Netflix (NFLX) comments [CCO Ted Sarandos] from 43rd UBS Conference (12/07/2015)

43^rd Annual Global Media and Communications Conference

Netflix (NFLX)

Speaker: Chief Content Office – Ted Sarandos

Tuesday: 12/07/2015

Notes:

• Goals and targets moving forward? Aspiring to take Netflix global, keep chewing away at this effort. Available and relevant in every part of the world.
• International growth – launching territory by territory, started out as country by country then region by region. In 2015 launched Italy, Spain, Portugal, Japan, Australia. Pretty ambitious year, all has gone well. (New country launch) Pretty minimal disruption. Used to be disruptive for the company, now not so much.
• Now we are a global buyer of shows and rights from TV instead of regional. Some resistance but only really from regional content sellers. It’s a structural change. The studio partners are wrestling with it. We are kind of alone in this space of buying global rights.
• How to measure since we can’t do overnight ratings? We look at the net subscriber growth, which means people are attracted because of the great content. People stick with it because easy interface, easy to use, like the programming, like the product. Our high quality, original content is growing. Internally we look at the hours of programming per user, externally would look at net subscriber growth which measures the health of the business.
• Challenges and opportunities for the budget? About 16 original series growing to 31 next year. Have 10 feature films in process or production, over 12 documentary series in 2015, some kid shoes. Last year had 10 Golden Globe nominations, etc. its high quality.
• $5b programming and amortization and $6b of cash spend for 2016? Yes, still those plans.
• ROI of spending knowledge? Most of the territories have different economics, you learn with each launch.
• 2015 launches? Jessica Jones, Daredevil, etc. In DVD days, had over 100,000 DVDs in library. We have to have a breadth of programming to appeal to everyone. Jessica Jones or Daredevil? In viewing fight, they are neck and neck.
• Nielsen – picked a week, probably cherry picked, likely in Spring, the #1 show was “Game of Thrones”. #2 show of all TV – broadcast cable, etc., was a Netflix show…” We were probably #1, the data doesn’t measure all of the devices. If the 4 networks and all on TV, sure. If Netflix is watched on 700 SKUs across the world, the mix between laptop, iPad, TV is different, thus the viewership is probably not captured. We have some of the most watched shows on TV.
• Netflix is streaming in 4k, better than TV. It is higher technical and artistic quality.
• Investors are very interested in next new original shows, you say 31 shows next year. What’s exciting?….The Crown (Queen Elizabeth story in UK). The Get Down (birth of hip-hop in NYC in 1970s). The Ranch ( Warner Bros in LA), and the revival of Full House. Stranger Things.
• Kids performing? Some data shows Netflix on top. Having real success with legacy kids brands. About half of households globally are engaging in kids content regularly. Possible shift from Nickelodeon to probably Netflix.
• Netflix definitely not getting into nightly news. Vice is getting into nightly show with HBO, but we aren’t. Not getting into news gathering space, news gathering is probably fairly commoditized, not in line with on demand strategy. People watch news and sports because it is live. People go to Netflix for the control of the On Demand part.
• Long term interest in sports? People think of Netflix as a substitution for cable, they get frustrated at their cable bill each month, but they keep cable for sports. For me, never saying we wouldn’t do sports, but the Netflix On Demand strategy doesn’t enhance sports viewing experience. People want to know who wins the game at the same time as everyone else. Problem I have is the leagues have all the pricing power for forever. If model where we could create our own sports league like ESPN with the X-Games then that’s what would get me interested.
• Cable networks maybe sold too much to Netflix? What you’re seeing is a fundamental change in consumer behavior. People are watching On Demand. It is SVOD. Studios and Networks used to make a lot of money where people used to watch it. Now it is Netflix is where the viewer is. If you want to make money, need to sell it to Netflix, it is just a change in who the buyer is. Vertically integrated companies are not built to optimize. If you create content you should sell it to the highest bidder, even if it is not your parent company. That’s the rub for vertically integrated media companies.  FOX has the top show on ABC – Modern Family. They sold it to someone else. This is not something unusual – selling it to a competitor. The billions of dollars from NFLX being the buyer helped media companies, otherwise there wouldn’t be a buyer.
• Hard to know what is the next big thing in terms of shows. Success ratio of any given network is not that great. We would rather pay for the hits and avoid the misses, which is the second window we can buy it. AMC – have a great relationship. Walking Dead was great. Breaking Bad from Sony. Mad Men.
• Investors have been concerned that Netflix has too good of a job  because maybe NFLX bought rights in second window at too good of a price, media companies didn’t know how big NFLX would be, and the viewership is high. If marked-to market all deals versus if have to today, would it be different. Netflix built a great business from a lot of content, not just some of it. People pay for discovery. Premium is associated with a brand, but you also have to deliver the viewing as well. Discovery will make it harder to replace content, more distinguishable.
• Hulu, are they driving price up for everyone? Ownership structure is confounding. The amount of money spent on stuff outside their ownership of the three – Comcast/Fox/Disney, it is surprising. Probably driving up pricing on themselves and Amazon. We are disciplined to let some stuff go. If you track third party data, today came out that Amazon and Hulu are still about flat, and Netflix is up 60 bps to 37% of all North American traffic. Hulu is 22.6% and Amazon 3.1%, basically flat to slightly up.
• International –how has global launch impacted strategy on programming? Ramping up non-English local programming. More than 1mm US subs that watch French content. Want to do more local language.
• Programming as % of revenue leveling off? Trying to figure out margin, how much market share NFLX can win and how much you can invest in programming. Internally, trying to figure out programming and where the curve ends. Looking for hours per users (median and average) helps us check programming spend, which is good indicator on retention, They spend time on platform and stay on longer. Market like Japan, first big Asian market for us. Mostly Japanese stuff – 95% TV is Japanese and 90% is Japanese film. At least 30% offering is non-Japanese.
• Germany and France? 2mm subs in that region, Reed just announced. Programming strategy – they are really attracted to original programming from us. 8 out of top 10 are original. Adding local flavor helps and we will accelerate the pace.
• Southern Europe – how much already acquired vs. how much left to go? (NFLX purchases some in advance to entry of country). Try to keep a lot of dry powder to add stuff once we enter the market if we need some additional genre once we enter the market. Original shows act as a brand ambassador around the world for NFLX. Focus has been on enthusiasm on original programming.
• Movies? In golden age of TV, still 1/3 of watching on Netflix are movies. Our movies are old. For first release, some of our movies are 10 months old, some are 9 years old. Very resilient 30%. Want to improve movie mix but adding originals. Improving output means adding more 10 month old movies. Instead of spending another $1 billion on 10 month old movies, we should create our own content. We are still entering an output deal with Disney, which is a whole new deal. They are solely differentiated among the brands. Avengers, Disney animated features, or Star Wars. People don’t care about Paramount studios brand. Releasing another Adam Sandler move in next few weeks. He is pretty bankable. Even Pixels - $80m movie than has done > $250m at box office. He is a global superstar. 

