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Charter Communications, Inc. (NASDAQ:CHTR)

Q3 2011 Earnings Call

November 1, 2011 09:00 a.m. ET

Executives

Robin Gutzler - VP, IR

Mike Lovett - President and CEO

Chris Winfrey – CFO

Don Detampel – EVP, Technology and President Commercial Services

Analysts

Jeff Wlodarczak – Pivotal Research Group

Ben Swinburne – Morgan Stanley

Stefan Anninger – Credit Suisse

Jason Kim – Goldman Sachs

Bryan Kraft – Evercore Partners

Amy Young – Macquarie Research Equities

Jason Bazinet – Citi

David Joyce – Miller Tabak & Company

Rich Tullo – Albert Fried

Mike Pace – JPMorgan

Vijay Jayant – ISI Group

Operators

Good morning, my name is Felicia, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Charter’s Third Quarter Earnings Call. (Operator instructions) Thank you. I would now like to turn the conference over to Robin Gutzler, ma’am you may begin.

Robin Gutzler

Thank you Felicia. Good morning everyone and welcome to Charter’s 2011 third quarter earnings call. This morning we issued a press release over PR Newswire at 8:00 am Eastern Time detailing our results. This information is posted our website, www.charter.com under Investor and News Center. The website also contains the presentation that accompanies today’s comments and can be found under financial information.

Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully.

Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management’s current view only and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future.

During the course of today’s call, we’ll be referring to non-GAAP measures as defined and reconciled in this morning’s earnings release. These non-GAAP measures as defined by Charter may not be comparable to measures with similar titles used by other companies. In today’s earnings release, we reported results in accordance with GAAP as well as pro forma results for 2010 and 2011.

The pro forma results reflect the divestiture and acquisition of Cable Systems in 2010 and 2011 as of they had occurred on January 1, 2010 unless otherwise noted. The year-over-year growth rates we will be referring to this morning are in a pro forma basis. Joining me on today’s call are Mike Lovett, President and CEO and Chris Winfrey, our CFO and Don Detampel EVP of technology and President commercial services. I will now turn the call over to Mike.

Mike Lovett

Thanks Robin. Good morning and thank you for joining us today. We are pleased with third quarter results in which we grew our revenues 3% and adjusted EBITDA 3.8% and generated healthy free cash flow. We accelerated growth in our commercial business through our robust growth in our internet business and improved our margin by 30 basis points compared to last year.

We also continued to take an opportunistic disciplined approach to investing in ROI positive projects both organic and M&A as well as share and debt repurchases. We made meaningful advances in all four of our strategic priorities that we outlined at the beginning of the year.

Before we go into more details on our third quarter results I’d first like to take a step back and update you on the execution of these strategies.

First, we are focused on fundamentally improving the customer experience, which is the foundation underlying our future success. We are transforming Charter into a customer centric organization with a commitment to delivering unmatched customer experience. We are improving our product offerings as well as the quality and reliability of our service, and while we are starting to see positive results in our operations and customer retention we are still in the early stages. It takes time for these improvements to resonate with customers and to show off this meaningful improvement in overall external customer satisfaction studies.

However, you need to see results, the best evidence of our progress is new customer satisfaction, which is more than 35% higher than for our more tenured customers, and as I said we are seeing results in our operations. Our efforts drove an 11% decrease in billing and service calls and 10% fewer service truck rolls in the third quarter compared to last year, and we continued to see improved customer relationships.

In addition to increasing customer satisfaction all of this generates bottom-line savings. Our second strategic priority is to lead with our superior Internet product in our sales, promotion, and branding efforts, to leverage our structural broadband advantage and create new customer relationships. While video is still an important element of our business, we continue to lead with our strengthened Internet. In the vast majority of our footprint we have superior Internet speeds and in less than 4% of our footprint where we overlapped the FiOS and other fiber competitors we have comparable speeds with 60-Meg residential product. Nearly 95% of our internet customers have a broadband service of 12-Meg or higher.

Our advantage is evident. Charter’s Internet Service received top rankings from PC Magazine and high marks from the FCC in speed testing, and Netflix has rated us the best performing cable or DSL Internet provider for the third consecutive time this year.

Accelerated growth and the number of IP devices and bandwidth used in households will feel the need for faster speeds and greater reliability. Charter is uniquely positioned to provide those services. In addition to speed customers are looking for a solutions provider as evidenced by the popularity of our home networking product. The number of customers using our in-home Wi-Fi service jumped 34% year-over-year with nearly one in four customers now relying on us for home wireless connectivity.

As slide three highlights there is an opportunity to increase our Internet penetration particularly in Homes Passed where we don’t have a video customer relationship. We are seeing continued growth and penetration as our net gains of non-video homes again doubled. But a 10% penetration compared to well over 60% in homes where we have a video relationship we feel we have ample room for growth. We are growing share and forming new customer relationships by creative marketing, increased education of our Charter as a premier ISP provider and the use of non-traditional sales channels. Last quarter we announced our partnership with Dish. We have been very pleased with the initial results where we are seeing a significant improvement in response rate and sales performance. As we ended the quarter we started marketing this across our entire footprint.

Another priority for us is to aggressively drive commercial growth. There is a significant amount of untapped commercial opportunity in our footprint. We are making investments in people, processes, and systems to expand our capabilities in these markets and extend our reach. Our commercial internet and phone businesses are more growth oriented while our commercial video business is relatively stable. In Q3 we grew data and phone commercial revenues by nearly 30% versus last year.

Cell backhaul is a key growth area for us. We’ve approximately 1600 cell tower sites in service or under contract and have a healthy sales pipeline. We are leveraging our existing infrastructure in technology and expanding our products and services to capitalize on the commercial opportunity, we see upside in both the short and long term and we’ll continue to take an opportunistic approach to investing in and expanding this part of our business. We view it as a key driver with attractive growth and return prospects.

Finally our fourth strategic priority, changing the dynamic in video. While we view this as a longer term initiative we are taking actions now to enhance our video offering. We recently added the exciting new content for our video customers, including NFL Network, NFL RedZone, HBO GO, MAX GO and Big Ten Network 2 Go, and in a few weeks we’ll launch 3D content on demand. In addition, we continued to expand our HD channel lineup. We are on target to offer an average of 75 HD channels by year-end and while we’ll already have the most popular channels available we’re planning to offer over 100 HD channels in key markets next year.

We’re pleased that we’ve made significant enhancements to the programming choices for our customers this year, at the same time we remain very concerned about alarming rise in fees that local broadcast stations, regional sports networks and national cable programmers are seeking for their content. In the case of local broadcasters that content has historically been free to our customers.

As we have seen in the increasing number of disputes between operators and programmers, it’s the consumer that ultimately gets hurt, either by losing access to programming, even for a short time or paying far too much. The model that the industry is currently working under is more than flawed and in need of remediation.

