Time Warner Cable Inc. (TWC) Q4 2007 Earnings Call February 6, 2008 8:30 AM ET
Tom Robey - IR
Glenn Britt – President & CEO
Robert Marcus – Sr. Exec. V.P. & CFO
Landel Hobbs - COO
Jessica Reif-Cohen - Merrill Lynch
Greg Moffitt – Sanford Bernstein & Co.
Spencer Wang - Bear Stearns
Ben Swinburne – Morgan Stanley
Jason Bazinet – Citigroup
Doug Mitchelson - Deutsche Bank Securities
[Vijay Johns – Lehman Brothers]
Good morning and welcome to the Time Warner Cable fourth quarter 2007 earnings call. (Operator Instructions) Now I will turn the call over to Tom Robey, Investor Relations, Time Warner Cable, sir you may begin.
Thanks and good morning everyone. Welcome to Time Warner Cable’s 2007 full year and fourth quarter earnings conference call. This morning we issued two press releases, one detailing our 2007 full year and fourth quarter results and the other providing our 2008 business outlook. The earnings release defines some of the terms that will be used on this conference call; in particular describe the systems we acquired in 2006 from Adelphia and Comcast. Before we begin there are several items I need to cover.
First we will refer today to certain pro forma financial results. The pro forma financial information for full year 2006 presents Time Warner Cable’s results as if the transactions and the consolidation of the Kansas City Pool had occurred on January 1, 2006 and for the fourth quarter of 2006 as if the Kansas City consolidation had occurred on January 1, 2006. Reconciliations of the pro forma financial information to financial information presented in accordance with GAAP are included in our trending schedules.
Second, in the fourth quarter of 2007 subscriber net additions were declined do not include the impact of the disposition of certain systems in the greater Charlotte area and two smaller acquisitions which closed during the quarter. Schedules setting out the impact on subscriber count are included in our earnings release.
Third we refer to certain non-GAAP measures including operating income before depreciation and amortization or OIBDA, and pre tax flow. We use these methods when we analyze year over year comparisons. Schedules setting our reconciliation of these and other historically non-GAAP financial measures to operating income and cash provided by operating activities, the other most directly comparable financial measure as applicable are including in our earnings release or our trending schedules. All of these reconciliations as well as today’s releases and presentation slides are available on our company’s website at www.timewarnercable.com/investors. A replay will be available beginning approximately two hours after the call has ended and will run through midnight Eastern Time February 8.
Fourth I’d like to remind you that starting with first quarter 2008 earnings we will no longer differentiate our results between the Legacy Systems and the acquired systems. And finally today’s announcement includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, strategic, technological and/or regulatory factors and other factors affecting the results of Time Warner Cable. For detailed information about these factors may be found in Time Warner Cable’s SEC filings including its interim report on Form 10-K and quarterly reports on Form 10-Q.
Time Warner Cable is under no obligation to and in fact expressly disclaims any such obligation to update or alter it’s forward-looking statements whether as a result of new information, future events or otherwise. That covered, I’ll thank you and turn the call over Glenn, Glenn?
Thanks Tom and good morning everyone. I’d like to give my perspective on our performance of where we’re headed and then Rob and Landel will review our results and plans in more detail. Overall I’m very pleased with how we performed in 2007, our first year as a public company. We met all elements of our full year business outlook despite an increasingly tough economic and competitive environment. We added a net $2.6 million RGUs during the year including net additions of over one million digital phone subs and nearly one million residential high speed data subs. We made substantial progress in rolling our commercial phone and we enhanced our data product with our turbo offering. In addition we continued to develop and launch enhanced TV features and we’ve made significant progress with our sustainable network strategy.
The integration of Adelphia and Comcast acquisitions was challenging. However the most disruptive customer facing elements of that integration are now behind us and we are seeing substantial improvements. For example the Los Angeles division led the company in subscriber net additions in residential high speed data, digital phone and the triple play in the fourth quarter. We’re now on a solid footing from which to compete and we expect that all of the acquired systems including Los Angeles and Dallas to contribute to our growth in 2008.
As we look ahead our priority is to balance healthy near term financial performance against investments, in capital, in products, in more aggressive marketing and in better customer care. Investments that we expect will improve our competitive position and drive future growth. Our 2008 outlook reflects that balance. We expect to grow revenues in 2008 by approximately 9%. The OIBDA should expand driven largely by the adoption of advanced services and bundling in the acquired systems and supported by our continued focus on cost management again balanced by disciplined investment. As a result we expect OIBDA growth of 9% to 11% compared to 2007.
We expect that capital spending in 2008 will be similar to 2007 levels, about $3.5 billion. Rob will walk you through the assumptions underlying this forecast. We also expect to maintain roughly flat capital spending over our planned period and through a combination of healthy OIBDA growth and flat capital spending we expect to grow our pre cash flow by approximately 20% in 2008. This year we have provided guidance for earnings per share for the very first time. We expect to earn between $1.25 and $1.30 per share in 2008. We think that providing EPS guidance reflects our confidence in profitability and growth prospects and we hope that it will assist investors in evaluating our stock relative to the product market. As we head into 2008 we have two chief operational goals.