Time Warner Inc. (TWX) comments [CEO Jeff Bewkes] from UBS Conference (12/08/2015)

43^rd Annual Global Media and Communications Conference

Time Warner Inc. (TWX)

Speaker: CEO Jeff Bewkes

Tuesday: 12/08/2015

Notes:

• Goals for now? Focus on long-term. Been a combination of operational and prudent capital allocation. Having right mix of assets, networks, production, is really important given whats going on in the world and industry. Focus going forward: (1) invest in best content, (2) appropriate use of technology, what is in-house, whats outside, (3) internationally, (4) operational efficiencies and capital allocation efficiencies. All see a huge demand in the world for “on-demand” viewing. That results in tremendous advantages for companies that have right businesses and right global brands. We focus on quality, right brands – Turner, HBO, Warner Bros. Opportunities that exist for big brands are for current ecosystem, such as reinvigorating the ecosystem, but also outside it. Time Warner & HBO are in good position. There is tremendous turmoil in industry, will lead to success and misfortunes for some.
• Need, from a consumer point of view, want to watch content on any device, shouldn’t need advanced degrees to do this. We should pick up devices and be simple. Shouldn’t be that you have to know whats on TNT. Look at VOD, cable channels, linear, in a seamless interface.
• TV multi-channel: reached extraordinary penetration for many years, it has a loyalty, its habit. Programming investments are getting better. To authenticate across all devices is difficult. We want to help Apple, distributors. We want to compliment Verizon and Comcast for their user interface, but they need more.
• TV Solutions -  Hulu? Won’t comment on it as strategic investment. Hulu is a good service. We are one of the entities that could help with the interface product. If interfaces across all would be more vigorous, would help.
• We are making some investments in digital, but biggest issue was foreign exchange number. We want to highlight that we focus on growth for the long term. Have been investing in content for HBO Now – John Stewart, etc. Not major infrastructure. The new world – strong network presence inside the ecosystem and outside – means there will be more company capabilities that needs to be developed. We want to increase revenue growth line and earnings as well.
• Most content companies believe the bundle is the best for now…? We haven't seen any tipping point disruption yet, saw some subscriber weakness and ratings decline but nothing big enough. Our focus has been on HBO Now, which is global. Warner Bros. has partnered with SVOD services in China and SE Asia. CNN Go product has been well received and viewed. Apple/CNN product that is going on. We bought i-Stream-Planet which helps us put any network on a broadband delivered basis. We don’t call it disruption, we call it opportunity.
• Finish to 2015, ad market? Coming in at strong double digit EPS rate, which if we absorb $0.45- $0.50 FX headwind, we would’ve grown 20%. On the ad side – scatter is up double digits, which bodes well for 2016. Theatrical wasn’t as strong in 2015, though.
• HBO: will be huge 2016. Some new shows – Vinal (1 hour show by Mick Jagger/ Martin Scorsese), Divorce (Sarah Jessica Parker), and other shows. John Stewart, Bill Simmons, Sesame Street, etc. Also have distribution coming into play with Xbox and PlayStation, means we have all distribution in place to be more aggressive with marketing because we can fulfill the demand. Smaller bundles helps HBO, helps them get through  better.
• HBO has higher retail price versus some others, but smaller content, how is position? Quibble with “modest” content comment, we have thousands of hours of content. HBO has biggest, best, widest new movies of any company in the world. Then go to 30 min shows, 1 hour shows, comedies, sports shows – huge genre selection – HBO has adequate budget for $1 billion for original programming to get this high quality. Helps to have Turner and Warner Bros. as well.
• Overseas – too early for OTT? Sometimes the development of infrastructure plant as the reason if too early. Licensing show that is branded HBO – Canada, UK, France, Italy, Germany. Attractive risk/return deal. Far better method of distribution.
• Warner Bros positioning? 2015 strong year. 2016 shifting more to numerous big franchise. Will lead the industry in TV. Batman vs. Superman, Suicide Squad, Fantastic Beasts (Harry Potter), Stirrups (animated), Nights of the Round Table (King Arthur). Top 2 new shows + #1 comedy (Big Bang Theory). DC Comics doing well. Lego, JK Rollings, etc.
• Acquired programming: become less predictably valuable over long stretch as move to VOD and SVOD. Real place for acquired shows, to get picked up by TNT, should be a hit show.
• Original programming: more activity for Warner TV to produce first run, but to add cable production for other networks – Showtime, FX. 
• Health of syndication market worldwide – has been a very strong secular support level and is growing.
• Gotham – 1^st season was good, went on SVOD, 2^nd season not as strong
• Is having a show on SVOD going to hurt the ratings of shows? Don’t think so, think it’s the opposite. Think the data will support this as well. Gotham – 2^nd year, is on-line with second half of first year. Interest to track a season from the beginning will increase.
• On-Demand is like a volume control, it’s a feature.
• DC, Lego, Harry Potter world. Wonder Woman – script is good, could bring underrepresented female audience to the genre. Also has 2 LEGO movies coming out.
• Turner – how positioned for growth? 2015 Turner had substantial earnings growth, more from cost actions. 2016 more from revenue. Ad market starting well with scatter pricing in double digits. Affiliate fee is low-double digits, on-track, been saying that last 2 years. Specifically – low-teens % on affiliate fees. Double digits is too low, has to be in the teens (laughs). Have to translate back to dollars but strong organic growth.
• Should have strong shows coming in 2016 – TBS, TNT. It is a big budget. Tremendous conversation between Warner Bros., Turner, and HBO to collaborate.
• NFL? We like it but don’t have to have it. It would have to come at economic secretive way. Thursday package is the issue. Reason is good position – if you take mix of Turner channels, from affiliate and ad – have NBA out to 2025, NCAA March Madness to 2024, baseball to 2021. Have strong sports offering. Interested in NFL, but don’t have to have it.
• Balance sheet or capital deployment changes? None.
• Message to audience? Watch more TV. If you think about whats going on in media, it is very exciting time. Everyone is aware of challenges, concerned about if companies will evolve fast enough and strong enough. Media has to make the right decisions. We think it is very important to have the best content and best network. It has to be On Demand, will do whatever it takes to make it available to current ecosystem and future ecosystem. TWX has the scale on a global basis. 

Liberty Global (LBTYA/B/K & LILA/LILAK) comments at 43rd UBS Conference (12/09/2015)

43^rd Annual Global Media and Communications Conference

Liberty Global (LBTYA/B/K, LILA/LILAK)

Speaker: CEO Mike Fries

Tuesday: 12/9/2015

Notes:

