Hello, and welcome to the Time Warner Cable First Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objection, you may disconnect at this time. Now, I'll 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 2011 First Quarter Earnings Conference Call. This morning, we issued a press release detailing our 2011 first quarter results.
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 announcements includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management's current expectations and beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to various factors, 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 the 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 releases, trending schedules, presentation slides and related reconciliation schedules are available on our company's website 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, May 3.
And with that covered, I'll thank you and turn the call over to Glenn. Glenn?
Good morning,, and thank you for joining us. We're off to a good start in 2011, with first quarter revenue growth of 5% and Adjusted OIBDA growth of almost 4%. Products ARPU growth was strong across the board and subscription performance displayed seasonal strengths.
I'm particularly pleased with the performance of our high-speed data product, both product mix and ARPU growth trends continue to be very favorable. And since quarter end, we have crossed the 10 million subscriber threshold. High-speed data is quickly becoming the anchor product in the eyes of our customers.
B2B growth continued to accelerate and we're pleased with our progress in this space. Our advertising business coming off dramatic growth rates in 2010 continue to grow its revenue at double digit rates. We continue to generate a lot of free cash flow. And in the first quarter, we used our cash to repurchase shares and pay an increased dividend, returning nearly a billion to our shareholders.
This is really exciting time in our business. New technology is making it possible for us to provide a better video experience to our customers, one that gives them more control. Nowhere is this more evident than in our iPad app, which we launched last month to overwhelmingly positive consumer reviews. In its first month, 360,000 iPad users downloaded the app. We started with 30 linear channels simulcast over our cable network and we now have more than 70 channels. By year end, we plan to offer nearly all of the linear cable channels, as well as broadcast channels in several of our biggest cities and a lot of on-demand content.
I want to emphasize that our iPad app is not a one-off product. Rather, we are investing in a development process and a development team that will introduce new capabilities to our customers in rapid succession.
In the next month or so, we're planning to release an update that will add remote control capability and the ability to remotely program DVRs. The consumer electronics industry is embracing the idea of devices such as smart TVs, with built-in intelligence and two-way communications capability, all built in IP standards. The technology that we're using to simulcast videos to iPads will eventually feed all of these devices and over time, this may lead to a world without set tops, which we think could enable a much better customer experience.
However, without ignoring our traditional video environment built MPEG MPEG and analog standards. Later this year, we're planning to launch a new navigation application, which will be hosted in our network instead of in our set-tops, providing a much more intuitive and graphically-rich search environment for millions of customers using our set-top boxes.
Turning to the B2B space, we recently closed on the NaviSite acquisition. We expect NaviSite to jumpstart our ability to sell managed and cloud-based services into the small and medium business space. By bundling their services with our primary offerings, we hope to attract new customers, increase ARPU and reduce churn.
Before closing, I should mention that during the quarter, we signed a long-term agreement with the Los Angeles Lakers to carry their games on two new Time Warner Cable owned RSNs. One in English and one in Spanish. And those will start with the 2012 to 2013 season. This is a unique opportunity to gain greater control over our economic destiny and enhance our brand in Los Angeles, with both English- and Spanish-speaking audiences.
In summary, our business continues to perform well. We're investing thoughtfully and strategically to further improve the value of our services both residential and business customers. And, of course, we remain committed to returning cash to our shareholders. So now let me turn it over to Rob for more details.
Thanks, Glenn, and good morning everyone. As usual, I'll start with the first quarter highlights on Slide 3. We're off to a good start in 2011, with improving subscriber trends and very solid financial results. First quarter revenue was particularly strong, rising 5% year-over-year, as residential subscription revenue increased 3.5%, commercial or B2B revenue growth accelerated to over 23% and advertising revenue grew almost 14%.
Adjusted OIBDA grew over 3.5% in the quarter and operating income was up almost 15%. Adjusted OIBDA less CapEx increased over 14% to a record $1.1 billion, and free cash flow was up over 42% to $927 million or $2.65 per diluted share.
Diluted EPS increased 55% to $0.93. We returned just under a billion to our shareholders in the first quarter through our cash dividend and share repurchases. And finally, we remain on track to meet all elements of our full year financial guidance.
As Glen mentioned, we closed our NaviSite acquisition on April 21, and will include their financial results with ours going forward. However, I would note that our financial guidance is all based on our organic performance and does not include NaviSite's results or any of the cost associated with the acquisition.
Let's move on to our Q1 subscriber trends on the next slide. While the economy doesn't appear to have gotten worst during the quarter, unemployment and housing vacancy rates remain high across our footprint. The competitive environment hasn't changed significantly either, as marketing and promotional activities among our telco and satellite competitors continued to be intense. The pace of telco fiber buildouts continued to slow and we estimate that AT&T is still marketing U-verse videos to roughly 24% of our footprint, while Verizon is offering FiOS TV in about 10%.
In the first quarter, we continued to broadly execute variations in our $33 by 3 Triple Play offer to both new and existing customers. In addition, we began to refocus our marketing on the individual products within the bundle, especially HSD to target those customers that maybe less receptive to the full Triple Play.