First further improving our competitive position through focus on products, marketing and care and second continuing our expansion into new business. Let me give you a few key examples. On the product front, we’ll continue to roll out start over and other elements of our enhanced TV suite. Those are unique features that we believe improve retention. Another important focus of our video strategy is to enhance and better communicate our high definition value proposition to consumers. Our HD positioning has three elements each of which we believe provides a competitive advantage. First, it’s free. Second, it’s easy. And third we have the HD content the consumers want including the most popular linear channels and substantial on demand HD programming. In addition, this year we’re going to start to offer enhanced HD as we begin to extend services like start over to high definition programming.
In the year ahead we also expect to continue to make strides in our data offering. We grew our share of broadband homes in the second half of last year and this supports our belief that our product is superior to DSL. We intend to continue to press our advantage in the marketplace in 2008. The Telco fiber projects receive a lot of attention. But keep in mind that we currently face competition from their fiber based data services only in about 15% of our footprint. Last year we redefined our tiered service levels and we re launched turbo, which is our highest speed service. Demand for that has way exceeded our expectations. In digital phone we believe we have considerable runways since the acquired systems only completed the launch of this service at the end of last year. Not only is digital phone an important source of growth it is important to us competitively. Customers, who take a bundle including our phone service, are very likely to completely discontinue their wire line relationship with the phone company. These customers also have consistently demonstrated lower turn than single play customers. In marketing, we intend to be more aggressive in 2008. We have to better communicate our value proposition by investing more in marketing and also by marketing more affectively.
Now turning to very important new business initiative, we expect to compete very aggressively in commercial services in this year, 2008. Our business class phone service is now available in almost all of our divisions. As you know, this service is designed specifically to meet the needs of small and medium sized businesses which in many cases have been under served by the public phone companies. In 2007 our commercial services which were primarily high speed data and video generated approximately $660 million in revenues and we think we can grow our commercial services revenues at a rate at least twice that of our residential services in 2008.
Focusing a little further out, we’re making good progress on our advertising initiative along with the other leading MSOs and you’ll be hearing more about our plans on that front in the coming months. Again we are pleased with our 2007 accomplishments but we recognize that we are facing robust competition and a very uncertain economy. We need to keep evolving as the world around us changes and we are confident we can continue doing that and at the same time balance near term growth and return with longer term opportunities to produce attractive shareholder returns. Now Rob will take you through the details of the financials.
Thank you Glenn and good morning everyone. I’m going to begin by walking through our subscriber metrics and then I’ll cover our financial results and balance sheet and end with the discussion of our 2008 financial guidance.
Starting with subscriber metrics on the first slide, you’ll notice that although we’ve lost some basic subs this year our customer relationships, that’s the total number of households that pay us each month, has actually increased by a net 68,000 subscribers for the year. You’ve heard us say before that our objective is to sell something to every home we pass whether or not that something is video and that’s why we increasingly look at the customer relationship metric. You’ll also see that 14.6 million, our total customer relationships are about 1.4 million greater than our basis subs. In other words about 1.4 million of our customers are not video customers and are buying one or more of our other products.
For the 2007 fourth quarter RGUs grew by 591,000 to over 32 million as our RGUs per customer relationship continued to increase. By year end our ratio of RGUs per customer relationship had grown to 2.19 million. The acquired systems drove more of that growth this quarter than previously contributing 38% of the total RGUs net additions in Q4, two times their contribution in the third quarter. The Legacy Systems continued to grow RGUs albeit at a slower pace than in the past couple of quarters. Let me talk for a minute about what’s going on there. On the margin we continue to be impacted by competition and the economy. In particular, we have experienced slower homes past growth consistent with the overall down turn in housing completions nation wide. And compounding that higher numbers of unoccupied homes. Also in anticipation of a weakening economy we instituted higher credit standards over the course of last year. The good news is that this step has had the intended affect of helping us to keep bad debt levels steady. However it likely also had the affect of reducing total connects somewhat. Having said all that, even in this economic environment we think we can do better. As Landel will discuss we’re instituting more aggressive marketing as well as a number of other initiatives that we expect will boost the pace of RGU growth in the Legacy Systems.
