Charter Q2 Earnings Call Transcript
Executives
- Christopher L. Winfrey : EVP and CFO
- Thomas M. Rutledge : President and CEO
- Robin Gutzler : IR
Analysts
- Richard Tullo : Albert Fried
- Tuna Amobi : S&P Capital IQ
- Benjamin Swinburne : Morgan Stanley
- Lance Vitanza : CRT Capital Group
- Craig Moffett : Sanford Bernstein
- Philip Cusick : JPMorgan
- Brian Russo : Deutsche Bank
- Jason Bazinet : Citi
- Stefan Anninger : Credit Suisse
- Amy Yong : Macquarie Research
- David Joyce : ISI Group
- Jeff Wlodarczak : Pivotal Research Group
- Bryan Kraft : Evercore Partners
Craig Moffett - Sanford Bernstein: 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 and over the last year. Can you talk about what's the strategies are to win back those video subscribers? I would presume that a pool of people that take your broadband product but not your video would be your first target audience. Then Chris, just on the higher inventories that you talked about in CapEx, is it fair to say that given that you've already pre-set some of the inventories you would need that the CapEx for the rest of the year that gets to your 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 - President and CEO: Well, Craig, with regard to win back, you are 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 part of our strategy. So that is a big opportunity, but even larger than that is the unsold (passing) universe and the satellite subscriber base that exists inside that universe and what we've been doing to get ready to market 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, a two-way interactive video product with the state-of-the-art HD quality and the bulk of the service then we're moving toward getting a fully deployed HD product across our entire footprint on every channel we carry. As you know there is 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 superior data product and a superior voice product and put those altogether in a package that's compelling and 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 - EVP and CFO: Craig on the second question related to capital and 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. 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 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. 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'd 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 it's a new home with a new service. So, all of that will be flowing through in the coming quarters.
Stefan Anninger - Credit Suisse: Just two if I could. I was hoping you could expand a bit more on the product set that you are 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 features set that you hope to offer like gateway boxes, live video feeds in the home on devices beyond the TV set et cetera? Then my second question is about your new pricing and package initiatives that you started earlier in the summer, perhaps you could 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 - President and CEO: 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 merged that into a product set that now is all digital and two-way interactive and it 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 two-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 plan 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 customers to interact with existing CPE and to use new features – new equipment like iPads and Android devices to watch TV and we will be rolling those out toward the end of this year, at 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, since we've done the packaging, our triple-play selling has more than doubled and it's only been in the market for a month and we expect continued growth in that area.
David Joyce - ISI Group: 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 - President and CEO: 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 on both in the cloud and on existing CPE and on new CPE.
Benjamin Swinburne - Morgan Stanley: Then just, Tom, on the capital network outlook or strategy what is all-digital mean in this context? Charter has used utilized switched 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 sort of DTA approach at Comcast. I think there's been some B claims down to the B1 or that's what Comcast speak of the lifeline basic. Are you talking about 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 CPE levels?
Thomas M. Rutledge - President and CEO: What we mean is all – completely turn off all the analog product. With regard to the network, it means that the network itself actually is unburdened by the going to an all-digital platform and it actually, one way of thinking about it is, it creates additional capacity without any additional capital, because you are essentially turning off fat analog spectrum, making that spectrum available for other uses. 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. So, one way to 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 three units per house on average and that varies, but that's a good number, and we think that we can write a reduced cost curve of CPE. We think there are 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 – (for it). 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 to base 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: Just to be clear, you're saying that the average charger sub has about three TVs per home? Is that the three was referring to?
Thomas M. Rutledge - President and CEO: Yes.
Benjamin Swinburne - Morgan Stanley: But today, if you think about the current business, how many boxes are in those households today that you'll have to then increase to get to three to take – to make sure that all their TVs work when you move the analog off?
Thomas M. Rutledge - President and CEO: Chris, do you want to answer that?
Christopher L. Winfrey - EVP and CFO: Yeah, 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.
Bryan Kraft - Evercore Partners: I just had two questions. One, wonder whether there was 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 it looks like ARPU increased only about $0.20 sequentially. Then the other question I had is, I understand you went back to 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 - President and CEO: I'll answer the last question first. We don't 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 changes – I mean, an evolving answer as technology changes.
Richard Tullo - Albert Fried: Question in regards to set top boxes, is the increase in CapEx and back half of the year related to the TiVo implementation or are there other implementations outside that?
Thomas M. Rutledge - President and CEO: 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.
