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Charter Communications (NASDAQ:CHTR)

Q2 2012 Earnings Call

August 07, 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

Analysts

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Jeffrey Duncan Wlodarczak - Pivotal Research Group LLC

Stefan Anninger - Crédit Suisse AG, Research Division

Jason B. Bazinet - Citigroup Inc, Research Division

David Carl Joyce - ISI Group Inc., Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division

Amy Yong - Macquarie Research

Benjamin Swinburne - Morgan Stanley, Research Division

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

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

Tuna N. Amobi - S&P Equity Research

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

Brian Russo - Deutsche Bank AG, Research Division

Operator

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2012 Charter Earnings Call. [Operator Instructions] Thank you. Ms. Gutzler, you may begin your conference.

Robin Gutzler

Thank you, Lisa. Good morning, everyone, and welcome to Charter's 2012 Second 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 Forms 10-K and 10-Q. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully.

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

During the course of today's call, we'll be referring to non-GAAP measures as defined and reconciled in this morning's earnings release. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies.

In today's earnings release, we reported results in accordance with GAAP, as well as pro forma results for 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. Good morning, and thank you for joining us. The second quarter of 2012, we delivered revenue growth of nearly 5% year-over-year, increased adjusted EBITDA 2.7% and generated free cash flow of $26 million. Video relationships declined reflecting typical seasonal second quarter seasonality, but the trend for all products improved compared to the prior year. Our fundamental objectives haven't changed since we last reported, we're enhancing our video product and overall customer experience using our superior Internet product, coupled with video and voice to drive relationships and growing our commercial business.

As we entered the second half of 2012, we improved our product set, particularly video. We accelerated the expansion of our HD offering with over 100 channels now available in substantially all of our footprint. We will progressively go all-digital in the next 2 years, and since April, we're actively selling digital only. And we want that digital experience on each TV set and an HD on every HD set. With the changes we've made, Charter now has a strong video product relative to any other video provider.

In addition, our Internet offer now starts at 30 meg, a speed that is 10x faster than DSL and faster than U-verse can go as currently constructed. And we packaged it in a high-value offering that ensures that rich experience on each TV and drives uptake of all 3 products, including our fully featured voice products, all at an attractive price.

The goals of our new pricing and packaging strategy are: To drive deeper penetration of our services into the home with a simple compelling offer structure; drive higher ARPU per connect, which will increase over time; lower our transaction cost per customer by reducing customer touch points and number of follow-on transactions; extend customer lifetime through lower churn; and ultimately, increase operating cash flow and drive return on investment.

In the short term, customer connects, revenue and operating expenses will be impacted by the transition to new selling methods and operating practices, and we expect to see some pressure in the second half of this year. In addition, our capital spend will reflect that higher growth and deeper product penetration in the home, but the increase will be entirely success-based.

In the last quarter, we increased our CPE spend to ensure that we were ready to accommodate higher anticipated set-top box placements in third and fourth quarters. I'm pleased to say that we're seeing success with our new strategy. It's still very early, but thus far, we've seen a much higher uptake on Triple Play, with the sell-in rate on video connects more than doubling. At the beginning of the third quarter, we also implemented a number of changes designed to enable us to operate more effectively, to provide our customers with better service and to improve our ability to roll out new products over time. We reorganized field operations into 4 regions, with a shift in responsibilities and accountability to better service our customer's needs. We're centralizing our network management structure to ensure consistent service levels and change management throughout our operations. We've revamped our go-to market strategy from targeting to selling methods, and we're continuing to focus on improving the service we provide our customers in all aspects of the business which is critical. Whether it's sales, marketing or field operations, we're making a series of structural and tactical changes which I expect will have a cumulative effect on better service, lower churn and higher sales. And of course, we continue to focus on product development, but near term, our main objectives are to run a top-notch operation, deliver high-value competitive packages and provide high quality customer service. This will take time, but it is designed to drive sustainable, long-term growth and has a clear, demonstrated return on investment.

