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Charter Communications (NASDAQ:CHTR)

Q1 2012 Earnings Call

May 08, 2012 11:00 am ET

Executives

Robin Gutzler -

Thomas M. Rutledge - Chief Executive Officer, President and Director

Christopher L. Winfrey - Chief Financial Officer and Executive Vice President

Donald F. Detampel - President of Commercial Services and Executive Vice President of Technology

Analysts

Stefan Anninger - Crédit Suisse AG, Research Division

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

David Carl Joyce - Miller Tabak + Co., LLC, Research Division

Benjamin Swinburne - Morgan Stanley, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Bryan D. Kraft - Evercore Partners Inc., Research Division

Tuna N. Amobi - S&P Equity Research

Vijay A. Jayant - ISI Group Inc., Research Division

Alexander Sklar

Richard Tullo - Albert Fried & Company, LLC, Research Division

Operator

Good afternoon. My name is Brandice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2012 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Robin Gutzler, Vice President, Investor Relations, ma'am, you may begin.

Robin Gutzler

Good morning, everyone, and welcome to Charter's 2012 First Quarter Earnings Call. This morning, we issued a press release over PR Newswire at 8 a.m. Eastern Time detailing our results. 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 Form 10-K and 10-Q. We won't 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 the 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 2011. The pro forma results reflect the acquisition of certain cable systems in 2011, as if they had occurred on January 1, 2011, unless otherwise noted. The year-over-year growth rates we will be referring to this morning are on a pro forma basis.

Joining me on today's call are Tom Rutledge, President and CEO; and Chris Winfrey, our CFO. 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 & News Center.

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

Thomas M. Rutledge

Thank you, Robin. In the first quarter, we saw significant improvement in customer trends, and overall results were as planned. First quarter revenue was up nearly 3%, while adjusted EBITDA was down approximately 2% year-over-year. The change in adjusted EBITDA was primarily driven by the costs associated with accelerated customer growth. Free cash flow was $102 million this quarter versus $74 million in Q1 of last year. We gained 274,000 RGUs, more than double the net gain last year. We grew 20,000 video customers for the first quarterly video growth in 5 years. Internet customer additions grew by more than 50% year-over-year. And we added nearly 100,000 new relationships in the quarter, more than triple the gain 1 year ago.

Given the higher level of customer acquisition, we have an excellent opportunity to upgrade the level of service we provide those customers. In evaluating the key levers to drive further growth, my focus in the first 3 months has been on revising our pricing, packaging and selling structure and accelerating our path to an improved product set, particularly our video product.

The goals are to have higher ARPU per connect, lower transaction cost per customer, better retention by improving the value relationship with our customers and increasing operating cash flow across the 12 million homes we pass. Our Internet product is superior across virtually our entire footprint. The company has been smart in using this Internet advantage to gain new customer relationships and will continue to press this competitive advantage.

In the video, we've improved the quality of the product we offer today, and we will accelerate that. For example, Charter's goal was to have 100 HD channels by the end of this year. Today, we're on a path to reach that by midyear. Above and beyond HD channels, we will also employ a number of tactics to achieve higher digital sell-in in HD/DVR takeup. We have the necessary products and network capabilities today to create a compelling digital offer for existing customers and successfully compete for new video relationships by having a better video product than our competitors can replicate.

Our voice product will be more fully featured and priced more favorably than our competitors. And our commercial business is rapidly growing with a strong competitive position and a superior product offering. The company is underpenetrated in the marketplace, both in residential and commercial, and has a significant opportunity for growth. We have a powerful network and capabilities, and we are ramping our strategy and accelerating activities, which we believe will deliver results.

I'll now turn it over to Chris to give more details on the results for the quarter.

Christopher L. Winfrey

Thanks, Tom. Before I begin, I'd like to point out 2 reporting changes we made this past quarter. We moved revenue and customers related to bulk residential agreements from commercial to residential. In addition, we're not including residential customer relationships related to these agreements on an equivalent bulk unit or EBU basis. Both of these changes are reflected in our financial results and trending schedules, including historically, and more details can be found in the footnotes to those schedules.