Turning to video on the next slide we lost net 50,000 basic subscribers in the quarter which is an improvement over our third quarter loss. Illustrating the continued turnaround in the acquired systems they posted a significant sequential improvement. That was particularly true in Dallas and LA which reduced their combined quarterly subscriber loss by 69% sequentially. Of course we’d rather not lose any customers, but I will point out that approximately 75% of our Q4 basic subscriber losses came from our lowest tier or BFT customers, and just to remind you, these are the customers who pay us about $12 or $13 a month. As you can see we added 168,000 digital video subscribers in the fourth quarter ending the year with over 8 million digital subs and almost 61% digital penetration of basic. Although not reflected on the slides and not counted as separate RGUs we continued to see robust growth in DVRs and HD set top boxes among our digital subscribers. This is another way that we’re deepening and strengthening our relationships with our customers. We added net 253,000 DVR customers in the fourth quarter. DVR net additions have exceeded 200,000 in four of the last five quarters and DVR penetration of digital video customers is now at 42%. I want to remind you all that in general we’re charging about $10 per month for our DVR service. Q4 marked the fastest growth ever in HD TV capable customers. We installed HD boxes in 358,000 additional homes during the quarter, up substantially both sequentially and over last year.
Turning to the next slide, residential high speed data subscribers, we added a net 214,000 residential HSD subs in the fourth quarter bringing us to full year net additions of nearly a million subs. We finished the year with over 7.6 million residential HSD subscribers or 29% of service ready homes. Of note is that the acquired systems led by Los Angeles accounted for 39% of total net additions for the quarter. Despite slowing growth in the Legacy Systems generally, we are encouraged to see that some of our strongest growth is still coming from some of our most highly penetrated systems leading us to believe that we have not yet reached anything approaching an organic ceiling of demand. For example, San Diego which ended the year at residential HSD penetration of over 40% of homes past, it had almost a full point of penetration in Q4. As Glenn mentioned we are also very pleased with the mix of our HSD net adds and in particular the success we’ve had with road runner turbo our premium product.
Moving to the next slide, digital phone, Q4 was our best quarter ever for digital phone net adds. We added a net 285,000 digital phone subscribers in the fourth quarter, the highest quarter of net additions since we launched the service and that’s the fifth consecutive quarter in which net additions exceeded 200,000. We ended the year with total digital phone subs of 2.9 million just under 12% of our service ready homes past. Again the acquired systems represented an increasing percentage of total net adds, 49% of the total in the fourth quarter. And LA again, led all other divisions. As with HSD we’re seeing meaningful growth in some of our most highly penetrated Legacy Systems. For example, Albany has the highest digital phone penetration at over 28% and added more than two percentage points in penetration in the fourth quarter. That’s the fast penetration growth in the company. Remember, we’re still in the early days of digital phone in the acquired systems with penetration of only 4% so we’ve got a lot of room for growth there.
Let’s turn to bundling. We continue to see great success in selling multiple products to our subscribers, Q4 was actually our best triple play quarter ever, up a net 228,000 in the quarter driven by increases in the acquired systems and again LA leading the entire company. Now almost half of our customers are in a bundle.
Let’s move to the financial results. We had solid revenue growth in both Q4 and for the full year. Q4 ’07 revenues were $4.1 billion, that’s $251 million or 7% higher than pro forma revenues for Q4 ’06. Subscription revenue growth for the quarter of 8% versus pro forma Q4 ’06 was partially offset by a decrease in advertising revenues which was largely due to the loss of political advertising in 2007. As you know, although advertising is a relatively small part of our revenues it contributes disproportionately to OIBDA because of its high margin. Subscription revenue growth on a dollar basis was split roughly evenly between the three product lines. Despite their smaller bases both data and voice contributed about one-third of our total subscription revenue growth. In the fourth quarter of 2007 company wide total RPU increased 6% to almost $103.00 and remember there’s still a $15 to $16 dollar gap between the acquired and the Legacy systems on total RPU.
Turning to OIBDA on the next slide, Q4 ’07 OIBDA of $1.563 billion grew 13% over OIBDA for pro forma Q4 ’06. OIBDA margins for the fourth quarter expanded by 220 basis points compared to pro forma Q4 ’06 to approximately 38%. That’s our highest quarterly margin in the past two years. It’s worth noting that the margins improved sequentially both in the Legacy and the acquired systems including Dallas and LA.
Let’s look at free cash flow on the next slide. We ended the year with free cash flow generation of $1.1 billion, that’s 44% growth over 2006 and higher than we anticipated. The percentage of OIBDA converted to free cash flow went from 17.4% in 2006 to 18.5 in 2007. CapEx of $3.4 billion was in line with our expectations. As we look forward to 2008 free cash flow it’s important to note that 2007 free cash flow benefited from two items which will not recur in 2008. First we had a benefit in cash taxes and second we did not make meaningful contributions to our pension plan in 2007 because it was fully funded.
Let’s turn to the next slide to drill down further on CapEx. We continue to be very disciplined in our deployment of capital. CPE comprised the greatest percentage of our total CapEx in ’07 at 43% with the biggest driver of that spend being the continued deployment of digital set top boxes including HD boxes and DVRs. It also included about $50 million that we spent on cable cards to comply with the FCC’s separable security requirements beginning in the middle of last year. As you know we also made a substantial investment in continuing the integration of our acquired systems during 2007, about $200 million. As we’ve said, that’s substantially completes our integration related spending. In addition we spent approximately $200 million on our sustainable network strategy including our aggressive deployment of switch digital video which Landel will talk more about. You’ll note from the slide 72% of our CapEx in 2007 was in the variable or success based buckets, CPE, scalable infrastructure and line extensions. This is relatively unchanged from 2006. CapEx as a percentage of revenues was 21.5% for 2007 a decline of roughly 160 basis points from the prior year. This is an important trend which we expect will continue. I’ll come back to some of these items when I take you through our thinking on 2008 CapEx.