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

Christopher L. Winfrey

Thanks, Tom, and good morning, everyone. Turning to Slide 4, looking at Q2 customer and ARPU trends on the residential slide. Video customers decreased 66,000 in the second quarter, an improvement over last year's Q2 decline of 79,000. In addition to seasonality, as Tom mentioned, we ceased active marketing of analog service during the quarter. This had some short-term impact on video customer acquisition, but offering a fully featured video service will benefit us long term.

We grew Internet customers by 29,000, some 60% higher than the gain in the prior year's second quarter as we continue to see success with our superior data product, and we're making it even more competitive.

For phone, we added 6,000 customers during the quarter. It's early on, but we're seeing very positive phone results in Q3 from the new pricing and packaging.

In the second quarter, Charter generated top line growth of $85 million or 4.7% year-on-year shown on Slide 5. In the residential business, year-over-year grew Internet revenue 10.2% driven by a 291,000 increase in customers and modest ARPU uplift.

We increased phone revenue 1.9% driven by 75,000 customer additions, offset by slightly lower ARPU year-over-year. I expect this rate volume trend to deepen under our new offer structure. The focus is on ARPU per customer relationship and single product ARPU become increasingly relevant to evaluating performance.

For video, revenue is down 0.7% in the quarter due to customer losses over the past 12 months, which has improved. From a revenue standpoint, we expect video to be the largest beneficiary of the product improvements, new offers and operating strategies over time, both from a penetration and ARPU perspective.

On the commercial side, we drove 21% growth in revenue reflecting strength in our small and medium business service offerings and also in the carrier space. Excluding video, commercial revenue increased nearly 26%. We continue to see significant opportunity in the commercial space with a long runway for growth, and we're making investments to capitalize on the opportunity in our footprint. In the second quarter, for ad sales rose nearly 15%, predominantly reflecting increased political spend.

So looking at Slide 7, we grew adjusted EBITDA 2.7% year-on-year. As a reminder, we had some net positive onetime adjustments in the second quarter of last year which put approximately $4 million of pressure on the year-over-year comparison this quarter.

The key expense drivers within the quarter were programming expenses which rose $25 million or 5.3% year-over-year, higher marketing expenses driven by increased media investment and commercial marketing, which ties into the higher residential and commercial customer growth.

Marketing costs were up $20 million in the quarter year-on-year, but excluding the onetime benefit recognized in the prior year quarter, increased by $13 million. And finally, a $22 million increase in other expenses. When you sort through the puts and takes, the key drivers for those expenses were labor, including sales force and benefits, increased preventive maintenance levels on the network, and reconnect expenses for higher reconnects mix percentages and volume.

Moving to CapEx on Slide 8. Q2 capital has totaled $468 million, $144 million higher than last year. The increase was driven by 3 key areas: $63 million higher spend on CPE to support increased installation, and as Tom mentioned, appropriate inventory levels to accommodate higher CPE placement expected in the second half of the year. Approximately 60% of the $63 million year-over-year increase related to inventory pull forward; second, increased scalable infrastructure spending. We saw some timing between the first 2 quarters and the year-to-date increase of some $40 million in this category was largely driven by higher capital investment for Internet penetration and throughput; and finally, higher commercial CapEx, which increased $16 million to $61 million in the second quarter to support growth in that business particularly cell backhaul construction.

At this time, we estimate our 2012 CapEx spend to be at least $1.5 billion, and we could exceed that by as much as $200 million depending on the level of success of our new operating strategy, which would reflect higher RGU growth and increased video CPE placement for new and existing customers as a result of increased digitization and DVR penetration. This type of spend has a clear ROI positive outcome driven by the objectives Tom outlined. And if we're successful, we would expect to see elevated CPE spend continue as we go all-digital and put the full set of Charter products in existing and new customer's homes. The clear expectation is that this investment strategy will put us on a very different growth path.