Turning to Slide 4. First quarter revenue grew 2.8% year-on-year. Residential Internet grew 9%, driven by share gains and growth in home networking, partially offset by the impact of promotional offers. As we discussed in the fourth quarter call, our focus is on driving penetration and using Internet to create customer relationships, increasingly bundled relationships as our video product improves.

Phone revenue was up 2%, reflecting customer growth and also slightly lower ARPU, consistent with our strategy to use attractively priced offers to drive deeper product penetration in homes we serve. Video revenue was down 3% year-on-year. In video, while we did significantly better with our basic customer base in Q1, we still have a year of net losses that impact the top line. As we start to do better in video, it will take several periods to see the full benefit in revenue.

In addition, we saw a $12 million decline in premium and VOD over the prior year. We expect to get greater benefit from premium as part of the pricing and packaging strategies Tom discussed. And while free VOD usage is up substantially, pay VOD usage has declined. In addition, Q1 was a poor quarter for events.

As we mentioned on the fourth quarter call, we continue to offer promotions to -- that drive share gains during the first quarter. We were able to achieve the significant volume growth, with little impact on total ARPU per residential customer relationship, which declined $0.78 from Q4 2011 to Q1, and reflected a higher mix of lower ARPU non-video relationships.

We also rolled through price adjustments towards the end of Q1, which included increases to certain Internet gears and basic and digital video. April will be the first month of those increases -- the first full month of those increases, so these had little impact on Q1, but will have a positive impact on revenue in Q2.

Turning to Slide 6. Commercial business continues to accelerate, incurring revenues over 20% compared to the first quarter of last year. Our cell backhaul pipeline is stronger than ever, but we had few reactivations in Q1, driving less in cell revenue. And ad sales were up 6.5% year-over-year, driven primarily by the accounting change we have discussed in the previous quarters, though we also saw price increases in volume in political and automotive spend.

Moving to adjusted EBITDA on Slide 7. We saw margin pressure in the quarter, and adjusted EBITDA was down 2% year-on-year. There were 3 big drivers impacting earnings and margin in the quarter. First, our video margin. I already mentioned the revenue pressures for video. Stabilizing or returning the video category to growth would be a significant top line and bottom line driver for us down the road, but our emphasis on growth will likely result in both the OpEx and CPE investment in the near term.

On the expense side, we recognized programming and retrans cost increases of $22 million. But these were not matched by price adjustments in Q1, and therefore, impact the year-over-year comparison. We expect improvement in Q2 related to the rate adjustments.

The second large driver was the impact on margin from accelerated customer growth. We estimate the higher expense to drive the accelerated growth inside the quarter relative to the same quarter last year as approximately $17 million, driven by marketing, sales and reconnect expenses. We'd like to see more of this and hope it continues. As Tom mentioned, we'll look to further improve the ROI of that spend by including more value into what we sell, resulting in higher revenue per connect and greater customer lifetime value.

And the third main driver of lower EBITDA was our customer experience investment, which totaled approximately $9 million in Q1. This was driven by increased contract labor and higher levels of preventative maintenance. This is likely to continue in the near term, but should pay off in the form of lower churn and better cash flow.

Importantly, in areas outside of customer experience and growth-related cost, we remain disciplined on nonrevenue-generating expenses. For example, first quarter bad debt expense was 12% lower than the prior year, even as we grew sales.

Turning to Slide 8. In CapEx, recall that we estimated 2012 CapEx at $1.4 billion to $1.5 billion on the Q4 call. As we mentioned, this will likely give an update in Q2 as we finalize and implement the strategies Tom highlighted.

Spending in Q1 totaled $340 million, which was $16 million lower than last year due to timing of our scalable infrastructure spend, which was partially offset by higher CPE spend to fund the customer growth.

