Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Charter Communication Inc. (NASDAQ:CHTR)

Q4 2011 Earnings Call

February 27, 2012 09:00 am ET

Executives

Robin Gutzler - VP, IR

Thomas M. Rutledge - President and Chief Executive Officer

Christopher L. Winfrey - EVP and Chief Financial Officer

Donald F. Detampel – EVP Technology and President Commercial Services

Analysts

Philip Cusick – JPMorgan

Jeff Wlodarczak – Pivotal Research Group

Stefan Anninger – Credit Suisse Group

Bryan Kraft – Evercore Partners

Jason Bazinet – Citigroup

Amy Yong – Macquarie Research Equities

David Joyce – Miller Tabak & Company

Frank Louthan - Raymond James

Rich Tullo – Albert Fried & Company

Lance Vitanza - CRT Capital Group

Vijay Jayant - ISI Group

Tuna Amobi - Standard & Poor's Equity Group

James Ratcliffe - Barclays Capital

Operator

Good morning and welcome to Charter’s Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. (Operator instructions) Thank you. And Ms. Gutzler, you may begin your conference.

Robin Gutzler

Thank you. Good morning, everyone, and welcome to Charter’s 2011 fourth quarter earnings call. This morning we issued a press release over PR Newswire at 8:00 am Eastern Time detailing our results. Before we proceed, I’d like to remind you that there a number of risk factors and other cautionary statements contained in our SEC filings, including our Form 10-K for the year ended December 31, 2011. 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 in 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 if 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 Tom Rutledge, President and CEO, Chris Winfrey, our CFO and Don Detampel EVP, of Technology and President Commercial Services.

The presentation that accompanies their comments can be found on our website charter.com, under financial information. The press release and trending schedules are also posted on our website under Investor and News Center.

With that, I’ll turn the call over to Tom.

Thomas M. Rutledge

Thank you, Robin. I’m glad to be here. I’ve watched Charter for a long time and have always thought it’s a great company with terrific assets and real potential. The company has addressed some unique challenges in the past and I believe its now well positioned. I’ve been diving into the business and while still early on, and impressed with the team, the operations and the strategy for future growth.

In 2011, Charter improved its customer relationship growth trend and delivered solid financial results. The company grew by 2.7% -- grew revenue by 2.7%, increased adjusted EBITDA by 3.3% and generated free cash flow of $488 million. With a stronger balance sheet, Charter returned more than $725 million of capital to shareholders through share repurchases.

I’m excited about the year ahead and I believe there is significant opportunity for growth here. My focus will be on ensuring that the fundamentals of taking care of our customers are constantly improving, that we offer products and services that are better than any alternative and that we are a company that customers want to do business with. The team here is terrific and I’m excited to be onboard and to help Charter reach its full potential.

I want to thank Mike Lovett, for his support in the transition phase and his leadership in implementing many elements that are critical to our future success. Given that I’ve been at Charter for two weeks, I’m going to stop here and turn it over to Chris and Don to give additional details of the fourth quarter, the past year and our strategic priorities. Chris?

Christopher L. Winfrey

Thanks, Tom. We made significant foundational progress in 2011 and gain momentum in the back half of the year. We maintained our focus and we continue to execute consistently against our four strategic priorities, which included fundamentally improving the customer experience, leveraging our superior internet product to drive residential relationships, aggressively driving commercial growth, and changing the dynamic in video.

We made strategic investments in our business, which sets us up for future success. Specifically, we rolled out the first ways of a multi-year customer experience transformation, switch digital and DOCSIS 3.0 covered 86% and 93% homes passed at the end of the year. And we improved our existing product and added new residential and commercial offerings.

This past year, we continued to focus on customer relationships by using internet, our most competitive product today to get our foot in the door. Particularly in the more than 7 million homes where we don’t currently have a video relationship or our internet penetration is only 10%.

We see a significant opportunity to win those households to ultimately selling more product. At the beginning of the fourth quarter, with significant process on the building blocks we felt that it was the right time to get aggressive to capture share and increase customer relationships. We saw the results of those efforts in our Q4 results.

In the past quarter, we drove increased volume and grew revenue at 2.6% from prior-year. Adjusted EBITDA was basically flat with the prior fourth quarter driven by one-time effects in both Q4, 2011 and Q4, 2010.

So let me provide some background on the drivers within the quarter. Slide 6 highlights, we ended the year strong with very favorable customer trends and momentum as we enter 2012. We grew residential customer relationships by nearly 3000 this past quarter versus a decline of approximately 35,000 in the year-ago quarter. And we grew non-video relationships by nearly 50,000.

In terms of residential primary subscriber units or PSUs, we drove an increase of approximately 50,000 compared to 1900 last year. We more than doubled our residential internet gains versus last year and continue to see penetration opportunity, particularly, in non-video homes, which comprised just over 65% of our footprint and where we increased our penetration with internet or phone in the past year by roughly 25%.