As I mentioned, subscriber trends improved in the first quarter. Total primary service units increased by 208,000, and while that's fewer net add than in last year's first quarter, it's the best year-over-year sub [subscriber] performance we've delivered in more than a year.
Churn was up about 10 basis points year-over-year, but was down sequentially in each PSU category. And although it's early in the quarter, let me say a word about Q2 subs. As you know, the second quarter is seasonally weaker than the first. But on a year-over-year basis, so far Q2 is looking a lot like Q1.
High-speed data once again comprised the majority of Primary Service Unit net adds in the quarter. We added 189,000 HSD subscribers and finished the quarter with just shy of 10 million total HSD subs or 36.5% of passings. That's a 5.1% year-over-year increase in our HSD subscriber base. As Glen mentioned, we crossed the 10 million mark shortly after quarter end.
We continue to gain HSD share during the first quarter. On a size-adjusted basis, we again added significantly more HSD subs than both AT&T and Verizon. Our residential HSD subscriber mix continued to improve with more customers taking higher-speed tiers. We added 136,000 Turbo and 9,000 Wideband or DOCSIS 3.0 customers.
Our Wideband net adds, while still a small portion of the total were nearly double our Q4 net adds, largely driven by our new Signature Home offering, which includes Wideband in many markets.
Close to 16% of our residential HSD sub base now take Turbo or Wideband. Commercial HSD net adds accelerated for the second consecutive quarter to 12,000.
We continue to see good results in Digital Phone. Net adds were 84,000 and we ended the quarter with almost $4.6 million total voice subscribers, a 6.1% year-over-year increase. At quarter end, our voice penetration reached 17% of total phone passings. We had 12,000 commercial voice net adds in the quarter for a total subscriber base of 123,000.
Although we lost 65,000 video subs for the full quarter, we actually added video subs in the seasonally strong month of March. Once again, we lost lower-end analog single-play video customers, while we added higher-end digital and bundled video subs. We did well with our Spanish-language offering, adding about 20,000 El Paquetazo subscribers in the quarter, with particular strength in Texas and Southern California.
DVR net adds were 42,000 and premium channel net adds were about 45,000 in the quarter. We added 26,000 customer relationships in the quarter and continue to have success with our bundled offerings, adding 83,000 Triple Play subs, up from 73,000 in last year's first quarter and increasing our Double Play subscriber count by 17,000. At quarter end, almost 60% of our customers were either Double or Triple Plays.
As you are aware, we introduced a couple of new offerings late in the fourth quarter of last year. Signature Home, our high-end Triple Play, coupling our best products with customized service and TV Essentials, a value-oriented video offering for those customers that prefer fewer channels at a lower price point.
While it's still too early to draw up conclusions, let me give you some preliminary observations. Signature Home sales have ramped each month since the December launch and we now have roughly 10,000 subscribers paying an average of $210 per month. During the quarter, 70% of the Signature Home connect were existing Triple Play customers who upgraded to Signature Home. On average, those customers are paying us about $20 per month more than they did previously.
Perhaps as important as the subscriber stats, is the extremely positive customer feedback we've received. We think we've struck a chord here with the high-end customer and we're excited by the prospects.
As for TV Essentials, we launched the tier in only 2 markets, so the numbers there are small. But it appears to be effective as a targeted acquisition and retention tool among some customer segments and as an upgrade offer for basic-only customers. We're in the process of evaluating how to expand the deployment of the offering across our footprint.
Turning to our financial results on the next slide. First quarter revenue was especially strong, increasing 5% year-over-year to $4.8 billion. Total subscription revenue, that's residential and B2B combined, grew 4.6%, driven by both ARPU improvement and increased PSUs. Subscription ARPU for PSU increased 3.4%, the highest year-over-year improvement in more than 3 years, driven by ARPU growth in each PSU category.
Advertising revenue increased almost 14% and total ARPU per customer relationship was 5.6% versus last year's first quarter to over $111. In dollar terms, total revenues were $228 million higher than in Q1 of '10, with $145 million of that growth coming from our Residential Subscription business, $59 million coming from B2B and $24 million coming from advertising.
Let's focus first on our Residential Subscription business on Slide 6. Residential Subscription revenue grew 3.5% year-over-year, driven by a combination of subscriber growth, improved subscriber mix and price increases. Of the $145 million of year-over-year Residential Subscription revenue growth, HSD contributed about 2/3 or $97 million and Digital Phone and video contributed roughly equal shares of the balance.
Residential HSD revenue increased 9.4% over Q1 of last year and 3.5% over Q4. Year-over-year residential HSD revenue growth has accelerated in each of the last 5 quarters and sequential HSD revenue growth was the best in over 3 years.
The year-over-year growth was driven by subscriber increases, as well as the nearly 4% improvement in residential HSD ARPU. This is the eighth consecutive quarter of year-over-year residential HSD ARPU improvement, as we continue to benefit from price increases and the improved subscriber mix I mentioned earlier.
