Thursday, December 10, 2015

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

43rd 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 17th 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.

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