Turning to cash flow on Slide 9, we generated free cash flow of $26 million, down from last year's second quarter, mostly due to the higher capital investment. We ended June with a weighted average interest cost of 6.6%, and our run rate interest expense is roughly $850 million, including the 13.5% notes which are callable November 30. Our leverage was 4.8x adjusted EBITDA at June 30, and our target leverage range is 4 to 4.5x, plus or minus a half turn either way to enable strategic activity. And while we're investing for growth, we remain focused on getting into that target leverage range.

And now back to Tom.

Thomas M. Rutledge

Thanks, Chris. In closing, I'd just like to say that we're excited about implementing the new operating strategies and are pleased with the early successes we've seen. The goal is to be well-positioned and grow not only in the Internet and commercial, but to win back video customers over time and grow our phone service. And we'll keep those relationships with product packaging, service and price value which nobody can match. Our strategy will have short-term implications for our run rate, for adjusted EBITDA and capital, but I believe our actions will make us more competitive , improve our service, put more value in the home, create higher incremental value per transaction and increase our long term growth potential in a positive way.

Operator, let's open the call for questions now, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Moffett with Bernstein.

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

Two questions, if I could. First, Tom, for you, you talked about winning back video subscribers, you look like you've added an awful lot of non-video subscribers in the last quarter end, and over the last year. Can you talk about what the strategies are to win back those video subscribers? I would presume that pool of people that take your broadband product but not your video would be your first target audience. And then, Chris, just on the higher inventories that you talked about in CapEx, is it fair to say that given that you've already preset some of the inventories you would need, that the higher CapEx for the rest of the year to get to the year guidance would largely be capitalized labor? Or at least the increment would be capitalized labor? And if so, does that have an impact on your expected labor expense that would hit EBITDA margins?

Thomas M. Rutledge

Well, Craig, with regard to win back, you're right. Our previous strategy and our results have created a lot of data-only relationships in Charter. We have almost 1 million of those relationships, and so the opportunity to sell them other products has always been a part of our strategy. And so that is a big opportunity. But even larger than that is the unsold passings universe and the satellite subscriber base that exist inside that universe. And what we've been doing to get ready to market to that universe is to make our product set superior to satellite. So we've gone away from the historic analog distribution that we've had, and gone to an all-digital product, the 2-way interactive video product with state-of-the-art HD quality on the bulk of the service, and we're moving toward getting a fully deployed HD product across our entire footprint on every channel we carry. And as you know, there's a lot of inertia in the video business, but we have an inherently superior video product than our competitors in most places, the bulk of our competitors. And we have a superior data product and a superior voice product, and put those all together in a package that's compelling, it actually creates a value proposition for the consumer based on what they're currently paying. And we think we have an opportunity to grow our business for years to come.

Christopher L. Winfrey

Craig, on the second question related to capital in general and labor, so we took during the second quarter, reflecting a higher percentage of our customers that were being sold into digital, reflecting a higher number of boxes that were being placed into those homes already starting in Q2, but gearing up for Q3 in particular. And the higher number of DVR sell-in and a higher placement of DVRs inside the home, that type of inventory increase will continue. And as the model plays out, we'll accelerate. And so I think you'll see some of those trends continue. On that basis, when we increase the estimate for CapEx for this year, over 90% of that increase really comes from CPE. And so that should give you some indication, it's also the reason that the range is somewhat wide depending on the level of success and how quickly that grabs hold as planned. Your second question was on labor. And so, yes, to the extent you're doing more installs, and to the extent you're spending more time in the home placing more CPE, all of which is accretive, you'll be spending more on labor. Some of that will be OpEx to the extent it's a reconnected home, and some of that will be capital to the extent, let's say, new home or with a new service. So all of that will be flowing through in the coming quarters.

Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division

But would you expect this capitalized labor to be a net benefit to expense in that less of it hits the income statement because more of it hits the balance sheet? Or would you expect it to be an addition to both pools because of the increased volumes?

Christopher L. Winfrey

I'd expect it to be an addition to both pools because of increased volumes.

