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Cablevision Systems Corporation (NYSE:CVC)

Q2 2012 Earnings Call

August 7, 2012 10:00 a.m. ET

Executives

Bret Richter – SVP Financial Strategy & Development

Jim Dolan – President & CEO

Gregg Seibert – EVP & CFO

Wilt Hildenbrand – Senior Adviser, Engineering & Technology

Analysts

Jessica Reif Cohen – Bank of America Merrill Lynch

Brian Russo – Deutsche Bank

Ben Swinburne – Morgan Stanley

Craig Moffett – Bernstein

Philip Cusick – JP Morgan

Jason Bazinet – Citi

Mike McCormack – Nomura Securities

James Ratcliffe – Barclays

Marci Ryvicker – Wells Fargo

John Hodulik – UBS

Bryan Kraft – Evercore Partners

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Cablevision Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Bret Richter, Senior Vice President-Financial Strategy & Development. Please go ahead, sir.

Bret Richter, SVP Financial Strategy & Development, Cablevision Systems Corp.

Thank you. Good morning and welcome to Cablevision’s second quarter 2012 earnings conference call. Joining me this morning are Jim Dolan, President and CEO of Cablevision, and Gregg Seibert, Executive Vice President and Chief Financial Officer.

Following a discussion of the company’s second quarter 2012 results, we will open the call for questions. If you don’t have a copy of today’s earnings release, it is available on our website at cablevision.com.

Please take note of the following. Today’s discussion may contain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ.

Please refer to the company’s filings with the Securities and Exchange Commission for a discussion of risks and uncertainties. The company disclaims any obligation to update the forward-looking statements that may be discussed during this call. Let me point out that on page five of today’s earnings release, we provide consolidated operations data and a reconciliation of adjusted operating cash flow, or AOCF, to operating income.

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

Jim Dolan

Thank you, Bret, and good morning. During the second quarter of 2012, we continued to improve the overall Optimum experience for our customers. As we have stated before, we are changing the way we approach our business and we believe that our initiatives are positioning the company for long-term success. We added nearly 7000 total Optimum customer relationship in the second quarter. Net basic video subscribers were essentially flat company-wide. Both of these metrics reflect a significant improvement as compared with our performance during the second quarter 2011.

Optimum East experienced positive video growth as well as substantial increases in the number of Optimum Online and Optimum Voice subscribers. Optimum West felt the effects of a seasonally slow quarter which impacted all of its customer metrics.

We continue to focus on all aspects of our relationships with our customers including our products, pricing, customer service, network quality and performance. Our second quarter financial performance reflects the near-term impact of the operating and capital investments that we are in the process of making.

Second quarter 2012 total revenue increased by 0.5% as compared with the second quarter of 2011. AOCF declined 7.2% versus the prior year period, primarily reflecting lower margins in our core cable business. As expected, capital expenditures increased significantly in the second quarter. This increased level of investment negatively impacted free cash flow, which was $59 million for the quarter.

We continued to be committed to our return of capital initiatives. We repurchased 5.6 million shares of stock in the second quarter and last week the board declared a $0.15 per share quarterly dividend which is payable next month.

Turning to operations, product service and operational improvements and enhancements are all continuing as we strive to provide our customers with more value from their Optimum relationship. Our data network augmentation project, which was completed during the first quarter, significantly improved the Optimum Online experience. Our investment also enhanced our ability to monitor our network’s performance. As a result, we were not surprised when our product performance improvements were validated by the FCC’s latest Measurement Broadband America report, which was released on July 19.

According to the report, customers of our core Optimum Online and Optimum Online Boost Plus services received more than 100% of advertised speeds on average across a 24 hour day. In addition, the report highlighted that Optimum Online customers received 128% of advertised speeds during peak weekday hours and Optimum Online Boost Plus customers received 113% of advertised speeds during peak hours.

Another area in which we provide our customers with great value is through our continued investment in WiFi. Our WiFi network has more access points than any other WiFi network in the country and this product is becoming increasingly attractive to our customers who are seeking to contact to content outside of their homes.