As you can see on Slide 9, we had another quarter of positive free cash flow, which was $28 million higher than Q1 of last year driven by working capital improvements, partially offset by higher cash interest payments. Since March 31, we continue to refinance our debt obligations to opportunistically improve our maturity profile and to amend certain provisions of the credit agreement to bring them in line with other parts of our capital structure.

Slide 19 contains our pro forma and maturity profile for all transactions completed since quarter end. We expect our annualized interest expense, pro forma for all refinancing activities to date, to be approximately $860 million. And our leverage was 4.8x at quarter end.

In closing, I'd like to remind everyone about our tax assets highlighted on Slide 10, which are equally important for debt and equity holders. As of 12/31, we had $9.3 billion of tax basis and $7.4 billion of NOLs, and we don't expect to be a significant taxpayer until after 2017. Simply put, $1 of EBITDA from Charter is not the same as $1 of EBITDA elsewhere, given our NOLs and outsize tax basis. With positive free cash flow, a moderate leverage target and valuable tax assets, we have a unique financial profile to drive Triple Play growth.

Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first audio question comes from the line of Stefan Anninger.

Stefan Anninger - Crédit Suisse AG, Research Division

I'm wondering if Mr. Rutledge could maybe discuss in a bit greater detail what some of the changes to your pricing and packaging you may be considering. Would you consider ever moving away from the focus on offering, for example, your single-play HSD product, which you have been doing since, I think, the back half of 2010? And then I do have one follow-up question.

Thomas M. Rutledge

Well, the most significant thing that we're doing from a packaging perspective and from a pricing perspective is improving our video product and adding value to our video product. Charter has a superior network infrastructure, and it hasn't been fully taking advantage of it because of the legacy of its analog subscriber base. And what we're doing is improving the digital product we go to market with in video. So the most significant impact from a consumer perspective will be that when they buy video from Charter going forward, they're going to get a much richer package in terms of the kind of quality of picture they get and the amount of channels they get. And they're going to get offered that in a way that, combined with the data and voice, make to the compelling offer from a competitive point of view. And it'll be a superior product to Satellite, superior product to U-verse. In the video space, it'll be obviously a better data product, already is a better data product than our wireline competitors and the voice product will be more fully featured and less expensive. So combined, it'll be actually sold at a higher ARPU than we currently sell, but the value proposition for the customer will be much greater. We'll be taking advantage of our network assets.

Stefan Anninger - Crédit Suisse AG, Research Division

Okay. I guess the follow-up question, I'll just go back to the original question. Would you -- are you still as focused -- do you think, going forward, will you still be as focused on pushing the single-play HSD product that you had priced at about the same price as it was as part of the bundle back at the end of 2010? Or do you think you might steer clear of doing that going forward?

Thomas M. Rutledge

We continue to have great success with our high-speed data product, and we'll continue to support that in the marketplace as a standalone product. But we'll be also enhancing that market posture with additional packages.

Operator

Your next audio question comes from the line of Bishop Cheen with Wells Fargo.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

Your leverage continues to improve, although it seems to be at this -- inside 5x. As you look out with all of the other projects you have going on for capital allocation, where do you think you can take your leverage 1 year from now? Or for a little wider look, say, by the beginning of 2014, where would you like to have it as a stable place?

Christopher L. Winfrey

Well, I think absent providing -- this is Chris, absent providing EBITDA guidance, we remain focused on getting into our target leverage range of 4x to 4.5x. Frankly, the timing for us getting there depends on the level of success that we're having in driving some of the initiatives that Tom was describing and the strategic opportunities that present themselves along the way. So in the meantime, our first and largest priority is to protect the long-term EBITDA and cash flow generation capability of the business, and that may mean investing more in OpEx and capital to go drive that kind of grow that puts you in a better, steady-state cash flow position, which ultimately delevers you significantly through -- mechanically through EBITDA growth. So the timing of that depends not only on the long-term success, but also the upfront organic opportunities that present themselves to go invest for growth. So I don't want to provide a guidance as to when we're going to be hitting that. It's the function of the growth opportunities and other strategic opportunities that come, but it's safe to say that we still believe that 4x to 4.5x, plus or minus a half turn periodically to enable strategic opportunities, that 4x to 4.5x is the right place to be for us. I hope that's helpful.