As part of our continuing efforts to offer the best possible experience for our customers, we announced this morning that we’re launching a unique tool to augment a great content already available on charter.net that will enhance the online user experience for our customers. The new search and discovery feature will organize video content already available online through charter.net such as HBO Go and EPIX with online content from sites such as Netflix, Amazon and Hulu into a single online directory. Rather than searching separate sites content available from these multiple sources will be integrated in one place making it easier for customers to find what they want regardless of the source.

We provide a superior Internet product ideal for streaming video. This is another example of us taking an innovative approach linking the value of superior speeds to customer experience. Over the next year, our customers will have an increasing library of content to enjoy anywhere, any time on any device.

We’ve also initiated a key component of our next generation TV strategy with our TiVo pilot underway in Texas. Early pilot participants have responded favorably to the overall service, particularly the improved recommendations, user interface and search capabilities, all of which enhance the customer experience and should increase usage of our on-demand library.

We will complete a full production launch in Texas and conduct pilots in a few additional markets later this year with a full production launch enterprise wide in the first half of 2012. As you can see we are making great strides in improving our video offering and we believe that these enhance our competitive position in video.

Looking ahead, we expect our broadband infrastructure to play an increasingly large role in consumers lives especially as their desire to view video content on demand increases and the delivery of content evolves to IP. It is all about services delivered over that platform and we want to provide the best delivery and experience. We believe that this sets all of our products up for success down the road.

Our strategic initiatives focused on 2011 are now in place and we are going to take hold and gain momentum. That momentum was evident in the third quarter in our commercial and Internet revenue growth. Looking at volume while digital and phone volume grew less in the quarter compared to prior year, internet was stronger and our video losses improved slightly. We also drove adjusted EBITDA growth, generated free cash flow, improved our customer relationship trends, and lower churns. I will now turn it over to Chris to walk through the financials.

Chris Winfrey

Thanks Mike and good morning everyone. As shown in slide five we grew revenue by 3% in the quarter led by growth in higher margin Internet and commercial products. Internet revenue rose 8% termed by the addition of more than 190,000 new customers. Commercial revenue jumped 19% versus the prior year quarter supported by improved sales productivity and line extensions for businesses and carriers. Revenue from residential phone increased 4%, an area where we can do better despite a broader fixed line cord cutting trends.

Video revenues were down 1% termed by video customer losses partially offset by the price increases in the quarter. In addition we are still facing economic headwinds as it relates to core achieving on video on demand and premium channels, but did see some uplift in certain areas such as our sports tier due to the addition of new contents as Mike mentioned.

From both video and internet the total revenue impact of the targeted price adjustments this past quarter was about $10 million. We are pleased with minimum churn associated with these price adjustments and keep in mind that we have not yet seen a full quarter’s impact to revenue so Q4 will reflect a slightly higher run rate.

Ad sales were down approximately 3% than the prior year primarily due to lower political spent versus 2010. Clearly, we expect Q4 advertising sales to also be lower year-on-year. Last year’s political campaign boosted Q4 sales by about $14 million.

Looking at the makeup of total revenue on the pie chart on slide five, we continue to diversify our revenue, and while video is still critical to our business it represents only half of our sales now down from 60% just a few years ago. Increasing the investment for the IP side of the pie namely Internet, commercial and phone would bode well from video to Mike’s earlier point.

Slide six highlights our commercial business which continues to accelerate, up 19% on prior year versus 11% of Q3 of 2010. The growth was driven mostly by new relationships with small and medium businesses in carrier customers. We increased our commercial PSUs by 22% compared to last year excluding video. In Q3 Carrier Space revenue rose by 50% to $12 million in the quarter.

Turning to our residential business on slide seven, our total PSUs were effectively flat in the quarter compared to $16,000 gain in Q3 of last year. As Mike highlighted the downturn of PSU growth was driven entirely by slower phone growth, as internet gains and video losses both improved from prior year. We achieved lower churn but also saw fewer connects.

In addition to ongoing little household formation, high vacancy rates and ongoing competition, we only started to see the positive impact to our top-line actions in the very tail end of Q3 particularly in phone. We also maintained our disciplined approach to customer acquisition. For the past year we suppressed direct marketing to the higher credit risk segments of our service area and while the segment formed a large portion of our connects in the past it represented an even larger portion of our disconnects, and a disproportionate share of our cost.

But while we benefitted from the cash flow impact of our strategy we cannot ignore the segment permanently. We designed Charter Starter, we mentioned briefly in the last quarter, to target these households with an attractive yet affordable product offered in a more controlled low risk manner. Charter Starter is a triple play off that includes base level video, internet, and phone products for $80 per month or double plugged video and internet for $65. There is a limit on the equipment and the amount of pay per view and video on demand customers can take as well as a required prepayment for the first month charges and install fee, and we are looking to add a deposit requirement within the billing system in the coming months.

Recognizing that these customers may desire more as they demonstrate payment history, we gradually expand the offering. We tested the product during this past quarter and completed the soft launch at the end of September ramping up marketing efforts in October. To clarify, our overall strategy is unchanged. Charter Starter strengthens our systemic credit controls and provides an entry for new customers. So in and of itself we don’t see it as a near term material connect driver but controlled in fairway to address the segment.

Even more than the industry focus on PSUs or RGUs, customer relationships really are the core focus area for Charter. In the third quarter a rated decline in total residential customer relationships dropped nearly fourfold. Key driver being our non video customer relationship growth to 55,000 relationships double the growth rate than last year’s third quarter.

Residential ARPU increased 3.5% from prior year driven by the price increases I mentioned and increased bundling and advanced services penetration. Once we secure the customer relationship bundling remains the key factor to maximizing retention and up-sell. At the end of the quarter, 61.9% of our customers subscribed to more than one of our products.

Moving to slide eight, while making positive strides in retention levels, we experienced a decline in video customers in the quarter. Video customers decreased 65,000, and despite the price increase a slight improvement over the loss of 66,000 last year. Of the 65,000 loss, 63,000 were basic analog, representing a disproportionate share of the video loss.

Digital growth slowed significantly compared to last year’s third quarter as we completed fewer analog-to-digital channel migrations, which traditionally drives digital upgrades. While there is still an opportunity here, as we get further up the penetration curve in absence of stronger push we will have less of an opportunity for digital conversion which impacts RGU and ARPU growth.

Video ARPU was 4.3% year-on-year to 72.21 driven by the rate adjustments and higher mix of digital customer in the base. Given the recent pressure on housing and ARPU lift from video-on-demand, premiums and digital upgrades we see ourselves well-positioned when the economic climate does start to turn. In the meantime, our goal is to ultimately stabilize the video business with the product developments and customer experience enhancements Mike outlined.

Looking at slide nine, we achieved strong growth in the residential internet PSUs in Q3 as more and more customers recognized our speed superiority. Overall penetration reached 29.5%, but as Mike pointed out we continue to have an outsized opportunity in the roughly seven million non-video homes passed in our footprint given the lower penetration there.

Our internet penetration of homes passed where we do have a video relationship is well over 60% and we see new reason on why seven million homes should be just as interested in our superior internet product. We’re accelerating penetration in these homes, and as Mike mentioned we’re looking at innovative ways to further accelerate growth.

Internet ARPU grew 1.8% primarily due to the price increases through broader penetration of our home networking product which grew to 23% penetration in the quarter. We grew residential phone customers at a slower pace than in 2010, adding 11,000 phone customers during Q3 compared to 31,000 a year ago, primarily due to fewer upgrades from our existing customers. We still think there is an opportunity to get back to the previous phone attached rates and we’ve refocused our offer set both through acquisition and retention and shifted back to a higher direct response marketing mix as compared to internet and video branding.

Phone ARPU dipped 1.1% compared to third quarter of last year due to an increase in value-based packages. As we recognize the strategic importance of attaching phone with our other products, we believe it’s likely that declines in phone ARPU will persist.

On slide 10, looking at expenses and adjusted EBITDA, we achieved continued growth in EBITDA that outpaced revenue growth reflecting year-over-year margin improvement. We grew sales of higher margin products and continued to benefit from our customer experience and lifetime value strategies through lower service cost and bad debt.

While total operating expenses rose in a slower pace than revenue, they increased 2.6% stemming from higher marketing expense and programming costs, partially offset by bad debt savings. The upturn in marketing cost to 3.9% of revenue reflected higher brand and media investment, channel development as well as increased marketing efforts in commercial. We saw programming costs rise 2.4% due to contractual increases net of the impact of customer losses. Our outlook here has not changed; unfortunately we expect programming cost to maintain their upward trend.

Moving to slide 11, overall CapEx was 16.8% of revenue. Total dollars were up slightly as we spent more on line extensions driven by commercial and customer premise equipment. The increase was partially offset by timing our strategic bandwidth initiative rollouts to avoid customer experience impacts and we are still on target to be largely complete with DOCSIS 3.0 and SDV by year-end.

Our estimated capital expenditures for this year remains approximately $1.3 billion to $1.4 billion and about three quarters of our CapEx continues to be success based. Notably, commercial CapEx totaled $48 million in the quarter, 41% higher year-on-year. Our total commercial spent now represents a $172 million of CapEx on an LTM basis.

Turning to slide 12, net loss was $14 million better compared to the year ago quarter as a result of adjusted EBITDA growth and lower income tax expense partially offset by higher interest expense from the 2010 and 2011 refinancings and an increase in depreciation and amortization from CapEx. We continue to generate free cash flow in the quarter and our free cash flow totaled $91 million in Q3 of 2011 compared to $135 million last year. The decrease was caused by changes in working capital, increase to interest payments and higher capital expenditures partially offset by higher adjusted EBITDA.

Working capital provided $36 million less cash in the quarter versus prior year driven primarily by the timing of payments. As a reminder, our taxes are predominantly non-cash due to our $10 billion tax basis and $6.9 billion loss carried forward position at the end of last year and we do not expect to be a significant cash tax payer until after 2017. Cash tax payments for Q3 and year-to-date were $2 million and $7 million respectively reflecting certain state income taxes.

Now turning to our capital structure, we had a $1.1 billion of liquidity at the end of Q3 and remain comfortable with our maturity profile and leverage target, and we’ve demonstrated discipline in our balance sheet return to capital strategy.

During the third quarter, we repurchased $193 million principal amount of our secondary notes in the open market and immediately following the S&P U.S. downgrade we launched a $200 million share buyback program. So as of the end of the quarter we purchased 2.4 million shares for $116 million.

On the M&A front, we closed several tack-on acquisitions in the quarter and continued to evaluate opportunities for both acquisitions and divestitures.

With that I will turn it back over to Mike.

Mike Lovett

Thanks Chris. The fundamental changes we are making will continue to strengthen our business and yield positive results laying the ground work for future success. Meanwhile we had another marked by revenue and adjusted EBITDA growth and continued healthy free cash flow coupled with disciplined execution of our strategic priorities.

Many of you know that a few weeks ago I announced that I will be stepping down as CEO of Charter following a transition period. I am comfortable that I will be leaving Charter in a great position with extremely talented leaders and an incredible group of employees. I remain confident that our strategy will drive profitable growth and build value for our shareholders, and now we have the momentum and the right leadership team in place to execute against that strategy.

Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Wlodarczak with Pivotal Research.

Jeff Wlodarczak – Pivotal Research Group

Good morning I am Jeff Wlodarczak. I have two for Chris and then one follow-up. Your marketing expense ramped in the third quarter, is that a reasonable run rate going forward? And then the CapEx was quite a bit lower than we expected. Is it reasonable that you are probably going to be coming at the low end of your guidance for CapEx in 2011?

Chris Winfrey

Sure. On the marketing spent if you take a look both sequentially and year-over-year there is about a $15 million increase. When you take a look at sequential it's important to keep in mind that Q3 does represent a higher acquisition period so there is some seasonality there. I'm going to focus my comments more on year-over-year because that’s traditionally where we’ve talked about as opposed to seasonality.

So the $15 million increase year-over-year about a third of that is coming from commercial. There is a few million that’s inside there for some online branding and social media activities as well as different one-off activities, so that’s a few million that I would consider one-off, and the remainder of that is something that may be fair to consider as run rate as well as the commercial simply due to the fact that we have been investing in another channels, but retailer online to expand our channels. While we continue to be in a really good competitive situation across all of our footprint it’s fair to say that some of the cost border continues to increase slightly there.

As it relates to the second question on CapEx, there was a fair amount of seasonality that was in there. Usually you get a fair amount of connect volume which was the case inside of Q3. What was offsetting that if you take a look in the scalable infrastructure category it's hold back intentionally on some of our DOCSIS 3.0 and SDV activity inside of the quarter. These tend to be some of the most customer facing months inside the year, and so tweaking the network at the same time of having some more service related events that seasonally takes place we just pulled back a little bit. So I think you will see an uptick on that in Q4 and as I mentioned we do expect for DOCSIS 3.0 and SDV to be largely complete at the end of the year.

I think the guidance that we’ve given, the 1.3 to 1.4, if we plan to take that I think we would have been, I think you can take a look at what we’ve done Q1 through Q3 taking into account both volume for Q4 as well as the comments related to our scalable infrastructure and kind of pin point through there.

Jeff Wlodarczak – Pivotal Research Group

Fair enough. And then just one quick follow-up. Any color you can provide on trend in fourth quarter would be helpful.

Mike Lovett

We did see in, particularly as Chris mentioned with the marketing spent and, a fair amount of that back ended in Q3, we see trends picking up, still some headwinds economically obviously and some challenges, but we do see some trends particularly on the phone side taking up with the focus on direct response marketing and returning back to the focus of the bundle.

Jeff Wlodarczak – Pivotal Research Group

Great, thanks guys.

Operator

Your next question comes from line of Ben Swinburne with Morgan Stanley.

Ben Swinburne – Morgan Stanley

Hey good morning guys, and Mike certainly wish you all the best going forward. I just want to ask a couple of questions around sort of strategy on the business. You guys talked a lot about some of the new initiatives. You report about 15% of your customers are non-video, and I know last quarter you talked about a trial with Dish, but with a satellite plus Charter data and voice, you’ve also rolled out this online portal that help customers find sort of over the top content. Did you sort of step back in how you are positioning the company in the market? It seems to be a different approach than your peers, thinking about it more as an ISP and what that might mean to profitability and free cash flow and returns over time, how are you thinking about that?

Mike Lovett

Yeah, thanks Ben. Certainly the video business has its challenges. It’s still a significant part of our business so we are not abandoning it by any means. Well, you are right, we do see ourselves and we are – bit of a mantra within the company is to think of ourselves as an ISP. But I think that not only drives the strength of our superior broadband product and we are leading with that strength, but it supports the video business and other products and services over time particularly as the infrastructure evolves to all IP. I don’t know Don if you want to add some color to that?

Don Detampel

Well, I would just add our announcement today regarding the enhancement to Charter.net I think is just a step in that direction. Fundamentally we think that a massive amount of program is becoming available online and on-demand which is great for consumers, but defining what you want to watch is really painful. So what we are doing is we are coupling our high speed internet with Charter.net in introducing a service that will integrate and organize content from multiple sources. This includes our entitled content, that our video subscribers have the right to view, as well as the over-the-top content from sources such as Netflix, Hulu, and Amazon, which is an industry first. So for us, it’s about bringing simplicity to what is something now complex in leveraging our broadband pipe.

Mike Lovett

So, Ben, if you think about what kind of our underlying theme of our strategy, it’s leveraging the capabilities and frankly the superiority of our infrastructure from a competitive standpoint and then linking it to the – at their early stages, the in-home experience for the customer and being that solutions provider and this is just a first step towards that.

Ben Swinburne – Morgan Stanley

How do you guys – I appreciate the comment. How do you think about getting that search and discovery functionality integrating it into the existing guide you have installed in your base and making it easy for the customer to access that stuff through the television or connected device, connected set-top, because still people are spending the vast majority of their time watching video on TV versus on a PC or IP.

Mike Lovett

Yeah, I think the first step of that obviously is our deployment and our partnership with TiVo, and maybe Don you can talk about how we see the next innings.

Don Detampel

Right. Well, certainly TiVo is a good next step. I mean I think everybody is aware that TiVo is renowned for their search and discovery and recommendation capabilities. They’ve been at this for years. So we think partnering with them really gives us a jump start. Although unfortunately from a programming standpoint, we currently don’t have all the rights we want to blend this content. Clearly that’s what consumers are demanding and we believe over time we will have a similar experience available as well in the home.

Ben Swinburne – Morgan Stanley

Great. If I could just ask one separate follow-up to Chris on the use of capital in the quarter. You said you bought back I think a little over $100 million worth of debt, and then on the buyback, on the stock repurchase, you had a step down from – I think it was August to September, any thoughts you can share with us on how you are looking at balancing all that and what’s available to you in the market et cetera?

Chris Winfrey

Let me clarify the first one and then ask your question back on the second, because I’m not sure I fully understood. So we repurchased $193 million of principal amount of debt inside of the third quarter. So I think at the time when we announced the buyback, at that point in time we also disclosed that we had purchased $100 million of face value at the time. Through the rest of the quarter, we got up to a total of $193 million and those were the second lien 8% notes which become due in April 2012. On the second question you had…

Ben Swinburne – Morgan Stanley

Yeah, I’ll clarify.

Chris Winfrey

Yeah.

Ben Swinburne – Morgan Stanley

How do you look at buying back debt versus stock in the current environment given where the stock is, given where the debt markets are? And maybe just update us again on sort of the leverage sort of appetite of the company.

Chris Winfrey

Understood. So I think the biggest mantra here is just staying opportunistic with the opportunities that provide themselves to us. We were already purchasing debt in the open market when you had the S&P U.S. downgrade, and it was in a very-very fast turnaround with our board that we decided in real short order that we should go ahead and launch a buyback program. It’s not at the stage of our target deleveraging to the target leverage range of 4 to 4.5 times that we probably normally would have launched a formal buyback program. But given some of the market dislocation that was taken at the time, we saw that as a unique opportunity. We moved really quick to take advantage of that. We had already been buying debt inside the market at what we thought were attractive rates relative to an NPV basis for debt.

I think that’s the type of approach that you’ll continue us to see to go after, whether it’s being opportunistic on M&A, acquisitions and divestitures, whether it’s investing in the commercial business and advancing the product set towards all IP or whether it’s doing debt buybacks or stock buybacks. As I mentioned, at 4.7 times leverage, it’s not at the stage where we would have said, “Let’s go launch a formal return of capital strategy,” but we took advantage of what we thought was a pretty strategic opportunity to buy back the stock.

Ben Swinburne – Morgan Stanley

Thanks a lot.

Operator

Your next question comes from the line of Stefan Anninger with Credit Suisse.

Stefan Anninger – Credit Suisse

Hi, good morning. Thanks for taking my question. It looks like you had substantial success with your non-video sub growth in the quarter, I think it’s the highest, at least I can see on the trending schedule that we’ve ever seen. In that, can you talk a bit more about your success with naked HSD and this is I guess a related question to Ben’s question. Where are most of those customers coming from? Are they coming from DBS Households with DSL, we know about the Dish deal, and are you able to pick up any U-verse subs?

And I guess on a related note, one thing you’ve talked about in the past is getting consumers to understand that they can order naked HSD without buying video from Charter and that has been bit of an uphill battle given the long-term bundling sort of strategy you’ve had. It looks like that must be improving and maybe just talk about how that’s going?

Mike Lovett

Yeah, Stefan, from a marketing standpoint, a lot of it is about education. So it’s not simply the value and superiority of our product. It's education with regards to the fact that they can buy through our high speed product without buying video. As you mentioned I mean the legacy marketing approach for the entire industry has been video first and other products second. I think that’s a bit of a shift certainly for us here at Charter. So a lot of it are marketing, and some of the uptick you saw in marketing spent is around education relative to that fact.

We’ve highlighted as I mentioned in our comments this morning that we’ve got 60% plus penetration of our broadband product with our video households and substantially lower penetration, roughly 10% in non-video households and that just doesn’t seem logical to us when you have a superior product like our internet product. A lot of our activity is coming and our growth is coming from DSL, share flow is dramatically favorable not only to Charter but I think the cable in general relative to broadband.

We are competitive and we feel we are competitive with U-verse, but I think the dynamic competitively will shift as we roll out our TiVo product. I think TiVo in combination with multi-room DVR and our broadband product gives us a real competitive edge to go win back households in the U-verse footprint.

Stefan Anninger – Credit Suisse

That’s great. If I could just ask a quick follow-up with respect to your Dish alliance; are the subs that you are picking up with that alliance their existing Dish subs that have DSL, is that correct, so you’re marketing into homes that currently have DSL and Dish, is that correct?

Michael Lovett

We’re marketing to Dish households, but we’re also marketing collectively to non-Charter and non-Dish households.

Stefan Anninger – Credit Suisse

Got it. And then with respect to U-verse in your footprint, as the footprint growth seems to slow there, are you seeing any changes with respect to the number of customers that could defect over to U-verse or the number of subs that you may be able to pick up from U-verse, et cetera?

Michael Lovett

I think it’s a little early to kind of declare some type of victory relative to how things stabilize. But having been in this business for 30-plus years and competed with a number of, not only our box but other hardware over builders, you see a dynamic in 18 to 24 months where things really stabilizes, I use the phrase it’s like – it’s Europe in World War I where the trenches are kind of dug and people are in them and movement doesn’t really take place, and I think we’re probably heading into that stage where you see that type of stability. We really think that we have opportunity with the TiVo partnership in combination with our value of phone relative to them as an incumbent phone provider along with superiority of broadband, we feel like we have an opportunity to win share back.

Stefan Anninger – Credit Suisse

Excellent. Thank you.

Operator

Your next question comes from the line of Jason Kim with Goldman Sachs.

Jason Kim – Goldman Sachs

Hi, good morning. Thank you for taking my question. I had two questions first one for Mike and the second one for Chris. First for Mike, on the wireless you guys have consistently commented that Charter is going to be a follower in terms of wireless and see what develops in rest of the industry. And we’ve seen other operators looking to deploy Wi-Fi in some of their footprints to add mobility to their data service. I mean is that something that could make sense for Charter as well or do the economics not make as much sense for the company given the footprint?

Michael Lovett

Yeah, Jason it's a great question. I think as we mentioned we’re looking at Wi-Fi in essence within the household first, but certainly there is opportunity and we are exploring it within specific markets. You think of some of the communities that we serve that are oriented towards that type of usage, I use Madison Wisconsin as one example. That might be an area that we look at deploying Wi-Fi, doing it across our entire footprint the economics – it’s a little at odds relative to the type of footprint we have. But I think we could look at it surgically, and that is something we’re exploring.

But first and foremost, we’re driving penetration of in essence Wi-Fi, Home Networking within the household first paving multiple devices off of it. I’m very pleased with the success we’re having there.

Jason Kim – Goldman Sachs

Just a quick follow-up on that. Is there like a general rule of thumb we can use in terms of how much CapEx it would cost you guys to build Wi-Fi in terms of cost per home, et cetera?

Chris Winfrey

That’s not something that we’re prepared to talk about today. I think given what Mike has said it’s not the large priority today. When you take a look across our footprint what it would like in LA versus what it would like in Madison versus what it would look like in Southeast, would be dramatically different since it’s almost net even relevant.

Jason Kim – Goldman Sachs

Got it. And as a follow-up question to I guess capital return to shareholders, you’ve done some opportunistic transactions so far, and I’m wondering if your expectation is to implement something more sustainable long-term in capital return program to shareholder over time or do you prefer this kind of opportunistic approach that gives you a lot more financial flexibility?

Michael Lovett

I think given where we are today at 4.7 times leverage, it's not something that we have to decide today. I think there is some value to being opportunistic as we’ve been so far. I suspect that if we were to move closer to the four times range, we would have to get people a little bit more color on that so that they can get comfortable about how to think about the business. But there is some real value to taking the approach that we’ve taken so far of being opportunistic and I think along the way we’re really generating a fair amount of value for our shareholders as well as through example of buying back the debt of deleveraging along the way through uses of cash flow.

So, I think it's a very good question for once we are at a stage where we are well in or even at the lower end of our target leverage range, and sitting on a fair amount of cash which when you take a look at the balance sheet today because we’ve been deploying capital that isn't the case today, so it's not something that we are particularly worried about today.

Jason Kim – Goldman Sachs

Got it. Thank you.

Operator

Your next question comes from the line of Bryan Kraft with Evercore Partners.

Bryan Kraft – Evercore Partners

Hi, good morning. Two questions. One, how are you thinking about CapEx next year? I assume that commercial and then TiVo lunch are going to put some upward pressure on CapEx, while DOCSIS 3.0 and SDV ending this year is going to put some downward pressure. Is one of those sides greater than the other? Also how are you thinking about going all-digital at this point? I think you've done a trial testing that and how are you thinking about pricing the TiVo product as well? Thank you.

Michael Lovett

Why don't we start with the CapEx spent? I'll hand this over to Chris, but from kind of a broad sense. The way we look at things, and I think the pleasant factors of this business is we are running about 77% of our CapEx to success base, and where we see opportunity, be it this year or in future years, where we see opportunity with healthy returns on investment we are going to put the pedal down and we are going to make those investments. I think from a detailed standpoint maybe Chris you could cover that?

Chris Winfrey

Yeah, the fact is if you take a look at commercial you will see that that’s been area that’s significantly accelerating and then as you pointed out SDV and DOCSIS 3.0 we have caught up effectively on those two areas. There are a number of different areas where you continue to invest in the business whether that’s roll out of the TiVo or whether it's setting the stage for the next generation IP products. But at this stage we are not giving CapEx guidance for 2012, but we will be doing that during the course of the next earnings session.

So, I think you’ve highlighted exactly right all of the areas that are going to be in flux. As Mike mentioned a lot of it just depends on the success that we are having both on the residential side as well as the commercial side.

Mike Lovett

Bryan from an old digital standpoint, I think one of the benefits we have with the platform is the investment we are making in switch digital video is providing us an essence remaining bandwidth for new opportunities, particularly linear HD content at this stage. I think the fact that we’ve got a trial in place doesn’t necessarily signal that we are going to be moving down the path of all digital we are just looking at the opportunities associated with it. The least of which is mining additional bandwidth, but there are other operational benefits to come with going all digital such as theft of service, security, etc. Whether or not we deploy that we haven’t made a determination yet, but we are pleased with the results that we’ve seen in the trial.

The other opportunity we have in mining bandwidth is analog migration, and one of the unique aspects of Charter is we’ve got a very robust analog channel lineup because of legacy issues, so I think there is more opportunity for us to move analog into the digital platform which again freeze up additional bandwidth. So I think we have a number of levers to pull one of them being all digital, but as I said we are pleased with results of the trial on a number of levels. And then from a TiVo standpoint may be Don you can give an update?

Don Detampel

Right. With TiVo so we have not released the specific pricing, I mean obviously as we start to roll it out in Texas we are testing the market in various price points there, so we will be more specific as we move down the road. But I also would like to highlight, regarding all digital, I mean we are increasingly are beginning to think all IP versus all digital and in getting us there. And if you think about TiVo as a bridge to that path it is an important bridge because it is the device that is obviously an IP device and a linear device. So it starts us on that path as well our next gen gateway product which will start trialing next year. So, as we think about all digital we are really thinking kind of one step further really how do we get to all IP.

Bryan Kraft – Evercore Partners

That’s all really helpful, thank you. If I can just ask a follow-up. If you think about – I mean some of the projects this year with SDV and DOCSIS 3.0 we seem to be sort of catch up one time in nature with the thinking that next year CapEx would go down assuming a similar kind of level of activity in the business from a growth perspective. Is it fair to say that if CapEx were to be flattish next year that would imply some sort of acceleration in the growth rate because it would be success based CapEx that would be sort of replacing some of the stuff that’s more project related catch up this year.

Chris Winfrey

Generally I think that’s right, although I’d focus primarily on the commercial segment. So if you think about the acceleration that’s been taking place there it's $48 million. There is really different types of spent that are inside the commercial, if I can maybe pass over to Don to talk a little bit about how we think about the commercial CapEx, because some of the pay back return is based on the segment versus carrier. It’s fundamentally different, and it all ties back to some of the discussions we are having around IP, so.

Don Detampel

I think what Chris is highlighting here is our investment in cell backhaul. And internally we kind of label this CapEx spent as smart spent. Let me elaborate a bit on what we mean by that. As we deploy a lot of this cell backhaul obviously that is a big IP pipe going out to these towers. Essentially we are prefunding our next gen IP network. Eventually as we look five, seven years down the road, our view is that everything will be riding this IP pipe. So as we look at the new cell backhaul contracts we get a good but it’s generally a longer payback under a pretty conservative model. But we think this has a lot of upside in a variety of areas.

Number one, it's pretty obvious the kind of bandwidth that’s being driven by these mobile devices so as wireless carriers continue to increase speed we will obviously be a beneficiary of that speed increase. As well as we make these build we do at passing a lot of businesses and we are very selective as we make these builds to make sure that we are going by businesses that as well we could bring on as customers.

And thirdly, our models generally only count one tenant per tower, and as Mike mentioned we currently have 1600cell towers either in service OR under contract and as that universe grows we are beginning to see opportunities to get second and third tenants on those towers which really makes this investment very, very attractive for us.

Bryan Kraft – Evercore Partners

Sorry, go ahead.

Don Detampel

No, I think we’re good.

Bryan Kraft – Evercore Partners

Thank you very much. That was really helpful.

Mike Lovett

Thanks, Bryan.

Operator

Your next question comes from the line of Amy Young with Macquarie.

Amy Young – Macquarie Research Equities

Hi, thanks. Can you help us think about the margins over the next few quarters, you will gain some operational efficiencies but you’ll also be spending on the marketing front, so what’s kind of the net impact on margins?

Chris Winfrey

I think as we’ve increased the marketing spend, we’ve been using the operating efficiencies that we’ve been able to generate inside of the business to fund those marketing increases. Obviously not only is it marketing that we have to fund but unfortunately is the programming increases and the impact of the video margin that takes place there. But if you take a look at year-over-year consistently throughout the quarters this year, we’ve been able to increase margin at the same time increasing the amount of marketing spend that we are putting in place.

I have to tell you that it’s not the one and key driver that we have inside the business, the biggest driver that we have is achieving customer relationship growth and long-term value for the shareholders. It may mean that as a result of that due to timing of some of the spent or other considerations you may see margin fluctuate a little bit here and there. But, generally, I still think there is a fair amount of opportunity on the operating cost side as we go through to continue to fund the amount of marketing spent that we’re looking to do.

Mike Lovett

And I think the key here Amy, I would add to Chris’s points, is that operating efficiencies are sustainable, they are not quarter-by-quarter one-time event, they are sustainable improvements in the business, so we are running a leaner organization as we go. And I think the investment marketing is really priming the pump for top line growth.

Chris Winfrey

Particularly as customer experience improves along the way because the investment that we are making their drives a lower amount of calls to the call center, lower number of service calls, lower number of service related truck rolls, and as Mike highlighted we are still in the early stages in terms of achieving that customer experience.

Amy Young – Macquarie Research Equities

Okay, thanks. And how do we think about high-speed data ARPU, it has accelerated this quarter, should we see that trend going forward and how do we think about Charter Starter and the impact on pricing?

Mike Lovett

I will the HSA and then maybe Chris can talk a little bit about Charter Starter. We’ll see opportunity and we’ve highlighted the success we’ve had with our home network and our in-home Wi-Fi service. And on average it generates about $10 worth of recurring monthly revenue and I think driving deeper penetration that will continue to drive ARPU growth. We’ve made some tradeoffs relative to ARPU growth with regards to giving speeds for free, giving upgrades in speed tiers to our existing customer base. We feel like that’s the right investment because it drives longer customer lifetime value. So there are some tradeoffs there. I still think there is pricing strength in our broadband product, but we’re not going to play the rate card so heavily that we impact ourselves negatively on share flow. I think this is more a share flow game than it is an ARPU game.

Chris Winfrey

And on Charter Starter, I’m glad you asked the question. I think there was a little bit of confusion when we talked about this last quarter. The fact is that our strategy hasn’t changed. We’re really benefitting from the fact that we focused on the right customer segment to avoid people spinning in and out of our products. What we did want to do though is recognize that as economic conditions have been tough and as that segment unfortunately we believe has continued to increase you can’t permanently ignore the segment. And so what you need to do is you need to find the fairer product that is available to address customer needs, so that you don’t completely shut out a certain segment of the market that could potentially be growing, but in a way that actually makes sense from Charter’s perspective as well.

The way to do that is to make sure that the customer is getting into a product that, a, they can afford and, b, when it rolls off promotion that is not rolling off at a high price point, so they go from month 11 to month 12 and suddenly are no longer able to afford the product. So the product that we’re offering is at the rack rate, it’s a limited product both in terms of the product itself as well as the equipment that’s associated with it as well as the pay per view and the video-on-demand.

As a result, what we did during this quarter, really the first step of that is implementing much, much tighter systemic credit controls that makes it virtually impossible for customers in that credit class to get in the door. So that is actually going to have a negative volume effect. Offsetting that though is that we’ve started to increase marketing a little bit, not going well out of our way to go make that our primary segment, but starting to increase marketing that segment again with a defined product that serves their needs and also makes sense for us. And so, I think at best at this point it’s fair to say it’s neutral but cash flow positive, the approach that we’re taking. Could it be a more material – could it be a source of a larger connect drivers over time, that’s a possibility. But the focus point here wasn’t so much about getting the material connect driver or making us a focus on to that segment, it was really about making sure that we had a fair product for this segment over time and in a way that made sense for us.

Amy Young – Macquarie Research Equities

Okay. Thanks.

Operator

Your next question comes from the line of Jason Bazinet with Citi.

Jason Bazinet – Citi

Just have one longer term question. As consumer bandwidth demands increase and you focus on the broadband product as your lead product, I think there is a little bit of concern on the buy side that there may be choke points sort of in the network that cause the CapEx on that part of the business to go up. So, do you think that’s a reasonable concern and maybe in the context of answering the question? If you could just sort of trace a bit from the consumers’ home back into the cloud and qualitatively just tell us where – is there a lot of headroom and where and why you run into potential constraints over time? Thanks.

Mike Lovett

Jason, it’s a great question. I think since we’ve got an Internet guy sitting at the table here Don Detampel, I’ll let him answer that question.

Jason Bazinet – Citi

All right. Great, thank you.

Don Detampel

Perfect, thanks Mike. You are correct in saying that we certainly anticipate strong growth in our internet product both from the commercial side and the residential side. As you think about our network we generally think about it in three pieces. The HFC, the Hybrid Fiber-Coax piece of the network, our regional core networks and our national backbone are kind of the three components of our network. As we think about the capital that will be required, clearly the bulk of the capital is in the HFC plan. So even though we have a very robust coax planned out to all of these residential and commercial customers, we know that we will have to do node splits and increase capacity to keep up with demand. Now, the good news is that theoretically the coax plant we have in place outruns anything but fiber to the home. So we are in a very good position there. But there will be continued spends, and I think and I’m not going to give any guidance, but I would think that as we look into the future there will continue to be some fairly significant investments, not in excess of what we are doing today, but continued investments to keep up with the speed requirements.

In the Metro Core and also the national backbone, those are fully fiber networks and they operate very similar to any kind of internet provider all through the day and we can map that very accurately what the growth calls for and it will require capital but not excessive capital there. So our main focus is we are locking down on the HFC plan and we’re meeting upper estimates there.

Mike Lovett

And I think Chris can add some color relative to how we think about that particularly with CapEx and viewing it as success base because it's driving additional monthly recurring revenue.

Chris Winfrey

I agree, it's something that we debate inside the business quite a bit, but the reality is that to the extent that traffic demand whether it's upstream or downstream is driving us to spend on what's called the CMTS or node splits, we really view that as very, very positive capital. That's not unlimited and so that’s something that we do discuss inside the business in terms of how much do you really need to do. But the fact is that if we are in a situation where we're having to spend significant amounts of CMTS as well as node splits in an increasing way and I would caveat that could very well be the case. It would be fantastic news for Charter. Because the reality is that when you're taking a look at competing against DSL as more and more people starts having multiple IP devices inside their home, it makes it all that more clear that DSL is fundamentally obsolete as compared to a broadband cable connection inside the home. So I think that spent that we are really happy to be spending, we certainly view that as success based.

Jason Bazinet – Citi

Thank you very much.

Operator

Your next question comes from the line of David Joyce with Miller Tabak & Company

David Joyce – Miller Tabak & Company

Thank you. Just I was wondering if you could comment on the – an update on the amount of your footprint that's covered by Verizon FiOS, by U-verse, and CenturyLink, and you did say that your marketing is focused on trying to increase phone attach rates but I'm wondering if you have been seeing any uptick in consumers going wireless only for the voice product?

Mike Lovett

Yeah, we see, David, in our footprint we’ve got 30% to 35% is U-Verse overlap, less than 4% is FiOS and/or other fiber providers. We’ve got some very small group of municipal fiber belts, the lion share of that is FiOS and the CenturyLink I apologize, Chris, maybe.

Chris Winfrey

I think it's around 10%.

Mike Lovett

Around 10% of CenturyLink.

Chris Winfrey

And in terms of just traditional telcos 62% is AT&T coverage and then of that about half of that is U-verse.

Mike Lovett

And I’m sorry, David, your other question?

David Joyce – Miller Tabak & Company

If you’ve been able to determine if consumers have been moving more towards wireless only voice services to help explain the meaning of the voice net adds.

Mike Lovett

Yeah. From a voice standpoint, certainly core cutting is a challenge not only for Charter but for the entire telco industry. But the lion share of the impact to us in net adds through the first three quarters was our by design strategic shift to more brand oriented marketing since we’ve emerged from our restructuring. We typically had spent virtually a 100% on direct response in media and we shifted a significant portion of that in the first three quarters of this year to brand and feel like we’ve laid the right groundwork for refreshing the brand, the Charter linked to our customer experience efforts. Now we’ve indexed back to a healthier balance and we’ll see the results and are seeing the results early in Q4 relative to a more direct response in media marketing. So we’re seeing less of the impact from core cutting more of the impact from our own strategic decisions to shift to a brand-oriented marketing.

David Joyce – Miller Tabak & Company

Great, thank you.

Mike Lovett

Thanks.

Operator

Your next question comes from the line of Rich Tullo with Albert Fried.

Rich Tullo – Albert Fried

Hey. Thanks a lot guys for taking my questions. Really congratulations on a strong performance. As I look at your peers, I think you guys are doing a much better job at exploiting the opportunities that are presented to you in the marketplace despite the tough economy. With that said, how many weeks during the quarter was Charter Starter available to customers?

Mike Lovett

It really came at the end of the quarter so we are in the very early stages of focusing on marketing that product.

Chris Winfrey

Yeah. We didn’t do a large mail drop really until the end of October. So, I think that we were on trial setting up those credit controls that I was talking about during Q3, did some trial at the end of Q3 and then did a larger mail drop that meant to cover the second and third week of October and it's far too early to determine what the impact of that really is.

Rich Tullo – Albert Fried

Fair enough, and excuse me if I got a little confused. Could you just kind of go over the difference between the prepaid and the deposit. Are some accounts going to be prepaid available to them and are some accounts going to need to make as deposit, I mean how does that work?

Chris Winfrey

No, there won't be form of prepaid setup other than an order to get service activated for that very high credit class segment today. The customer is required to prepay the first month as well as the install fee. What that does is it determines an ability and willingness to pay. Getting a deposit setup inside of the billing system takes a little bit more time. There is going to be a few more months until we add that on top. So at that stage, and that’s where I would caveat in terms of what this can do with growth is that you are now talking about a segment that is somewhat cash constrained in order for them to really demonstrate that they are going to be an able and willing payer, and they need fund the first month, the install fee and the deposit upfront. Obviously the first month gets returned to them and the deposit whatever time that it would require six month payment history before we start moving them up on to different credit class that starts expanding the amounts of product that they could take.

Mike Lovett

It really Rich is all about allowing the consumer to kind of right size for their capability, the monthly fee and then build a relationship that grows into our creditworthy relationship over that six month period to move up stream into our product segment.

Rich Tullo – Albert Fried

Yes, fair enough. I mean it's a good opportunity I could see for a lot of people. The search and discovery, is that called search and discovery first off or do you have another name for it?

Don Detampel

Search and Discovery is a pretty common term in the industry so you are right on labeling it that way.