Operator

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

Jeffrey Duncan Wlodarczak - Pivotal Research Group LLC

This is Jeff Wlodarczak. One for Tom and 2 quick ones for Chris. Tom, is part of your ultimate strategy here over time to re-brand the Charter offering or are you satisfied with the Charter brand in the market? And then for Chris, is the temporary effects of the customers connects in revenue for new initiatives, is that mostly related to the fact that you're no longer marketing analog or is there something else? And then Chris, for the last couple of quarters, you had been running about a $9 million hit related to investments in your customer experience. Did you still have that hit that quarter -- excuse me, this quarter and what's the outlook going forward?

Thomas M. Rutledge

Well, Jeff, on the re-branding strategy, we don't have a re-branding strategy at the moment. And there are parts -- there are aspects of the way Charter's footprint is distributed that makes re-branding more difficult for us than some companies. So I'm not sure it's a good idea. We think that we can be successful with our current brand, and it doesn't mean that we won't consider it, but we don't have a current plan to change our brand name.

Christopher L. Winfrey

And, Jeff, on the temporary effects of connects to the revenue, it's a combination of what you were describing, which is actively only marketing our digital product, as well as transitioning different sales channels to different selling methods and the process that is going on there, as well as when you're bringing on these customers maybe having a little bit less onetime revenue in the short term, which generates a higher recurring revenue stream over the long term. As to the customer experience investments, it does continue. And I would say, over $5 million was what we saw inside the quarter. It's becoming less of a onetime item as we spend more time in the home to make sure that the customer's issues are fully resolved before we'd leave a trouble call and preventative maintenance, which we've talked about for a couple quarters now as we accelerate that, will become a recurring practice over time. And so that's probably why you've heard us move less to speaking about that as we expect to be doing those activities going forward.

Operator

Your next question comes from Stefan Anninger with Crédit Suisse.

Stefan Anninger - Crédit Suisse AG, Research Division

Just 2, if I could. I was hoping you could expand a bit more on the product set that you're hoping to launch on the video side, so more HD is clearly part of the roadmap. But I was hoping you could expand on the other parts of the feature set that you hope to offer like gateway boxes, live video feeds in the home on devices beyond the TV set, et cetera. And then my second question is about your new pricing and package initiatives that you started earlier in the summer. Perhaps you could big give us a bit of color on the customer response to that, I think it featured more focus on obviously Doubles and Triple Plays, but also premium services, et cetera.

Thomas M. Rutledge

All right, well, with regard to our video product, we've gone from a business where we were selling analog television up against an all-digital satellite broadcast service. And we've morphed that into a product set that now is all-digital and 2-way interactive and has at least 100 channels of HD and will ultimately have, in a relatively short period of time, every channel that we carry that's capable of being carried in HD, in HD. And that product is -- unlike satellite is a 2-way interactive product that has the capability of VOD transactions, both transactional VOD and free VOD. So it's inherently a better product as currently configured than our satellite competitors. But we had to put the plant and put the operation in place to make that capable. With regard to the long run and CPE, we do have an evolving CPE strategy. We have not committed to a gateway, I think that intelligence in the network, meaning capabilities in the network make a gateway not necessarily an efficient way of going forward for us. We would like to end up with the lowest CPE possible, and we think that we can get on a curve where we have declining CPE per unit cost for years to come. And we're actively trying to pursue that. At the same time, we think that there are opportunities to use cloud-based services, including streaming video and streaming guide applications, that allow our customers to interact with existing CPE and to use new features or new equipment like iPads and Android devices to watch TV, and we will be rolling those out toward the end of this year, the beginning of next year, and have an integrated network-based video, CPE strategy going forward. With regard to packaging and Triple Play, as I said in my comments, now since we've done the packaging, our Triple Play sell-in has more than doubled, and it's only been in the market for a month, and we expect to continue growth in that area.

Operator

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

Jason B. Bazinet - Citigroup Inc, Research Division

A question for Mr. Rutledge. You've had the benefit of working at a number of cable firms in the industry. As you implement these structural changes and this new strategy to go all-digital and sell the Triple Play more aggressively, are there 1 or 2 metrics that you think are most important that you would suggest we use to sort of benchmark your progress versus peers? Is it something like EBITDA per home passed, is that the right way or EBITDA less CapEx per home pass? What would you think is the most salient metric for us to follow?