Operator

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

David Carl Joyce - Miller Tabak + Co., LLC, Research Division

I was wondering if you could comment a little more broadly on the strength that we're seeing in the video product. Does it seem like there's more consumers coming back into the pay TV environment, granted you do break out residential and commercial video subs? But the residential was a nice surprise. If there's more color you could provide on that'd be great.

Thomas M. Rutledge

I'm not sure I can tell you what the exact macro trend is, but it's certainly -- there's a couple of favorable wins at our back which are -- certainly, the economy isn't getting worse. I'm not sure it's getting better from a housing perspective, but it's not getting worse. And the amount of telco overbuild, as a percentage of passings [ph] activity has declined year-over-year, and it looks like that's a longer-term trend as well. So that's having a somewhat of a favorable impact on growth opportunities.

David Carl Joyce - Miller Tabak + Co., LLC, Research Division

And where are you generally on the evolution of the TV Everywhere product becoming more available?

Thomas M. Rutledge

Our plan -- we have it in our product roadmap for this year. And our plan is to roll it out or upgrade, I should say, TV Everywhere, but a tablet-based video product, some elements of which will be TV Everywhere, but parts of it will be cable television as well inside the house.

Operator

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

Benjamin Swinburne - Morgan Stanley, Research Division

I have two. Chris, I wanted to ask you or Tom about the incremental spending in the quarter. I think you said $17 million related to customer growth and it includes marketing?

Christopher L. Winfrey

That's correct.

Benjamin Swinburne - Morgan Stanley, Research Division

Okay. So, I mean, you look at -- you added 100,000-plus incremental PSUs. You guys talked about the RGU increase. If I strip out the marketing increase, and I'd love for you guys to comment on the marketing spend in the quarter, whether that -- where that was aimed, if that was brand or kind of a more direct marketing or variable with customer growth. I mean you're spending -- you're not spending much money to add a lot of incremental services, so I'm wondering if that's how you guys think about it. The backup marketing was like $5 million increase or $50 a -- incremental PSU, which is a pretty fabulous return. So I'm wondering if you could talk about the marketing spend, how much that was brand versus sort of directly related to customer growth, and then if that's the right way to think about your sort of return on investment on subs going forward. And then just on the pricing increase in April, Chris, would you be willing to comment on EBITDA growing in the second quarter or not at this point? I know you guys don't give quarterly guidance, but obviously, you're investing quite a bit, but you also have some help on the ARPU front 2Q, which you talked about.

Christopher L. Winfrey

So maybe I'll take the second one first, which is we're not going to provide Q2 guidance for revenue or EBITDA. But it's safe to say that given the dynamic of having the bulk of your programming increases flow through in Q1 and at the same time, not taking a rate increase until effectively Q2, it certainly will be beneficial to the top line, much of which or all of which will go to the bottom line, so it should be an improvement relative to Q2. On the second one, as related to...

Thomas M. Rutledge

Yes, I was going to say we're not going to break out our marketing spend by brand and by acquisition, but marketing costs are a factor, obviously, in growth, but so are transaction costs. Our objective is to create more valuable products that have longer subscriber lives, which means that the ROI or the cash flow per transaction goes up on a lifetime basis. And that's our primary objective. And we already have a good transaction process, meaning that the cost of a transaction for us is positive from an ROI perspective, and that includes the fact cost or the marketing cost, and we think that we can improve it.

Benjamin Swinburne - Morgan Stanley, Research Division

And, Tom, do -- you mentioned the video product getting better and talked about high-def and adding more programming. What about the guide? That's been an area where customers, I think, have probably had some negative experiences, and particularly, on some of the legacy boxes. What's the plan for the guide at Charter over time? Are you happy with the product today?