Residential voice revenue grew more than 5.5% year-over-year due to continued subscriber growth. On a sequential basis, residential voice revenue growth was the highest in more than 18 months. Notably, residential voice ARPU was up year-over-year for the first time ever.
Residential video revenue grew about 1% year-over-year, despite our smaller video subscriber base, as residential video ARPU increased over 4.5% from Q1 of '10. The ARPU improvement was the product of price increases and higher digital video and DVR revenues, offset by lower transactional VOD and premium revenues.
Moving on to commercial or B2B revenue on Slide 7. We had another very strong quarter in our B2B operations. B2B is an increasingly important engine of growth, contributing more than 1/4 of our total year-over-year revenue improvement in Q1. As I mentioned at year end, we're focused on improving sales productivity and expanding the number of commercial establishments we reach with our plan. We're also focused on increasing the number of B2B customers that take more than one service from us. At quarter end, 2/3 of our roughly 450,000 B2B customers were Single Play, so there's a nice opportunity there.
B2B revenue for the quarter was $313 million, up 23% over Q1 of 2010. That marks our fifth consecutive quarter of accelerating year-over-year B2B revenue growth. Of the $59 million of year-over-year growth, data contributed about 40% or $23 million and voice and cell tower backhaul contributed just under 30% each. B2B data revenue increased more than 15%, driven by growth in shared and dedicated Internet access and Metro Ethernet revenue. B2B voice revenue increased over 60%, driven by subscriber growth. And cell tower backhaul revenue was $28 million more than double our revenues in Q1 of '10.
At quarter end, we had an install base of nearly 6,400 revenue-generating radios and a meaningful backlog under contract. So we're well on our way to achieving organic growth similar to what we achieved in 2010.
Finally, we closed on our acquisition of NaviSite last week, which will jumpstart our entry into the enterprise-focused managed and cloud services business and enhance the suite of products that we offer our existing SMB customers. As I mentioned at the outset, NaviSite results are not yet included in the B2B revenue or other financial guidance we've provided.
Moving on to advertising revenue on the next slide. Advertising revenue of $197 million increased $24 million or almost 14% year-over-year despite a drop in political advertising. Strength in the automotive category, which grew 35% and media advertising, which increased almost 55% accounted for about 85% of the year-over-year increase.
First quarter ad revenue benefited from our ad-rep deal with Verizon, under which we sell regional advertising on behalf of FiOS TV in New York City, Los Angeles and Dallas. We booked the revenue from the sale of FiOS inventory on a gross basis and treat Verizon share of that revenue as an expense, so the revenue from this deal has a lower margin than revenue from selling our own ad inventory.
During the first quarter, we also signed an ad-rep deal with AT&T U-verse and we'll start to see the benefits of that deal in Q4. We still expect that full year ad revenue will be greater than in 2010. But remember that the comps get much tougher as the year progresses given that we generated $55 million from political advertising in the second half of last year.
Let's turn to Adjusted OIBDA and operating; income on Slide 9. First quarter Adjusted OIBDA grew 3.6% to $1.7 billion, while operating income rose 14.7% to $975 million. Our Adjusted OIBDA margin fell 40 basis points versus Q1 of last year, as improved revenue mix and better voice and HSD gross margins were not enough to offset lower video gross margins, higher wireless and home security investments compared to the first quarter of last year and an increase in consulting spend related to our strategic sourcing initiative that will yield both operating expense and CapEx savings during the year.
Operating income margin improved 170 basis points year-over-year to 20.2%, driven by a significant decline in amortization expense. Total first quarter operating expense grew 5.7% compared to last year. Employee costs were up 5.9% year-over-year, driven by annual salary increases across all of our businesses, higher headcount primarily in B2B and higher payroll taxes. B2B employee cost grew 25.4%, while residential employee expenses were up 4%.
Programming expense increased 2.6% in aggregate and 6.4% on a per subscriber basis, less than recent quarters due in part to the reversal of an $18 million accrual for programming services previously carried without a contract. We continue to expect total programming cost growth for the full year 2011 to be in the same ballpark as 2010.
Voice costs were up only 3.1% in Q1 as we began to benefit from the migration of customers off of our Sprint contract. As of the end of Q1, we have migrated roughly 1/4 of our phones customers and we expect to move another 20% by the end of Q2. As a result, voice cost improvements should be even greater in the back half of the year.
When we're all done in 2014, we expect to see our pre-migration voice cost cut roughly in half. First quarter marketing expense of $159 million was $8 million higher than last year and remained constant at 3.3% of revenues.
During the first quarter, we continued to invest in new business initiatives, including wireless and our new Smart Home Security offering. In Q1, the combined losses from these initiatives were approximately $15 million compared to $5 million in the first quarter of 2010. We plan to continue investing in these new initiatives over the course of the year and still expect our total 2011 start-up losses to be in the $75 million range.
Looking forward, we expect that Adjusted OIBDA growth will be greater in the second half of the year, and we continue to expect to generate double-digit operating income growth for the full year.
Turning to capital spending on Slide 10. First quarter CapEx was $663 million or 13.7% of revenues. Total CapEx was down about 10% year-over-year in part due to the timing of expenditures. We also benefited from our strategic sourcing initiative, which is helping to reduce per unit pricing and enhance the efficiency of our supply chain.