Thomas M. Rutledge

Well, I do think EBITDA per home passed is the ultimate metric. And if you look at Charter, we have the lowest EBITDA per home passed, and which to me is why Charter is so valuable. It's got all of that upside opportunity and what we call runway. So as we go forward, I think you'll want to see us growing our revenue line. And growing that revenue line in a good way, meaning creating customer relationships that are higher revenue per month customer relationships.

Operator

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

David Carl Joyce - ISI Group Inc., Research Division

This is David Joyce for Vijay. I was wondering how the TiVo box fits into your CapEx plan? Are you still committed to TiVo there? And given the product strategy, what's the prospect of the EBITDA growth in the second half?

Thomas M. Rutledge

Well, our commitment to TiVo is a commitment to their software actually. And we have a license agreement with TiVo to use their user interface, and we are using their user interface currently on boxes they provide. But as we go forward, our strategy is to use the user interface, both in the cloud and on existing CPE and on a new CPE.

David Carl Joyce - ISI Group Inc., Research Division

And on the EBITDA growth potential, given your product strategy for the second half?

Thomas M. Rutledge

Chris, why don't you...

Christopher L. Winfrey

So we don’t provide EBITDA guidance. So I won't do that here. But I think what I would express is that the past few quarters have demonstrated, when we've accelerated growth what are the impacts of that both in terms of increasing OpEx from a onetime or an accelerated growth rate level of OpEx, as well as for CapEx, and everything that we're talking about here is certainly about accelerating the growth, not only in terms of the amount of relationships that we have, but the depth of our product and services that we're providing into the home for new and existing customers. And so you'll see pressure, both from a CapEx as well as from an OpEx perspective to drive that growth. Ultimately, all of which is going to drive a higher customer relationship ARPU, as well as intended to drive a higher long term run rate EBITDA and the EBITDA per home passed that Tom was referencing.

Operator

Your next question comes from the line of Phil Cusick with JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

Can I just ask for some clarification? There was one sentence in your release that said you expected customer connects revenue and OpEx may be adversely affected during the transition. The revenue and OpEx seems pretty clear, but the customer connects I was a little confused about.

Thomas M. Rutledge

I'm not sure I understand the question.

Christopher L. Winfrey

Yes, I think I did. This is what I referenced before. We're -- as we transition to new selling methods and the way we go to market, everything from the marketing strategy, targeting strategy, selling strategy, the organizational structure that Tom was referencing is just turning a lot of knobs all at the same time. And so while we have a very compelling pricing and packaging structure that's going in place, and it's seen very early success, you're changing a lot -- you're turning a lot of knobs at the same time and so you could expect to see, you might see some short-term impacts from doing that.

Philip Cusick - JP Morgan Chase & Co, Research Division

So we should look for the business turning up more in the fourth quarter than the third, does that make sense?

Christopher L. Winfrey

I don't think we're at a stage where we're providing monthly or quarterly guidance, but it's a natural impact of that, of what I was describing, and that'll take some time to work out, and as well as moving away from selling -- proactively selling analog and focusing more on selling digital which, at the end of the day, is a much higher-quality customer base.

Operator

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

Amy Yong - Macquarie Research

Can you talk about -- on 2013 CapEx. I know it's still a little early, but how much I guess is onetime in nature and since most of your CapEx is success-based, can you just help us think through the moving pieces for 2013? And also, can you comment on any churn benefits from DTV not carrying Viacom or DISH and AMC in your footprint?

Thomas M. Rutledge

Well, we -- the second part of your question, I'll answer first. It's hard for us to see that because the same time those events were going on, we changed basically everything we do in terms of how we go to market. And that we did say that we've been successful so far with our new selling techniques. I can't attribute those to any other external factors and what proportion they might play. With regard to -- we're not giving guidance for future periods for CapEx, but the biggest issue that we will have from a CapEx perspective going forward is how fast we grow. And the faster you grow, the higher the CPE would be in the periods when you're growing rapidly.