Thomas M. Rutledge

Well, we have an issue with the product and our legacy boxes and how to deal with that. And as part of our -- my prior answer about TV Everywhere, what we're contemplating is putting out IP products in the home and out of the home that give you control over your existing set-top boxes. So the ability to program a DVR to do search and to do other kinds of -- even to change channels have been deployed in other parts of the cable industry as applications on tablets, smartphones and PCs. And I think that, that opportunity allows us to take our legacy boxes and make those legacy boxes work better from a user interface perspective and allow functions like search and discovery to appear on all of our existing set tops. So I'm actually fairly positive on the situation we have in terms of the way that the consumer electronics industry has evolved. It actually creates an opportunity for us to take our existing capital base of deployed boxes and make them really work a lot better without having to replace all those boxes with a new, more powerful box that has a capability of carrying a more robust guide. And I think that has long-run implications for the kind of money that we're going to have to invest in the CPE. I think it means that we can have thinner client CPE going forward, which means that it should cost less on an incremental basis.

Operator

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

Jason B. Bazinet - Citigroup Inc, Research Division

Just a question for Mr. Rutledge. There's a perception in the marketplace, and I don't if you agree with this, that the video product is still very much the anchor product for cable and that once that relationship is lost, it's very difficult to sell in other services. I guess my question is twofold. Do you agree with that as a general premise, or do you see that sort of changing as data becomes more important? And given that, is there -- is it fair to say that your top priority is to sort of get the video customers as a percent of all the passings [ph] up as sort of a prerequisite to drive other products?

Thomas M. Rutledge

Well, I wouldn't say it's a prerequisite. Video is a great business as a standalone business, and it's a very powerful medium and it allows you to advertise effectively and sell other products across your platform. So having -- when you're a multiproduct company, having a video relationship is a real competitive advantage. That said, it doesn't mean that all of the products that the network is capable of providing shouldn't be sold to the market niches that exist. So for instance, commercial is not particularly video-centric in terms of the opportunity and yet, it's a big piece of the business. So at the residential level, we are underpenetrated from a video point of view. It's a good business from a return on investment perspective. It allows you to sell other products, and so I think it's a essential part of our product mix and we ought to take advantage of it, because our network's capable of doing it. But that doesn't mean that in places where video doesn't work as a driver that we shouldn't use other aspects of our network like high-speed data and voice, WiFi to create additional opportunity. So I don't look at it as a prerequisite, but just as a significant opportunity.

Operator

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

Lance W. Vitanza - CRT Capital Group LLC, Research Division

First, on the video side, could you talk a little bit about where you are seeing disconnects? How much of that is losing subscribers to Satellite? How much is losing subscribers over the top? How much is just losing households, people moving in with one another and so forth, given the economy?

Thomas M. Rutledge

Well, we actually gained subscribers in the first quarter and...

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Right. But -- on a net basis, but certainly you had disconnects, and if we were to think about those disconnects, just would love to get a little sense of where you think those guys are going.

Thomas M. Rutledge

Well, essentially, I mean, to speak in generalities, there's very little over-the-top substitution going on, almost -- and the whole multichannel universe is highly competitive. The biggest competitor that Charter has is Satellite, and so a lot of activity is the result of moves and other commercial activity. But in the end, the subscriber base is subscribing to multichannel television generally at very high penetrations. And the biggest competitor we have in the video space is Satellite.

Lance W. Vitanza - CRT Capital Group LLC, Research Division

Okay. And then on -- with respect to the programming costs, do you see, when you look out -- I mean, do you see any easing on the horizon, or should we expect kind of continued unit cost increases that we've been seeing over the past several quarters?

Thomas M. Rutledge

I think that the programming cost is a -- there's nothing changing the current trends in programming, except that it's become a very big number. There's some regulatory pressure on programmers, the retrans issue has the potential of creating additional regulatory pressure. And so whether that will cause programmers to moderate their rate of increase, it's hard to say. But right now it's a difficult part of the business to manage from a cost perspective.