First quarter residential capital expenditures were 12.7% of residential revenues and were down about 11% year-over-year to $550 million due primarily to lower CPE as set-top box spending declined over 40%, driven by both reduced volumes and lower per unit prices.
B2B capital expenditures were $113 million, flat with last year's first quarter. Roughly half of the B2B CapEx was attributable to line extensions and expanding our cell tower backhaul footprints. While capital intensity in the first quarter was our lowest ever, we expect CapEx to be more back-end loaded this year. For the full year, we still expect that capital spending will be less than $3 billion.
Moving onto cash flow on the next slide. Our cash flow by any measure has never been stronger. Adjusted OIBDA less capital expenditures for the first quarter was $1.1 billion, a 14% year-over-year increase and an all-time high. The $133 million of growth was the result of $60 million of year-over-year improvement in Adjusted OIBDA and a $73 million decrease in CapEx.
Free cash flow for the quarter, which benefited from a $270 million tax refund related to overpayments in 2010 was $927 million, up 42% year-over-year. Free cash flow per share increased almost 45% to $2.65. Because of the tax refund and because we will continue to benefit from 100% bonus depreciation throughout the year. On a net basis, we do not expect to pay significant cash taxes during 2011.
As we said on our last call, with these tax benefits, we expect double-digit free cash flow growth for the full year. Just a reminder, as you model 2012 and beyond, the bonus depreciation benefits we're enjoying this year will reverse in future years, resulting in less tax depreciation and higher cash taxes.
Turning to the next slide. First quarter diluted earnings per share of $0.93 increased 55% from $0.60 in Q1 of '10, primarily due to an increase in operating income, a decrease in book taxes and a modest benefit from share repurchases, which was partially offset by higher net interest and other expenses.
Both this year and last year's first quarters were impacted by a number of items highlighted in our press release. Most notably, EPS in both quarters was reduced by a non-cash charge to reverse previously recognized tax benefit related to the expiration of certain Time Warner Inc. stock options held by Time Warner Cable employees. The impact in this quarter was $0.06 per share. We continue to expect the 2011 full year diluted EPS will be in the $4.25 to $4.50 range.
Let's finish up with a balance sheet. We ended the quarter with net debt and preferred equity totaling $20.3 billion, essentially flat with year end 2010. Our leverage ratio was 2.93x. During the quarter, we returned $996 million to shareholders through our dividend and share repurchase programs. We paid out $167 million or $0.48 a share in dividend and bought back 12 million shares of common stock or $829 million during the first quarter. Since we launched the repurchase program in November of 2010. Through the end of the first quarter, we have repurchased 20 million shares at an average price of $67 per share for a total of $1.3 billion. This leaves about $2.7 billion remaining on our authorization.
So to summarize. We're off to a strong start in 2011, both from an operational and a financial perspective. As a result, we expect to deliver strong growth in our full year operating income, free cash flow and EPS. Thank you.
With that, I'll turn it over to Tom for the Q&A portion of the call.
Thanks, Rob. Candy, we're ready for the Q&A portion of the conference call. We would ask each caller to ask just a single question, so that we can accommodate as many callers as the time permits. Our first question please, Candy?
First question comes from Jessica Reif-Cohen, Merrill Lynch.
Jessica Cohen - BofA Merrill Lynch
Here's my single question and a half. Rob, could you talk -- give us, like, just talk about the underlying margin. You had some unusual expenses going on in the quarter. If you could just pull the onetime step-out, that will be very helpful? And secondly on LA, I know Glenn mentioned the plan to start up in RSN. Could you just talk generally about what your intentions are in LA? Would you like to own the whole market? Will you buy more teams? Will you add more teams to the RSN?
Okay. On margins first, Jessica. I mentioned most of these in our Adjusted OIBDA discussion. But in -- I guess, first, I'll start with an expectation for the full year. And I think we've said this before, we're expecting that margins for the full year going to look a lot like last year. So the things that drove the somewhat lower margins in the first quarter really were; one, we spent more on our new business initiatives, in particular wireless and our Home Security initiative in Q1 relative to Q1 of last year. We had some consulting expenses in connection with what we call our strategic sourcing initiative, which is really an initiative designed to improve both OpEx and CapEx. The benefits this quarter primarily showed up in the CapEx line. And it's a contingent kind of an arrangement, so when we save money, we pay a little bit of consulting. So that's what you're seeing there. We did have a delta in bad debt year-over-year, nothing meaningful to talk about, they're just relatively small numbers. And lastly, the other driver, I think, relates to increases in compensation expense. Really, primarily related to our continued ramp up of our B2B capability. So those are really the items that are driving the 40 basis point delta in margins. But again, for the full year, we're thinking pretty flat to last year.