Phone grew sequentially and while not quite matching gains of prior-year Q4. The year-on-year comparison improved relative to prior quarters in the year. We also improved our video performance, cutting losses by more than 25%. We are very pleased with our success in growing volume coming out of Q4, and that momentum continues across all product lines. The strategy is the right approach and timing to create long-term value.

Turning to slide 7, our overall fourth quarter revenue grew by 2.6%. In the residential side of the business, internet rose 8.6% and phone increased 2.8%, while video decreased 2.5%. In the video, our biggest opportunities are reducing video losses and driving advanced services penetration, which are strategic initiatives are squarely focused on.

Video ARPU increased 2.9% on prior-year as a result of price adjustments in the third quarter and higher digital and HD DVR penetration. However, premium revenue development remains lackluster, decreasing by $6 million versus the prior-year.

As shown on slide 8, internet ARPU increased 2.2% versus prior-year Q4. Nearly flat versus Q3, with higher tax rates of $10 home networking product offsetting the effect of promotional offers.

Phone ARPU decreased $0.50 versus Q4 of last year, reflecting our strategy to drive penetration, particularly, with existing double play customers. Given the retentive benefits and incremental margin, increasing Triple Play phone penetration at a reduced phone ARPU is accretive. Its still early in the year, but the momentum we had coming out of Q4 is continuing nicely in the first two months of 2012, which sets us out for long-term success.

The team has already made some tweaks to acquisition and migration plans to balance rate and volume to ensure we are maximizing revenue. The success in our commercial business continued with another quarter of accelerated growth, highlighted on slide 9. We drove revenue gains of almost 22% year-on-year, excluding video, revenue rose nearly 30% in the fourth quarter. The majority of the growth was due to higher sales to small to medium sized businesses as well as a healthy increase in sales to carrier customers.

We are making the investments to drive this business, so you’ll see CapEx accompanying the accelerated growth. These investments, particularly in cell backhaul strengthened – significantly strengthened our IP capabilities at the core and at the edge of the network, which supports all of our residential and commercial services, including video over time.

Fourth quarter ad sales were down nearly 5% year-on-year. Q4, 2010 included the benefit of political advertising, and while we had a better political advertising this year, the year-over-year difference for political spend was approximately $9 million. So excluding this effect, core advertising grew by 7% and overall revenue grew by 3.1%.

Looking at slide 10, total year adjusted EBITDA grew 3.3% and margin increased 20 basis points compared to last year, while Q4 adjusted EBITDA was essentially flat and margin decreased from 38.3% in 2010 to 37.4% in 2011.

Within the quarter the year-over-year decreases was driven by several factors. First, the effect of the fourth quarter 2010 political advertising. Second, programming expense grew $31 million versus a year-ago, and keep in mind that Q4 of last year reflected a one-time accrual adjustment and full-year programming cost rose 4% in total or 9.3% on a per customer basis.

Finally, within the fourth quarter we also invested in accelerated growth and our customer experience transformation. All in all, when you consider these three effects, we believe the impact to Q4 adjusted EBITDA on a year-over-year basis was roughly $20 million. As we continue to execute on these initiatives, revenue will naturally lag investment and we’re seeing a near-term impact on margins and cash flow from the growth in customer experience investments, but these efforts will ultimately benefit our financial profile long-term.

Turning to slide 11, on CapEx we finished 2011 with $1.3 billion capital expenditure, which was at the lower end of our $1.3 billion to $1.4 billion guidance. This represented an increase over 2010 driven by investments in a rapidly growing commercial business. Commercial CapEx totaled $195 million representing roughly $60 million over $102 million increase year-on-year. The remaining increase stemmed from investments in our sales and product capabilities and incremental capital storm related damage in 2011.

Both years; 2010 and 2011 included spending for DOCSIS 3.0 and Switch Digital Video which were essentially completed at year-end. Combined spend for those investments was approximately $65 million in 2011. Q4 CapEx totaled $327 million, a $66 million increase over prior-year driven primarily by higher spend for commercial, internet infrastructure such as CMTS and support capital. About three quarters of our CapEx remained success based.

Looking ahead to 2012, assuming higher residential and commercial growth, we expect CapEx to total $1.4 billion to $1.5 billion in 2012. We want to provide some color around those assumptions. We expect commercial CapEx to grow similar to the 2011 increase and to support higher expected residential growth we expect spending in the following areas.

CPE driven by customer volume and more aggressive HD DVR, higher CMTS for upstream and downstream to support speed increases, higher penetration and increased usage, service group splits to gain further HD capacity on SDV, taking our HD channels to a 100 plus in the course of this year and further investments in the customer experience both in the systems and the network. This is an ambitious activity plan subject to achieving the higher growth rates and targeted benefits for certain programs. And more importantly as Tom, gets his arms around the business and sets the agenda; we’ll look to provide an updated estimate after Q2.

Slide 12 highlights, in 2011 we generated $488 million of free cash flow, and we ended the year with $1.3 billion of liquidity. Our leverage target remains 4 to 4.5 times and we’re comfortable plus or minus have to turn either way to enable strategic activity. We look at investment opportunities inside the business and also externally in the form of M&A. In absent those opportunities, we will evaluate the best return of capital to our shareholders over time, and will be disciplined.