• CWC deal rationale for LILA? Transaction in Latin America is a game changer for that part of the world. Not uncommon for deals like this to get announced and people think “ugh, it’s not what I hoped or expected”. Reminder, we think about things in terms of 5 year time frames, creating value over 5 year time frame, and this deal should bring value. We like the region of Latin America which is why we created the tracking stock  - “LILA, LILAK”. 2 great assets down there, which are growing high-single digit to low-double-digit EBITDA (VTR and Liberty Puerto Rico). These 2 current assets are “sub scale”. We are trying to find ways to build a platform that has scale. The CWC deal brings that scale needed. They are the #1 fixed/broadband provider in 7 out of 18 countries. They have a massive sub-sea cable business that feeds those markets as well as our markets. They are heavily invested in mobile. Together, the CWC business with Liberty (LILA/K) gives us the scale and opportunity for growth. Think it will be low double-digit EBITDA growth. We have audited synergies of $125m on top of $145m of one-off capital expenditure synergies. By the way, there are two levels of synergy we can’t talk about. We’d like to but, but that’s how the U.K. works. Think the total synergy story is really attractive.
• Why finance it this way – use Liberty Global shares and not LILA/K? It was a negotiated transaction. The seller was a UK seller. To get it done of this size they wanted something larger, the LBTYA/K shares. The LILA/K tracking stock doesn’t have a very long trading history, and not a very good one thus far. We didn’t like to use it at that price, either. So used LILA stock minimally for the deal. Will have the CWC company as part of the larger company first, will help get the synergies done this way and much easier. LILA has two great assets in the Latin America region that do $450m of EBITDA and manage them with 4 people. CWC has 250 people and it about twice the size. Think running it as consolidated business, then how to spin it in the future, is the right move. Think it will be very value accretive.
• Spin-off? Not committed to it yet, once it becomes more stabilized, will look at it then.
• Have been spending a lot of time on the “Liberty 3.0”. It has been over a year that has been working on. It is a fundamental change in how we manage the top line as well as operating costs. Today, we are a mid-single digit grower for EBITDA, believe we can be a high-single digit grower over next few years. It won’t be straight line but CAGR. There are: (1) revenue reasons, such as new-build opportunity, 10-12 million homes, 50 million home platform today. Not all in the next 3 years but a good portion of them in next 3 years. On average, newbuild generated about 25-30% of net adds. Believe that number goes to 50-60% while we grow the market share of existing footprint. (2) pricing. Have done a good job historically on pricing, believe much better today, though. Will continue to drive pricing on 27m home platform. (3) B2B and mobile; working on SoHo and mobile, currently underpenetrated in B2B and small business, just getting started in mobile. About 20% of revenue now, will grow. Will eventually grow above the residential business in terms of absolute dollars. Customers, revenue and growth are focuses. About 60% of the upside we see from that mid-single digit to that high-single digit comes from revenue drivers, other 40% have said publicly is about 1 billion Euro synergy/efficiency between today’s op-ex base and three years’ time. That doesn’t mean normal pace goes up a billion less; thus op-ex stays relatively flat over next 3 years. This comes from procurement, centralized IT (just did this across all markets), working on call centers.
• More color the expansion will be? 4 million of the 10-12 million will be in the U.K. (“Project Lightning”) (3 billion pounds (£) over 5 years), ramping up in 2016. Targeting 46£ of ARPU, getting 46£ of ARPU. Targeted 40% penetration after 3 years; right at 10% after 3 months, 20% after 6 months. On track with those numbers. Newbuild is self-financing, is a huge IRR on levered, because most homes are within 50m. Other markets will not get as specific on. They move and flux. Germany, Poland, every market has some newbuild activity. Just putting more activity over next 3 years.
• Quad play bundles? Most of you are investors in US markets, wondering when there will be quad-play. In Europe, already a quad-play market, because incumbent telco competitors already have footprint. We are all combining those products to a four-play bundle. Launched mobile in 9 markets already, committed to that. With the acquisition of “BASE” will have 7 million mobile subs. About 10% of revenue coming from mobile. Committed to that product in those markets, mostly through MVNO. This is most efficient way of getting in the mobile business. It drives revenue, it also has 50-70% less churn if they have mobile, broadband and video. Margins are good. Average ARPU is in low 20’s. Seamless connectivity across fixed/Wi-Fi/mobile. Lots of good reasons to have mobile platform.
• Mobile and 4G offering? A lot of advantages of MVNO: (1) don’t have to build the network, the infrastructure, you just rent the towers (2) you still own the customer, meaning can put together own product, SIM card. Disadvantages are that you have to re-negotiate these deals every two years. Key is margin, sustain reasonable margin and bandwidth. Think in most cases, mostly regulations and relationships, can keep those customers happy for long time. Already launched 4G in 3 countries, working in another 3, on table for 3 more. When one market, Belgium, bought the operator. Had large MVNO relationship, bought the small operator. Had synergies.
• Vodafone? Can’t say a lot more than what we’ve said publicly. Never talked about a merger, only about asset-swap. Looking at what markets and relative valuation. Didn’t agree on valuation. Liberty believes growth is sound and stable and in a fortunate position. We are not in decline. One company is growing, the other not growing. We know the transactions in the market. Disagreement on valuations for the assets (implying Vodafone asking unreasonable prices, Liberty declined).