Operator

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

Bryan D. Kraft - Evercore Partners Inc., Research Division

I'm sorry if you said this in prepared remarks, we got dropped off the call for a little bit. But I'm just wondering if you could just update us on where you are with the TiVo rollout. I think that it was originally scheduled for second half and then that was going to be delayed. And then also, I just wanted to see if you could comment on the gross ad versus the churn trends. I know gross ads obviously accelerated with the increase in marketing spend, but I was wondering what you're also seeing on the churn side.

Thomas M. Rutledge

Do you want to talk about churn?

Christopher L. Winfrey

Yes. So the bulk of our performance inside of Q1 and Q4 really came from improved acquisition. We did see improved retention levels as well, and so year-over-year improvements and we continued to do well as the customer experience investment has taken hold. But the bulk of the net gains improvement still remains from an acquisition side.

Thomas M. Rutledge

Yes. And we continue to work integrating the TiVo product. We have a complicated VOD infrastructure, and we're continuing to work on getting that product developed.

Bryan D. Kraft - Evercore Partners Inc., Research Division

Do you have any kind of update on the time frame for the commercial rollout or...

Thomas M. Rutledge

We do have some customers in place in Texas, but we haven't announced the general rollout as of yet.

Operator

Your next question comes from the line of Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Equity Research

So as I look at the penetration for Charter, one of the things that strikes me that you guys have the -- among the highest digital penetration in the industry, and yet that seems to not translate into some of the other potential drivers that some of your peers have been able to leverage. So, Tom, speaking to perhaps your experience at Cablevision, what is it that strikes you here as the potential anomaly in terms of actually leveraging this very high digital penetration? And how should we think about that going forward? The video penetration overall is still far below the industry average and yet the digital is very high, and it seems to me, as you alluded to, that the plant is as good as anyone else's. So any thoughts on that -- addressing that would be helpful.

Thomas M. Rutledge

Sure. Just because you have a high penetration of digital boxes doesn't mean your entire product is in digital. And what we are doing is removing analog signals and increasing the amount of total digital signals in the product mix, so that all incremental customers going forward are 100% digital. And that's different than the digital set-top penetration, which is publicly reported. So the actual customer experience taking advantage of the network capability will be a greater experience going forward. They'll have more digital signals, more HD signals, more two-way interactive signals. And the product will be better than what competitive satellite companies can replicate.

Tuna N. Amobi - S&P Equity Research

Okay, that's helpful. Just a follow-up question for Chris on the liquidity situation. It seems like working capital was a potential contributor this quarter. I'm wondering how you think about that in the context of the full year with respect to working capital to be a positive contributor? And how does that kind of fit into your overall liquidity management? I know you have about $1 billion avail on the facility, yet cash seems to be relatively precariously low. So I'm just kind of wondering whether you view this as a potential constraint to liquidity management and how you tend to address that?

Christopher L. Winfrey

'

I think there's a distinction there between cash being low, and that's just good treasury and good debt management to make sure you're paying down in your revolver and not sitting flush with cash when you don't need to. As to the working capital, it was a good working capital quarter inside of Q1. It's highly seasonal, and you'll see it pop up and down during the course of the year. But from an annual perspective, there's nothing inside the business that makes you the significant user or contributor of cash and we tend to be somewhat working capital neutralized in the past and nothing's fundamentally changed. But there will be seasonality between the quarters.

Operator

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

Vijay A. Jayant - ISI Group Inc., Research Division

I have a couple of question. Chris, can you sort of talk about what was your rate increase, specifically on video? And also on the broadband side, on whether it's also for the service and the hardware component on broadband? And second, more on the strategic side, given your assets are, across, I think 25 states, is there still an aggressive strategy to rationalize and make them more contiguous on doing swaps? And is that market still active right now? Any color on that will be appreciated.