We've demonstrated that discipline this past year and we’ve taken an opportunistic approach. We signed or closed on more than a dozen tack-on acquisitions or swaps; we returned more than $725 million of capital to our shareholders, or about 150% of free cash flow, buying back 12.7% of the company since the beginning of 2011. That reduced our shares outstanding to 100.6 million shares at the end of the year. In addition, we’ve been busy this past year enhancing our liquidity position and improving our maturity profile.

From January 2011 to February 2012, we've raised more than $5 billion of debt to extend our maturity profile and approximately 90% of our debt now matures beyond 2015. More recently we began to reduce our annualized interest expense by taking out costly legacy debt at better rates. Through the last two tender offers and the repayment of the remaining bonds in March and April, we’ll be able to reduce run rate interest expense by approximately $100 million on an annualized basis. Keep in mind that full run rate doesn’t start until April.

And moving to the next slide, a quick update on our tax assets. At 12/31, our NOLs totaled $7.4 billion and our tax basis was $9.3 billion. We've provided additional disclosure in our 10-K, and on slide 13 to give more color around the timing and amount of depreciation and amortization of our tax basis which we hope you’ll find helpful.

I’ll now turn the call over to Don, to review the 2012 priorities.

Donald F. Detampel

As Chris outlined, we’ve been building momentum as we head into 2012. This year we’ll continue to focus on our four strategic priorities summarized on slide 14, which are consistent with 2011. We will continue our customer experience transformation, which is the foundation of our overall strategy. Our goal is to deliver an unmatched customer experience through a company wide initiative that is gaining traction.

We still have a lot of work to do, but the cultural transformation is taking hold and early customer feedback is positive. Satisfaction for our new customers is 35% higher than for tenured customers. We’re implementing our none-or-one philosophy, meaning that customers should not experience any disruptions in their Charter services none, but if they do we’ll make it right the first time one; and we’re backing that all with the service guarantee.

Our second priority is to deliver the fastest, most reliable and clearly superior broadband service. For the third time in two years, we increased our internet speeds further distancing ourselves from the competition. In December, we announced the increase of both download and upload speeds for our residential and commercial customers and 95% of our customers are now on speeds 15 Mb or higher. But our internet service is about more than being fast, it’s about being powerful; it’s multi-dimensional including download and upload speeds and ease of use.

We're focused on delivering the best internet experience for our customers, particularly with the growing number of IP enabled devices in home. And we've the network capacity to deliver that rich experience now and in the future as the demand for high speed services increase. In addition, we’re driving managed home networking solutions, which allow us to be the solutions provider for our customers and also benefits ARPU. Today one out of four of our residential internet customers rely on us for home networking. Third, we’ll continue to aggressively drive growth in our commercial services business.

As Chris, mentioned earlier we drove fourth quarter revenue gains of almost 22% year-on-year in our commercial services business and our momentum continues to accelerate. We will continue to invest capital to upgrade our regional core networks, and extend our fiber plan to support cell tower backhaul opportunities passing additional business opportunities on the way. As at the end of 2011, we had 1400 cell towers in service and over 300 towers under contract and the pipeline remains very healthy.

We’ll also continue to expand our commercial product offerings with advanced telephone services and enhanced Ethernet connectivity. We’re making improvements to automate and streamline our back-office to support the commercial business and we’re supporting all of these initiatives with an aggressive sales effort. We see lots of opportunity for growth in this area.

Our four strategic priority for 2012 is to change the dynamic in our video business. We've deployed a version of the TiVo product in Fort Worth and are working with TiVo to field-test the product in several other markets with our employees. We don’t expect that testing will be completed in time for us to fully launch TiVo across the enterprise by the end of the second quarter as previously projected.

Meanwhile, we currently deliver a very robust video product and continue to enhance it. We’ve added exciting new video content such as NFL Network and we advanced our TV everywhere capabilities with the launch of our unique online search and discovery engine and increased streaming capabilities.

We ended the year with an average of 75 HD channels per market, and we plan to significantly increase the number of channels available to our customers by the end of this year.

We’ll continue to bring even more content on-demand and drive HD DVR penetration. And we recently completed our Liberate software deployment, which provides the platform for product and advertising applications that enhance the customer experience and laid a foundation for interactive TV. And now, back to Tom.

Thomas M. Rutledge

Thank you, Don. As we enter 2012, we’re continuing to accelerate our volume growth year-over-year. We’ll stay on the expenses as we move to increase penetration and drive deeply into the marketplace.

Pricing, packaging, and technological innovation are the key focus areas for me personally as I get up to speed. This is a great company with even greater potential. There is a lot of work ahead of us, but we’re focused on execution.

We’re on a terrific position, and I’m pleased with the start of our new year. I look forward to delivering on our strategic plan, and capitalizing on our opportunities and the confidence that we’re setting the stage for long-term shareholder value.

Operator, we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Phil Cusick with JPMorgan.

