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Cablevision Systems Corporation (NYSE:CVC)

Q2 2011 Earnings Call

August 9, 2011 10:00 AM ET

Executives

Patricia Armstrong – SVP, IR

Jim Dolan – President and CEO

Thomas Rutledge – COO

Gregg Seibert – EVP, Cablevision Systems Corp.

Analysts

Craig Moffett – Sanford Bernstein

Douglas Mitchelson – Deutsche Bank

Benjamin Swinburne – Morgan Stanley

Jason Bazinet – Citigroup

Thomas Eagan – Collins Stewart

Marci Ryvicker – Wells Fargo

James Ratcliffe – Barclays Capital

Matthew Harrigan – Wunderlich Securities

Richard Greenfield – BTIG

Mike McCormack – Nomura Securities

David Joyce – Miller Tabak & Co.

Bryan Kraft – Evercore Partners

Operator

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2011 Earnings Conference Call for Cablevision. (Operator Instructions)

I will now to turn the conference over to Ms. Pat Armstrong, Senior Vice President of Investor Relations. Please go ahead.

Patricia Armstrong

Thank you. Good morning, and welcome to Cablevision’s second quarter 2011 earnings conference call.

Joining us this morning are members of the Cablevision executive team, including Jim Dolan, our President and CEO; Tom Rutledge, Chief Operating Officer; Gregg Seibert, Executive Vice President and Chief Financial Officer, John Bickham, President of Cable and Communications; and Donna Coleman, Senior Vice President Financial Planning And Control.

Following a discussion of the company’s second quarter 2011 results, we will open the call for questions. If you don’t have a copy of today’s earnings release, it is available on our Web site at cablevision.com.

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

Let me point out that on Page 5 of today’s earnings release, we provide consolidated operations data and a reconciliation of adjusted operating cash flow or AOCF to operating income.

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

Jim Dolan

Thank you, Pat, and good morning.

For the second quarter, Cablevision’s consolidated revenue grew 9% to $1.69 billion and AOCF increased 2.3% to $574 million. These results reflect the addition of Bresnan as well as a one-time favorable programming cost adjustment that occurred in the second quarter of 2010. Without these items, revenue growth would have been 1.5% and AOCF growth would have been essentially flat for the quarter. These results also exclude AMC Networks, which was successfully spun-off in June.

For the first six months of 2011, Cablevision generated $354 million in free cash flow, a 31% increase over the prior year on a pro forma basis. Even without the contribution from Bresnan, free cash flow would have increased by 21%.

The company repurchased more than 4 million shares in the second quarter. In addition, the Board of Directors has once again approved a $0.15 per share dividend payable in September.

With the successful completion of our second spin-off in two years, I’m optimistic about what lies ahead for the new Cablevision. While a weakened economy and competitive pressures impacted our subscriber metrics this quarter, I’m confident that our superior architecture and network combined with our new product innovations will ensure that we continue to deliver better products and greater value for our customers.

We’ve always been focused on a strategy that includes capitalizing on our investments in our cable business and exceeding our customers’ expectations on every level. And as Cablevision’s CEO, I can assure you that the focus has never been stronger than it is now.

I would now like to turn the call over to our Chief Operating Officer, Tom Rutledge.

Thomas Rutledge

Good morning. Thank you, Jim.

Telecommunications revenue for the quarter was $1.6 billion, an increase of 9.8% over the prior-year period. Excluding the impact of the recently acquired Bresnan properties, total revenue growth was 1.7% year-over-year. In the second quarter, our total company results included an increase of 5,000 high-speed data customers, 27,000 new voice lines and a video loss of 23,000.

In the Eastern Cablevision operations, average revenue per sub or RPS was $154.86, up 1.7% sequentially and up 3.8% over the prior-year period. Our rate increase at the end of last year was smaller than normal due to the earlier retransmission issue. Yet RPS has grown steadily, and we are seeding the marketplace with a higher-priced package through our new Ultimate Triple Play, which is priced $10 higher than our standard Triple Play.

Introduced in May, the Ultimate Triple Play already represents over 50% of our new acquisition Triple Play customers. These customers are voluntarily agreeing to higher rates in response to the enhanced services offered in the Ultimate Triple Play package.

In the Eastern Cablevision footprint, our Telecom competition remains active and the economy has seen little improvement. While the second quarter is traditionally a stronger growth quarter for us, these two factors made our growth more challenging, and this trend has continued into the third quarter.