• Content? Pretty clear on strategy – have 25m video subs, 18m broadband subs. All they do is access content. Have to be involved. We spend 2.5 billion already on content, mostly on the linear side – channels, SVOD, premium, etc. Also realize, there are 4 areas where we can be tactical in content investments: (1) free-to-air assets in Europe, (2) SVOD, (3) production companies, (4) sports. Done deals in all 4 areas. Bought 2 broadcast assets – one in Belgium, other in Ireland. Small investment in ITV. Invested heavily in OTT product called “MyPrime”. Sports rights in Holland and Belgium. Formula E. Small stake in LionsGate. How does it make sense? All of the equity in 7-8 deals is about 400 million, not a lot of money. Common theme – tactical, authentive, very high returns, very little capital exposed. Have done a good job of gaining value, I think. Example: bought free-to-air on Belgium, today using marketing with BMW based on the STB data we have, knowledge of consumers, etc. In Holland, launching premium sports channel, 5^th highest. Working on cross-promotion and marketing. Have commercial arrangement with LionsGate, helps with SVOD. They are capital light and strategic assets.
• U.K. – have all the sports, only one, didn’t have to bid on any of it. Germany is the same way. Have access and pricing. Some markets, like Holland, just bought the rights, paid tiny amount. Because we own the sports, worried about not having access, bought it.
• Financial leverage, buying back stock, hedging FX, etc. what is leverage amount? Starting with balance sheet, right sized, de-risked. 8 year average life, now is 4-5x leverage, at upper end of that. 100% fixed, 100% hedged. Borrowing at credit pools and not parent company. Average cost is about 5%. As long as growing and don’t need to raise capital, we believe we are in good position. Since buyback, committed to it. Bought 13 billion since began, have another 2.5 billion left. Seeing correlation between buying back stock and FCF. Doesn’t mean that’s the only thing to do with FCF. If we have 2.5 billion in FCF and buying back 2.5 billion in stock, still have 2-3 billion of liquidity because we can access capital. Believe that’s a good place to put the capital and that’s what we are doing.
• Leverage – 5x EBITDA? Can de-lever very quickly if we wanted to. Don’t see the need to – long-term, fixed, hedged. Since our business is growing, it is a great source of levered returns for shareholders. We want to make money for equity holders. We stress test it, could de-lever if wanted to but we are still growing so its right amount of debt at 5x EBITDA.
• Belgium? Highly political, highly local issue. – the regulation of cable in Belgium. Small country, hadn’t been implemented yet, waiting for details. We fought it. It will be retail  - construction. Currently living in best regulatory environment, they are allowing deals, mobile, net neutrality. Especially as we vertically integrate more.
• Dutch market, competition, synergies? In 12 countries in Europe. Holland, where we just made acquisition, consolidated nationwide footprint, certainly has had difficult start to merger. Probably rushed the merger. Acquired in November, rollout in April. In reality, focusing on all right things since then – new products (replay TV), customer service, sports channel. Synergies on track. Said 250 million, on track, but work in progress.
• Pricing? Pricing is one of key drivers of revenue for next three years, but we are smart and tactical about it. To take price increases, its more than just raising prices. You have to invest for costumers, improve quality of service, innovate, better the product. UK everybody raises prices 5-6% no problem, mostly due to sports, SKY added a great EPG, broadband speeds went from 100 mbps to 150 mbps and now to 200 mbps. Its 100% margin – raising prices.
• Upside opps? Newbuild. To be transparent, we were committed to declining capital intensity. Had this calculus we believed in: revenue growth, OCF growth, FCF growth, and FCF growth is also driven by lower capital intensity in terms of lower percentage of sales on capex, even though we spend fraction of what US spends. On core business, capital intensity was declining. But in UK, the light bulb went off. If you can generate 30% unlevered rates of return and create a self-financing source of customer and cash flow growth for next 5 years by doing newbuild. Thus the % of revenue might be a bit wobbly but we should do it, it’s a great investment. We need to give investors more data. But trust me, this is a massive opportunity for us. As well as CPE coming down. Didn’t exist 1,2, 3 years ago. Partially because we didn’t own Virgin, wasn’t thinking about it then. For shareholders, it will do a lot. This is exciting for us internally.
• Competitive threat from incumbents? Europe is not a fiber for whole marketplace; maybe Holland has 5% fiber. Switzerland has done fiber. Today, average incumbent is 80 mbps, that plays out 100-150 mbps sweet spot. We are 2-3x faster than incumbent. Consumption is growing 40-50% per year for data. It is a meaningful differentiator. People care about quality of service and the speed of product. Increase in speed is almost directly 1:1 ratio in increase in consumption. Unless the telcos build fiber, they are not a risk to us.
• Risks? Probably people would say balance sheet, regulators.
• UK market – competitive environment? The Virgin Media deal may go down as the best deal we’ve ever done. We were lucky to pay a 8 multiple. Synergies were achieved, delivered high-single digit EBITDA growth right now. 50£ ARPU, growing reasonably each year with investments in the business. The newbuild will accelerate the growth. Brand is good, networks are first class, programming is solid, mobile working great. Competitive environment looks fine to me. BT will do mobile, will have quad-play similar to how we have been, will have synergies as well. BT buying EE, a locally regulated decision. EE is Liberty’s MVNO provider. Want to make sure we still have access, which we will. O2 and Three also merging. Regulated by EU. Liberty looking at that deal as well, don’t think it will have meaningful impact.
• Germany market, comp. landscape, Deutsche Telekom? Germany will remain a growth engine, historically been 8-10%, could be mid-single digit which is normal. Majority of broadband market share comes to Liberty. Market as a whole is big, have EBITDA margins in the 60%, we have no mobile revenue, no B2B revenue – great opportunities going forward in Germany. Deutsche Telekom getting aggressive but still…
• Altice, etc. ? You fall in to one of three buckets today in Europe: (1) consolidator looking to consolidate in the markets and across markets (Liberty Global, Vodafone, Telekom,  who see great scale with reach and breadth.) (2) those that are retrenching (KPN is clearly retrenching, sold everything except Holland.) (3) everybody in between. Regulators seem to be supportive of cross border consolidation and more so in-market consolidation. Should find it easier to cover the sector going forward, you may lose a few names. No reason to have 120 mobile operators in Europe. 

U.K. Competition:

BT buying EE http://www.bbc.com/news/business-31144009

O2 and Three are merging Brussels.htmlhttp://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/telecoms/11966010/Three-O2-merger-faces-in-depth-probe-from-Brussels.html

Time Warner Cable (TWC) comments at 43rd UBS Conference (12/09/2015)

43^rd Annual Global Media and Communications Conference

Time Warner Cable (“TWC”)

Speaker: CEO Rob Marcus

Tuesday: 12/9/2015

Notes:

• “Year of surprises”, was confident a year ago the deal would close with Comcast (CMCSA)
• Not surprising that CHTR still had interest in us, but was surprising was the speed it all unfolded and the entrance of Altice to the market
• The operational turnaround – in early 2014, we were confident in what would lead to better TWC. By improving sales and marketing strategy and products, knew we could revitalize the residential business. 2 years later the TWC team has done spectacular. Still very confident in video sub growth for the full year in 2015. Subscriber performance is finally beginning to translate into the economics – revenue and margins.
• Overall, the turnaround in TWC is exactly what we hoped and thought would happen.
• Feel bad about the prolonged period of time that TWC had deal with personal uncertainty with these deals. But, the CHTR deal is a better deal so feel great about it.
• Latest on the process/best guess for when deal closes? Don’t know, not good at making guesses with how regulatory people do these things. Currently on day 89 of the FCC 180 day shot clock. Assuming no further delay, that expires March 9, 2016. All of the comments from the various interested parties are all in. TWC has responded to all of the FCC requests. Same for the DOJ. At state local level most has been obtained, except – NY, New Jersey, Hawaii, and California. Making progress on these.
• Time table from California has caused some angst, but we are all working with California to see if we can’t speed it up faster than that time table.
• In the meantime, working closely on integration. Fully confident in Tom Rutledge that he will hit the ground running. Expect the deal to close faster because of all the work the FCC/DOJ has done from the TWC/CMCSA deal, but who knows.
• Title II – what happens to this? Support open internet, generally comfortable with FCC’s open internet rules, but not comfortable with FCC’s classification of broadband as a Title II service. Through the NCTA are challenging this. But will refrain from how this will come out. No doubt the losing party will appeal. The significance is: chosen to take FCC at their word as it will not prevent broadband companies from raising rates, and thus we continue to invest in our infrastructure.
• 2 years into 3 year plan – TWC MAXX – seeing capex at about 19% of sales, what about 2016/2017? Been investing in three big buckets: (1) investing in growth by building out network for more residential premises and businesses, (2) to accommodate growth, subscriber growth, and traffic growth for broadband, and (3) improve customer experience. Customer experience: invested in reliability of plants, replaces older STB to make experience better, and rollout of TWC MAX – all-digital, more HD video, and adding Wi-Fi in the mass markets. Will not give specific capital intensity guidance, but will say will continue to invest in these buckets. Longer term, dynamics at work that could reduce capital intensity. Once these initiatives are done, won’t have to again. Also, potential for customers to bring their own “STB” and so TWC won’t have to. Long term number – hard to say, mid-teens % of sales seems right for capital intensity. Some cable companies may be less, some may say a different number is better, but mid-teens seems right.
• TWC MAXX –by end of 2015, will be half of the way through (~50%).
• As rollout TWC MAXX – speeds up to 300 MBPS, still more juice on the DOCSIS 3.0 to offer faster speeds if had to before moving to DOCSIS 3.1. Have field trials for DOCSIS 3.1, I order to get to those gigabit speeds, will have to replace modems in customer homes. This will be similar to 3.0 DOCSIS, a gradual replacement for those customers who want the speeds first. Will have to invest in capacity availability and CMTS, but these are things TWC is already working on prior to 3.1 rollout. In terms of competitiveness, the 300 mbps is good. Also, the standard speeds are where most people are, which is very competitive.
• GOOGLE Fiber? Based on premise that Google wants to get higher speeds regardless of who does it –them or someone else. We are not sure what GOOG wants.
• Cord-cutting? This topic has monopolized all the headlines. I will remind you that TWC is having the best video subscriber growth in over a decade. Definitely some cord-cutting going on but believe TWC can do well despite this. An OTT offering is not in our plans. Believe assets are better used for selling other people’s content through superior infrastructure.
• Adding Netflix to the STB? (Charter seems open to it, CMCSA as well) TWC is open to it, always has been. Want to deliver want customer want to experience. Been embracers of OTT video because it helps our broadband business.
• Potential with ROKU? Would like if in future, customers can go to Best Buy, buy a ROKU, and they are good to go without leasing a STB and can use other OTT and TWC products. This seems attractive to TWC. This could expand video customers as well.
• Set-top Box fees? TWC charges for one, CHTR does not. Everyone charges STB rental fees, but there are differences for the modem charge. When move to world where customers could essentially bring their own STB, may be some lost revenue, but helps the capital intensity and customer service paradigm.
• Password sharing for OTT services? There are differences of opinion in MSOs and CEOs. Definitely some password sharing that goes on, but don’t see it as causing me to lose any sleep. TWC limits customers to 5 concurrent streams with one username and password. There should be some ways to manage it. Worry about the fear of password abuse gets in the way of technology advances.
• Growth in 2015 for programming, 11% similar to % in 2014. Nothing new to add to this, no 
• “silver bullet”. Programming cost per video sub would continue in foreseeable future, likely higher than video ARPU growth. Will it last forever, probably not. It is in the beginning stages of fray, where some content is available outside the cable bundle. This could change the dynamics.
• Skinny bundles impact? Not sure on the demand is there yet. Get that not every customer wants the same thing. Want flexibility in programming agreements but not there yet. The big fat bundle is tremendous value, it is easy to understand, simple. Video performance comes off the back of a triple-play offering that has a rich HD offering. We own some RSN’s in the interest of controlling some sports programming costs.
• Broadband – CHTR doesn’t charge modem rental fees, TWC does? Very hard for me to answer this, ask Tom Rutledge.
• CHTR focused on 60 mbps as base, TWC has a lower one for economic reasons? View is not every customer can afford or wants the standard speeds. So offer $15 a month for 2 mbps offering. Believe it is 10-12% of gross HD connect has taken this economic product. These are likely customers we probably wouldn’t have gained if didn’t have this product.
• Over many quarters now, the HD subs want higher speeds for broadband. What used to be the highest speed is now the standard speed.
• Usage based pricing? Not sure on where this goes. When TWC launched usage based pricing, it was to better match customer needs with what TWC was delivering. If you use less broadband, then pay less. Have to admit that customers place a huge value on the “unlimited” broadband product, vast majority on this plan. CHTR has already committed to not have usage-based pricing.
• Amazon selling Showtime to subs? This is not much different than other OTT – view them as both friend and foe as a video player. Helps with broadband, could be a substitution for TWC video, but view it as more complimentary, as TWC offers other things such as (specifically) live sports.
• 82% of gross adds/connects is “fat bundle” – since beginning of cable, has been “light” cable. Half of the 18% are the light, the other half is “expanded basic”.
• Programming costs – bad for margins – but current state is “investment phase” to build customer experience (this won’t repeat itself), after done with investment phase, the margin characteristics should be more favorable. The mix shift in business – residential and business internet – is higher margin and will improve margin. Also, customers improving solutions to solve problems, thus less phone calls or truck stops.
• S-curve for penetrating in business services? Definitely think it can. Off 17^th straight quarter where business revenue grew $100m+. Still, lowly penetrated, probably around 10%.
• Advertising? Overall, been bumpy year, not just because less political. Feeling good about next year.