Jessica, on the RSN question. I think it's best to look at it as this was an opportunity that came along, and we seized it as a way to have more surety about our expenses for the next, some number of years going forward. Clearly, the Lakers must have content in that market and we were going to carry them one way or another. So having them in our own RSN gives us some financial stability. And also, I think as a local business and they're a local business, we are coming up with lots of sort of joint promotional things that we can do, which I think is going to enhance our brand in that market. Whether there's any more of those opportunities, I think, they come up time to time. We'll just have to look at them. It does appear that the network companies are in a bit of a feeding frenzy trying to lock up every moving sporting rate in our country for many, many years. So there's obviously a lot of competition there. So a little hard to predict how it's all going to turn out.
Jessica Cohen - BofA Merrill Lynch
And what about owning more of the market?
More cable and obviously, it's been rumored in the press and reported that the Charter property is going to come to market. And I won't comment on that specifically, other than say we're going to evaluate it like we look at all acquisitions, and look at what it would look like under our ownership and apply our cost of capital to it and all the synergies and what have you. And then evaluate it versus other investment alternatives including buying our shares back and we'll come out wherever we come out.
Next, Vijay Jayant, Citadel Securities.
Vijay Jayant - Citadel Securities, LLC
Glenn, just wanted to come back to broadband pricing and the prospect of usage-based pricing, you guys have tested that in the past. Is it something you're doing again or want to bring back? Can you just talk about that?
I think -- well, first of all, we do not have any immediate plans to change our pricing. But I would repeat what I've said in a number of different forms. I think some sort of pricing with the usage dimension is essentially inevitable and exactly how it unrolls, you're seeing it in the wireless space now. But exactly how that gets implemented, who goes first and what have you, I think remains to be seen. But clearly the volume activity on the Internet is growing really fast, which is good by the way. That means it's useful to our customers. Clearly, you keep up with that, there's going to be more and more investment required. And I think it will be natural that just like everything else we buy in our lives, the people who use more will pay more and people who use less will pay less.
Next, Ben Swinburne, Morgan Stanley.
Benjamin Swinburne - Morgan Stanley
Rob, can I just come back, I wanted to clarify the PSU or subscriber commentary you made in the prepared remarks, that Q2 just looking like a lot like Q1. I'm assuming that's on a...
Hey, Ben, a little bit louder. I'm having trouble hearing you.
Benjamin Swinburne - Morgan Stanley
You mentioned Q2 looks a lot like Q1 on subscribers. Is that a year-over-year PSU percentage decline comment?
Yes, you got it exactly right. It's on a percentage prior year PSU net adds basis.
Benjamin Swinburne - Morgan Stanley
Okay. I thought we were looking at 200,000 adds in Q2 for a second there. But thanks for clarifying. And then, Glenn, one of the things that's interesting about what you're doing on the development side is how much of it ties into the tablet phenomenon. And certainly, if you drive by the Apples store in the Upper West Side, it seems like everyone in America has a tablet. But we know that's not true. So I'm just wondering, how you think about bringing this stuff to your broader customer base over time? Because even any year, two years from now, most of us won't have a tablet and you're doing a lot of interesting things with IP and the network around improved navigation, search and discovery, adding more on-demand long-tail content. But how do you get that to everyone in your video customer base over sort of the foreseeable future?
That's a great question, Ben. Essentially, what's going on is the consumer electronics industry is embracing devices with video displays in them that also have intelligence and that have two-way radios and that are all built MPEG the IP standard. And in a sense there's nothing magical about the IP standard versus MPEG or anything else. It's just a bunch of standards that the world is coalescing around. So these devices and there's all sort of different things, these tablets, the Smart TVs that are in the market now. And obviously, there's PCs and what have you. And I think the departure from the past is that the old TVs, which received different standards, TV by different standards, those were relatively dominated, little or no intelligence and they weren't really two-way devices. And that's why we always have set-tops because of those devices couldn't display our services without set-tops.
So what we have is the possibility of transmitting our services to these devices, having much better navigation using a combination of the intelligence of the device and the intelligence back in our network. Doing security and software instead of hardware and essentially getting rid of set-tops. So although the initial application was for the iPAd and you're right, not everybody has an iPad, just all of our friends. I think the bigger story here is about the TVs, which were all going to be receiving our video service this way. This isn't the public Internet. It's essentially simulcasting signals over our cable system. Just like today, we simulcast in several different other formats. So that's what we're doing. And I think this question is right on, it's going to be a better customer experience.
Laura Martin, Needham & Company.
Laura Martin - Needham & Company, LLC
Let's follow-up on this issue of iPad. I'm really interested in the consumer program. Are there programming cost aspect of this? I know you and Viacom are in a lawsuit now over you guys putting their channels on the iPad. I'm hearing from the Disney folks that you guys have agreed to give them the customer name and they're saying, "They're charging extra for this service that you guys putting them on a house." I guess, I'm interested, Glenn, on the programmer side, are there groups of programmers you can identify, some of which are just letting you use this stuff in the house, some of which are suing you, some of which are making other demands for forms of compensation, monetary or otherwise?
And then on the economics on the cost, my recollection of this, Glenn, is that you guys have a, from the government, the ability to pass-through the cost of the set-top box and to the extent you move away from that and you don't get that kind of costs returned to you with the profit margin. Does that mean that we end up with less revenue as you move to this IP world, where you're going to have to incur and expense all the cost as you develop this new consumer-friendly product?