During the second quarter, we expanded our network by adding nearly 5,000 additional hotspots in our Optimum East territories. In addition to adding coverage, we continued to invest to enhance the speed, capacity and connectivity of the network.

In June, we launched the free Optimum WiFi Finder app, which enables Optimum Online customers to locate Optimum WiFi hotspots. This app is expected to facilitate more WiFi connections at even higher levels of usage. Throughout the second quarter, we continued to see growth in the number of Optimum WiFi users, registered devices and data usage. By the end of the second quarter more than 1.4 million devices had been registered with Optimum WiFi, nearly 1 million of which were connecting to Optimum WiFi monthly, a clear example of how our investment is valued by our customers.

One final note on WiFi. Our Optimum WiFi users currently have access to certain Time Warner Cable and Comcast WiFi hotspots in the Northeast. In May, we announced plans to participate in a broader cross-MSO cable WiFi initiative, which will ultimately enable roaming across participating MSO WiFi networks throughout the United States.

Current participants in this initiative include, Cablevision, Comcast, Time Warner, Cox and Bright House. Optimum customers can already connect to WiFi hotspots in certain Bright House markets, including in parts of Florida. Cablevision WiFi network will be a major contributor to this initiative and our participation provides yet another incremental benefit to our Optimum Online customers.

In terms of new products, we introduced our Live TV Optimum app for the Kindle Fire in July and we plan to launch a version of the app for other Android devices shortly. The latest version of the Optimum app, which is also available for laptops and Apple mobile devices, has a look and feel that is consistent with our new Onyx user interface and guide. The Onyx guide is in the final stages of testing prior to its planned deployment to our digital set-top boxes during the fourth quarter.

In addition to our own efforts, we are always working with our programming partners to improve our customers’ viewing experiences and expand their choices. For instance, we worked with NBCUniversal to make it easier for our customers to watch London Olympics programming online by automatically authenticating them to view this content from home or over Optimum WiFi.

Services such as these are facilitated by our digital network. We expect to complete the conversion of the balance of our Optimum East analog customers to our digital service later this year. Once our remaining Optimum East customers are entirely digital, we can reclaim the bandwidth currently dedicated to our analog service and deploy DVR Plus to these homes.

The benefits of DVR Plus, a two whole home DVR that functions on all of our deployed digital boxes, are already being enjoyed by over 200,000 Optimum East customers. We have enhanced the product’s performance and user experience with each software release and we are confident that the flexibility of the product’s cloud-based design will prove to be the valuable strategic asset for Optimum in the future.

Finally, we plan to relaunch the Optimum brand later this month. I’m very excited about this initiative as it is an important part of our overall strategy of putting the customer first. Overall, I am pleased with our continuing progress and I have great confidence in our ability to develop and deploy new products and services in a rapidly changing technological environment.

Our ability to meet our customers’ needs and exceed their expectations is routed in the capacity, flexibility and resiliency of our network infrastructure.

With that, I would now like to turn the call over to our Chief Financial Officer, Gregg Seibert.

Gregg Seibert

Thank you, Jim, and good morning, everyone. In the second quarter, we had a net increase of approximately 2,000 video subscribers in Optimum East and a similar level of net video losses in Optimum West. This compares favorably to the second quarter of 2011 when we lost nearly 23,000 video customers company-wide.

As Jim noted, we added approximately 7,000 net new customer relationships in the quarter as compared with a customer loss of nearly 17,000 in the comparable 2011 period. We also added approximately 25,000 high-speed data customers and 23,000 voice customers company-wide, both of which also compare favorably to the second quarter of 2011.

Average revenue per video subscriber across all properties was $155.12 in the second quarter, an increase of $2.76 as compared with the prior year period. RPS also rose sequentially, increasing $2.59 or 1.7%, principally reflecting higher pay-per-view revenue, advertising and data services revenue. Average revenue per customer relationship was $139.14 in the second quarter.