Let’s turn quickly to the balance sheet. At December 31 our net debt and mandatorily redeemable preferreds totaled $13.6 billion a reduction of more than $1 billion from where we ended 2006 driven by our strong free cash flow. That puts us at of 2.4 times ratio of net debt and preferred equity to trailing OIBDA. This is below our stated target leverage level of 3.0 to 3.25 times OIBDA. We therefore continue to evaluate our options for optimizing our balance sheet.
Moving to the last slide I want to cover our 2008 outlook. We expect approximately 9% growth in revenues and 9% to 11% growth in OIBDA off our 2007 basis. I want to note that we expect Q1 to be the slowest OIBDA growth quarter of the year with growth accelerating as the year progresses. This is partly attributable to a number of year over year comparability items including the timing of equity grants. Additionally, we plan to spend more marketing dollars in Q1 than in the first quarter of last year. These together accounts for roughly 400 basis points of year over year growth in the first quarter. Also I remind you there are margins typically decline sequentially from the fourth quarter of one year to the first quarter of the next and we expect that trend to continue this year with Q1 being the low point followed by margin improvements throughout the year. We expect approximately 20% growth in free cash flow. As I mentioned a minute ago, we expect to achieve this growth in spite of the fact that we over delivered relative to our guidance in 2007 and that 2007 free cash flow was boosted by the two items I mentioned earlier, lower cash taxes and lower pension contributions which we don’t expect to benefit 2008. Our free cash flow guidance implies that we will convert somewhere between 35% and 40% of every incremental dollar of OIBDA into free cash flow and will increase our free cash flow conversion rate to around 20% of OIBDA.
Baked into our free cash flow guidance is our expectation that capital expenditures will remain steady at approximately $3.5 billion both in the near term and over our long term. This would result in a reduction of CapEx as a percentage of revenues to approximately 20% in 2008 and this will continue to improve over the next few years. Let me provide a little color on our plans for our 2008 capital spending. We expect CPE capital; the single biggest component of our CapEx will stay essentially flat. That assumes continued healthy demands for our HD and DVR boxes and that’s also inclusive of the fact that we’ll have a full year of cable cards in ’08 versus a half year in 2007. We expend to spend about the same amount on our sustainable network project. And finally while integration spending on the Adelphia Comcast systems is largely complete, we’ll replace that amount by roughly $200 million of incremental capital spending on our commercial business. It’s possible that we’ll sign more sell back [inaudible] a subset of our commercial business than we anticipate. But keep in mind that any additional capital we spend in that area would have very attractive returns.
Finally we expect our EPS in 2008 to be in the range of $1.25 to $1.30 a share. For comparison purposes I want to remind you that 2007 EPS of $1.15 per share included an $0.08 per share gain on the dissolution of the Texas Kansas City partnership. With that I’ll turn it over to Landel. Thank you for listening.
Thanks Rob and good morning everyone. As you heard from Glenn and Rob, 2007 was a successful year for us financially and operationally. I’m going to add some perspective on our operations and detail some of our plans for 2008. But before I talk about the year ahead, I want to recap the progress in our acquired systems. As shown by our performance in the fourth quarter our ads are driving results. Acquired systems which represent 35% of our homes past contributed 38% of RGU net additions in the fourth quarter. The acquired systems in LA delivered 76,000 RGU net additions in the fourth quarter more than five times net adds in Q3. Basic video turn in LA was at its lowest level since the transaction, in fact, Q4 basic video term was almost 60% lower than the fourth quarter of 2006. LA and Dallas reduced their combined quarterly basic video subscriber net loss in the fourth quarter by 69% sequentially. In Dallas we completed the fasted rebuild in our company’s history, in an increasingly competitive environment. There too we turned a corner. Digital phone net additions have been consistently strong over the last three quarters and basic term was lower in Q4 than a year ago. Remaining acquired systems [inaudible] by Cleveland and Buffalo were more easily integrated and for several quarters now have been generating OIBDA margins similar to those in the Legacy Systems. In short through the efforts of our top notch teams in these systems, we have completed the integration and stabilization of these properties and now we’re ready to grow.