Thomas M. Rutledge

Want to talk about the rate increase?

Christopher L. Winfrey

Sure. So the rate increases for both basic and digital customers as well as Internet range anywhere from $2 to $5, and so roughly 40% of our base got a 3% increase. And that was the -- affected the rate increase. And March was not a full month, and so the first full month will really begin in Q2.

Thomas M. Rutledge

And while there is an opportunity to rationalize assets, we don't discuss M&A activity.

Operator

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

Alexander Sklar

This is Alex Sklar here for Frank. So you talked about the wireless backhaul backlog being significant. I'm wondering if you could provide any more color on how many fiber-to-the-tower deals you've signed to date and what the total opportunity is there. And then the follow-up on the TiVo question, given what you were saying earlier on finding ways to improve existing boxes rather than spend on new equipment, does TiVo -- is TiVo still going to fit into the long-term plan, or can you go all IP without it?

Thomas M. Rutledge

Maybe on the first question, I'll hand that over to Don Detampel, who heads up our commercial business.

Donald F. Detampel

Thanks, Chris. So as you mentioned, our cell tower pipeline remains very strong. So we reported 2,600 cell towers either in service or under contract, so you can do the math on it. We had a very strong first quarter. I do see that continuing into the near future as carriers continue their push -- their wireless carriers to drive their 4G networks. And these carriers started in largely the Tier 1 markets, and as you know, we serve as primarily Tier 2, Tier 3 markets. So now this bandwidth demand to the towers and their deployment of 4G is kind of moving into our realm and we're very well-positioned with our network to take advantage of it.

Thomas M. Rutledge

And your question about going all IP in terms of set-top boxes, there aren't TVs that are coming on market that are all IP or can take an IP feed, I guess, is a better way of saying it because they can take the regular feed as well. It creates an opportunity to have a cable system that both feeds IPTV and MPEG TV. And there are multiple variations of MPEG as well, which actually, from a technical perspective, are more efficient than IP from a total data throughput perspective. And our network, because of the server-based architecture that we've constructed, can serve multiple kinds of devices. So we can serve legacy set-top boxes with MPEG-2. We can create new hybrid boxes that are IP and MPEG using more efficient MPEG standards for server-based programming. And we can mix and match all of that in the same cable system, and there's enough channel capacity to serve all of those functions. So as I look forward, I think our CPE evolution will result in a world where our incremental cost of CPE per customer will go down as we buy world-class CPE -- world vendor class CPE, and buy that in multiple formats. And so how that'll all evolve, I'm not sure, but the architecture that we've constructed allows us to follow the marketplace to its most efficient place.

Operator

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

Richard Tullo - Albert Fried & Company, LLC, Research Division

Can you remind us how many channels were added in the first quarter?

Thomas M. Rutledge

In terms of HD?

Richard Tullo - Albert Fried & Company, LLC, Research Division

Yes.

Thomas M. Rutledge

Look, there's the multi-market...

Christopher L. Winfrey

Yes, by market, it's multiple systems, so I think the keys that you want to be thinking about is that at the end of 2010, we were at 43 average HD channels. At the end of 2011, we were at 75, and then we'll be over 100 in -- by midyear.

Thomas M. Rutledge

That's right.

Richard Tullo - Albert Fried & Company, LLC, Research Division

Okay. And was the lower video-on-demand usage a function of consumers and the economy or more of a function of just the video calendar with not a lot of big movies out?

Thomas M. Rutledge

It's hard to say. The transactional video-on-demand went down, meaning video-on-demand that people pay for it, but the amount of the total product that's available in video-on-demand, including free video-on-demand, is increasing dramatically and usage is increasing dramatically, so that the overall cable platform infrastructure from a VOD perspective is increasingly being used and increasingly being valued by customers.

Robin Gutzler

Great. Thank you, everyone.

Thomas M. Rutledge

Thank you.

Christopher L. Winfrey

Thanks a lot.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.

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