Amy Yong - Macquarie Research

Okay. I guess, is there any way to parse out how much CapEx would -- is onetime in nature for this year?

Christopher L. Winfrey

Well, Amy, if you take a look inside the slides that we've prepared, you can see a split out, there's also in the trending schedule. So you see a pretty clear split out of the CPE component of that inside of each quarter. So you can pretty clearly take a look at when we've grown faster, where that has driven CPE. We've also mentioned that to the extent we're having success at these kind of levels, as well as increasingly going all-digital over the course of the next 2 years. You'll expect to see that column inside of the bar chart continue to be at elevated levels, and I don't think if we're successful in 2013, I wouldn't expect that portion to be going down.

Operator

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

Benjamin Swinburne - Morgan Stanley, Research Division

Just wanted to follow up to an earlier question, Chris, on the pricing and packaging changes. Is there any impact on the install base on the changes that you're having that are factoring into your forward comments?

Christopher L. Winfrey

Well, I think, at this stage, we're focused on getting new customers to connect. But obviously, your existing base of customers are getting excited about the offers that are in market, the opportunity to have up to 4 DVRs for $20, and they're calling in. We're moving them into higher priced and higher -- more importantly, higher valued packages. And over time, they'll be targeted. So you may have customers who are calling in and sitting at ARPU of x and call in for an upgrade and get moved to an ARPU of y for which you have some upfront capital and expense to go upgrade that customer and put CPE deeper into the home. At this stage, the larger focus is on new relationships, but some of that certainly for sure will exist for existing relationships as they move into the higher value packages.

Benjamin Swinburne - Morgan Stanley, Research Division

And then just, Tom, on the capital network outlook or strategy, what does all-digital mean in this context? And Charter has used, utilized switch digital in the past to add capacity? And then we've seen sort of various versions of all-digital from some of the other operators you've had the -- is it the sort of DTA approach? At Comcast, I think, there's been some reclaims down to the B1 or that's sort of Comcast-speak of the lifeline basic or are you talking about a completely digital, eliminating all analog down the road? And if you are, can you just maybe give us a sense for what the boxes per digital sub level looks like, so we can sort of figure out what that might mean in terms of sort of CPE levels.

Thomas M. Rutledge

Yes. What we mean is all and completely turn off all the analog product. With regard to the network, it means that the network itself actually is unburdened by the going through an all-digital platform, and it actually -- one way of thinking about it, it creates additional capacity without any additional capital because you're essentially turning off fat analog spectrum, making that spectrum available for other users, the biggest one among those might be additional data speed capabilities. So going all-digital, while it's a painful process and requires a placement of CPE, it actually frees up the capacity of your network. One way of thinking about it, it gives you -- it extends the life of your network and the capability of your network without any additional network capital having to be spent. With regard to a CPE per household, I think it's around 3 units per house on average, and that varies, but that's a good number. And we think that we can ride a reduced cost curve of CPE. We think there some factors that are working in our favor in terms of the kinds of CPE that are available. And smart televisions and iPads, for instance, are televisions that have a set-top box essentially integrated into them as part of the -- or another way of thinking about an iPad is it's a cable-ready TV in an IP world. And so we think that ultimately, CPE per unit will go down and that the number, the amount of CPE device in the house that's watching cable television will go down. The amount of CPE necessary because some of the devices will actually, essentially be integrated CPE devices.

Benjamin Swinburne - Morgan Stanley, Research Division

And just to be clear, you're saying that the average Charter sub has about 3 TVs per home, is that what the 3 was referring to?

Thomas M. Rutledge

Yes.

Benjamin Swinburne - Morgan Stanley, Research Division

But today, if you think about the current business, how many boxes are in the those digital households today, that you'll have to then increase to get to 3, to make sure that all their TVs work when you move the analog of?

Thomas M. Rutledge

Chris, do you want to answer that?

Christopher L. Winfrey

Yes, I'm not sure that it's any longer on our trending schedule, but a few quarters ago, it was, and it was 1.5 per digital customer.

