widespread basis quickly. And so that's a little bit confused, but I think you're going to see, over time, fewer set-tops, lower CPE spending. And hopefully more of the intelligence move back into the network, as well as into a consumer home device. And by the way, this will all result in a much better consumer experience which is what we should really be focused on.
Jason Bazinet, Citi.
Jason Bazinet - Citigroup Inc
I have a question for Mr. Britt. The Data business has not historically had a content cost associated with it. I was just wondering if we believe the press reports, it suggests that ESPN did get some sort of, I think, content cost embedded in that ESPN deal. Is this sort of a one-off or is this sort of an example of the camel's nose sort of getting under the tent and three to five, 10 years from now, we'll be talking about potentially declining gross profit margins on a data product as more people pile in and charge for content, if you will, on the data product.
I think that our high-speed Data business is fundamentally a different product than our video product. Our video product essentially we are selling a bundle of content and obviously, there's content cost associated with that. High-speed Data business, we are selling access to the Internet and then the consumer refuses to go where they want. You will note in our ESPN arrangement, we require you to be a video subscriber. That is unlike what the other operators have done.
James Ratcliffe, Barclays Capital.
James Ratcliffe - Barclays Capital
I know you don't want to get too much into the buyback timing. But can you talk about qualitatively what sort of things, would it be the market conditions and other factors that would affect that timing? Are we just talking share price or is there other stuff going on there?
James, we're going to look at all the market conditions, share price is certainly one of those. We'll, of course, also be looking at what other opportunities there are that may present themselves to deploy our financial capacity and ways to generate even more attractive returns than buying back shares. So by design, the buyback program has a certain amount of flexibility built into it and really, that's all we're alluding to.
Next, Tom Eagan, Collins Stewart.
Thomas Eagan - Collins Stewart LLC
Glenn, I was looking for some of your thoughts in some of the new digital services being offered like Apple TV and Google TV. Our first take is that Apple, is Apple TV is more of a substitute to Pay TV but that Google TV may be more of a complement?
I think what you see is a whole lot of different efforts to make it easier to get Internet content on TVs. I think to some extent, the idea of buying a separate box is going to be superseded by the new TVs that will have direct Internet conductivity. And as I've said before, I'm not sure those are in the market anywhere yet, but I know they're going to be in the market very soon if they are not actually in the stores. So I think what you have is -- Apple is different to Google and they should all speak for themselves, but Google is very interesting. I think they're trying to extend their surge in software capability. And to the extent consumers want that, that should be an interesting thing and perhaps complementary to some of the things that we do. Apple presumes we want to sell devices compatible with their other devices and we'll see where that goes in a world where the CE companies themselves are offering that functionality.
V. J. Giant, Citadel Securities.
Vijay Jayant - Citadel Securities, LLC
On the buyback, DIRECTV, which has also announced a similar target leverage and a buyback philosophy, has basically suggested that they look at their levered fully tax free cash flow yield and their marginal cost of borrowing and if there's an over charge there, they keep buying back stock. Can you sort of talk about how you philosophically think about value in your own stock?
Sure. I think what you're describing is essentially something you have to do in order to execute a buyback program. We're not going to buy back shares if we think the price doesn't justify it and we're going to compare the potential returns of buying back shares to other opportunities to deploy our financial capacity. And I don't think it's much for complicated than that.
Bryan Kraft, Evercore.
Bryan Kraft - Evercore Partners Inc.
I was just was looking for two data points, with basic sublosses being concentrated among the basic-only subs, how much of the base is still basic-only subs at this point? And then, would you be able to provide, I'm sorry if you did it in the main part of the call, but could you provide an updated statistics for FiOS and U-verse overlap, please?
Basic only, meaning true lifeline BST, is just under 10% of the sub base.
Bryan Kraft - Evercore Partners Inc.
How much of that come down over the last two years, would you say? Has it come down a lot or has it been around...
Historically, it declined, but the DTV transition boosted it up a little bit. So I think if you sort of took two points in time now and several years ago, the difference wouldn't be that material.
And on the competitive overlap, we're roughly 33% overlap with a digital television offering from the telcos and that's split between 23%, U-verse, 10%, FiOS. The FiOS number, the 10% really didn't changed quarter-to-quarter, Q2 to Q3.
That concludes our call. Thanks for joining us this morning.
Thank you. You may disconnect at this time.
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