As compared with the prior year total, total cable revenue for the quarter was essentially flat. Optimum East cable revenue was flat, principally reflecting the year-over-year reduction in video subscribers, the absence of a rate increase and the impact of certain promotional pricing. The impact of these factors was offset by additional data and voice subscribers and higher advertising revenue.

Total cable advertising revenue in the second quarter was up over 8% compared with last year’s second quarter. The growth reflects improvements in automotive, pay-TV services and other advertisers which were partially offset by a lower level of local issue-related political advertising.

AOCF for the cable business declined by 7.9% overall and by 9% in Optimum East. As Jim mentioned, the decline in Optimum East AOCF primarily reflects a lower AOFC margin. The principal elements of the margin reduction were higher programming costs and an increase in other operating expenses including non-executive employee compensation. Overall, Optimum East’s second quarter AOCF margin was 36.6%, down from 40.2% during the prior year quarter.

Optimum West’s performance partially reflects a seasonally slow quarter. As noted earlier, Optimum West lost approximately 2,000 video subscribers and gained approximately 2,000 voice and 2,000 data subscribers. Total Optimum West customer relationships declined by just over 1,000. Average revenue per video subscriber for Optimum West was $137.52 in the second quarter, up nearly $10 since the second quarter of last year. Revenue was up 7.1%, primarily due to the higher video and data revenues and AOCF increased 8.9%.

The AOCF margin for Optimum West was 29.9% in the second quarter. In July, Optimum West received a favorable judgment relating to its dispute with the Montana Department of Revenue. The court determined that all disputed property tax assessments were invalid and it directed the Department of Revenue to refund the amounts under protest. However, because the tax authority has the right to appeal this judgment, our second quarter financials do not reflect the very positive outcome of the proceeding.

Total capital spending in the second quarter was $296 million, reflecting a $90 million increase in Optimum East as compared to 2011. The increase in second quarter capital expenditures in Optimum East principally reflects increased investments in customer premise equipment and scalable infrastructure primarily related to the digitization of our cable network and our RS-DVR product. Capital spending for Optimum West was $20 million in the quarter, a $3 million decline compared with the second quarter of 2011.

At Optimum Lightpath, revenue increased 5.2% as compared with the second quarter of last year. Ethernet revenue grew 12.3%, while AOCF increased by 5.4% over the prior year period.

As discussed, our second quarter financial results reflect the impact of a number of initiatives that we were implementing throughout the year. Certain of these initiatives have resulted in higher operating expenses and higher capital expenditures as compared to the comparable 2011 period. As we continue to execute our strategy, we expect this level of investment to increase, in part due to the timing of certain initiatives such as the Optimum brand re-launch.

In addition, we expect second half 2012 capital expenditures to be significantly higher than during the comparable 2011 period. We believe that these initiatives are important elements of Cablevision’s long-term success.

Now, turning to the company’s financial position. Free cash flow from continuing operations for the second quarter was $59 million, a substantial decline from the prior year period. The company’s second quarter consolidated cash position was $338 million and net debt was $10.2 billion. We had $1.19 billion undrawn available under the $1.25 billion revolving credit facility at CSC Holding.

In calculating our total company leverage ratio, annual ACOF is determined using the “latest quarter annualized.” As a result at June 30, the company’s consolidated net leverage ratio was 4.8 times. The CSC Holding’s restricted group leverage ratio was 3.6 times.

At quarter end, Bresnan net debt was approximately $1 billion, with $75 million undrawn and available on its revolving credit facility. The leverage ratio for the quarter was 6.5 times, down from the first quarter ratio of 6.7 times. In the near term we expect that our latest quarter annualized AOCF will continue to be the principal factor in determining our quarterly leverage ratio.

Turning to Cablevision’s stock repurchase program, as Jim noted, in the second quarter we repurchased approximately 5.6 million shares of Cablevision’s stock for $68.4 million. This investment reflects a 2.6% reduction in outstanding Class A shares. From the inception of the program through the end of the second quarter, we have repurchased 41.3 million Class A shares. We currently expect to continue our repurchase activity in the coming quarter.