However, our Optimum business service has grown steadily. Optimum Lightpath revenue was $77 million in the quarter, which was an increase of 9% versus the prior year period. Lightpath now provides service to over 4,700 buildings, an increase of 17% over the prior year.

Second quarter AOCF for telecommunications segment was $625 million, representing an increase of 1.8% over the prior year. In last year’s second-quarter for the cable company, there was a non-recurring favorable adjustment of $23 million. Excluding that impact as well as the Bresnan impact, AOCF would have been flat year over year. Operating expenses of cable remained in check in the quarter, increasing only 2.8% on a pro forma basis.

Optimum Lightpath AOCF grew by 17% in the quarter to $32.7 million. Margins continued to rise at Lightpath, and in the second quarter, Lightpath’s AOCF margin was 42.4%.

The Bresnan properties now branded Optimum have been under our ownership for about six months. Already these properties have a triple play sell-in rate of roughly 50% compared with 20% at the time of acquisition.

Total cable advertising revenue increased 22% over the prior year period. Without the inclusion of the Bresnan properties, it was up 13% on a same-store basis. This marks the seventh consecutive quarter of double-digit ad sales growth.

While traditional ad sales are strong, we are complementing this revenue through the use of our advanced advertising products. As an example, Optimum Select, which is available across the entire core footprint, launched a new RFI product in the second quarter where advertisers can now fulfill customer request for coupons, brochures, et cetera, through email response. Email is attractive not only to our customers, but it’s very important to advertisers who can save on postage and shipping costs and yet still reach their customers on a timely basis.

We’ve now implemented hundreds of RFI campaigns for various advertisers, which generate more highly qualified leads. Additionally, we have run a large volume of 30-second telescope ad that lead to advertiser long-form content and 10 to 20 minutes of engagement by our subscribers. Each of these are examples of how we continue to enhance our advanced advertising offerings, which in turn drives incremental advertising revenue for us.

Overall, in order to continue to drive growth and to compete aggressively, we’re keenly focused on adding more and more value to the products and services our customers enjoy today. We’re doing this through enhancement of existing products and services as well as through the addition of new and unique products.

Most recently, we’ve rolled out network DVR Plus in New York City and Connecticut, and plan to launch it in Nassau County this fall and Suffolk County early next year. This is much more than a whole house DVR solution. Our service will eventually allow customers to chose how much storage they would like and take advantage of multiple simultaneous playbacks.

We’ve launched the iPad app, where our customers can view essentially all of our channels with intuitive, streamlined navigation on an iPad. Earlier today, we’ve launched the same application for iPhones and iPod touches, and at the same, added remote control capability for all these devices on all TVs in the home.

We are currently trialing in front of 50,000 customers our enhanced set-top user interface, which includes more sophisticated search products, one of which is Movie Explorer, our own recommendation engine, allowing us to dramatically increase the number of movie titles we can offer on video-on-demand.

We’ve increased Wi-Fi speeds to 15 megabits downstream and 4 megabits upstream. And we’ve introduced, as I said earlier, the Ultimate Triple Play, which includes a new faster higher speed service, Boost Plus, and a wireless router. And coming soon, we’re planning to introduce the same functionality which we have deployed on the iPad and the other Apple products, on Androids, smart phones and tablets as well as PCs and Macs. All of these devices will be serviced by our integrated whole house products, leaving us the clear competitive leader in the local telecommunications marketplace.

As a result of these ongoing new product efforts, cable capital spending in the quarter increased appreciably from the previous quarter, as we invested in Boost Plus, iPad app development, and RS-DVR. Total cable capital for the quarter was $175 million or 11.6% of cable revenue. On a year-to-date basis, total cable capital spending was $282 million or 9.4% of revenue.

If you look at the Eastern Cablevision operations on a standalone basis, capital efficiency for the first half of 2011 was 9.0% compared with the prior year period capital efficiency of 10.8%.

I’d now like to turn the call over to Gregg Seibert for (inaudible).

Gregg Seibert

Thank you, Tom.

As I’m sure you’re all aware, we successfully completed the spin-off of AMC Networks on June 30. On the date of the distribution, we effectively provided our shareholders with $9 per share of tax-free dividend. I think we’ve demonstrated that providing strong shareholder returns is fundamental to the company’s strategy.