Rich Tullo – Albert Fried

Okay. And who is providing the middleware or aggregation for that?

Don Detampel

So right now we work with Synacor in providing that capability.

Rich Tullo – Albert Fried

Okay. That’s excellent. Thank you very much and again congratulations on – in my view is a strong execution.

Mike Lovett

Great, thanks Rich.

Robin Gutzler

Operator, I know we are running a bit behind. Maybe we could just take two last questions.

Operator

Your next question comes from Mike Pace with JPMorgan.

Mike Pace – JPMorgan

Hi, thank you. Just two key topics here, the first on the M&A front. Can you just talk about the opportunities you see there, I'm assuming on the residential side it's really just on the margin, but could you focus more on the commercial side. And I guess maybe back to residential duty I think, do you prefer to be a net buyer or net seller of residential assets, and on the commercial side, what are the benefits of getting bigger for M&A here, greater network customers, general expertise, etc. and then I have a follow-up capital structure question, thank you.

Mike Lovett

Okay. Mike, I will handle this – I’ll answer a little more broadly and then hand it over to Don to talk about commercial opportunity and how we view things and what filters you use. You hear this a lot from us in Charter and you will continue to hear this. We are always opportunistic relative to being a net buyer and net seller. So I think you will continue to see us operate that way. I think there is a unique opportunity for us and you have seen this with the tack-ons that we have done. There is efficiency and scale benefit at the enterprise level, but we have always talked about the scale benefit that we see on local geographies, so adding tack-ons whether it’s 5000 or 50,000 subscribers, we will continue to look at that.

Looking at some of our footprint we operate in a number of states there is an opportunity for us to divest in the economic survey. We will continue to look at that and again be very opportunistic. And Don, maybe you can talk a little bit about how we view commercial opportunities.

Don Detampel

Sure, on the commercial side it’s a lot about building capability, credibility, and reach. And we’ve looked at a number of opportunities we may have won very small tuck-in acquisition down in Birmingham which was a fiber network that allowed us to really extend into the downtown area Birmingham and give us some great connectivity to business customers where we didn’t have connectivity in the past. But I think we strongly believe that there are some inorganic opportunities out there and we continue to search for those and to the extent it helps us even more aggressively grow, we will put those under the proper lens and execute if they look desirable.

Mike Pace – JPMorgan

Thanks. And then may be for Chris on the capital structure, I think as look at the high coupon net debt, it becomes callable in 2012 and given the overall balance sheet you really have the flexibility to really do what you wish there. I guess if we just started with a blank piece of paper I guess what would the capital structure look like going forward in terms of issuers and I guess I want to focus more on the second lean part of the capital structure, is there really a need for that to exist going forward, thanks.

Chris Winfrey

Yeah. Mike, if we really start with a clean sheet of paper which wasn’t what we were given, we would probably have two issuers, one more at the junior level, one more at the senior level, one being a high yield the other one being more bank cut, I tend to agree with you that naturally when you take a look at this section maintenance is something that would be what you would draw in that clean piece of paper.

Having said that I do think that there are different pockets of capital market opportunities that are opening up all the time, and we are always going to be opportunistic with that. So while it may be something that we start on a clean sheet of paper we wouldn’t have to do today. There may be some interesting ideas that come along the way that will enable us to attract lower interest cost or achieve more flexibility and we will certainly be open minded. But I tend to agree with you. We have similar issues on a clean sheet of paper, we would have a more simple capital structure. As you mentioned there is a fair amount of debt that comes callable in the coming year and I think we are taking a look at all of that stuff on an NPB positive basis, it's not just about simplification, it’s really about making sure that we are doing the right thing by our shareholders in terms of how we’d like to take out that debt over time.

Rich Tullo – Albert Fried

Great, thank you.

Operator

Your final question comes from the line of Vijay Jayant with ISI Group.

Vijay Jayant – ISI Group

Hi thanks. You had some rate increases in July, but you didn’t get the full effect of that in 3Q. Can you sort of talk about how much of this we can see in 4Q on both broadband and on the video ARPU from that just sort of trending into sort of the fourth quarter. And second, given your voice ARPU substantially higher than your peer group and given some weakness in that category, can you talk about the elasticity of pricing and your strategy on driving unit growth and compromising on price tag? Thanks.

Mike Lovett

Yeah Vijay, I will take the voice ARPU question and Chris can talk about rate increases and what the impact is going forward. The way we are looking at voice we have – so there is a couple of things going on, because we are registered CLAC we get the benefit of what's called UCAL (ph). So there is a regulatory charge that our customer see that some other operators, I think the vast majority of other operators don’t have because they are not CLAC. So there is a benefit in our offer there that is somewhat unique and it's roughly, Chris, $5.5?

Chris Winfrey

Yeah, that’s about right.

Mike Lovett

About $5.5. The way we think about voice strategically and more and more, and you will hear more about this in the coming quarters, we are looking at the value that that product adds to the sticky mix of the household and the increase in customer lifetime value. So we’ll, in all likelihood you’ll see us get more aggressive on pricing to drive deeper penetration on our existing base with our voice product to increase the lifetime value. It’s a huge churn benefit. I think if you look at what we talked about historically, and this continues to trend almost the same from the day that we launched our voice product, we see a 40% improvement in churn in a triple play household as opposed to a single analog video household. So, obviously, there is a significant customer lifetime benefit associated with putting that product in the house.

We are also facing the winds of core cutting with mobile phones. We see there is window of opportunity to drive landline penetration now and we are hitting the gas on that. Chris, do you want to talk about rates?

Chris Winfrey

Yeah, Vijay, on rates you asked about Q4, so in Q3 just to flash back when we talked about the incremental for Q4, we had $10 million rate increase that was going through during the quarter. That came about equally split between basic between tiers and between the cable modem fees. So, again, equally which seems basic, which is basic video tiers on the digital side and on internet. There will be inside of Q4, a few million additional uplift to that $10 million that should roll through during the course of Q4 I think that gives you enough color in terms of how to think about it.

Mike Lovett

One more thing Vijay on the voice, because I think it’s great question relative to how we are viewing that product strategically. While you’ll see moderate declines or likely to see moderate declines in ARPU over the coming years, those declines will be more than offset by the increase in lifetime value the term benefit brings to us.

Vijay Jayant – ISI Group

Great, can I just ask another one on the analog video subscriber losses, which is disproportionately most of your video losses. Where are those folks going and really is the starter program really targeting to those folks, I mean would that keep them behind, keep them back?

Mike Lovett

Yeah, I think a lot of what you see and it’s not the vast majority, but a significant portion of analog only households are in those bottom segments. They are shopping on a regular basis for other providers. I think the way we look at it they are shopping and hopping so to speak. They are moving from one provider to the other because they are shopping for deals. Within Charter Starter we will help address some of that but not all of that.

Vijay Jayant – ISI Group

Great, thanks so much.

Mike Lovett

Thank you. Thank you all, look forward to talking to you again soon.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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