Philip Cusick – JPMorgan

Hi, guys. Thanks for taking my call. Maybe we should start with just the sort of operating margin thoughts for the year, CapEx going up pretty nicely, it’s a lot of success-based in. Is that – should we assume that, that’s a significant increase in the marketing budget and so that margins contract a little bit through this year, how do you think about that?

Thomas M. Rutledge

Well, as a general proposition, we look at growth and growth opportunities as a return to capital and not particularly from a margin perspective. So, depending on the various revenue mixes whether it’s from business services or from video, you get different margins, and so rather than give guidance on margin, I want to say that we’re focused on growth.

Christopher L. Winfrey

Okay, that’s right. So, from a technical standpoint, obviously we’re increasing on the acquisition side both on CapEx as well as marketing into our success-based acquisition. Of course, we’ve cost per order, you increase the amount of media spend to get drive inbound call volume and commissions and reconnect spend, But I’m not trying to figure it out, not trying to get into guidance on the margin. Some of those cost categories will tick-up to the extent we have a success.

Philip Cusick – JPMorgan

Okay. Thank you, guys.

Operator

Your next question comes from the line of Jeff Wlodarczak with Pivotal Research.

Jeff Wlodarczak – Pivotal Research Group

Good morning, guys, its Jeff Wlodarczak. A couple for Tom, realizing it’s early I wanted to get your thoughts around potentially rebranding at Charter, you dealt with a success with Optimum and then your thoughts about continuing Charter’s DISH and TiVo partnerships? And I’ve one follow-up.

Thomas M. Rutledge

Well, I don’t have any opinion on rebranding. You’re right; we used a brand strategy at Cablevision that was successful. We’ve seen Comcast through similar thing with XFINITY. So it is an opportunity, but I haven’t worked through the marketing issues with the Charter team yet on that particular issue.

Regarding DISH and TiVo, DISH is a relatively small channel. It’s unusual, but successful. And so we’ll look at that. I’m not sure I’d have come up with that on my own, but it is interesting and successful.

And TiVo, I’ve always thought it was a fabulous user-interface, and I’m glad to see that Charter and TiVo have been working together to bring that user-interface to our customers and so, as we work through those issues I’m excited by the way TiVo can present information to our customers.

Jeff Wlodarczak - Pivotal Research Group

All right, it sounds good. And then, I just wanted to get your take on potential M&A, does Charter need more scale? Thanks.

Thomas M. Rutledge

No, with regard to scale, I think Charter can be a very successful company at it’s current size. It’s – the thing that’s great about Charter is that it has 12 million passing, it has got a huge runway in terms of opportunity and it can be a much larger company without any kind of a change in potential marketplace.

Jeff Wlodarczak - Pivotal Research Group

Thank you.

Operator

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

Stefan Anninger - Credit Suisse Group

Good morning. Thanks for taking my question. Could you provide a bit more color on your CapEx outlook and specifically some of the one-time projects or initiatives that are embedded in the guidance, and how long they may take to complete?

And then if I could ask a second question, your video results were a bit better than our estimate and could you provide any changes or any color I should say, on changes that you maybe seeing in the operating environment and landscape either from a competitive perspective or from a consumer perspective?

Christopher L. Winfrey

So I’ll take the CapEx one. As I mentioned in the prepared remarks, the CapEx estimate that we’ve provided today really is contingent on higher growth from both the residential and the commercial segment. And I mentioned that we expect similar amount of increase in 2012 as we experienced in 2011. In 2011, it was $60 million for commercial.

And then the remaining category is really a success-based CapEx whether it’s HD DVR, it’s the scalable infrastructure associated to CMTS investment and converged IP network, and it’s some [different] programs related to driving growth. So I think it’s less about one-off items and it’s much more about the growth opportunities.

Stefan Anninger - Credit Suisse Group

Okay. So there – we don’t know sort of SDV like or….

Christopher L. Winfrey

Well, I mentioned that there are service group splits for Switch Digital Video, which enables us to take the channels to over 100, but as you’re expanding capacity, which is enabling further growth on the network you’re always going to have these type of investments.

Stefan Anninger - Credit Suisse Group

Right. Okay.

Christopher L. Winfrey

The second question, again was – the video question?

Stefan Anninger - Credit Suisse Group

Right. Yeah, just perhaps you could provide a bit of color on the environment for video at this point, and anything you’re seeing from either the consumer perspective or competitive perspective?

Thomas M. Rutledge

Yeah, go ahead.

Donald F. Detampel

So, look, on the video side what we’re seeing is we’ve seen a 25% improvement year-over-year on the net losses. Obviously, we’d like to change that into an even better performance over time. But it is an improvement. I think that reflects a couple of things. One is, the customers are recognizing that it is a different day at Charter, and that we’ve taken customer experience seriously, so I’d like to think that you see some of that coming through.