Now that we’ve completed the spin, I thought I’d take a moment and mention that the results of AMC Networks including costs associated with the spins such as legal and professional fees, are now reported as discontinued operations. Also reflected in discontinued operations are the management fees which had previously been charged by Cablevision to AMC Networks.

I should caution that AMC Networks results of operations when reported on a standalone basis will differ from the results presented in the Cablevision earnings release in the 10-Q due to certain reclassifications and adjustments made for the purposes of discontinued operations reporting.

Turning to leverage and liquidity. At the end of the second quarter, the company’s consolidated cash position was $357 million, net debt was $9.9 billion, and at June 30, we had $1.35 billion undrawn under the $1.41 billion revolving credit facility at CSC Holdings. The drawn portion is primarily backstops for letters of credit.

As of June 30, the company’s consolidated leverage ratio was 4.4 times, and the CSC Holdings Restricted Group leverage was 3.1 times.

In April, CSC Holdings repaid in full its maturing $326 million 7-5/8% senior notes with revolver borrowings and cash on hand. And as a reminder, we utilized our revolver to execute our share repurchases in the first half of this year. As a result of the spin off and refinancing of AMC Networks, AMC distributed to Cablevision $1.25 billion, all of which was used to pay down borrowings under the CSC Holdings revolver.

At June 30, Bresnan net debt was approximately $1 billion, with $75 million undrawn and available on its revolving credit facility. The leverage for the quarter was 7.2 times. There were a number of expenses incurred in the first half, including the wind down of our contract with a third-party voice provisioning company, the ramp-up of our sales and marketing efforts, and the Optimum rebranding, which impacted AOCF. We expect the Bresnan operating margins and leverage ratio to improve in upcoming quarters and remain excited about Bresnan’s prospects.

Turning to Cablevision’s share repurchase program, in the second quarter we repurchased approximately 4.2 million shares of Cablevision stock totaling $143.9 million. From inception of the program through the end of June, we have repurchased 21.7 million shares totaling $695 million.

We have $305 million of repurchase authorization available under our existing program, and we expect to continue to be opportunistic in our approach to share repurchases. Since the beginning of the repurchase program, June of 2010, our total outstanding class A shares have decreased from 251 million to 231 million, shrinking the total class A share base by approximately 8%.

Free cash flow for the quarter was $122 million and compares with the pro forma first-quarter free cash flow of $232 million. This quarterly variance was driven largely by increased capital spending of $83 million from the quarter as we invested in new product initiatives.

Free cash flow per share for the first six months of 2011 was a $1.23, a 38% increase compared with pro forma free cash flow of $0.89 per share in the prior year period.

I also want to take an opportunity to update our investors on our NOL position. At June 30, the NOL at Cablevision was $1.6 billion, down from the prior quarter amount of $1.9 billion, primarily reflecting the amount of the NOL that went with AMC in the spin-off.

We’ve taken advantage of the bonus depreciation provisions in 2010 and 2011, and intend to do so again in 2012, and this has given us about 14 or 15 months of additional NOL cover. We currently estimate that we will not fully use the NOL until sometime in 2013.

Finally, diluted earnings share was $0.31 for the quarter, up from $0.20 in the prior year period. Excluding income from discontinued operations, EPS was $0.24 in the second quarter versus $0.07 in the prior year period.

Operator, we are now prepared to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Craig Moffett with Bernstein.

Craig Moffett – Sanford Bernstein

Hi, good morning. A question for Tom.

Tom, can you talk about your expectations for how you make the cable business grow? I know you’ve talked in the past about your optimism for continued penetration of additional services. Can you just update us on your thinking? And where are the growth opportunities in this business? And kind of what we can expect going forward?

Thomas Rutledge

Well, I think obviously, we are in challenging economic times and in a highly competitive world. But I’m still very optimistic about the business itself and its growth prospects in the long-term.

We continue to have a big opportunity to grow the business universe, and the actual opportunity there may be bigger in terms of penetration opportunity than there actually is in the video business and in the residential voice business, because almost all businesses, I think, will continue to have a wireline voice product for the foreseeable future.

So there is still a tremendous opportunity in the small business marketplace. There’s still a big opportunity where Lightpath competes to grow those businesses. There is a big opportunity to grow the advertising business going forward and to take more share out of the market. I think you continue to see a shift out of traditional media. Television continues to work quite well and continues to attract dollars, and the interactive platform we’ve built, I think, can allow us to not only maintain our share of that business, but to shift the share in the future.