Charter Communications (CHTR) comments at 43rd UBS Conference (12/08/2015)

43^rd Annual Global Media and Communications Conference

Charter Communications (“CHTR”)

Speaker: CEO Tom Rutledge

Tuesday: 12/8/2015

Notes:

·         Been through most states and cities, very few approvals to go: New York, Hawaii, and California

·         California has given CHTR far out date, trying to move that in, no response from them yet

·         DOJ & FCC – already submitted all documents

·         No surprises thus far through the deal process; will be smaller company than existing Comcast (CMCSA), not vertically integrated like CMCSA

·         Have made comments and actions to be more favorable for customers and other business, such as Netflix

·         Have had conversation with Netflix (“NFLX”) over how to get them involved in CHTR’s product set

·         Have worked with field people and call centers on integration, which is about 90% of the employees

·         Know that CHTR has to create go-to-market strategy to attract customers

·         CHTR has the highest penetration on “fat basic” – a valuable product that customers can relate to, and thus growing video, voice, and internet business

·         Will have to do all-digital at Time Warner Cable (“TWC”) that will take a couple of year

·         Will have to bring calls back on-shore as some are still off-shore

·         Will have to make sure quality of service calls improve by hiring more expensive, high quality people to answer those calls

·         Big issue: can CHTR pull of the execution? Believe we can do it.

·         CHTR believes in putting a two-way interactive box on every outlet, and they have been putting one-way digital/analog boxes, which gets data speed, but still need to do it the CHTR way

·         CHTR believes the future is “on demand” and two-way interactive, every TV that is connected should be two-way interactive experience

·         $800 million synergies still good? It may look conservative compared to Altice’s projections (laughs), and maybe we are –programming synergies is about 50% of that number, operating synergies as well.

·         Believe margins will improve over time, most of which coming from just being a better service organization, improving the quality of the products by investing in them, the service, and how we relate to customers, can take costs out of the business

·         These take upfront costs – training, hiring – which are operating expenses, but should result in a higher margin because it takes transaction intensity out of the business

·         Also working on taking capital out of the business, such as set-top boxes, downloadable security, a process can buy multiple STB from different vendors, can deploy them in a different way.  