Turning now to 2008, everything we’re doing in operations this year is focused on enhancing or sharpening our product set, driving more aggressive marketing and improving the customer experience. Let’s start with high definition video. HD has become a key component for some of our competitors marketing but we are not prepared to [inaudible] ground in the HD battle. We can and do compete with our HD offerings every day. As Glenn said, our value proposition has three elements. First HD is free, second it’s easy. With Time Warner Cable you don’t have to buy equipment or order packages in order to get the best in HD. In fact, all the CPE we now order is HD capable so we expect to enable more subscribers to enjoy better video experience in the year ahead and in many cases we’ll be able to move them to HD without [inaudible]. Third we plan to deliver all of the best HD programming choices; the ones our customers actually want not some arbitrary number of channels without regard for quality or whether they actually exist for that matter.
So how are we delivering on our HD promise? Let me spend a minute on switch digital video as it enables our strategy. At the end of 2007 we had switching launched in nine of our 23 divisions and we’re in the midst of wiring and installing switching in nine more. By the end of this year we plan to have launched switching in every division that needs it to remain competitive. Our customers are already seeing the difference. In our most advanced divisions like Albany and San Antonio, we’re delivering more than 40 HD channels today including roughly 20 switch channels. So switching works and it will allow us to launch relative HD content as it comes available and as we conclude deals with our programmers. For example, we currently have agreement to carry 53 HD channels in addition to 25 regional sports’ networks and we have deals pending for an additional 20 channels. We don’t offer only linear HD. Perhaps the element of HD plan that differentiates us most from our competitors is our dramatic expansion of HD video on demand. Currently we offer 50 transactional movies in HD; by year end we expect to have as many as 200. In addition, our HD showcase offers 80 HD titles on demand for free. Remember this is over and above our linear HD channels. Satellite simply can’t match this offer. You’ll see us move much more aggressive marketing around these value propositions in 2008.
Video on demand is another area in which we plan to extenuate our competitive advantage. With over 1.3 billion views in 2007 alone, which equates to an average of 14 views per digital subscriber per month, we clearly have a great foundation on which to build. We plan to continue to expand availability of transactional movies on demand in both SD and HD offering up to 1000 titles to all of our divisions by the end of this year. Divisions with this many titles have seen in increase in buy rate as much as 10% higher than the organic growth rate of movies on demand. Here again we’re focused not on some arbitrary number of titles but on the best content; the movies that our customers really want to watch. You’ll also see much more aggressive marketing of VOD in 2008 as well.
We’ll also continue to move forward with our enhanced TV services. Start over was available in seven or Time Warner’s cable divisions at the end of this year and we plan to have it in most of our divisions by the end of 2008. We’re also beginning to work on start over HD which is now available in our South Carolina division and satellite simply can’t offer this. In addition we’re working to launch more of our enhanced TV features such as look back, catch up and quick flips. Just an example, quick flips which provides instant access to short form internet content is planned to be launched in most systems with start over this year. And we’re [inaudible] look back now and plan to scale the roll out during the year. Where these features are available you will see us marketing them much more aggressively.
Beyond video we’re also working to extend our competitive advantage in high speed data. As Rob mentioned our road runner turbo offering has gained significant traction since we introduced it in the middle of last year. In 2007 we added a net 229,000 turbo subs, that’s more than 20% of our residential high speed data net additions and these subs pay us an incremental $10 a month. Success with turbo provides validation that there’s a real and substantial market for premium speed tier. In addition, our standard, basic and light offerings compete very effectively with DSL. As Glenn indicated we are convinced that our services are clearly superior to the phone company’s DSL offering. In fact, we’ve observed that the largest part of our organic growth now comes from DSL. And importantly we captured more subs from DSL than they went from us. In 2008 we plan to ratchet up our road runner marketing as we focus on converting even more DSL customers and winning a still larger share of the remaining valid conversions.
Turning to digital phone, we’ll continue to aggressively drive penetration. Remember we continue to broaden our product line here as well. Digital phone unlimited has launched in all divisions. We also have digital phone unlimited in the state, digital phone local and our new international one price plan which offers up to 3,000 minutes per month to 100 countries for less than $20, which has launched in 13 divisions. In digital phone we have a lot of opportunity in all of our systems and the acquired systems, we’re just getting started. Now I want to share a couple of examples of things we’ll be doing in 2008 that we expect will improve our customers’ experience and our margins.
Customers have told us that they value consistent long term pricing. As a result we now offer the price lock guarantee. Price lock guarantee offers our customers the option to enter into a longer term contract with us at a set rate and gives our customers pricing assurance. The result so far has been a total churn reduction of close to 30% and a voluntary churn reduction of nearly 50%. Bottom line, customers like it and it’s good for us because it reduces churns. Another critical element of the customer experience is ensuring quality care. We have aggressive plans to improve our customer experience a number of ways this year. First we’re standardizing our interactive voice response systems or IVRs throughout all our divisions. This allows us to wrap calls to the right CSR, one who can answer the question or provide the service requested the first time. This is a great investment because it improves the customer experience by shortening call times and reduces cost. We’re also going to drive consistent implementation of work force automation tools throughout our company. The tool set plus our [inaudible] people to our customers’ homes more quickly also improving the customer experience and lowering costs. And finally, removing our tier two high speed data support offshore. Our preliminary results are very encouraging. We’re seeing both higher quality calls and lower costs.
In all of these examples the key is to accomplish two things; a better customer experience and a favorable impact on our margin. In the new business area, we expect to compete more aggressively in commercial services in 2008. We launched our business class phone service in almost all of our divisions last year or now have approximately 1,000 employees dedicated to commercial services including 350 focused on sales.
In conclusion, we’ve made significant progress on many fronts this year and we have aggressive goals for moving forward. We know that tougher economic times require innovative thinking and we are prepared to deliver. We plan to sharpen our product focus, market much more aggressively and stay focused on ideas that improve our customers’ experience and our margin. Overall I think that operationally Time Warner Cable is ready to compete on all fronts. With that I’ll turn it over to Tom for the Q&A portion of the call.
Your first question comes from Jessica Reif-Cohen - Merrill Lynch
Jessica Reif-Cohen - Merrill Lynch
First question, I have two questions, I didn’t hear any mention of a wireless strategy so could you discuss how you view wireless, is it just a vision of the [inaudible] an extension of your existing services, how important is it and what the time frame might be? And Rob can you just elaborate on what you said about the balance sheet options, meaning can you even buy back stock free [inaudible] now what would the timing be of increasing leverage?
On the wireless question, there’s really nothing new to report from where we were last quarter but I’ll repeat what we said then. We’ve looked at wireless in kind of two strategic buckets. The first is whether it’s important to have cell phone service as an offering to offer some quadruple play. And as everybody knows we’ve had a relationship with Sprint and did tests, a product called Pivot in the market, and to date we’ve seen less than incredible demand for that. So we still continue to pursue ways to have that as a defensive capability but we don’t see it as a big thing that we need right now. And our relationship with Sprint continues to be very good despite their issues. The second bucket is whether there’s an affirmative opportunity for us in the wireless broadband space and its no big secret that we and some of the other MSOs have had numerous conversations with players in that arena and to date none of those have turned into anything that we think we want to do but we continue to have those conversations. So again that is pretty much where it was last quarter. At the risk of preempting Rob I’ll do the balance sheet question too because I actually know the answer.
We, as you pointed out, we do think we could use more leverage. We’re below our target for leverage and we think it would be appropriate to be more highly leveraged and to return that capital to our shareholders. I think everybody knows the ways in which you can do that so there’s nothing magical about it. I also think that since reading the newspaper and talking to investors, the question of Time Warner’s ownership and [inaudible] has been teed up. You should expect that we won’t resolve what we do on our balance sheet until there’s some clarity on that issue. So I think on timing, it’s going to relate to that but we are dedicated to at some point getting capital back to the shareholders.
Your next question comes from Greg Moffitt – Sanford Bernstein & Co.
Greg Moffitt – Sanford Bernstein & Co.
I’m going to ask one question with a lot of unrelated parts. First if you could just elaborate a little bit maybe Landel on the, what are you seeing differently in different competitive scenarios in the places where you compete against AT&T in San Antonio for example, what are you seeing versus UVerse how does that affect your competitive balance with the satellite guys and the same thing with Verizon. And then secondly you’re small, medium enterprise initiatives are being rolled in right now with your general RGU counts. I’m wondering if you could just break out a little bit for us what kind of success you’ve had to date and how you see that might ramp and then are you having most of the success with voice products, is it more with data services like T1 and what does that sales process look like?
When we talk about competition Greg, let’s kind of walk through first a couple of different things and how we think about it. The first way I want to attack it is by product set and then we’ll drill down into UVerse and Verizon. Taking it by product set first, when it comes to high speed data, still seeing strong growth there, we’re over indexing our yields against DSL so we’re still competing very affective there no matter where we compete against the competitors. Phone, we’re also very happy there with strong growth in the acquireds, good growth in the Legacy, not a lot of headroom in the acquireds as you look out ahead of us and the product set differentiation continues to drive strong growth there. So drilling down to the third part of competition which is video, which is probably the most competitive space. Remember first of all, when you just look at the general overlap it’s roughly 40% AT&T and 30% Verizon overlap in our footprint. And you’re right if you think about those two components Verizon first of all is very active in LA and Dallas and beginning to see some in New York City and Upstate New York, whereas UVerse or AT&T is active in Texas, also active in LA but beginning to spread to the Midwest. So let me give you some context. If you think about video, especially those basic sub losses in the first quarter of that 50,000 anywhere between 15,000 and 20,000 of that we think is [inaudible] is economy related. So now you’re down to a pretty small number of sub losses, and by the way, if you look at that remaining piece most of that is still losses to satellite versus Telco and we’re seeing that in pretty much the very active areas of Texas. Alright, so now when you drill down and look at the Telco sub losses which we’re seeing because they’re a new and interest to the market, that’s primarily UVerse versus [inaudible] for us. But in both those cases every area we’re seeing first of all it’s still fairly rational, it’s all around promotion and we feel we can compete with them on video with some of the things I outlined. For example and let’s just take them by pieces. DSL and the all around high speed data, much heavier focus on us this year on how much better we are than the DSL product and continue to improve our yield than your high speed data phone. Much more aggressive marketing around our different product set, particularly in video, focused on HD and how we do differentiate our selves was to go right at satellite. With regard to Telco, price lock guarantee, staying ahead of them. So a lot of the stuff we talked about, we’re going to compete head on in these areas so we’re pretty comfortable with what we’re seeing out there and our plans for ’08.
Greg, let me take the second one, good morning. Let’s first start with revenues and then we’ll get to subs underneath that. Of the $660 million of commercial revenue we’ve got in ’07 the lion share of that is video and data, commercial phones is really a new launch this year and it’s still a relatively small part of the pie. It’s about two thirds data, one third video. We’re not yet going to break out commercial voice customers again because it’s awfully small, it’s early stages. We’ve got about 280,000 commercial data customers. I think that pretty much covers your question.
Greg Moffitt – Sanford Bernstein & Co.
But the commercial voice customers as you get them will obviously have very high RPU, but won’t add much to the subscriber counts because its just the nature, you may have a lot of access lines per account but it’s show up as a single account. So it’s hard to get insight…
Going forward, there’s kind of standard ways that people report business market in the telecom space and I think we’re new at it so we’ve got to get our arms around it but we’re going to be providing greater clarity as we go through this year.
Greg I think that you mentioned that the sales process itself, remember the 1,000 people that we have dedicated to this business, 350 or so are dedicated to the sales process and remember the sales process is a little more complex compared to residential but there we have sales engineers who are going to work with those clients because the sales process itself is a little more detailed but we have 350 people focused on that now and ready and moving into that marketplace.
Your next question comes from Spencer Wang - Bear Stearns
Spencer Wang - Bear Stearns
Just have one’s drilling on one topic which is CapEx and I guess first Rob you indicated that CP CapEx in ’08 would be flat year over year and I know there are a bunch of things that go into that number, the mix of new advanced customers, total RGU net adds, on a positive side probably no cable card or less of a cable card issue and probably lower set top box costs, so I guess my question is do you believe that with flat CP CapEx or net adds are flat year over year or am I missing something and then on your long run CapEx being flat in absolute dollar terms how much of that, what would it be without commercial I guess.
First piece of the question Spencer, I’m not going to give you RGU guidance for ’08 today. You’re right there’s a mix of factors that go into the CP capital and RGUs are one piece of it but as you said we’ve got HD boxes and DVR mix which also go into the question of how much CPE capital we’ve got so I’m not going to suggest or draw the correlation between flat CP capital and flat RGUs. With respect to commercial in 2008 we’ve got baked into our guidance about $200 million of commercial capital. As that business grows and in particular as we seize sell back [inaudible] opportunities, you might see that go up as a proportion of the total.
Spencer Wang - Bear Stearns
Okay, thank you.
Your next question comes from Ben Swinburne - Morgan Stanley.
Ben Swinburne - Morgan Stanley
Two questions if I may, on broadband Landel, could you give us some color on the gross connects versus churns, just to get a sense for how your, I know you talked about your market share versus DSL picking up but could you give us a sense on those two methods, is churn picking up in data and if it is, is that something you would assign to economic issues out there or potentially bringing in some lower quality subs in the past? And then second Glen could you give us an update on your thoughts on digital long term, any change in terms of booking out a low end digital box to drive to an all digital migration, you obviously sound very pleased with how switch digital is working. I’d love to get any update there [inaudible] in your mind on that front?
On broadband, we’re looking at north of 60% of our gross connects are coming from DSL and actually that’s accelerating for us. Also what I think about when I look at the total US marketplace and the split between DSL and cable versus the Time Warner Cable footprint, let me just give you and example. Our estimates in our footprint are 56% of the footprint is cable versus DSL 42%. We over indexed the nation by 200 basis points. So you can see, and by the way, that’s been increasing over the last half of 2007. So we continue to yield there. Churn in high speed data is actually down. Churn basically in all product categories is down. Which means, if anything, you’re just seeing slower connects around high speed data but hopefully that gives you a sense of how we’re yielding against DSL and by the way we also over indexed in yield against the [dollop] universe. So hopefully that gives you the granularity you need around high speed data.
I think just to build on that as Landel said, churn is down in all the products and I think that is largely due to our increased bundle penetration. It may be partly due to the economy and people moving less often to but we are seeing better churn across the board. On going all digital, I think where we are on that has really not changed from where we’ve been. I think that over a long time period we will tend towards being all digital in our systems but it isn’t going to happen everywhere all at once. There are places where we are already all digital and those are places where the digital penetration was sufficiently high that it was easy to finish it off. So for example here in New York City, without a lot of fanfare we went all digital in Staten Island last year, we’re almost done in Brooklyn Queens and I think you’ll see the rest of New York over the next 18 months go all digital and it’s easy in New York because everybody has a set top on every box so it’s just changing out the residual analog boxes. There are other markets where the digital penetration is relatively low and I think it’s going to be a number of years before those go all digital so it’s hard to generalize but I do think sometime down the road we will be there, it’s just not all at once.
Your next question comes from Jason Bazinet – Citigroup
Jason Bazinet – Citigroup
I just have a question on the acquired system, the EBIDTA margins. When you guys think about margin expansion as now part of your footprint, how do you think we should think about it? Is it sort of a structural issue that’s going to be hard to mitigate given the lower penetration rates or do you think they can over time approximate the Legacy Systems.
Jason, what we’ve seen during 2007 is that the margin gap that we started the year off with between the acquired and the Legacy systems has actually been cut in half. You’re right to focus on the RGU penetration question because that’s really what’s going to drive the shrinking of that gap and we do expect that gap to continue to shrink. You know, within the acquired there’s obviously a mix of different margin characteristic systems and the gap is larger in Dallas and LA than in the other properties but again we expect that to continue to shrink and no I don’t believe it’s structural.
Jason Bazinet – Citigroup
Okay thank you.
Your next question comes from Doug Mitchelson - Deutsche Bank Securities
Doug Mitchelson - Deutsche Bank Securities
I’m sorry Tom but my new 2008 policy is to ask one more question than Jessica asked so…a quick one, so Landel first you mentioned 20% high speed internet as coming in at a higher priced turbo yet if I do my math right your high speed data RPU declined 4% year over year. So can you talk to subscribers churning down given the weaker economy or what was the driver there? Second you and your peers have mentioned HD VOD quite a bit recently and given that you’re [inaudible] efforts the past decade have not stopped share losses to satellite, it’s really helped but they haven’t stemmed the tide, wondering why you think HD VOD is so important and if anything new is happening with the guide which is often complained about, and then lastly for Glenn a quick one. Just a theoretical case, if you are fully spun out to shareholders is there any impact you know either on the cost structure or tax position or management of the company as you see it?
Okay Doug, let me reverse a little bit who answers I think the Turbo and RPU question should be handled by Rob and maybe Landel can handle the HD VOD one and I’ll deal with the spin off question.
Okay Doug the important thing to remember here is that turbo while we’ve had great success with it in the short time that it’s been re-launched, is still a very small portion of the total base so that while it’s helping overall HSD RPU there’s limits to how much it can move the needle. If you sort of look at the year versus the quarter it’ll give you some sense of what’s going on. In the quarter about 40% of our net adds were turbo, about 40% of our net adds were standard and about 20% were combined basic and light. If you look at that same metric for the year, it’s flipped around a bit because we clearly had the acceleration at the premium end later in the year. It’s probably 25% turbo, or 35% basic and the remainder light and basic. So again the mix is still skewed towards the standard and light end but turbo should mitigate any mix compression factor on the HSD RRU.
[ 6:09 to 7:13 audio blank ]
… a lot of interesting features that we have to tell people that we actually have those things and do a much better job of it so you’re going to see more of that this year. Your last question was what’s the cost impact I guess or other impact if we were actually to be fully spun from Time Warner. The answer to that’s pretty simple, we are appropriately since we are only partly owned by Time Warner we are operating at a very arms length basis today and our taxes are treated as though we were a separate tax payer so you really would not see much impact. There are a couple of fairly small functions that we share like Washington office and Treasury Department. I think the costs we’re incurring today is approximately what we would incur if we had separate functions so I don’t think our P&O or balance sheet other than the leverage issue would look materially different.
Your last question comes from [Vijay Johns - Lehman Brothers]
[Vijay Johns - Lehman Brothers]
Landel, just wanted to, now we have some data as one year anniversary when triple play promotions go through, can you sort of talk about you know what’s the retention in general, are there more [inaudible] that are required to keep them and does that sort of vary between where the [inaudible] have you know employed there own integrated triple play versus a synthetic triple play versus satellite?
On triple play a couple of things, you heard the statistics Rob gave you with regards to roughly 16% triple play penetration right now. Our sell in Vijay right now is still 22% to new customers. Our bundled sell in is roughly 54% and we’re still selling in even in our competitive areas between to an arc of roughly $118 to $119. I think you’re seeing in the competitive areas a lot of promotional pricing around the triple but they seem to be sticking pretty well and we’re having particularly good experience with the price lock guarantee and you heard the churn statistic around that. So our focus in those areas especially in the competitive areas this year will still be on triple play, they’ll be on price lock and the staying power of those is pretty good. Now where we didn’t have those before, we’re not seeing substantial roll off at the end of these. Not a giant jump up in price either but they’re sticking in pretty well and price lock’s going to greatly benefit that.
I think that’s all we have time for this morning. Thank you all for joining us.
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