As we highlighted during our first quarter call, we are in the process of exploring potential strategic alternatives for our Clearview Cinemas business. This process is ongoing and we have no further update at this time. Similarly, a court date related to the Voom litigation has been set for September 18. We await our opportunity to pursue our claims, but we will have no further comment on this pending litigation at this time.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from Jessica Reif Cohen of Bank of America Merrill Lynch.

Jessica Reif Cohen – Bank of America Merrill Lynch

Hi. Two questions, I – you said VOOM – I want to ask something about VOOM, more about the mechanics, not so much the result. If you are successful in winning the lawsuit, how – if AMC gets paid for at least partially in affiliate fees, how would Cablevision get its fair share of compensation?

Gregg Seibert

Jessica, that’s the type of question that we are not prepared to answer. We really want to leave Voom for the litigation itself.

Jim Dolan

Our general counsel is here and I am sure that he is not going to let us answer that, Jessica.

Jessica Reif Cohen – Bank of America Merrill Lynch

So my second question, okay, the second question also you have been a little bit vague about what CapEx will be. I mean you said significantly higher but you haven’t given a range. I’m wondering if you’re willing to give us a range for the balance of the year and will 2013 CapEx be lower than 2012?

Jim Dolan

Well, we’re just – we’re not ready to do that prognostication yet, Jessica. I am sorry I’m throwing you strikes on both of those questions. But we are not going to give forward-looking statements at this time.

Jessica Reif Cohen – Bank of America Merrill Lynch

Can I ask one last question then?

Jim Dolan

Go ahead.

Jessica Reif Cohen – Bank of America Merrill Lynch

On pricing, you have resisted increasing prices so far this year. Given these results, are you at least reconsidering that?

Jim Dolan

We’re leaving the option open. That’s not a strike, that’s a ball, but not committing to anything at this point.

Jessica Reif Cohen – Bank of America Merrill Lynch

Okay, thank you.

Operator

Thank you. Your next question comes from Doug Mitchelson of Deutsche Bank.

Brian Russo – Deutsche Bank

Hi. This is Brian Russo for Doug. With the video ARPU flat on a year-over-year basis, I was hoping you could kind of walk us through some of the upward and downward pressures in the quarter that were behind this? You gave a little information between East and West but a little more color would be helpful. Thanks.

Jim Dolan

Gregg, do you want to...

Gregg Seibert

Sure. In terms of ARPU overall, as I pointed out in my prepared remarks, what was affecting video was a combination of additional pay-per-view events this past quarter, this is particularly in East and, again, East because it represents basically 90% of our subscriber base is effectively 90% of ARPU. So let me stay focused on that. It’s a combination of seasonal lift, advertising in particular was very strong last quarter and, as I mentioned before, the pay-per-view side of the equation was very important for us. There’s also an impact from promotional pricing and packaging that was felt in the quarter.

Brian Russo – Deutsche Bank

Okay, thank you.

Operator

Thank you. Your next question comes from Ben Swinburne of Morgan Stanley.

Ben Swinburne – Morgan Stanley

Thank you. Jim, you listed a whole bunch of product initiatives that are going on right now. Any of those that you’d highlight as being particularly important to the business this year on the revenue front? I know that you guys have done a lot on the product side that you haven’t specifically charged for, it’s all baked into the price. But maybe, for example, Boost, that’s something that I think you guys have done more in terms of marketing this year.

Is that having a positive impact on ARPU or do you look at these as more trying to get the product up to where Verizon is and sort of staying in line with them and maybe moving ahead of them next year? How do you think about the competitive position if you just step back and look at all of this stuff going on?

Jim Dolan

Well, first off, I would like to delude myself into believing that we’re going to and we are passing Verizon in a lot of categories. So one of the impacts that we’re shooting for and that we’re actually starting to achieve now is the retention of customers. That to me – I mean, there is two ways to grow -- two ways that you grow customers. One is keep the ones you have and then sell more.