Operator

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

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

Just had 2 questions. One, wondering why there wasn't more flow-through from the broadband price increases that you implemented in April? I think there were $2 to $3 on most of the tiers, but looks like ARPU increased only about $0.20 sequentially. And then the other question I had is, I understand you went back using fully featured DVRs for your whole home DVR solution, is there a product roadmap to move back towards centralized in-home storage and thinner clients? Or are you going to skip that step and go straight to a network DVR?

Thomas M. Rutledge

I'll answer the last question first. We don't know yet what the right answer to that question is. But we think that the immediate opportunity is to use conventional DVRs and that the long run opportunity is to buy DVRs in more efficient packages, meaning by storage in bulk and whether that's in the home or whether that's in the network, I'm not sure yet what the right answer to that is, it's an evolving question as technology change -- I mean, an evolving answer as technology changes.

Christopher L. Winfrey

And on the Internet ARPU, the increase we saw was exactly what we expected. And I think what we had mentioned is that on average across the customer base, the rate increase was about 1.2% on average across the entire base. There are segments of both Internet and video to which those rate increases were applied that were not eligible for a rate increase because they may have been inside of a price guarantee contract, and so it couldn't be applied to that. But from our perspective, the Internet ARPU uplift was exactly what we expected and as well as the overall rate increase at 1.2% across the base is what we were looking for and what was achieved.

Operator

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

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

I have 2 questions, the first is on the balance sheet. We've recently seen a lot of issuance in the high-yield market. Your benchmark bonds are trading well inside of 5% now and if I'm not mistaken, you still have a big chunk of that 13.5% notes outstanding. Any reason in particular we haven't seen Charter come to market with another refi?

Christopher L. Winfrey

Look, we're always looking at the market and the opportunities that presents itself both in the bank as well as the bond market. And the reality is that we've done 2 tenders on this 13.5% notes, and we're thinking through all of that in an NPV positive way. And we've tendered twice to take out those 13.5% notes, and we didn't get all of them in. They become callable on November 30, so that you can imagine all the different type of analyses we do internally to think that through, and obviously, both bond and bank markets have been somewhat attractive as of late and continue to take a look on it on an NPV basis.

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

Okay. And then all of the commentary surrounding the growth opportunity, you've also mentioned a desire to bring leverage down at least a little bit, I believe, so I suppose I'm seeing the obvious, but should I infer a common stock dividend isn't even in the conversation at this stage?

Christopher L. Winfrey

Well, I think the better way to think about it is that we do have a target leverage of 4 to 4.5x, and we're comfortable plus or minus half turn to enable strategic opportunities. Those opportunities have always included, whether it was stock buybacks, whether it was M&A, whether it was investing deeper inside the business, as well as if you didn't have a better use for it, and you were kind of inside your target leverage range potentially on a dividend. I think what we're expressing today as we see the biggest opportunity for an ROI and payback by investing inside the business, and that's why we've accelerated the CapEx to implement the plan that Tom was outlining. So we see that as the best use of cash flow today. That could change over time as opportunities present themselves. But we're at 4.8x today, so we're not sitting on excess cash or below our target leverage range, and we'll be focused on getting into that target leverage range and evaluating uses of free cash flow once we're there.

Operator

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

Tuna N. Amobi - S&P Equity Research

I have a few questions as well. So I guess the first one for Tom, on the win back of the penetration of non-video subs with a data product. I know the DISH partnership you had eluded to last call that you were going to follow up on that, and I was wondering if you still see that as a potentially important channel that you could be aggressively pursuing, and how much of that was a factor in Q2. And separately, I wanted to see when we can begin to hear about your wireless roadmap, especially now that you're very close to your all-digital completion? Is that a 2013 event? I know Tom you'd recently suggested that Wi-Fi could be a superior solution for cable compared to cellular or even 4G. So if you can maybe help us to articulate your plans on that and how that could factor into your CapEx plans? And lastly, for either Tom or Chris, I guess on the CapEx, when I think about your system right, so correct me if I'm wrong, but it seems like close to 10% of your footprint now is kind of either not -- less than 550 or even not 2-way activated. So while that's a relatively small percentage, it's certainly not insignificant compared to your peers and certainly so for Cablevision if you think about the competitive situation out there. So again, the question is can you maybe provide some color on what you're seeing in those particular markets and if you might see an urgency to address this in the future CapEx plans. I know now you've articulated CPE success-based for those systems, I'm wondering if you see some vulnerability that might lend some urgency to upgrade those systems.