And I still think, in the long run, the residential business is an opportunity for us, with our superior products, to continue to grow penetration. We are at very high penetrations in our marketplace. There is very little housing growth going on right now, and there is actually a high vacancy rate. All of that hurts the residential business at the moment, but for the long run, I expect that we will have a more normal economy in the future, and that residential growth will take advantage of that.

Craig Moffett – Sanford Bernstein

Other operators have targeted Home Security Services. Is that on your radar screen? We haven’t heard as much from Cablevision about that topic?

Thomas Rutledge

We don’t have a current business plan to exploit that as a new revenue opportunity, but obviously the digital world and the digital products that we provide are capable of pretty much any communications product that you can conceive in the home and in the business. So to the extent there is an opportunity there, we can take advantage of it.

Craig Moffett – Sanford Bernstein

Thank you.

Operator

Your next question is from Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson – Deutsche Bank

Thanks. And I guess sort of following up that a little bit. When you look at the state of competition right now, Tom, any more details that you could give us would be helpful with regards to the level of promotional intensity as you move from 2Q to 3Q. A lot of your peers have talked about increasing competitive intensity. And also a number of your peers talked about real softness seen in mid May. And any sort of comments about how the business is trend lining would be helpful?

Thomas Rutledge

Well, I think that we are subject to the same national forces that the industry is.

We do have a big wireline competitive overlap with Verizon. They have been very aggressive through the second quarter with promotional offers.

Satellite in our marketplace continues to shrink in terms of market share and are less impactful directly to us than maybe the rest of the industry. And we haven’t seen any uptick in economic activity in the housing market, which does impact our business.

Douglas Mitchelson – Deutsche Bank

Would you say that the FiOS competition has become irrational or still manageable? Or are you optimistic that you can actually sort of start to improve share against FiOS?

Thomas Rutledge

We hope to increase share against FiOS. I mean we continue to, interestingly, maintain our market share in data. We continue to grow our voice business. And since our FiOS competition actually began, we’ve increased our total customer relationships subscribers by more than 10%.

And yes, we have lost several points of video penetration, but it is a marketplace where we can continue to provide superior products, superior customer service and compete aggressively, and continue to grow our RPS by adding new value products into our sales mix and using our selling techniques to drive our customers toward those products.

So yes, it’s very competitive. Looking at their pricing and their – what they have to do to grow the market share, is it irrational? I think they lose free cash flow on every customer they connect. If that’s irrational, it is irrational.

Douglas Mitchelson – Deutsche Bank

Thanks for that. And Gregg, just a clarification, you said that you would start to use the NOLs in 2013? Or that’s when the NOLs would be used up by?

Gregg Seibert

No, it’s our expectation currently, Doug, that we would burn through the NOLs sometime during 2013, which is 14 or 15 months longer or farther out than it would have been if we haven’t utilized the bonus depreciation.

Douglas Mitchelson – Deutsche Bank

Great, got it. Okay, thank you.

Operator

Your next question is from Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne – Morgan Stanley

Thank you. Good morning. Just a question or clarification, Gregg, on the management fees. I think you said those are no longer being run through the cable P&L. I just want to make sure that’s correct? And is that true for all periods in the press release or just for this current quarter?

Gregg Seibert

That’s true for all periods, Ben.

Benjamin Swinburne – Morgan Stanley

Okay, great. Thank you.

Tom, you guys have been ahead of your peers in terms of new products, going back to WiFi and network DVR. You’ve tended to not try to charge incrementally for most of these products, and I’m wondering as you look at the ARPU trends, FiOS doing what it’s doing, if you’re thinking that there might be opportunities to sort of monetize some of this stuff little bit more aggressively as you look out over the next 6 to 12 months, PC to TV Relay, all the things you guys have done over the last two years.

Thomas Rutledge

Well, there are multiple ways of monetizing what we’re doing to our network. Ultimately, it’s a question of creating value for your customers. That sometimes gives you pricing power on your overall mix, and sometimes there are opportunities to sell your way into the marketplace with new products that drive incremental ARPU on each transaction. And we choose different methodologies to drive value in.

But the point I was trying to make earlier in my presentation was that sequentially our RPS is growing pretty nicely. And that’s as a result of selling in a transactional product at a high penetration rate.

On the other hand, Wi-Fi we don’t charge for. And the reason we don’t is we think we need to build value over time by creating utilization of that product. It’s not a product that has an immediate economic observable value to a customer until they utilize the product. So as that becomes more utilized, it gives us pricing power on our overall subscriber relationship.

So we think there is a way to monetize network DVR, and not only an opportunity for monetization, because it offers new services and new functionality that aren’t offered by traditional DVR. But it’s in a less-expensive capital projects, as well, on a per-subscriber basis, which either gives us the opportunity to charge the same rates as our competitors and have lower cost, and in terms of product differentiation, you can argue it gives us a higher revenue per subscriber opportunity, as well.

So depends upon the product, how it gets rolled out and how it’s perceived in the mind of a consumer when it’s initially launched.

Benjamin Swinburne – Morgan Stanley

Great. Thank you very much.

Operator

Your next question is from Mike McCormick from Nomura.

Patricia Armstrong

Mike, we can’t hear you.

Thomas Rutledge

We can’t hear you, Mike.

Jim Dolan

Operator, let’s move on to the next question and put Mr. McCormack back in the queue, if he can get back in. Operator?

Patricia Armstrong

Do you want to hit mute, Jim?

Thomas Rutledge

Hello? Do we have anyone else on the call? Have we been disconnected.

Operator

Your next question comes from Richard Greenfield of BTIG.

Thomas Rutledge

Thank you. Hello?

Operator

Richard, your line is open.

Patricia Armstrong

Could we try another one, operator?

Operator

Yes. Your next question comes from Jason Bazinet of Citi.

Jason Bazinet – Citigroup

Yeah. I just had a question on the AOCF in the quarter. So just I want to make sure I wasn’t missing something.

It looks like you added year-over-year about $140 million of revenue and about $13 million of AOCF, and you mentioned the $23 million one-time benefit from a year ago. But the marginal sort of EBITDA margins, when I make that adjustment, seem like they were a bit lower than they were a year ago. Can you provide any more color on sort of those management fees or any other sort of adjustments that are related to the AMC spin, or anything else that might be impacting the AOCF in the quarter?

Thomas Rutledge

Well, on the AMC management fees, they’re no longer absorbing $32 million worth of an overhead allocation that we had allocated to them. Of that, roughly half has been reduced on our end.

And in conjunction with that, we also suffered some severance costs as we reduced overhead, and so I think that’s probably the effect that you’re seeing.

Jason Bazinet – Citigroup

Okay, perfect, thank you very much.

Patricia Armstrong

Operator, can we have the next question?

Operator

Your next question is coming from Tom Eagan.

Thomas Eagan – Collins Stewart

Great, thank you. In terms of customers, they were a little bit lower than we had expected, a little lower versus last year. If you could give us a little bit of color in terms of basic and data, how was the gross adds versus the churn? Was the churn that much higher and was the gross lower?

Thomas Rutledge

In general, churn was up slightly and gross adds were down.

Thomas Eagan – Collins Stewart

Any color on high-speed data versus basic? Thanks.

Thomas Rutledge

No. The one thing that’s true about our business in general is that we have a very high sell-in of Triple Play. 70% of our customers are at Triple Play and Triple Play packages. And so they tend to move together, at least in the residential marketplace.

Thomas Eagan – Collins Stewart

I guess the surprise was on data because you mentioned that your share was increasing in terms of data. Was there something in the marketplace specifically in the second quarter that hurt your gross adds in the quarter? Thanks.

Thomas Rutledge

No, I said our market share of data has remained consistent at about 75% of market share in the New York DMA that we serve. And that remains true. So the real issue is total data growth in the marketplace.

Thomas Eagan – Collins Stewart

Right, okay. Thank you.

Operator

The next question is from Marci Ryvicker with Wells Fargo.

Marci Ryvicker – Wells Fargo

Thanks. Tom, can you talk about the different regions in your eastern footprint? I think you said previously that the low-end neighborhoods are where you were losing the most customers, and if I am reading you right, it sounds like Verizon maybe incrementally aggressive in Long Island, so maybe dynamics within the eastern region have changed?

Thomas Rutledge

The Verizon footprint is throughout our service area, which includes New Jersey, Westchester, New York City and Long Island. And their tactics are the same throughout the footprint. And they’ve been aggressive in their offer strategy in the second quarter and in the first quarter. And that’s been true throughout our footprint.