We are doing best probably now in keeping the ones that we have. And my hope is that with the re-branding efforts and with some of the other new products that we’re launching that we’ll begin to entice new customers in still this year and grow the subscriber base.

Ben Swinburne – Morgan Stanley

Is the Onyx guide sort of a game changer on the video side of the equation? I mean, it’s something -- I don’t know when the last guide refresh was for you guys but it sounds like something you’ve spent a lot of time and maybe money on.

Jim Dolan

It was quite a while ago when we did a guide refresh and, yes, the Onyx guide is a significant change in the customer experience. I would liken it to some of the Internet video providers that are out there like Netflix, etcetera, but it’s actually much superior to that and you can get a preview of it on the tablets that we have -- on the apps that we have on the tablets now, give you an idea of what that guide and that menu system is like. And you will see that it’s quite superior.

Ben Swinburne – Morgan Stanley

Is it a product that can be rolled out across the entire set-top box base pretty quickly, or are there only some boxes that can handle the...?

Jim Dolan

No, no, I mentioned earlier that we are just finishing up the digitization of the rest of the New York market, which should be done this year. So, yeah, no, it’s going to go across the entire base.

Ben Swinburne – Morgan Stanley

Great. And then I did have one follow-up. Gregg, you made a comment in your prepared remarks about LQA? You said in the near term we still don’t see that as the appropriate way to measure leverage. I didn’t know if that was -- if you were intentionally highlighting that could change and if it could what else would you guys be looking at? I just wanted to ask that.

Gregg Seibert

Actually, Ben, I was going in the opposite direction here. We don’t have any type of M&A activity other than the Clearview Cinemas, which we mentioned, and we’re not planning on going out and making substantial acquisitions at this point. So I don’t see a lot at this point that could dramatically affect the – or dramatically increase the amount of debt that we have outstanding. So the point that I was trying to make is that over future quarters, I believe that it will be the latest quarter annualized AOCF that will be the primary determinant of where our leverage is.

Ben Swinburne – Morgan Stanley

I see.

Gregg Seibert

Now, that said, of course, I don’t want to limit any potential corporate actions so we have the ability to do whatever we think is in the best interests of the business, but nothing on the horizon.

Ben Swinburne – Morgan Stanley

Thank you very much.

Operator

Your next question comes from Craig Moffett of Bernstein.

Craig Moffett – Bernstein

Yes. Hi. Verizon has at least signaled that both in pulling back their subscriber numbers a bit and talking about taking pricing, that the competitive environment may get to be a little more accommodating. Are you seeing anything like that?

I mean it seems like our sense is they’re still quite promotional for new subscribers but maybe pricing up more aggressively on the existing base. I wonder if you could just talk about what you’re seeing from Verizon FiOS in your overlap markets?

Jim Dolan

Rather than talk a lot about Verizon, let me just talk about what Cablevision is seeing. And the promotional pricing that we’ve seen over the last couple years has been – it’s been fairly deep in terms of the discounts.

And then when your customers roll off of the promotional pricing, there’s a big huge jump that they have to make. And it tends to give them sticker shock, and that’s something that in the long run isn’t really very healthy for the subscriber base and for the company.

And so we’ve seen an easing in the marketplace in terms of promotional offers that are deeply discounted. And we’re certainly in agreement with that strategy, because you’re here for the long term, and that big jump at the end of the promotional pricing is tough for the customer to take.

And it creates, I think, a lot of unnecessary churn in the marketplace that doesn’t benefit any of the providers in the marketplace. So I think there’s some rationality coming in across the board, including with us in regards to that kind of pricing.

Craig Moffett – Bernstein

Are you still seeing – they have some commitments to finish out the New York City market. Are you still seeing a lot of new construction in BQB and new passings in BQB and New York City, more broadly?

Jim Dolan

No, haven’t. We haven’t seen any spikes or anything like that, and it’s been pretty quiet. So – but they know better than we do. So you should ask them.

Craig Moffett – Bernstein

Okay. Thanks, Jimmy.

Operator

Your next question comes from Philip Cusick of JPMorgan.

Philip Cusick – JP Morgan

Hi, guys. Thanks. Can you hear me?

Gregg Seibert

Yes.

Jim Dolan

Yeah.

Philip Cusick – JP Morgan

Okay. Thanks. I wonder if you could expand a little bit – I think you mentioned a little more investment not just in CapEx but in the OpEx in the second half. It sounds like you’re going to spend a little more money in marketing to rebrand the Optimum product. Can you talk a little bit more about that and should we look for margins to be a little more pressured going forward, given that spend? Thank you.

Jim Dolan

Well, yes, we did. We started off with approximately, I think, about 18 initiatives at the beginning of the year, and we’re working our way through them. And it was my – it’s my hope that we’ll get through most of them this year. Now, that will have some impact, obviously, on the second half. And this could drift into the next half of next year, but how significantly, I don’t know.

We’re committed to finishing the initiatives, because we think that overall they’re very good for the health of the company and for customer satisfaction. The timing on them – I still can’t give you a great determinant or be very specific about how they will impact one quarter versus another.

Gregg Seibert

I can add to that, that a number of the initiatives that are having a financial impact on us are underway. And what we’re seeing is we’re seeing them flow through quarter by quarter. As we looked at the business, one of the outward manifestations of what needed to be done was in the SamKnows report from last year and the difference to this year. That was our augmentation project, which was completed and has had great results.

But it wasn’t only the network. There were other issues such as how were we compensating non-executive employees in the field, etcetera, that have had to be addressed over that period of time. And as Jim’s pointed out, it’s been a really top to bottom review of the business. We are incurring additional expenses, but we’re incurring them to benefit the business on a long-term basis.

Jim Dolan

And I do believe that many of these over the long term will provide efficiency in terms of the operating of the cable system.

Philip Cusick – JP Morgan

Okay. Thanks, guys.

Operator

Your next question comes from Jason Bazinet of Citi.

Jason Bazinet – Citi

I want to respect your decision not to talk about CapEx for 2012 or 2013. So, maybe I can broaden it and just talk about CapEx in general. It still seems to me when I look at the numbers that one of the defining characteristics of your firm relative to peers is you generate about 60% more revenue per home passed. Do you believe in the long run that that will give you structurally lower CapEx to revenue ratios than many of your peers? Thank you.

Jim Dolan

I think that that has more to do with our technology strategies than anything else. And so, I don’t know that I could make that statement that you did.

Gregg Seibert

Yeah, it’s hard to relate us directly to the peers. One of the things that’s defining about Cablevision is the regional footprint in which we operate. We’re committed to putting the capital in the plant that’s necessary to serve our customers the way that they need to be served. And I think WiFi is an excellent example of that.

Jim Dolan

And the RS-DVR is another example. That’s – our comrades in the industry are primarily going with home-based devices which are clearly moving towards more and more storage capacity, etcetera, while meanwhile we’re moving towards a cloud-based architecture there. And so, that will offer more distinction between us and them than anything else probably.

Jason Bazinet – Citi

Do you think when the dust ultimately settles, you will have a lower CapEx to revenue ratio than peers?

Jim Dolan

Now you’re asking me to prognosticate and I’m not going to do it. So thanks, nice try.

Jason Bazinet – Citi

Very good, thank you.

Operator

Your next question comes from Mike McCormack of Nomura Securities.

Mike McCormack – Nomura Securities

Hey, guys, thanks. Maybe you could just make a quick comment on – you talked about the WiFi initiative, but also thinking about utilization of tablets and other IP devices in the home. And maybe just discuss the impact on your local access network. Obviously, you’ve done a lot to fix the advertised speeds but just thinking about as those proliferate, is there another CapEx cycle coming? And then on the flip side of that, do you have an ARPU opportunity here and as people continue to adopt these products and are you seeing utilization on a per home basis increasing?