We’ve done – made some improvements to the packaging of offers. We’re running a free HD DVR in start of Q4 and that has certainly had an impact. I also think you’ll see a slowing down of the overbuild as it relates to, particularly U-verse, which is kind of 30% of our footprint and 4% is FiOS. So, you see that impact slowing down, their lines have been drawn and so we’re certainly hopeful that some of those impacts will slowdown and the network is increasingly digital, which improves the amount of subscriber losses to what you’re subject to.

So I do think there is some fundamental transmitter happening inside the business and we’d like to keep it up in terms of the improving performance.

Thomas M. Rutledge

That’s right. And I think we can continue to improve our video product, relatively rapidly we’ve a network that’s highly capable from a physical perspective, and it’s a question of launching all of our product in HD, getting a fully-digitized product in front of all of our customers and essentially having a superior video product to our competitors, which we’re able to do and we’re on track to do.

Stefan Anninger - Credit Suisse Group

Thanks. Just one last little caveat or question around this issue of the consumer. Have you seen in your view any change to the way consumers are currently behaving within your footprint?

Thomas M. Rutledge

I don’t think there is a change. It’s certainly not getting worse.

Stefan Anninger - Credit Suisse Group

Okay. Thank you.

Operator

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

Bryan Kraft – Evercore Partners

Hi. Thank you. Thomas, in the context to some of the major initiatives you pursued when you were at Cablevision such as the RS-DVR, Municipal Wi-Fi going all digital. I just wanted to get your thoughts on whether you see an opportunity for Charter to pursue the similar initiatives. And I guess specifically on digital is that something that should be a priority for the company or is that something you can spread, say over a three to five year period? Thank you.

Thomas M. Rutledge

All right. Well, all cable systems in the United States have similar architectures and they are highly capable. But we are in a -- and Cablevision was successful in its approach, in its time and place, and Charter has a different time and place. But the network is capable as any network in terms of what it can do. The question is what you do first and how do you do it in the unique circumstances that we are in today. And I – well, I think RS-DVR ultimately is a strategy for enhancing the value of the network and moving intelligence into the network and reducing CPE. I am not sure it’s an immediate priority for Charter. I think having a full digital product available to our customers is an immediate opportunity, how soon we go and turn off all the analog from a digital perspective. I’ve yet to determine, but I think we can get the market very quickly with a complete and robust digital product. And as Don said we have a Wi-Fi strategy already at Charter and a significant portion, I think a quarter of our customer base is already buying Wi-Fi services from us. So, we have an opportunity to extend that opportunity, but I don’t have a game plan yet to express.

Bryan Kraft – Evercore Partners

Okay. Thanks for your thoughts. I appreciate it.

Operator

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

Jason Bazinet – Citigroup

I just have a question for Mr. Rutledge, maybe on similar lines, maybe it’s too early to say much. But as a layman just looking at Cablevision relative to Charter, it just seems that you almost couldn’t pick two more different cable companies. Cablevision very clustered, Charter less so, Cablevision very urban, Charter less so, Cablevision low DBS, Charter very high. Cablevision high files, Charter low files, I mean the list, high video penetration at Cablevision, low at Charter. So I know it’s sort of early days, but is you sort of look at that list of differences. How do you think that will influence the opportunity at Charter relative to sort of the game plan at Cablevision?

Thomas M. Rutledge

Well, as I just said Charter isn’t Cablevision and it’s a different time and place for me with the issues in front of Charter. But inherently the physical asset the cable system that passes 12 million homes at Charter is a highly capable network. And we can design products on that network that are superior to our competitors and I think we can drive into the marketplace. It is true that it’s less clustered which requires different kinds of marketing strategies and tactics, but I think those tactics are available to us. So at some level the cable systems are similar, the architectures and the physical assets are similar. Obviously Charter went through some unique circumstances that gave it a marketplace disadvantage. Those issues are behind us and now we have a sort of a Greenfield marketplace opportunity, from my perspective. And so growth is our priority and when you think about how many unsold passings we have, there is a big opportunity.

Jason Bazinet – Citigroup

And so has ultimately met the sort of acceleration in top-line growth, the primary metric you think we should look at in terms of your success.

Thomas M. Rutledge

Yes.

Jason Bazinet – Citigroup

Okay. Thank you.

Operator

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

Amy Yong – Macquarie Research Equities

Hi, thanks. Given your CapEx guidance should we assume that commercial growth will kind of accelerate in 2012 relative to this year? Then also high speed data ARPU grew nicely in the quarter. Can you help us think about high speed data growth over the next few quarters, particularly, as you balance that with customer relationship growth? Thanks.

Christopher L. Winfrey

So Amy, this is Chris. On CapEx, the answer is yes. It should assume that commercial continues to accelerate growth. On the second one for high speed internet ARPU, I guess less about the actual ARPU here. Charter is at a different stage than maybe even some of our peers given our low penetration rate. Both were – both across the entire base at homes passed. And particularly in those areas where we don’t have a customer relationship today, it really is about driving growth. And what we’ve been able to do so far is to be aggressive in the marketplace with promotional offers, not only do you get the benefit of that roll off price once it’s coming off promotion. But in the meantime what we’ve been able to successfully sell in is 25% of our base has this in-home Wi-Fi product that’s offsetting some of the promotional pricing on ARPU. And as a result of that we’ve been able to keep ARPU relatively flat sequentially and year-over-year. I mean, it bounces around a little bit here and there, depending on which lever you pull. But that’s really how we think about the internet ARPU. It’s not much, it’s really about driving growth. There will be a time and place for that, but Charter maybe in a different place than others.