·         If you look at CHTR’s curve for capital intensity, it peaked in 2014 and is coming down. Similar curve for new assets, but new company will be more efficient than old CHTR because of (1) Worldbox being developed already, (2) all-digital strategy already developed, just needs to be implemented through new company, and (3) TWC assets are in better shape than old CHTR was, since coming out of bankruptcy.

·         Old CHTR went through bankruptcy and coming out of bankruptcy has a lot of deferred maintenance costs. A lot of work was being contracted out. Had to walk out and look at the physical infrastructure – 200,000 miles of assets – and made a list so CHTR could go all-digital. CHTR hired people to improve customer service, etc.

·         Bright House already has good customer service, TWC is pretty good

·         2 year investment process? Parts are shorter. Pricing and packaging will occur right out of the gate. Will need to do two-way interactive for TWC, but will be different rollout than CHTR did. Still a capital intensive project.

·         Competition? Very competitive environment, CHTR lost video subscribers for a decade. CHTR will have positive video sub growth in 2015, expect to have positive video sub growth in the future. Why is that? Believe CHTR video better than competitors video, specifically satellite. If overall pie isn’t growing, still believe can take market share. Do this by making our product superior. TV is becoming a more “on-demand” product.

·         Spectrum Guide update, and Worldbox? Worldbox is finished, ready to deploy. Spectrum Guide is finished, still testing it in Reno and Dallas/FW. It is complete, it works, is backward compatible user interface, that works on all CHTR boxes. Worldbox helps free CHTR from just buying boxes from two companies. Since it created a market shift, helped big time on pricing. A lot of value has been received by CHTR, new company will see a lot of improvements in pricing.

·         Churn? Churn rates going down, costs per customer going down from operating expense level, service calls are declining. This creates more satisfaction, thus customer life increases, which means churn goes down, which means costs per revenue goes down. This is how you reduce costs in the business. This also means less disconnect, so less disconnects with same amount of new connects means more growth.

·         Rollout? Have to be careful how you roll things out, because it negatively disrupts customers as they have to learn something new. High quality search-and-discovery on a user interface, that can change as tastes change

·         Over-the-Top video a threat? From broadband perspective, want to sell a really high capacity broadband, put network in position where can incrementally increase capacity at a low cost, thus differentiates from competitor. To realize these differences, consumers must use video on the network. Want OTT providers to go to 4K or 8K, thus network is perceived as more valuable. A lot of content companies went in streaming arena without a true strategy. Notion of “video space” is not a valid concept. Video comes back to digital world to the TV. Now content companies are reacting to their own bad behavior, but OTT helps CHTR control costs of content and increases need for broadband.

·         Password Sharing? Big deal, if you ask young people, all have someone else’s password. Real problem is content company have their own sites, but no uniform control over the stream. Can go to LA, NYC, and Chicago simultaneously, implying large password sharing. One account know of has 30,000 concurrent streams (laughs). The value of all content comes from the copyright.

·         Skinny bundles? Testing the cable service on a Roku box, specifically. Skinny bundles have been sold for years – for example, Basic only. It is about 15-20% market share of cable sold. While would love to buy everything a-la-carte and sell it in packages, that is not the way it is sold to CHTR. A lot of people want cheaper TV. But to get cheaper TV that satisfies is the hard part. Currently, have to buy all of a content companies offerings and package it the way they want. Can’t package it in a niche way CHTR wants.

·         Strategy for business? Want to put small Wi-Fi router in each small business, can have more mobility for customers.

·         Ultimately mobile platform is what CHTR wants to reach to, where the customer is moving, measured in megabits. CHTR can build this out relatively rapidly, stepping into MVNO relationship contracted with BHN/TWC. There is an auction coming up, but difficult for CHTR to participate in, not sure when deal will close.

·         Interested in how CHTR transforms from a stationary wireless to a non-stationary wireless.

·         Monetizing broadband? Fastest growing cable company in US in terms of revenue, EBITDA, subscriber growth in percentage terms. Think we got the pricing right to grow. Want to grow by adding high quality products, high quality service, and growth comes from subscribers over pricing. How you allocate revenue among segments is an academic exercise.

·         Underpenetrated assets – the more penetrated, the better the margin and costs per customer. Goal is to get more customers. The strategy is to create the most economic value for shareholders.

·         Video business at 34%-ish, broadband at 42%, customer relationships at 48-50%. Both TWC and BHN are within 2% of that. There is more upside than realized. Each upside comes at lower cost per new subscriber.

·         ARPU? Not how CHTR thinks. Want to grow revenue and customer relationships. Don’t think about products individually but rather attributes to a relationships, cost inputs to a relationship.

·         Model prior to this deal? Non-usage based pricing, no data caps, minimum of 60 mbps, no hidden taxes, nothing that distracts from the product and quality. All good things to drive value in the eyes of the consumer.

·         Liberty owns 26-27% of CHTR, will own 17-18% of new company. Not in a control position. From a conventional analysis, there is no issue with John Malone.