Time Warner Cable Inc. (TWC)
February 27, 2013 11:45 am ET
Executives
Irene M. Esteves - Chief Financial Officer and Executive Vice President
Analysts
Benjamin Swinburne - Morgan Stanley, Research Division
Richard Greenfield - BTIG, LLC, Research Division
Presentation
Benjamin Swinburne - Morgan Stanley, Research Division
Okay. Good morning, everybody. I'm Ben Swinburne, Morgan Stanley's media analyst. We are pleased to have with us from Time Warner Cable, Irene Esteves. Irene is the CFO, has been CFO for about 18 months now, prior to her time at Time Warner Cable as CFO at XL Group. Irene, thanks for joining us this morning.
Irene M. Esteves
It's great to be here, thanks.
Benjamin Swinburne - Morgan Stanley, Research Division
Why don't we start out at a high level on the cable business in general and then Time Warner Cable specifically. And ask if you could tell the audience about the primary drivers of growth looking out over the next couple of years.
Irene M. Esteves
Sure. I mean, where we've gotten a lot of our growth has come from business services, where we're growing at 20% plus, and that's on a bigger and bigger base. So we're now at $1.9 billion in revenue and we still expect to grow 20% next year, in the 20% to 25% range. And also in HSD, we've got a terrific HSD business that grew 8% last year and we see great growth rate for that as well and a long runway for both of those businesses. But then since you asked me about kind of a longer-term question, what don't I take this time to talk about our 2013 guidance and put that in perspective a bit. We have a very strong and stable business based on the subscription model that we all know and love, 15 million households paying us $120 a month, month in and month out. So we are confident in the long-term profitable growth of our business. We've been able to grow revenues and maintain margin within a relatively small band. But that doesn't mean every year we're going to have flat margins. So when we gave guidance for '13, we talked about 4 primary drivers of slight margin compression and we refer to it as 4Ps. The biggest one being programming expense and I'm sure we'll talk a little bit about programming expenses. The second was pension expense, which was up 20%, given the very low interest rate that drives the expenses on a GAAP basis. Political advertising, which we had a very strong year in 2012, it's a highly profitable revenue source and that pretty much goes away in '13. And then, we had some in-sourcing cost savings, which helped offset some of the programming expense increases in the past. So we really don't have much of it in '13, but certainly, this comes back to us in '14.
So as you think about those headwinds, they really hit us head on right in the first quarter, and then we expect the offsets to come throughout the year. So while we think the first quarter is going to be relatively flattish, we think the long-term guidance is still intact. We're confident in that long-term guidance. And when you get back to it, you think about that momentum that's building through 2013 that's going to carry us into '14 and beyond. It's very exciting. We think the model works, and we're very confident in that long-term profitability that you asked us about.
Benjamin Swinburne - Morgan Stanley, Research Division
Great. And when you think about managing the business longer term and some of the challenges the business have and you mentioned a couple of them in 2013, how do you sort of navigate those over the longer term? And what do you guys doing internally at Time Warner Cable to make sure you're in the position to hit those expectations?
Irene M. Esteves
Yes, the biggest thing is building our capacity for the HSD business. We've seen capacity usage grow 40%, 50% per year. And we're forecasting over a very long time period our capital expenditure. We're looking out 5, 7 years, and we're expecting those percentage increases to go on infinitely. So we're always staying ahead of that need in keeping our network capacity with plenty of headroom for that kind of extraordinary growth. So that's important to us. And on the business services side, it really gets to how we attract and retain very high-quality talent. We've been very successful over the last few years bringing in more and more experienced sales reps. But it takes time for them to ramp up. So we hired quite a few in 2012. We expect to hire more in 2013 and that's a big part of our success formula is making sure we have that pipeline, as well as the investments that we're making in our plans in order to build out and proactively build our network for the business customer.
Benjamin Swinburne - Morgan Stanley, Research Division
Great. I think we'll touch on probably all of those as we move through the questions. One other sort of completely different topic but important to Time Warner Cable and we are in San Francisco, so a number of Dodger fans in the audience are probably pretty low. But I'd love to get your take on the decision you've made, both with the Lakers and now with the Dodgers to get into the sports distribution business in the Los Angeles market, a big market for the company.
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