Amy Yong – Macquarie Research Equities

Okay, thanks. And can you also talk about programming expectations for this year either on an absolute basis or on a per-sub basis?

Christopher L. Winfrey

So -- go ahead.

Thomas M. Rutledge

Well, I don’t think we want to discuss our future programming contracts. It’s an issue in the business and we will try to manage it the best we can.

Amy Yong – Macquarie Research Equities

Okay.

Robin Gutzler

Thank you. Next question operator.

Operator

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

David Joyce – Miller Tabak & Company

Thank you. I think I understood you correctly that where your digital, you have gotten all the -- you have upgrades in place. What is your path to giving all digital on the video side?

Thomas M. Rutledge

How are we going to go – well, I think that we can transition to selling in all digital product relatively rapidly. And then it’s a question of growing digital penetration and recovering spectrum. And I think there are a variety of tactics to do that. And we are not today laying out all digital strategy, but it is something that the business has to do and will do.

Donald F. Detampel

I will also note that in certain nodes, we are all digital. So we’ve already started that effort.

David Joyce – Miller Tabak & Company

Okay. And on the residential video link subscriber losses, do you have a sense of their – the reason for leaving -- like the breakdown between whether they’re going to telco, satellite or just the economic reasons?

Thomas M. Rutledge

You know, at a fundamental level I think our video product in some households isn’t as competitive as it ought to be. And our job is to make it more competitive and superior to our competitors as quickly as possible. There are other forces besides that, There is – there are economic forces. As I said earlier, I don’t think those are getting worse. So I think our actual video performance is improving year-over-year and I think it will – if we do what we’re supposed to do, which is to have a superior digital product we ought to be able to grow video.

David Joyce – Miller Tabak & Company

Okay, great. Thank you.

Operator

Your next question comes from the line of Frank Louthan with Raymond James.

Frank Louthan - Raymond James

Great. Thank you. Couple of questions, Tom, as you see that the general strategy appears to be pretty similar to sort of non-conventional strategy, we’ve heard that line from Charter before you came, but could you give us an idea, are there any, should we be looking for any changes from you or maybe we reported first quarter any, any update on your overall strategy and it seems you pretty much on board with that and then any thoughts on, and particularly with thoughts on the DISH partnership that you have done, does that help grow the non-video customers and what do you think after, a few months that under the belt; how do you feel about that as a longer term opportunity?

Thomas M. Rutledge

Well, I have only been here two weeks, so it’s not a couple -- I am still where the -- how the elevator works. And so, I don’t have an opinion on it, other than to say that its an effective strategy, and Charter does have a superior Internet product almost everywhere, virtually everywhere it operates, and it has invested heavily in its Internet service, it can deploy massive speeds across its platform and that’s a distinguishing characteristic of the company and it has taken advantage, that doest mean we can't do other things as well, and so I will try to make all of our products as good as our Internet product.

Frank Louthan - Raymond James

Okay. And then, what do you think is the ultimate penetration of the home networking product, that means, we’ve seen you done some marketing studies and so forth, so its been a nice lift for what seems to be a little bit of a curious product, congratulations on getting customers to pay for that. But where do you think that kind of goes ultimately going forward?

Thomas M. Rutledge

Well, I think depending on how you price it, at how you package it; you can dictate the market share. And I think, it’s healthy for us to have a Wi-Fi product in our customer’s homes at very high penetrations.

Frank Louthan - Raymond James

Okay. Thank you very much.

Operator

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

Rich Tullo – Albert Fried & Company

Hey guy’s, thanks for taking my question and welcome aboard, Tom. Can you provide a little color on the TiVo implementation? It doesn’t seem a whole lot of difference between what you said and what the state of plan was prior. What was the reason for pushing it out a little bit?

Donald F. Detampel

I can respond to that. So first of all, I just want to eco Tom’s words, I mean, we remained very committed to the TiVo platform. We believe that the experience it delivers to our customers is superior than anything we have in the market right now; so we remain very committed. In our particular that the integration of the TiVo platform into our platform, basically we had different VOD systems than TiVo had integrated in the past. So what we’re working through are some of those integration issues, but we had previously believed that through the first-half of this year that we’d be pretty well implemented across the enterprise. We now know based on our testing that we will require some further field testing, and we’re not going to deliver that product to our customers until we know it’s fully baked and right.

Rich Tullo – Albert Fried & Company

Fair enough. Can you give us an update on Charter Starter? I know that, that was an initiative last quarter that I thought was intriguing. How is it working out?