Okay. Lot of questions there, Laura. I'm not going to talk about any specific programming deals except to put it in context. And again, this is a simulcast and I think there's great confusion about technology, which is changing quickly. And there's a tendency of whenever anybody says IP for mass hysteria to rein, everybody think it's the Internet. But IP is a set of standards and it's being used in all sorts of different devices, in sorts of different ways. And the use of it doesn't mean it's the public Internet. And I think that's the importance here. This is the way TV is going to be distributed in the future. It's not going to be new or different. We're not going to have analog anymore after a while. And so the old forms of digital are going to migrate to IP. It's just a different way of with encoding bits, it's not magic. On the cost of the set-tops. it's an interesting thing. There is a residual price regulation of set-tops in places where there isn't effective competition. And there's a statutory rate of return according to our formula. It doesn't mean that we or others actually charge that amount of money. And it's also not relevant where there's effective competition, which isn't much of our footprint.
Having said that, I think, if we move to a world without set-tops, you are right, we will probably have lower revenue because we do charge for them. We also have lower capital costs and I maybe slightly wrong in this statistic. But I think about 40% of our service calls relate to set-tops. And think about not having all those service calls. So my guess is, although you may -- if we magically snapped our fingers and have no set-tops, which will only happen over many years, we would have a somewhat smaller balance sheet, somewhat smaller revenue, probably a more profitable company and much happier customers. So that's what this is all about.
Next, Rich Greenfield, BTIG.
Richard Greenfield - BTIG, LLC
A couple of questions. One, just on, I think, Rob, you mentioned that EBITDA growth or operating income growth will accelerate in the back half of the year despite some tougher ad comparisons. I'm just curious, what's driving that given that advertising obviously was a big benefit in the current quarter and kind of how you look at that?
And then two, just in terms of following up on Jessica's question about acquisition behavior. It seems like you guys have come out and kind of talk down Insight. Curious kind of what about Insight doesn't fit the criteria or is it just the price issue? And how do you think about the overall, it seems like more and more cable systems, everyone is trying to rush to sell now and monetize valuation-wise. And I'm just kind of curious, what are the things that you're looking for specifically? Is it just complementary fit or is there -- is it really looking at your share buyback relative to everything?
Rich, why don't I jump in on the acquisition front, let Rob handle the other question. I think you just pointed out something that was interesting is, which is there does appear to be a lot coming to market. So that in itself should raise a question about what's going on there. And if you're a buyer, what does that mean? I won't try to answer that question but I think everybody should, why selling is everybody selling all of a sudden? What does that say you should do as a buyer?
Without commenting on anything specific about insight or anything else, suffice it to say that we look at all the synergies and we have a pretty good idea of what the synergies are having been in the business a long time. And look at what these things look like under our auspices, within our programming cost and et cetera. And we project that out and just kind of back with their cost of capital and that gives you an answer. We're a little old-fashioned. We actually think that we should be making money for our shareholders. If what it takes to buy something is you give all the upside to the seller, then that doesn't seem to be very smart to us.
Richard Greenfield - BTIG, LLC
Do you need to be bigger in subscribers?
I don't think we need to be much bigger. I hesitate a little bit because, obviously, AT&T may be moving to a new scale. So scale may matter in the long run. But a lot of these things we're talking about coming in the market are not big enough to move the scale much. And I think you have to look at it in that context.
Rich, on the -- what I actually said was that Adjusted OIBDA growth would be greater in the back half of the year. The biggest single driver of that is improvement in our voice gross margins, which is being driven by the continued migration of subscribers away from Sprint and to our own voice back-office solution. And that more than offsets the impact of those tough advertising comparison that you're describing.
The only other one thing I'd call out as you probably recall that in Q4 of last year, we had a couple of one-time items, a severance item, as well as a reclassification of certain expense as operating expenses as opposed to depreciation. And those will result in favorable comparisons in Q4, but the biggest single driver is the phone cost.
Next, Marci Ryvicker, Wells Fargo.
Marci Ryvicker - Wells Fargo Securities, LLC
I just want to focus on a comment that was made. You're focusing on marketing products within the bundle. So how should we anticipate the impact on ARPU. ARPU has been really strong, even as Triple Play customers increase as percent of your base. Should we see further acceleration in ARPU as you go after the individual products?
Marci, I don't anticipate that the market emphasis on individual products will in fact have an impact on ARPU. The objective here is to simply highlight the individual attributes of our products in particular as we compete with some of the single play providers. When you spend all of your energy talking about the bundle and that's been very successful for us to date, it doesn't give you a lot of airtime to sing the praises of the individual product, when we think there's a lot to sing about. So the goal obviously once we get customers interested in individual products will be to continue to upsell them into bundles. But as part of our messaging here, we're really intent on highlighting in particular our video and high-speed data attributes.
Next, Craig Moffett, Sanford C. Bernstein.
Craig Moffett - Sanford C. Bernstein & Co., Inc.