Thomas M. Rutledge

All right, well, with regard to the DISH relationship, it hasn't had any impact of any material impact in our strategy in the second quarter. And I haven't addressed it, but it's a very small channel and not significant, I guess, is the best way to describe it. With regard to wireless, we don't have a plan currently to deploy wireless hotspots on our plant, but it is an opportunity for the business, and we do have an opportunity immediately to start deploying Wi-Fi in commercial circumstances where the commercial customer also has Wi-Fi available to our customers as a result of their relationship with us. And it's a hotspot strategy that's based on physical location as opposed to -- and the customer relationship as opposed to the plant itself. That said, in the long run, the cable architecture is a very robust architecture and the data network that we have is very robust and can carry -- as I said before, when we take off analog signals and unburden our cable plant, the amount of capacity that we have available to add to our data product is huge, particularly huge relative to what we've already deployed against the data product, and it's already a better data product than our competitors. You can leverage that data product by attaching radios to it and have very small cells with very high capacity, and they can be Wi-Fi, they can be cellular or some combination of both. And so I think in the long run, our architecture lends itself to either an adjunct service to the 4G products that are currently being deployed by the cellular companies or a direct competitor.

Christopher L. Winfrey

The final question you had there was just related to the bi-directionality and the over 550 megahertz of the network. And if you take a look on the trending schedule, you'll see that the homes passed per Internet is about 97% of our total homes passed, which means that at a minimum 97% is 2-way or about 98% that's above 550 megahertz. So you're really talking about at the edge case studies and that has not been the focus as of today.

Tuna N. Amobi - S&P Equity Research

Okay. So you don't see a need to get substantially closer to 750, that's not an issue right now?

Christopher L. Winfrey

No. We're now saying 98% is greater than 550 megahertz, predominantly that is at 750.

Thomas M. Rutledge

Yes, we have no plans today to upgrade any networks beyond what their current capacity is. And we think that even the 550, the small number of 550 plants we have in an all digital world are sufficient.

Operator

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

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

A question in regards to set-top boxes, is the increase in CapEx in the back half of the year related to the TiVo implementation? Or are there other implementations outside of that?

Thomas M. Rutledge

It's the -- it's the increase in regular set-top boxes that we're deploying across our footprint and it has nothing to do with TiVo directly.

Operator

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

Brian Russo - Deutsche Bank AG, Research Division

This is Brian Russo for Doug. Is marketing easier or more challenging now that you have 1/3 of the video subs in the market versus the 2/3 at Cablevision? And what are you doing differently at the Charter versus Cablevision in terms of marketing?

Thomas M. Rutledge

Well, it is a different marketing situation and our concentration in DMAs is different than other companies that I've been associated with in the past. And our penetration is lower, so there are challenges to that and opportunities. The opportunity is we have more to sell, and we have a lot of diverse marketplaces with a competitive footprint that I think gives us an opportunity to have a superior product to our competitors. So there's a whole series of puts and takes, but it is a different marketing environment, and in some ways, the good side of it is that that we have a superior product to our competitors in a lot of places. The difficulty of it is that using mass media is harder to do than other situations, but the growth of the Internet interestingly creates a new medium to target customers that hasn't existed, so that the cluster strategy of the '80s and '90s of putting your cable systems together in TV markets, may not necessarily be as effective today with the opportunity to sell your product through a data service. So we're learning what the best and most effective marketing techniques are, and we're encouraged by the results that we're getting.

Robin Gutzler

Great, thank you. Operator, I think that's all we have.

Thomas M. Rutledge

Thanks, everyone.

Operator

And thank you for participating in today's conference. You may now disconnect.

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