Thomas M. Rutledge

So, Charter Starter is doing exactly what it was intended to do, and it was never intended to be a significant driver of volume, and it is a very, I think helpful way to get the product to the customer in a way that they can actually afford to take the product in a way that’s protecting Charter as well from a credit standpoint, but it was never one of Charter going out and trying to specifically target that segment over time, but just making sure that we could be fair to the customers and fair to Charter as well, its doing that, but its not a material driver of volume.

Rich Tullo – Albert Fried & Company

I mean, I know it’s kind of hard to suss-out what CapEx is going to be contributed to what, but since the commercial incremental increase last year was $60 million, the incremental -- this increase this year, I mean, is it going to be roughly half of the stated increase?

Christopher L. Winfrey

No. I think, what I said in the prepared remarks is that we expected a similar increase in commercial CapEx is what we had experienced in 2011 as we’re heading into 2012.

Rich Tullo – Albert Fried & Company

Okay. Thank you very much.

Christopher L. Winfrey

Thanks.

Operator

Your next question comes from the line of Lance Vitanza with CRT Capital Group.

Thomas M. Rutledge

Hi, Lance.

Robin Gutzler

Hello.

Christopher L. Winfrey

Hello, Lance.

Lance Vitanza - CRT Capital Group

Hi. Can you hear me?

Thomas M. Rutledge

Yes.

Lance Vitanza - CRT Capital Group

Hello, sorry about that. You mentioned you’re focused on return with respect to the CapEx. Focused on return rather than margins, I understand that. Can you give us a sense though of what the -- what the hurdle rates that you set out when you planned your CapEx budgets?

Thomas M. Rutledge

I don’t think that’s something we disclose, and they’d want to.

Christopher L. Winfrey

No, we don’t and we wouldn’t want to, what I can reference you back to is, what we we’ve said in the past, is it depends a little bit by product, right. If you take a look at things like Cell Backhaul, obviously you accept longer paybacks because it’s a secured revenue stream with a long-term contractual horizon. If you take a look at residential products that don’t have the same type of contractual requirements to payback both by needs as well as just by definition of what we’re getting is much, much shorter on some of those products. Those hurdles are in place internally, they depend by product and by segments as well.

Lance Vitanza - CRT Capital Group

I mean, I guess from my standpoint, this year you did about 2.7% of EBITDA, you’ve told us that you intend to spend roughly a billion dollars on success-based CapEx, I’m just trying to get a sense, how much incremental EBITDA can we realistically expect over the next few years, I mean can Charter even become a $3.5 billion EBITDA company?

Christopher L. Winfrey

I think what you're not picking up in that analysis -- the answer is we’re not going to provide the answer. But you’re not picking up the inside of theirs that repairing the video business means substituting what today is well over $100 million of bucket that we’ve to fill in the revenue and a portion of that on EBITDA every year.

So, stopping the video losses, and potentially returning that business to growth over long time is the opportunity as we and to deliver on commercial and Internet. But when you take a look at EBITDA growth, as you look at these CapEx and the revenue and EBITDA coming from those growth areas, and isolation and that not offset that with the video losses you’ve been looking at it the wrong way. Is that helpful?

Lance Vitanza - CRT Capital Group

Yeah, it is. Thank you.

Operator

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

Vijay Jayant - ISI Group

Hi. I’ve a couple of questions. First on video, you made a comment that you’re seeing the video business sort of improve, but I’m still looking at sequential video revenues sort of decelerate, I see decline and even though subscriber losses are improving, so can you give us some context, I think you mentioned something about a $6 million premium revenue decline, some context from that will be helpful?

And second, more philosophical question for Tom, obviously the network at Charter is different from what you see at Cablevision, also what you probably saw at Time Warner Cable, can you sort of talk about how far are the networks, what does it take to sort of get to the same level playing field, are we two years behind, obviously CapEx is sort of trending up partly to upgrading the plan for DOCSIS and everything else. So, some context about that will be really helpful? Thank you.

Christopher L. Winfrey

So, I’ll take the first one on video. You’re right, as you take a look at the sequential development of revenue, the key things to keep in mind is, one is the timing of rate increases. So we did take some rate increase inside of Q3, that’s why you saw a lift inside of Q3 on video related to that.

The second one is that as you’ve heard Tom talk about the opportunities, he believes here, we all believe is that the opportunity drives further proactive migration to digital and to HD DVR. Some of that upgrading that we had in the past has not taken place as aggressive by 2011. And so that’s a revenue opportunity that has historically offset a lot of the subscriber losses and we didn’t see as much of that in 2011, the opportunity there is large.

And then, third one, as you pointed out is historically we’ve been able to drive increases in premium as well as Video On Demand and I think that’s more driven by the economy, inside of 2010-2011 we’ve seen a lot less of that premium in Video On Demand uptake. In fact, premium as I mentioned in the fourth quarter was down $6 million year-over-year.

So it’s all of those factors, subscriber losses which have declined and we’re doing a better job there, it’s digital and HD DVR where we’ve a larger opportunity and rate increases as I mentioned we’ll be having some rate that will be taking place effectively inside of Q2 on the video and internet product, and it’s stopping those subscriber losses is the big one.