The economic impact on our customers in lower-income neighborhoods is more pronounced. And we see less gross adds in low income areas, and that’s the result of economics and vacancies. It’s also true to a lesser extent in the higher income areas, where we are more competitive, as well. So, there is economic pain in competitive areas, and there is aggressive competition in competitive areas.

Marci Ryvicker – Wells Fargo

Thank you.

Operator

Your next question is from James Ratcliffe of Barclays.

James Ratcliffe – Barclays Capital

Good morning. Thanks for taking the questions. Two, if I could. First of all, on capital – in terms of capital structure in general, should I take it that you’re still targeting 4 to 4.5 times net debt to EBITDA as the right leverage level for the business? And secondly – I’m sorry.

Gregg Seibert

Sorry. No, continue.

James Ratcliffe – Barclays Capital

And just secondly, you mentioned that you’re expecting the NOL to run into 2013 at this point. Given the reversal impacts of stimulus, should we expect to see any time thereafter cash taxes actually run above book taxes, or would essentially the two come into alignment going forward?

Gregg Seibert

Let me start with the first question, in terms of leverage ratio or leverage targets. We are at 4.4 times now, on a net basis. That’s a very comfortable level for us.

And I would say that the right range to continue to look at is 4 to 4.5 times. I don’t rule out the possibility of our going higher under extraordinary circumstances, but I don’t see those circumstances on the horizon. So we’re comfortable with where the leverage is now within our target range.

In terms of the NOL, I don’t have my head of tax here today, but my sense is that you should not see periods where cash taxes run above the book taxes.

James Ratcliffe – Barclays Capital

Great. Thank you.

Operator

Your next question is from Matthew Harrigan with Wunderlich Securities.

Matthew Harrigan – Wunderlich Securities

Good morning. If you are able to ring-fence some deals, now that the acquisition prices have presumably gotten a little saner, post inside and with the freefall in the financial markets, would you be inclined to do that? I mean obviously with your stock at this level, that’s the most compelling application of your balance sheet flexibility generically.

And then secondly, if I might, could you talk about any implications of XG-PON long-term over at Verizon, or is that pretty irrelevant given the amount of capacity both you and Verizon have right now in your networks?

Gregg Seibert

Let me address the acquisition topic first.

I think that as everybody on this call knows, we’ve been associated with every potential acquisition in the cable industry over the last nine months. I’ve seen research reports that have us buying three or four different targets.

And I think the reality is very much what we stated from the time that we made the Bresnan acquisition. We start with an operating plan, we determine what we think that we can do with the asset, we look at the returns from those type of acquisitions and we compare them to opportunities such as repurchasing our own stock. And I think, again, Bresnan for us was a almost unique situation. It had a combination of operating attributes and financial attributes which made it especially attractive.

And we will continue actively to look at acquisition opportunities going forward, but I don’t see anything on the immediate horizon in that regard. And I’d also point out that given the disruption in the markets at this point in time, it would be very difficult to go out and ring-fence a transaction today and use non-recourse debt to do it. The high-yield markets locked up quite a bit over the last few months.

And part of the issue with the auction process, as we see it, is that we’re often times asked to make a financial commitment, as in the case of Bresnan, six months before actually doing the financing. And I think in today’s market, there is a tremendous amount of market risk that any flex terms on any type of a commitment from our friends in the banking community would be dramatically wider. And so I think that the ability to finance on a ring-fence basis at this point in time is quite reduced.

So we’ll see where the acquisition market goes, but at this point in time, as both Jim and Tom have pointed out, we are focused on our core operations and Bresnan.

Thomas Rutledge

And on your BPON, GPON question, most of the plant that Verizon built in our footprint is BPON, which is a less capable network than what they’ve been building in more recent times.

Regardless of which network they have, our network is able to provide superior products and continue to lead and innovate in terms of data speeds, in-home wireless products and IP products that you see us launching today on the various iPhone, iTouchs, and iPads. And the ability to integrate all those products seamlessly to the benefit of the consumer at low cost.

I think ultimately we have a superior architecture, not only because it can do everything that the FiOS network can do, but it can do it less expensively.

Matthew Harrigan – Wunderlich Securities

Great. Thank you.

Gregg Seibert

Operator, can you check and see if either Rich Greenfield or Mike McCormick are back in the queue? They both tried to ask questions earlier and we were unable to hear them.

Operator

We do have Richard Greenfield with BTIG.

Richard Greenfield – BTIG

Hi. Thanks for taking the question. A few.

Could you start with Bresnan? You said depressed EBITDA in the quarter in the first half. How big was that in each of those? And then could you comment on what the second half swing factor could be?

Two, your data product’s been one of your standout products historically. The FCC I guess took you out to – I guess there’s no other way to say it than kind of the proverbial woodshed. And I would love to get your thoughts on what you actually think is going on there, especially given how strong your market share has been, and whether that study matters.

And then lastly what are you actually doing to fend-off Verizon in terms of competitive offers? Anything new that’s in the pipeline that you could talk to? Thanks.

Gregg Seibert

Well, let me start me with the Bresnan one for a second. I think Rich asked the question – sort of is there something that we anticipated or didn’t anticipate on Bresnan that depressed the margins in the first half?

The answer is yes. And that I think that’s the third-party voice provisioning aspect. That’s essentially, at this point in time, done with. So that was sort of a one-time expense. I’m not sure that from an accounting standpoint, KPMG would bless me saying it’s one-time, but we know we are not going paying it going forward, as we are now provisioning our own calls out of there.

So that was something that depressed the margins more than we anticipated, that’s going away. And we expect the margins to broaden out to the type of numbers that we were looking at moving forward. And we expect, as I’ve mentioned in my remarks, for the leverage of Bresnan to come down.

Richard Greenfield – BTIG

Is there any way to think about a quantification per quarter in terms of EBITDA or AOCF impact?

Gregg Seibert

Yeah, I would think you could say it’s at least – Jim?

Patricia Armstrong

Between two and three points of margin, you should start to see a lift.

Gregg Seibert

Two or three points in margins, yeah.

Patricia Armstrong

In the second half of the year.

Thomas Rutledge

With regard to the data product and the FCC test, I mean the FCC test is an interesting test from our perspective. It was accurate.

Our product, which I said earlier has 75% share, has been consistently recognized by J.D. Power and PC Magazine from a consumer perspective as the best product, data product in the country. And it still is, notwithstanding the way that the FCC measured the product.

And while the FCC test is accurate, at some level, it doesn’t – it’s misinterpreted in terms of its implications to customers. One thing about it is that it’s a reference to advertised speed at peak times. So a DSL service at 750 kilobits that is operating at 750 kilobits looks better on that chart than our service.

And as I said earlier, 50% of our new triple play customers are selling into our DOCSIS 3 platform 50-megabit service. We continue to drive the data business. We continue to drive data ARPU in the business. And we continue to have a superior product to our competitors in the data business in the actual utilization and perception of the customer.

In terms of fending off Verizon or anyone else for that matter – there’s still more satellite customers in our footprint than there are Verizon, by the way. And that number’s steadily coming down. We think we can take it down faster with additional offer and selling strategies.

And we don’t have anything new or unusual to announce, other than that we did announce today that we have launched the iPad app on iTouches and iPhones, which will bring to about 1 million people – 1 million homes in our marketplace – the functionality of being able to watch live TV in the home on these devices. And also to act as a new remote control device on every TV in the house.

What’s even more interesting, to operate as a new navigation device, to have a real easy way to see what’s on, and to go through – use search engines, go through lots of information, and pick the kind of content that you want to watch. That makes our VOD product more competitive with over-the-top providers like Netflix. It makes us more competitive with any of the over-the-top providers. Makes us superior to all of our wireline and satellite competitors.

So we’ve got new products, we’ve got ways to sell them, and we’re going to compete aggressively.

Gregg Seibert

Operator, can we see if Mike McCormack is back in the queue please?

Operator

And your next question is from Michael McCormack from Nomura.

Mike McCormack – Nomura Securities

Great, thanks, guys. I’ll hold off on telling you who my wireless provider is. Just maybe a couple of things.

First, Tom, your thoughts on capital spending. Obviously some investment here in high speed and iPads and Android apps and network DVR. But how should we think about that run rate as the year progresses? Is this going to be a sort of a long-term investment process?

And then secondly for Gregg, on use of cash, you obviously have a target leverage ratio that has been discussed historically, which would indicate that we could see –to be honest, potentially I guess, a meaningfully higher share purchase amount at some point down the road. What’s the thought process of evaluating that?

Thomas Rutledge

Capital intensity, I think continues to come down in our business. We’ve done a variety of things to make that happen. We did have a little bit of increased sequential capital spending as a result of these new product rollouts.

But the overall capital trend is positive. We’re going to spend less money in capital this year than we did last year, including the Bresnan acquisition, which in itself is a new sort of get it ready for business has some capital intensity to it.

And we see our converter strategy using downloadable security, our network DVR strategy, and our ability to serve IP devices without converters at all as a continuation of a network architecture that we’ve been designing for a long time that allows us to serve more and more customers with less and less capital. So I think our long run capital intensity continues to improve, not only this year, but in years to come.

Gregg Seibert

And Mike, on the share repurchase front, we have been opportunistic in the way we approached it. I think that we over the last year, starting the program in June of 2010 and repurchasing $700 million worth of stock is probably more than I would have predicted when we initiated the program. I think the Rainbow spin and the ability to in effect monetize that cash flow to Cablevision gave us an ability to be especially active over the last couple of quarters.

We’re going to continue to look at the stock price. We’re going to continue to be opportunistic. I mean we have a period here of market disruption and market weakness that probably cuts in two different directions. On the one hand, obviously our stock has sold off a lot of here. On the other hand, there is not a tremendous amount of clarity as to where the markets are going. But I feel very comfortable that in this target leverage range, we have the capacity to do additional share repurchase, and we have the $305 million remaining authorization from our board.

So we’re in a position to able to move when we determine that the time is right to do so. And we continue to be focused on the program, and we continue to believe that our stock is undervalued.

Mike McCormack – Nomura Securities

Great. Thanks for letting me back in, guys.

Operator

Your next question is from David Joyce with Miller Tabak & Company.

David Joyce – Miller Tabak & Co.

Thank you. I was wondering if you could provide any sense you have on whether you have more seasonality effects now, with Bresnan being part of the portfolio? As maybe part of the explanation in addition to what you have already commented on for the second quarter?

Thomas Rutledge

There is a different seasonality in Bresnan than we have here in the New York area. So it is true that there is some new seasonality there, and that has some impact in the second quarter.

David Joyce – Miller Tabak & Co.

All right. And some of your other peers mentioned the decline in some premium channel usage or transactional VOD. Have you seen those effects as well?

Thomas Rutledge

Very slight declines in both. But as I said earlier, our RPS is up, and so we’re continuing to able to sell to our existing customer base additional products. And sequentially they are up 1.7%.

David Joyce – Miller Tabak & Co.

Thanks. And then finally, if I could, on the Lightpath side, are you seeing any average increase in the size of your customer there?

Thomas Rutledge

Actually, we are having more success in the middle-market area in Lightpath at the moment. So we continue to grow that business, and the middle-market is less competitive than the high-end of the market. And I would characterize our growth there as being – our steady growth in Lightpath comes from the middle market, and the larger market customer base is a lumpier kind of revenue stream.

David Joyce – Miller Tabak & Co.

Great. Thank you.

Gregg Seibert

Operator, we are prepared to take one more.

Operator

Your final question is from Bryan Kraft with Evercore Partners.

Bryan Kraft – Evercore Partners

Hi. Thank you. Tom, where do you think DVS penetration is now within your footprint? And I also want to ask where are in your efforts to gain programming rights to offer streaming services to your customers outside of the home? Thanks.

Thomas Rutledge

We think it’s about 11% in our footprint right now. And in terms of streaming rights, we are in active discussions with a variety of programmers. As we’ve launched these applications that I mentioned earlier. These are in-home applications to watch cable TV in the home on screens acting as televisions.

Those devices are portable, and we are acquiring the rights to have a out-of-home service. We’ve acquired some of those rights. We’re putting those together right now into packages, and we’ll begin to make those available to our customers in the relatively near future.

Bryan Kraft – Evercore Partners

Generally speaking, are you having to pay extra for those rights or are they getting bundled into the existing affiliate fees that you are paying?

Thomas Rutledge

Generally speaking, the programmers we’re talking to see it as part of their strategy to bundle those rights in their overall approach to the marketplace and so they don’t – they tend to get acquired with the renewals of general agreements.

Bryan Kraft – Evercore Partners

Great. Thank you.

Patricia Armstrong

Thank you all for joining us. That concludes our call.

Operator

Thank you ladies and gentlemen. This concludes today’s conference call. You may now disconnect your lines.

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