Jim Dolan

Hi, Mike. You know, look, overall data usage continues to increase at a pretty good pace. And yes, we’re seeing the proliferation of the tablets in the home and that, of course, is stimulating even more data usage. And then you take a look at just things like – I will give you, like Yahoo!, for instance, where if you look at them two years ago, a good portion of their content was written stories, etcetera. They’ve moved strongly towards taking that content to video.

So you have usage up, you have that kind of usage which is more data consuming, and so all of that is, we think, pushing the envelope. And these are things that the consumer wants and, I think, loves to have. And we have been busy working over this last year to make sure our network can handle it. I do not anticipate a – I think what you’re talking about which would be like a rebuild. I don’t see that. I think our network has plenty of capacity and flexibility to handle this increase and, I think, to distinguish Cablevision amongst the other providers. And if you have any more technical questions than that, you are going to have to ask Wilt.

Mike McCormack – Nomura Securities

Jim, if you would, just a quick comment on the business environment out there. I’ve heard some various data points about decision-making slowing down. What are you guys seeing on the Lightpath side with respect to that?

Jim Dolan

That one I’ll give to Gregg.

Gregg Seibert

We’re seeing the impact of the economy. We’re seeing people trim lines. Sales activity is not exactly where we would like it to be. The Ethernet side of the business is expanding nicely but we are seeing the effects of the economy at Lightpath.

Mike McCormack – Nomura Securities

Great, thanks, guys.

Operator

Your next question comes from James Ratcliffe of Barclays.

James Ratcliffe – Barclays

Good morning. Thanks for taking the question. Regarding the brand relaunch that you mentioned, can you clarify what the goals for that are, what you’re trying to change in terms of the customer perception and how you’re going to measure whether it’s been successful or not? Thanks.

Jim Dolan

Sure. We started off, as I said before, with 18 initiatives at the beginning of this year. All of them are customer-centric. All of them are designed to improve the customer experience from the product to the service to the delivery to sales, etcetera. And the re-branding is going to be the signal to the customer base about that change in Cablevision.

We certainly didn’t want to put it out before we got much of this work done, but we are pretty confident about, particularly, the changes that we made on the service side and on the network side and the changes that are coming on the product side with things like Onyx, etcetera, that it’s a valid signal to our customers that Cablevision has changed and become even more customer-focused. And that’s what the branding will hopefully do, along with all those changes.

James Ratcliffe – Barclays

Great, thanks.

Operator

Your next question comes from Marci Ryvicker of Wells Fargo.

Marci Ryvicker – Wells Fargo

Thanks. I have two questions. The first, what percent of your Optimum East customers are analog today and can you talk about maybe how much of the CapEx increase is coming from the move to digital? And then the second question is not that it has significant impact on Cablevision directly, but just curious as to your thoughts on Google Fiber?

Jim Dolan

The second one is interesting. The first one, it’s miniscule, right. I mean we’re basically finishing up, I think, in Westchester and Jersey, right, the Suffolk is done. And we’re pretty much through it. I think we took a short break for the Olympics so that we wouldn’t have any interruptions of service or programming then, and we’re restarting now. But we’re slated to be done this year. And percentage-wise what?

Gregg Seibert

We are 98.5% digital at this point.

Jim Dolan

Right, there you go. Okay.

Gregg Seibert

And, Marci, on the scalable infrastructure side in addition to the digitization process, you’ve heard a lot about RS-DVR today, and that’s another area where the capital expenditures have been going up. And once we’re 100% digital, we’ll be able to offer the RS-DVR throughout the East footprint, which is something that we feel strategically has great value to us.

Jim Dolan

As far as Google goes, I’m going to wait to see what all the analysts have to say about it and then I’m going to form an opinion.

Marci Ryvicker – Wells Fargo

Is it going to be the same or different?

Jim Dolan

How do I know? What’s your opinion? Next question.

Operator

Your next question comes from John Hodulik of UBS.

John Hodulik – UBS

Okay, thanks. Just a quick clarification. First, Jim, the Onyx guide, is that compatible with all the existing boxes in the Cablevision East territory? And then if you just talk about the deployment in the fourth quarter, is this just going to be simply pushed to all your customers in the fourth quarter so that they’ll have -- be working on the new guide by the end of the year?

Jim Dolan

Wilt, can you give the definitive answer?

Wilt Hildenbrand

Sure. Yes, it’s designed to work on every single digital box we have. And like all rollouts of this nature, we won’t just throw it in front of all three million customers at the same time. It will get rolled out in phases, but it should be done pretty much by the end of the year.

John Hodulik – UBS

Starting in the fourth quarter and probably corresponding with the re-branding?

Wilt Hildenbrand

Probably at the beginning of the fourth quarter, but yes.

Jim Dolan

Like I said, if you want to have a look at it, right, if you’re one of our customers or you know one of our customers who has a tablet...

Wilt Hildenbrand

Or a laptop.

Jim Dolan

Or a laptop, you can see it there using the Optimum app.

John Hodulik – UBS

Okay, great, thanks.

Bret Richter

I think we are going to take one more question, operator.

Operator

Thank you. Your final question will come from Bryan Kraft of Evercore Partners.

Bryan Kraft – Evercore Partners

Hi. Thanks. I just want to ask you a follow-up on video ARPU. Can you elaborate on the changes you talked about in promotion and packaging that impacted ARPU? And also, just can you provide an update on what the latest status is on the WiFi on the trains effort that has been, I guess, an ongoing question for a while? Thanks.

Gregg Seibert

Do you want to do trains? And I’ll...

Jim Dolan

Yes, I want you guys doing that. So trains are moving forward. We are working with.

Wilt Hildenbrand

We are working with the NPA.

Jim Dolan

The NPA, excuse me. And New Jersey Transit. Do you want to give an update on where we are with...

Wilt Hildenbrand

Yes, we’re still – we’re actually in pretty good shape. We’re working our way through all the little technical aspects of how you would do it, how you would build it and perform it. There’s some work that needs to be done in New Jersey in terms of how they want us to lay the fiber. The same thing on Metro-North. The MTA is in pretty good shape. It is all just getting the t’s crossed and the i’s dotted and starting construction on it, pretty much.

Jim Dolan

I mean, obviously and this...

Gregg Seibert

We don’t have an agreement.

Wilt Hildenbrand

We don’t have an agreement. That’s what I mean by t’s getting crossed and i’s getting dotted.

Jim Dolan

In this marketplace, commuting via the rail is a significant portion of what our customer base is doing. So, we want to be able to service them there. And so it’s an important effort on our...

Bryan Kraft – Evercore Partners

Do you know if that’s something that you’ll be able to keep exclusive to your customers or are the rail authorities going to require you to open it up to customers of other companies as well?

Jim Dolan

As Wilt said, we’re dotting the i’s and crossing the t’s until they’re all dotted and crossed. I would prefer not to comment on that – on aspects like that of it.

Bryan Kraft – Evercore Partners

Would you speculate on timing as to when you might actually start – have an agreement and start to build out?

Jim Dolan

I would hope it would be this year.

Wilt Hildenbrand

It could well be this year, at least with one of them if not all of them.

Bryan Kraft – Evercore Partners

Okay.

Gregg Seibert

In terms of the question on ARPU, again, we don’t break ARPU out in the individual components. But I will tell you again, it’s increased product penetration. Advertising revenues were obviously a big move for last quarter and we had two pretty successful boxing events on pay-per-view. So those were the primary drivers of the increase in RPS..

Bryan Kraft – Evercore Partners

Okay. Thanks for clarifying that.

Jim Dolan

Thank you, everyone.

Bret Richter

Thank you, operator.

Operator

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

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