Two questions if I could. First, you grew your customer relationships a little bit in the quarter. I'm assuming that, that is high-speed data subscribers, who are presumably satellite video customers. Can you just talk about your progress in targeting that as a strategic objective to drive a high-speed data penetration among non-video subscribers and what you're doing against that objective and how you're prosecuting that objective?
And then a second question for Glenn, in the past you said maybe 15% capital intensity is a long-term expectation. But it sounds like with the comment you just made about set-top boxes and what's happened with set-top boxes since you made those comments that, well, a lot has happened. I wonder if you could just revisit that long-term expectation.
Craig, why don't I take the sub question first. I guess, first, what I would say is we're up to about, I think, somewhat north of 2 million non-video customer relationships now. I think we're at 2.2, yes, 2.2 million. So it's actually quietly been something we've been increasing over time. We had high-speed data only net adds this quarter that were in the same zone as the first quarter of last year. I would say it's certainly something we'd like to do. Our objective is to sell something to every home we pass.
And if there are customers who are for one reason or another wedded to another provider for video that by no means, means that we're not interested in selling them data and voice and ultimately, we'd like to upsell them to the full Triple Play. When I talked earlier about highlighting the attributes of our individual products, high-speed data is kind of first and foremost in my mind on that front. And in the first quarter in particular, we've been fairly aggressive and fairly effective at adding customers based on promoting the virtues of high-speed data. So it's certainly something that we're focused on and I think we're having some success.
Craig, on the capital issue. I think that it's a little early to tell exactly what the trajectory of these Smart TVs are going to be. And I think, as I said earlier, this technology that we're using with the iPad is really ultimately more about Smart TVs than it is about tablets, as fun as that is. The first TVs are really just hitting the market now. If you go to Best Buy, you can see them. And we're working with all of the top manufacturers on serving those devices. There's still sort of unknown questions about exactly where in the house is the DVR and how does that work and what have you? And it's unknown how how fast those are going to sell into market and replace existing TVs. So my guess is, we're going to have set-tops with us for quite a while, but you can see where it's going to go in the long run. Because of that, I think it's too early to start talking about changing our prediction of capital intensity. But, yes, you can see a 10-year time frame where things might go.
Craig Moffett - Sanford C. Bernstein & Co., Inc.
But still you're already below 15 now.
We were this quarter and I think we're still at an awfully slow economy. I think if the economy were to pick up and housing in particular were to pick up, you would see the CPE part of that move up, back to a more normalized state.
James Ratcliffe, Barclays Capital.
James Ratcliffe - Barclays Capital
When we talk about streaming, can you talk about how important or not it is for streaming applications to essentially be TWC applications and TWC experiences versus those of the channel? And on the iPad app, but it's a TWC app that you use to watch channels whereas, for example, on the ESPN mobile side, you're watching ESPN out of the home on an ESPN-branded app. Is that something where you feel the need generally to be in the position where the consumers is using a TWC product that has then a list of content within that? Or are you comfortable with scenarios where the content is branded as experience associated with the channel instead?
Parts of that are unknown. And you're really jumping at two very different things so, and even -- the use of the word streaming, I think, is a tricky thing because our Digital Products to a set-top is creating, [ph] that's a technical matter. I think maybe streaming ought to be taken out of our vocabulary. The reality is the in-home experience is just a variation on our existing in-home experience. It's yet another simulcasts, so we have, already we have an analog, we've got standard definition, we have digital, we have high-definition digital and now we have IP. Those are just different versions of the same offering that you buy from us in a subscription. And clearly in the home that's Time Warner Cable.
The out-of-home experience is what we're all calling TV Everywhere and that goes over the public Internet. So it's really quite a different thing, which means you have to go to a website. So in ESPN's case, their website, We do plan to have our own portal as we get more TV Everywhere rights. And I think it remains to be seen whether consumers will want to go to an aggregated portal with the retailer name like ours or go to a bunch of individual program or portals. The out-of-home content will eventually be the same in all those places.
The only thing that I would add to that, James, is in my mind the key to all of this is that the content whether it's made available via a Time Warner Cable app or a programmer's app or website is only available to customers who subscribe to Time Warner Cable's multichannel video experience on an authenticated basis. So the key is what were ultimately doing is enhancing the value of what it means to be a Time Warner Cable video subscriber. And I think that's the key, probably more important than whether or not the app is branded Time Warner Cable or someone else.
There's one other thing about this worth mentioning. So the in-home experience or our full video offering, the media networks and all of our VOD. Most of the network companies, not all of them, but most of them do not own all the rights for all of their content to put it on a public Internet. So all of that out-of-home stuff that's on websites is essentially shows that's not in one of your networks. So it's really a very different experience at this point, where it all goes in the future, I think, is very much up in the air.
Next, Tuna Amobi, Standard & Poor's Equity Research.
Tuna Amobi - S&P Equity Research
So regarding the NaviSite acquisition. Just to get a little bit more clarity on that. Is that indicative of the kind of acquisitions we should expect going forward? Or you would likely to ramp up in that area of cloud computing and it seems to me your prepared remarks that, that suggested that this could actually be more of a feature, an enhancement kind of thing as opposed to kind of a standalone or profit standard so to speak.
So can you see -- can you perhaps clarify where you see the biggest impact of that deal and any financial details will also be helpful. And then separately, on the -- you seem to have some success with the shift in some residential subscribers to the Triple Play. To what extent is that like the results of your proactive marketing strategy or is that more or less a natural evolution of consumers taking more and more discounts? And I think I heard you, Rob, also allude to the fact that on the B2B, that 2/3 of the subs are single play, which kind of suggested the divergence of trends there. Can you speak to the dynamics of that versus the residential? And lastly, last time you mentioned that the sequential progression of subs got better as you went through the December quarter. I was wondering if that was also the case in this quarter?
Let me answer the first one, Tuna, and then Rob can take the subscriber one. On NaviSite, let's make it a little broader. I think there's a lot of opportunity in the B2B space generally. And where it's going very rapidly, obviously, from our numbers. And I think there are lot of different aspects to it. It's not quite as simple to characterize as the residential business. And I think there may be additional opportunities like NaviSite that are small acquisitions, that have a couple of features. In the case of NaviSite, there were physical assets that we didn't have that are going to be very useful. It is also very importantly, management skills in the space that we didn't have. So that's -- it's a great fit. Both as a standalone business but also to marry with our existing efforts.
So NaviSite mostly aimed at enterprise customers or it has been. And we think we can take their products and move them into the small, and medium business space which has been our main customer base so far. And so there's a nice synergy there. I think that whether we end up doing more acquisitions and that obviously depends on what deals there are, what have you. But I think there's fertile opportunity in the B2B space.
So, Tuna, I'm going to try to remember all of the different questions you had on subs. But let me start with Triple Plays. I think first and foremost, the continued improvement in Triple Play penetration is a testament to the value proposition of the bundle. Certainly, where marketing is aggressively. But it's being marketed to a receptive audience. Customers like what they get when they buy all of three products from us, whether that's attractive pricing, value for their money or some of the product attributes that are particularly unleashed when you have multiple products, things like caller ID on TV.
So I think it's about the marketing and it's about the value of the product. As for B2B, it's kind of a different phenomenon, I wouldn't call them divergent trends at all. Remember that for the longtime, all we sold was video to bars and doctors' waiting rooms, then we began to offer the HSD, which really started the high-growth era of our Commercial business. And much more recently, we started to sell voice. So I think the fact that we have a number of customers that only take high-speed data, which is the predominant single play is more a function of the early stage of our voice business and that's why I say it's an opportunity. I think there's no particular reason why we can't sell additional products into customers.
I don't think the typical single, double, triple play terminology really applies quite as neatly to the Commercial businesses as it does to Residential. So you shouldn't expect us to be talking that way, especially when we add things like managed services on top of connectivity to various customers. They don't lend themselves to neat PSU categories we used to talk about. But I don't view it as a divergent trend at all. I view it as an opportunity to sell more into existing customer relationships that we've built. You had a question on sequential trends through the quarter and I would say that the sequential trends in Q1 month-over-month were pretty good.
Our last question is Doug Mitchelson, Deutsche Bank.
Douglas Mitchelson - Deutsche Bank AG
Two real quick questions. On the high-speed data side, as you gain share, curious what's been happening with take rates on your data speed tiers? I know this is somewhat self-evident from the good ARPU performance there. But can you give us the mix of customers across your broadband tiers or how that's been changing year-over-year? And then the second one is, I know you discussed margins at length already and I get that video margins are compressing, while telecom margins are expanding this year. Is there a structural issue here that comes on to roost in the future years? Is there a solution to video margin compression as you look out?
I guess I'll take both of those. On HSD mix, I think, I talked about this in the prepared remarks. But the bulk of our net add in the HSD category came at the high-end. So we added 136,000 of our Turbo HSD subs. We added about 9,000 or 10,000 DOCSIS 3.0 or Wideband subs. So the higher speed tiers comprised the bulk of our net adds in the quarter. Our basic and lite customers actually declined in the quarter. And if you want to look at the total sub base, let me just run through it for you. If you add Turbos and Wideband subs, it's about 15%, a little over 15% of the total base now. The basic and lite subs are about 12% of the base and the remainder is the standard product.
I think on your margin question, Doug. I mean, we've talked about this for a long time and I don't really see any meaningful change to the pattern on video gross margins. What we've continued to try to do is improve the value of our video product, which should in turn allow us to generate more revenue from it. But on the cost side, I don't see a significant change in the trajectory.
Douglas Mitchelson - Deutsche Bank AG
So I mean, the right way to put it, I guess, as you look out in future years, you think flattish margins is still sustainable, right?
I think that's probably all we have time for this morning. Thanks everyone for joining us. And to give you a little bit of an advance notice, our next quarterly conference call, which will reflect our second quarter 2011 results will be on Thursday, July 28, 2011, at 8:30 a.m. Eastern Time. Have a great day.
Thank you. That does conclude today's conference. You may disconnect at this time.
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