Thomas M. Rutledge

So, on your philosophical question, as I said earlier, the network that we’ve is a high-capacity, fully upgraded network. We’ve the capability of delivering superior products in video, data, telephony and in-home Wi-Fi across our platform. And we can build products that are integrated in such a way that the overall value that we’re providing is superior to our competitors.

The network is essentially build, there are additions and minor upgrades to the network, but we had two master head-ins, we’ve the capability of providing high-quality and digital products throughout the United States and it’s a question of putting them together in the right packaging, pricing and product mix and driving yourself into the marketplace with a superior product. And that’s what we plan to do with our network. The network will require some enhancement, but it is essentially built.

Vijay Jayant - ISI Group

Okay, thank you.

Operator

Your next question comes from the line of Tuna Amobi with Standard & Poor's.

Tuna Amobi - Standard & Poor's Equity Group

Good morning, thank you so much for taking the question. I apologize Chris, if you alluded to this, I’m trying to get an update on the VOD premium take rates. I think you alluded to [card shaving] last time, I was wondering if there is any update on that?

Christopher L. Winfrey

I did mention that premium year-over-year has seen a decline of $6 million Q4-over-Q4. So, some of those trends we’ve seen to continue. Video-On-Demand, the overall usage is going up quite a bit. But it’s really taken place since -- by the free Video-On-Demand space. So, Video-On-Demand year-over-year was relatively flat in terms of dollars.

The overall usage is significantly higher, but the pay usage per customer has declined, and I think that's consistent with what you're hearing from other MSOs as well.

Tuna Amobi - Standard & Poor's Equity Group

That’s helpful. And On the tax basis, I see that the number kind of dropped from about $10 billion to $9.3 billion, and you've talked about that as a major tax attribute along with the NOL and I do agree. So, I guess my question, as you look out to your projection regarding the kind of the years that you feel those would apply to -- it seems to me a little bit conservative, you talked about 2017 potential as a date that you expect to become a full taxpayer, but…

Christopher L. Winfrey

If I can interrupt, I think what we say is that we do not expect to become a material cash income tax payer until -- after 2017, and that feeling from us hasn't changed. Of course, that's subject to a number of different variables, but as of today, that's where we're comfortable saying that we’d not be a material cash income tax payer until 2017.

On the book value of the tax basis, if you remember, as that tax basis amortizes, it flows into net operating losses. So, if you take a look at net operating losses, they're actually higher.

Tuna Amobi - Standard & Poor's Equity Group

Okay, that's helpful. Just one last question then for Tom, sorry for the question that seem to compare to Cablevision, but I had one myself, I guess as you think about what you did in terms of getting content out to consumers in and outside the home, and you look at Charter, where do you see perhaps the opportunities, I know both companies seem to be going a little bit different ways. You did the TV to PC relay and some of the other initiatives there at Charter it clearly seems to be going a little bit different route; the talk about the Charter.net aggregation with the SVOD providers, the search and discovery with TiVo which they’re pursuing a little bit more aggressively. So, I guess the question is how do you kind of reconcile those two strategies in terms of getting the content out to the consumers within and outside the home and what are the rights -- associated rights issues with that from both the companies' perspective? It seems to me that Charter has a little bit different sets of variety of right issues to deal with here, given the difference in strategy. So, any comments around those would be helpful?

Thomas M. Rutledge

Well, again, they are two different companies, and decisions I think at Charter will be based on the circumstances at Charter, and the opportunities that the markets presents to us. Inside the cable business, the right structures are fairly similar from a programming perspective across the industry and the copyright laws are obviously applied across the United States. The opportunities that those laws and right structures present themselves to most of the players in that business, and well I'm not prepared to announce a new strategy for Charter today, but we have a highly flexible network and a highly capable network, and we have the ability to mix and match those opportunities and present them to our customers in a way that we think will resonate the marketplace. So stay tuned.

Tuna Amobi - Standard & Poor's Equity Group

Thank you.

Robin Gutzler

Okay operator, I think we have one more question.

Operator

Thank you. And your last question comes from the line of James Ratcliffe with Barclays Capital.

James Ratcliffe - Barclays Capital

Good morning. Thanks for taking the question. Just quickly, if you can outline relatively how you're performing in areas both on broadband, video, where you do with – I guess, the 34% of footprint where you do face U-verse or FiOS versus where you don't, that would be helpful? Thanks.

Thomas M. Rutledge

Well, I think, fundamentally we have had a competitive disadvantage in the overbuild areas in some aspects of our product. But our – you see our Internet product is now in the marketplace, being marketed as a vastly superior product to our competitors. What we intend to do is bring all of our products to that division and to present a superior footprint – superior product set across our entire footprint, including our competitors’ footprints.

James Ratcliffe - Barclays Capital

Great. Thank you.

Thomas M. Rutledge

Thank you very much.

Robin Gutzler

Thanks all for joining.

Christopher L. Winfrey

Thanks everyone.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Charter Communication's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts