Jan 26, 2012
Executives
Robert D. Marcus - President and Chief Operating Officer Irene M.
Esteves - Chief Financial Officer and Executive Vice President Glenn A. Britt - Chairman and Chief Executive officer Tom Robey -
Analysts
Stefan Anninger - Crédit Suisse AG, Research Division Jessica Reif Cohen - BofA Merrill Lynch, Research Division John C. Hodulik - UBS Investment Bank, Research Division Michael McCormack - Nomura Securities Co.
Ltd., Research Division Philip Cusick - JP Morgan Chase & Co, Research Division Jason Armstrong - Goldman Sachs Group Inc., Research Division Vijay A. Jayant - ISI Group Inc., Research Division Douglas D.
Mitchelson - Deutsche Bank AG, Research Division Jason B. Bazinet - Citigroup Inc, Research Division Craig Moffett - Sanford C.
Bernstein & Co., LLC., Research Division
Operator
Hello, and welcome to Time Warner Cable's Fourth Quarter 2011 and Full Year Results Conference Call. [Operator Instructions] Today's conference is being recorded.
If you have any objections, you may disconnect at this time. Now I'll turn the call over to Mr.
Tom Robey, Senior Vice President of Time Warner Cable Investor Relations. Thank you.
You may begin.
Tom Robey
Great. Thanks, Candy, and good morning, everyone.
Welcome to Time Warner Cable's 2011 Fourth Quarter and Full Year Earnings Conference Call. This morning, we issued 2 press releases, one detailing our 2011 fourth quarter and full year results, and the other announcing the reload of our share repurchase authorization and an increase in our regular quarterly dividend.
Before we begin, there are several items I want to cover. First, we refer to certain non-GAAP measures including operating income before depreciation and amortization or OIBDA.
In addition, we refer to adjusted OIBDA and adjusted OIBDA less capital expenditures. Definitions and schedules setting out reconciliations of these historical non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our trending schedules.
Second, today's announcement includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on management's current expectations and 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 various factors, including economic, business, competitive, technological, strategic and/or regulatory changes that could affect our business.
These factors are discussed in detail in Time Warner Cable's SEC filings, including its most recent annual 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 its forward-looking statements, whether as a result of new information, future events or otherwise.
Third, today's comments on our outlook for 2012 do not include the impact of our pending acquisition of Insight Communications and the expected sale of AWS Spectrum by SpectrumCo. And finally, today's press releases, trending schedules, the presentation slides for Mr.
Marcus and Ms. Estevez, and the related reconciliation schedules are available on our company's website at timewarnercable.com/investors.
A replay of today's call will be available beginning approximately 2 hours after the call has ended and will run through midnight, Eastern Time, January 30. With that covered, I'll thank you and turn the call over to Glenn.
Glenn?
Glenn A. Britt
Good morning, and thanks for joining us today. Time Warner Cable capped off 2011 with a strong performance in the fourth quarter.
We grew revenues 4% and adjusted OIBDA almost 9% on a year-over-year basis. These results were driven by our focus on improved top line performance and tighter cost management, even as we invested in new growth opportunities.
Business services continued to be our biggest success story. Aided by the NaviSite acquisition, we accelerated the year-over-year revenue growth rate to 37% in the fourth quarter.
And even without NaviSite, business services revenue was up 25%, making Q4 the highest growth quarter of the year. In residential services, we returned phone net adds to positive territory.
We drove very strong broadband net additions and we continue to make incremental progress in stemming video subscriber losses. On the ad sales front, I'm particularly proud of the fact that we were able to match our full year 2010 revenues, even without the benefit of election year political spending.
We returned $3.3 billion to our shareholders in 2011, $642 million in dividends and the remainder in share repurchases. Together, these equaled almost 120% in free cash flow.
Not bad. As you saw in this morning's announcements, we are increasing our dividend by 17%.
At yesterday's closing price, that equates to a dividend yield of 3.2%, which is higher than 80% of the companies in the S&P 500 Index. And consistent with our balance sheet strategy, our board has replenished our share repurchase authorization.
As we enter 2012, I'd like this share some of our priorities for the year ahead. First, we plan to continue our aggressive growth in business services by expanding product offerings, growing our sales force, improving productivity and increasing our serviceable footprint.
This means continued investment, both in people and in capital. But remember, business services capital spending remains a fairly small part of the total.
We're also focused on growing our core residential services through more aggressive in targeting sales and marketing, and improved customer experience and continued product innovation. That sounds like a lot.
It is. The marketplace for residential services is dynamic, both in terms of customer expectations and the competitive environment.
In addition, the audience is bifurcating. One group is extremely price-conscious, perhaps due in part to the ongoing economic malaise.
The other group is willing and able to pay for more features and service. We're going to focus more attention on products and services that best meet each group's needs rather than pursuing traditional one-size-fits-all solutions.
Next, we expect to drive ad sales revenue growth by capturing political spending and by expanding our third-party rep deals. In 2012, we're planning to launch and support new business initiatives and product enhancements.
These include the Los Angeles RSNs, WiFi and IntelligentHome, which is our home security monitoring service. In addition, we expect to implement our recently announced Verizon Wireless deal.
As always, we will make capital investments in our infrastructure to enable future growth and allow for the continued best-in-class delivery of our products and services. Projects include expansion of our content delivery network, which powers our IP video capability, our 2 international headends, completion of DOCSIS 3.0 deployment, and conversion to all-digital in more cities.
We expect to be able to accomplish this while maintaining the capital spending of the last 2 years -- that is, between $2.9 billion and $3 billion, which represents a continued decline in capital intensity. And last, but certainly not least, we expect to integrate and capture synergies related to the NaviSite and NewWave acquisitions, which closed in 2011; and the Insight acquisition, which we expect to close in the next few months.
We're off to a very good start with both NaviSite and NewWave. In summary, our 2011 results demonstrate the continued resilience of our business and its rapid change in technology and the consumer marketplace.
We continue to make important progress in what has been a long-term evolution from a company focused only on residential video to one whose growth is now increasingly generated by residential high-speed data and business services. We have a full slate of initiatives in the year ahead, all designed to generate strong free cash flow, enable future growth and provide attractive returns to our shareholders.
So now, let me turn it over to Rob and then to Irene to give you additional background. Rob?
Robert D. Marcus
Thanks, Glenn, and good morning, everyone. As Glenn said, we finished off 2011 on a really positive note and we entered 2012 poised for further operational improvement.
In the next few minutes, I want to highlight some of our accomplishments and share with you some of our plans for the new year. We've been talking about the challenging economic and competitive environment for several years now, and the operating environment hasn't changed a lot over the last quarter or so.
Economic conditions, particularly occupied housing and employment, seemed to have lifted off the bottom a little in recent months, but they generally remain far below prerecession levels. On the competitive front, we estimate that AT&T's U-verse is now available on 1/4 of our footprint and Verizon's FiOS is available in around 12%.
That's roughly 10.2 million homes in total, which is only a slight increase over Q3 levels. FiOS marketing efforts and promotional offers were more aggressive in the fourth quarter, while DIRECTV and U-verse were somewhat less so.
So the operating environment remains tough, but we're actively managing the business to yield improved results in spite of external factors. As I outlined last quarter, on the subscriber front, we're focused on customer acquisition, upsell and retention, which we internally call get, grow and keep.
We're making good progress on all 3 fronts. We're driving customer acquisition and migration with more aggressive offers; better, more focused marketing and advertising; and improvements in our sales channels.
And our efforts are paying off. In the fourth quarter, new connects were 3% higher than a year ago.
We featured 2 primary offers in Q4. Early in the quarter, we targeted DSL customers with the $29.99 Internet campaign.
And in mid-November, we introduced an $89.99 Triple Play with a year of free DVR service. As you can see on Slide 3 of the PowerPoint presentation, all 3 PSU categories responded and we added twice as many PSUs in Q4 of '11 as we did in Q4 of '10.
Broadband was a real success story in the fourth quarter. Connects were up each month versus the comparable month of 2010, and fourth quarter residential broadband net adds increased over 40% on a year-over-year basis to 117,000.
Once again, high-speed data net adds over-indexed to our higher-speed tiers. Roughly 3/4 of residential broadband net adds were Turbo or higher.
And DOCSIS 3.0 net adds accelerated for the eighth consecutive quarter to an all-time high of 54,000. Our Triple Play promotion led to a sharp improvement in residential digital phone connects in December, and that helped drive total digital phone net adds of 50,000 in the quarter.
That's not as high as the year-ago period, but it does represent a significant change in trend. And in particular, we increased residential phone net adds by 45,000 on a sequential basis.
Our experience here reinforces our belief that the relative weakness of phone net adds earlier in the year was related to the value proposition, not the merits of the product itself. As a result, we plan to continue to feature attractive Triple Play and other bundles including our phone product.
In fact, just last week, we launched a new Triple Play offer, as well as a "Buy Wideband, get phone free for a year" promotion. We also were able to continue the year-over-year improvement in video subscriber performance in the fourth quarter, with 9% fewer net subscriber losses than a year ago.
Again, the vast majority of the video losses were analog Single Plays. Premiums continued to be weak in the quarter despite being featured in our Triple Play promotion in Q4.
As you know, we launched HBO Go this month, and our newest Triple Play offers include an attractive premium channel promotion, so we're hopeful we can re-energize this category. As a result of our efforts in the quarter, a number of other subscriber metrics showed substantial improvement.
DVR subscriber net adds turned around to a positive 53,000 after 2 quarters of decline. Our new whole-house DVR drove most of the adds.
El Paquetazo net adds were strong, particularly in the West, where subscribers more than doubled year-over-year, and we added another 9,000 Signature Home customers with ARPU of around $230 as compared to about $150 from non-Signature Home Triple Plays. Our promotions had the expected impact on bundles.
Combined, Double and Triple Play net adds improved both sequentially and year-over-year. Irene will talk more about our ARPU trends, but the good news is that because we increased bundle selling, our monthly recurring revenue per new connect actually increased in spite of our more aggressively priced promotions.
So we have a lot of initiatives trained on customer acquisition and upsell. It's too early to forecast Q1 subscriber performance, but I can tell you that subscriber net adds in the first few weeks of 2012 were somewhat better than the comparable weeks last year.
On the retention front, we've taken a couple of steps which, in the early going, appear to have helped on the disconnect side. Over the past 2 quarters, we realigned our customer retention function, concentrating calls in a smaller number of service centers staffed by experts.
These reps are armed with special training and somewhat more aggressive retention offers than we've had in the past. As a result, save rates are up.
In addition, we're taking steps to enhance customer loyalty. Around Thanksgiving, we offered our longest-tenured Triple Play customers free voice mail, not as a promotion, but as a thank you.
Although a relatively small gesture, the impact on customer satisfaction metrics was remarkable. You're likely to see more from us in this area.
Of course, a big part of getting, growing and keeping customers is ensuring that we deliver a really great customer experience, both product and customer service. On the product side, I'd say that the innovation engine at Time Warner Cable is alive and well.
In 2011, we introduced more than 2 dozen new products, from new features that make life a little easier to new product categories altogether. And we're planning to extend this innovation in 2012.
Our TWC TV app for the iPad has continued to get better and grow in popularity. It's now been downloaded to around 850,000 unique iPads.
And in December, it had more than 300,000 unique users. Last week, we launched a similar app, including almost 200 live video channels for the iPhone.
In addition, we have an app that enables customers to use their Android tablets and smartphones as very capable remote controls, and we expect to make live TV available very soon on devices running the new Android 4.0 operating system. We're planning to bring our live IP video to a wide variety of new platforms in the home this year, including PCs and Macs, game consoles, and certain models of Internet-ready televisions.
And in addition to live television, we plan to make On-Demand content available in all of these platforms. We're also improving the traditional video viewing experience by enhancing our VOD portal and moving to a uniform, genre-based national channel lineup this year.
Expansion of our Wideband footprint has enabled us to put more distance between our broadband product and DSL. At year end, DOCSIS 3.0 capability was available in 76% of our footprint, and we're planning to complete our deployment of DOCSIS 3.0 this year.
We also enhanced our broadband product by deploying 1,200 WiFi access points in Los Angeles, giving our broadband customers mobile access to the Internet. They seem to love it.
Our customers have used almost 10 terabytes of capacity in the 4 months since the launch. We hope to turn up as many as 10,000 new WiFi access points in Los Angeles and other cities in the year ahead.
And complementing our WiFi strategy, we inked a set of reseller and development agreements with Verizon Wireless last month. We're very excited about the opportunities those arrangements create and we're working towards a first-half launch in several cities.
As Glenn mentioned, IntelligentHome, our home security monitoring product, has been launched in 5 cities. And though we're in the very early days, we're very encouraged by the response to the product.
On the customer service side, we made significant progress in 2011, although I acknowledge that it's a long journey. Among other initiatives, we're focused on making it more convenient for our customers to do business with us by enabling them to interact with us through the channel of their choice and at a time that suits their schedule, not ours.
Historically, contacting the cable company meant a phone conversation with a rep at a call center. In 2011, we improved the number of calls resolved through interactive voice response systems by 40%, getting customers the answers they need faster and without the need for interaction with a live customer service rep.
We expect to expand this support channel by another 30% this year. Chat resolution more than doubled last year, and we're adding capacity to expand it by another 60% or so in 2012.
In addition, we're working to expand web self-service in the year ahead. This channel offers considerable promise since more than 1/3 of our customers already go to our website before calling us.
Improving the convenience of installation and service is another critical item to customer satisfaction. We've gone to 2-hour service call windows almost everywhere, and we've now got 1-hour windows and weekend appointments in some markets and we're even experimenting with specific times for service appointments in several cities.
An increasing number of our customers would prefer to do certain installs themselves, so we're putting resources behind a self-installation initiative this year, in the expectation that it can drive both higher customer satisfaction and lower costs. The bottom line on customer service, we're making progress.
There's still much work to do, but I think we're focused on the right drivers. Before I finish up, let me turn for a moment to business services.
In short, we had a great 2011 and we're counting on a repeat performance in 2012. Let me highlight a few areas of focus.
First, we're driving bundles. Our existing commercial customer base is still disproportionately composed of Single Plays, either video or high-speed data.
In recent quarters, we've had increasing success driving those Singles into bundles and adding more new bundled subs. In the fourth quarter, for example, virtually all of the 12,000 new commercial customer relationships were either Double- or Triple Plays, so this will be a continued area of focus in 2012.
Second, we're continuing to go upmarket. While most of our business services revenue comes from small businesses, we've had a lot of success selling to medium-sized businesses, products like dedicated Internet access and Metro Ethernet.
This trend continued in 2011 as we grew these 2 categories to more than 1/3 of business services broadband revenues. We plan to continue to drive these products hard in the year ahead as we work to win even more midsized customers.
Third, we're putting even more buildings on net. We plan to continue to aggressively expand the number of serviceable commercial establishments in 2012.
And fourth, we're adding feet on the street. We believe the opportunity is there and we want to make sure that we're both expanding the sales force and improving its productivity to capture more share.
So in closing, we drove better operational performance in the fourth quarter through very a focused effort in customer acquisition, up-selling and retention. And we supported these efforts with continued improvement in the customer experience, both product and service.
There's still much to be done and we're focused on the execution of aggressive plans to drive additional improvement in the year ahead. Thank you, and with that, I'll turn it over to Irene to discuss our financial performance and plans for the coming year.
Irene M. Esteves
Thanks, Rob, and good morning, everyone. 2011 was another good year for Time Warner Cable.
We grew full year revenue 4.3% as business services revenue grew almost 33%, and residential revenue increased 2.7% while advertising revenue was flat. And adjusted OIBDA grew 5.1%, reflecting our strong revenue growth and somewhat higher margin.
The acquisitions of NaviSite, and some of the cable systems from NewWave in 2011 accounted for roughly 60 basis points of total revenue growth and about 40 basis points adjusted OIBDA growth for the year. Operating income increased 10.3% and free cash flow grew over 20% to $2.7 billion or $8.19 per diluted share.
EPS increased over 36% to $4.97, exceeding what we projected at the beginning of the year. We returned nearly 120% of free cash flow to shareholders.
In total, we returned $3.3 billion through paying cash dividends of $642 million and repurchasing $2.6 billion of our common stock. And as Glenn mentioned, we announced a 17% increase in our quarterly dividend to $0.56 per share or $2.24 on an annualized basis and reloaded our share repurchase authorization to $4 billion today.
Before we get into the presentation, let me point out that my comments on our 2012 outlook do not include Insight or the sales aided by AWS Spectrum by SpectrumCo, and we'll provide you with updates on these when those transactions close. Let's jump right into our financial results on the next slide.
For the full year, total revenue improved 4.3% to $19.7 billion, with total ARPU per customer relationship growing 4.7%. Total fourth quarter revenue increased 4% year-over-year to $5 billion, with total ARPU per customer relationship increasing 4.2% to $115.
Of our fourth quarter revenue growth of $192 million, $97 million came from organic residential services, $76 million from organic business services, $34 million from NaviSite and $13 million from NewWave, partially offset by $28 million revenue decline in advertising and other revenue combined. Moving on to Slide 6, we had another terrific year of business services.
We targeted organic annual revenue growth in excess of 20% and over 30%, including NaviSite, and we handily achieved those goals with full year growth of 24% and 33%, respectively. For the fourth quarter, we had a record quarter in business services growth, which accounted for close to 60% of our overall revenue growth.
NaviSite contributed about 1/3 of business services growth. Our revenue was up $111 million or 37%.
Of the $76 million organic growth, HSD and voice comprised 75% of it. Overall, HSD revenue increased over 23%, driven by growth in shared and dedicated Internet access.
Business voice revenue increased 50%, driven by subscriber growth, and wholesale transport revenue of $44 million increased almost 50% and was driven by growth in cell tower backhaul. At quarter end, we had an installed base of nearly 7,700 revenue-generating radios and a meaningful backlog under contract.
We made significant investments in business services during 2011 and we expect to build on them further in 2012. As Glenn mentioned, we are focused on expanding our products and service offerings, growing our sales force, improving productivity, and increasing our serviceable footprint.
We expect these investments to help us drive 2012 business services revenue growth in the 25% to 30% zone again. For residential services, let's start with revenue on Slide 7.
Full year 2011 residential revenue grew 2.7%, including NewWave. Fourth quarter revenue grew 2.3% on an organic basis and was up 2.6% including NewWave.
The overall year-over-year growth in the fourth quarter was driven by a combination of HSD and voice subscriber growth and improved ARPU per video and HSD subscriber, partially offset by video subscriber losses. HSD revenue growth was up a robust 8.6% for the fourth quarter, contributing $91 million of the fourth quarter growth.
Residential voice grew 2.5% to contribute $12 million of growth, and video revenue was about flat. Switching to Slide 8.
We continue to do a good job of getting and retaining customers during difficult economic times. This, coupled with our ongoing effort to move existing customers up the value chain in both video and HSD, continue to drive revenue growth.
Flipping to Slide 9. Fourth quarter residential HSD revenue growth was driven by subscriber increases, as well as a 3.7% improvement in residential HSD ARPU.
This is an acceleration from the third quarter year-over-year ARPU increase and the 11th consecutive quarter of residential HSD ARPU improvement. The ARPU improvement reflects the continued benefit from price increases and an improved HSD subscriber mix as we migrate subscribers to higher-priced tiers of service.
In fact, at quarter end, Turbo and Wideband subscribers comprised nearly 19% of our residential HSD customer base, up from around 14.5% a year ago. Wideband subscribers alone increased 60% from the third quarter and increased tenfold from the fourth quarter a year ago.
Moving on to Slide 10. Fourth quarter residential voice revenue improvement was driven by subscriber growth, offset a bit by 1% decrease in ARPU.
We think we've learned something about the shape of the demand curve here. We're at higher prices compared to our peers and competitors, and are now improving the value proposition as well as improving our cost structure.
We expect the net effect will be higher voice revenue and profit. And turning to Slide 11.
The modest growth in fourth quarter residential video revenue reflects the 3.7% increase in ARPU, which more than offset the decline in video subscribers. The ARPU increase was driven by price increases, a more favorable video subscriber mix, increased equipment rentals and an increase in DVR revenue.
These factors were partially offset by an $11 million decline in premium channel revenue. On the next slide, full year ad revenues of $880 million were flat with 2010, which was a significant accomplishment given the drop off in political advertising.
During the fourth quarter, advertising revenues of $242 million decreased $27 million or 10% year-over-year, driven primarily by the decline in political advertising. Ad revenue was helped by new rep deals, where we sell the advertising for other video distributors, and strengthening in the automotive category.
As we look forward, we expect that we'll be able to grow ad revenues in the double-digit range in 2012, helped by political spending in the second half of the year. Let's turn to Slide 13.
Full year adjusted OIBDA increased 5.1% and our margin increased 30 basis points. Total operating income rose 10.3% and our operating income margin improved 110 basis points to 20.7%.
Fourth quarter adjusted OIBDA grew 8.7% and our margin increased 160 basis points. The improvement reflects higher OpEx in the fourth quarter of 2010 from several items, including $15 million from the reclassification of certain amounts previously recorded as depreciation expense and a $12 million severance charge, which were offset by the loss of high-margin political advertising in Q4 of '11.
Fourth quarter operating income rose 3.5% to over $1 billion. Our operating income margin contracted 10 basis points to 20.6%, primarily driven by a $60 million wireless noncash impairment, an increase in depreciation expense and a year-over-year increase in merchant-related and restructuring cost.
The wireless write-down was related to our discontinuation of MB&O [ph] services on Clearwire and Sprint's networks as we prepare to offer services through our Verizon Wireless agency agreement. The fourth quarter operating expense, which included $26 million from NaviSite and $8 million from NewWave, grew 1.3% compared to last year.
Employee costs were up 6.4%, driven by annual salary increases across all of our businesses and higher headcount in business services, including the addition of NaviSite employees. Business services employee cost increased over 38% while the rest of the company was around 3.5%.
Programming expense increased 2.1% in aggregate and 5.6% on a per-subscriber basis. This increase was driven by contractual rate increases which were partially offset by the decline in video subscribers.
Even with these increases, the video profit contribution per subscriber increased. We expect the increase in programming costs per sub will accelerate in 2012 to 8% or 9%.
Voice costs were down 18% year-over-year in Q4, driven primarily by the benefits from in-sourcing our voice support functions that we've talked about for quite some time now. Residential voice costs per sub per month in Q4 were around $9.
We don't expect this to change materially in 2012, since we're not planning to migrate large numbers of additional subs until 2013. During the fourth quarter, we continued to invest in new initiatives, including our wireless build-out and our new home monitoring product, IntelligentHome.
In Q4, the combined net cost from these initiatives were approximately $20 million, flat with the fourth quarter of 2010. And full year net costs were around $70 million, which was in line with our expectations at the beginning of the year.
In 2012, we plan to continue investing in WiFi and IntelligentHome and launch our L.A. RSN in the fourth quarter.
Overall, we expect our 2012 net costs from new initiatives to be in the range of $100 million to $150 million. Due to the timing of the launch of the L.A.
RSN, the lion's share of this is expected in the fourth quarter. Operating income growth moderated in the second half of 2011 as growth was impacted by the fourth quarter 2011 items that I just mentioned, and as we lacked a portion of last year's improvements in amortization expense.
Looking forward to 2012, even with the investments behind our new initiatives, we still expect to generate high single-digit operating income growth for the full year. Turning to the next slide, full year diluted earnings per share of $4.97 increased nearly 37% from $3.64 in 2010.
EPS included a number of items affecting comparability that, in aggregate, increased diluted EPS in 2011 and decreased it in 2010. These items are detailed in Note 1 of our press release.
Excluding both the 2011 and 2010 items, EPS would have increased over 25%, from $3.72 in 2010 to $4.68 in 2011, which still exceeded the range that we provided at the beginning of 2011. Fourth quarter diluted earnings per share of $1.75 increased over 60% from $1.09 in Q4 2010.
Excluding the items affecting comparability in Note 1 of our earnings release, fourth quarter 2011 EPS would have increased 40%, to $1.39 from $0.99 in 2010. Looking forward, we expect that 2012 full year diluted EPS will be in the $5.25 to $5.50 range.
Turning to capital spending on Slide 15. Our capital spend in the fourth quarter was $942 million, bringing our full year CapEx to $2.94 billion, consistent with our full year guidance and flat with 2010.
Full year CapEx as a percent of revenue was 14.9%, down from 15.5% in 2010 as we continue to offset higher business services spending with lower residential capital. Full year business services capital expenditures were $493 million, a 4.9% increase from 2010, with about 56% of the CapEx attributable to the line extensions and expanding our cell tower backhaul footprint.
Full year residential, advertising and other capital expenditures were 13.4% of revenue, down from 13.9% in 2010, due primarily to lower CPE, largely offset by higher support capital and scalable infrastructure. Looking forward to 2012 capital spend, we will aggressively invest in business services ahead of its revenue growth.
Offsetting this will be lower capital intensity in residential services. However, we'll continue to support residential CapEx on projects that will help us to more rapidly deploy product enhancements and improve our customers' experience.
Taking all of that into account, once again, we expect that overall capital intensity will continue to decline, with full year capital spending in the $2.9 billion to $3 billion range, consistent with the levels of the last 2 years. Moving on to free cash flow on Slide 16.
The company generated a lot of cash in 2011. We delivered $8.19 per share.
We continued to grow our free cash flow at double-digit rates. Given recent declines in interest rates, the present value of our projected pension obligations increased, and as a result, we made a $326 million contribution to our pension plans in the fourth quarter of 2011 compared to $52 million in contributions in the prior year.
And for the full year, we contributed $405 million in 2011 compared to $104 million in 2010. Free cash flow for the fourth quarter was $391 million compared to $665 million in the fourth quarter of 2010.
The decline was driven by the higher pension contributions and CapEx, partially offset by increased operating income. For the full year 2011, free cash flow was over $2.7 billion, up 20% from 2010.
Before we move on to our capital returns, let's flip to Slide 17 as a reminder that we expect cash taxes to increase in 2012 due to a step down of bonus depreciation from 100% to 50% in the economic stimulus legislation and reversal of bonus depreciation from prior years. Assuming flat CapEx in 2012, we expect that taxes will increase by approximately $700 million this year due to lower net stimulus benefits.
Including the impact of bonus depreciation, we're expecting free cash flow to grow in the mid single-digits. Let's finish up with our capital return slide.
We ended the quarter with net debt and preferred equity totaling $21.6 billion, a $1.2 billion increase from year end 2010. We finished 2011 with a leverage ratio of 2.98x our 12 months adjusted OIBDA.
We remain committed to our solid investment grade rating, and I'll remind you that the rating agencies treat our Insight acquisition as closed for purposes of calculating our leverage ratio, though they don't do the same for the pending AWS Spectrum sale. So our pro forma leverage is higher.
In addition, the rating agencies tend to treat certain non-balance sheet obligations as if they were debt. So you notice that we provided a more fully loaded leverage ratio in our trending schedules, which considers those obligations.
They add a little more than 1/10 of a turn to our ratio. In 2011, we returned 119% of free cash flow or $3.3 billion in total to shareholders: $2.6 billion in share repurchases and $642 million in dividends.
Since 2011 year end, through January 25, we have repurchased $96 million of additional shares. Since we launched the share repurchase program in November 2010, we've repurchased approximately 47 million shares, or roughly 13% of what was then outstanding, at an average price of $69 per share for a total of $3.2 billion.
As we look forward to 2012, in the absence of a significant acquisition or other strategic event, we would again expect to return more than 100% of free cash flow through dividends and share repurchases. And finally, as Glenn discussed earlier, we announced this morning a 17% increase in our quarterly dividend to $0.56 per share.
That's $2.24 per share on an annualized basis which, at yesterday's closing stock price, represents a 3.2% dividend yield, and this puts us in the top 20% of companies in the S&P 500. We also topped up our share repurchase authorization to $4 billion today.
All this is in keeping with our plans to both grow our businesses and manage our balance sheet prudently while still returning significant excess capital to shareholders. Thank you, and with that, I'll turn it over to Tom for the Q&A portion of the call.
Tom Robey
Great. Thanks, Irene.
Candy, we're ready to begin the Q&A portion of the call. [Operator Instructions]
Operator
Our first question comes from Craig Moffett of Sanford Bernstein.
Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division
I'm going to see if I can slip in 2 related ones, if I can. Could you just update us on where we are with home security, which we're starting to read more and more about?
And then another growth initiative, the expansion of your WiFi network in Southern California and the interconnection with other carriers, can you just expand a little bit on your strategic outlook for the role that you think WiFi can play in your business?
Glenn A. Britt
Craig, this is Glenn. Let me deal with both those on a strategic level and then Rob can give you some details.
The product that we call home security is about much, much more than that. It's a new set of technology that lets you monitor all sorts of things in your home, and we call it home security because everybody's familiar with that.
But this technology can allow you to look at things in your home. It turns out a lot of people like to look at their pets when they're not at home, which may sounds silly but it's something people actually like to do.
It allows you to just adjust your thermostat remotely, will allow for transmission of medical information, potentially. So it's a very interesting suite of products.
WiFi, what we are doing in L.A. is building WiFi pretty extensively.
Either Rob or Irene talked about what we've done so far, but we have plans to do a lot more this year and we're bundling that in with higher levels of our high-speed data service. So if you buy those faster tiers, you get free WiFi in these public places.
We also are selling it as a day pass to noncustomers, and that's gotten a pretty interesting pickup so far. So Rob, do you want to add to that?
Robert D. Marcus
I don't know. Just in the way of details, Craig.
We got the IntelligentHome product now launched in 5 cities. We're in central New York, Rochester, Charlotte, and in L.A., Southern California.
And the customer numbers are still very small. We're in the low thousands of customers, but the feedback has been really positive and the installation processes are going well, and customers seem to be appreciating it.
So, so far so good, I think we'll report more as we learn more and as the number of customers grows. On the WiFi front, I think Glenn covered it.
Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division
Just to be clear, should we assume -- it sounds like we shouldn't assume anything material on the numbers for 2012. Do you think in 2013, for the home automation product, that it will be a material contributor to the business?
Robert D. Marcus
Let me just seize the opportunity a little bit for you and then I'll respond specifically to your question. Home security in the U.S.
-- and assume for the moment that what's driving the initial sales of this product is home security as opposed to the other features Glenn described. I think we can debate that.
The home security business is somewhere in the neighborhood of an -- residential home security -- of a $9 billion business. If you multiply that by the percentage of the total U.S.
we cover, we're talking about an opportunity of, let's say is, I don't know, $1.5 billion to $2 billion. Penetration of U.S.
homes is somewhere in the neighborhood of 18% or 19%. So we think it's a nice business.
It's not a huge opportunity. We'd love to see meaningful penetration in 2013, but I think it's a little early to tell.
Operator
Next, Stefan Anninger of Credit Suisse.
Stefan Anninger - Crédit Suisse AG, Research Division
Could you discuss the competition you're seeing in New York City? I think in your opening comments, you mentioned that you saw FiOS get a bit more aggressive in 4Q with its promotions.
Maybe you could tell us a little bit about what you're seeing in New York with respect to the growing footprint of FiOS in the MDU market and whether that's more quickly or slowly than you expected ,and what are some of the things you're doing to combat that competition.
Robert D. Marcus
Well, look, we've been competing with FiOS for some time now in many of our markets, including New York City. As I mentioned, they were somewhat more aggressive in Q4 than they've been in the past.
And not surprisingly, as a result of that, in New York City and in upstate New York, where competition from FiOS is most intense, our performance was relatively weaker. None of that comes as a surprise to us.
And just as we've done in other markets that FiOS has entered, we've been aggressive in our marketing and ensured that our product set is as good as it can be anywhere. As you know, we're all-digital in New York City.
We've got DOCSIS 3.0 rolled out. We've got the most HD channels in New York City that we have anywhere, so we think we're well equipped to compete.
The one thing I would remind you of is that when we talk about FiOS competition, as I mentioned in our prepared remarks, the FiOS overlap of the Time Warner Cable footprint is still only 12%. So they're tough competitors.
We think we're up to the task, but it's manageable relative to size of the overall business.
Operator
Next question, Jason Bazinet of Citi.
Jason B. Bazinet - Citigroup Inc, Research Division
Yes. I just had a question for Mr.
Britt regarding retransmission payments. Is there anything from a legal or technical standpoint that would prevent you and the rest of the industry from beginning to pursue some sort of free over-the-air antenna that's integrated with the rest of the equipment that you install in a consumer's home, to give you leverage on those ongoing negotiations?
Glenn A. Britt
Interesting question, and it's a very complex legal issue actually. There's nothing stopping consumers from having an antenna.
But whether we provide that and if it's part of our cable system, as a legal matter, is a very complicated thing. It is something we look at a great deal.
Let's leave the answer at that.
Jason B. Bazinet - Citigroup Inc, Research Division
Okay. Do you think we'll expect more developments, or do you think this is just something where the status quo persists for a while?
Glenn A. Britt
I don't think you should expect big developments on that particular item.
Operator
Next question, John Hodulik from UBS.
John C. Hodulik - UBS Investment Bank, Research Division
Maybe a quick question in terms of margins as we look forward. Looking out to 2012, you're expecting some higher programming cost and you don't get the boost from the lower telephony cost this year.
You had some strong margin performance in 2011. Do you think we can still expect margin, call it EBITDA margin expansion, in 2012 versus 2011?
Irene M. Esteves
John, it's Irene. We are not giving guidance, particularly on the margin, because there's so many puts and takes to that.
And it's just difficult to predict and -- with where we're going on mix and so forth. But we did talk about operating income growth in high single-digits, which we're committed to.
And we typically -- we just don't manage to a margin. We're trying to grow absolute profit of the company, but not really forecasting a specific margin.
Operator
Next question, Jessica Reif Cohen of Merrill Lynch Bank of America.
Jessica Reif Cohen - BofA Merrill Lynch, Research Division
I'm going to try to sneak in 2. One is on Verizon Wireless agreement.
You mentioned you're going to roll out in a couple of markets. What will the marketing -- what would the package look like?
And can you talk about expectations to how they might drive your penetration? And what are your thoughts on that technology JV?
And on a completely different subject, as you think about rolling out your L.A. RSN, what kind of facility rates will you have to charge to make this investment pay off?
And how do you reconcile that against what's happening in New York City with MSG? Does it help or hurt your efforts in L.A.
as you reach out to other distributors?
Glenn A. Britt
Jessica, this is Glenn. Let me answer the second one.
And then for the Verizon one, I'll have Rob answer it. Obviously, what we end up charging other affiliates in L.A.
is of great interest to everybody in the sports market ,and it's a complicated situation. Everybody's watching it.
We are not quite ready to go to market yet, and though disappointing, it's premature for me to comment on that. But when we're ready, we will tell everybody what the placing is going to be.
Robert D. Marcus
Jessica, on the Verizon Wireless question. So as you know, we've got what I would describe as reciprocal agency agreements between us and Verizon Wireless.
They'll sell our products and we'll sell theirs. And in the early days, first markets we launched, I would expect that the offerings, that each of us make of our respective products, will probably look a lot like what Comcast and Verizon Wireless launched with in the 2 markets that they've launched.
So we're talking about really bundling together a wireless plan with our Triple Play, in the simplest case. And what the incentive to buy that bundle is will probably be something we tweak over time.
So as to the second part of your question, we have every expectation that Verizon Wireless will, in fact, be able to help drive our offerings, as well as our selling theirs. And as for the JV, I think it's a little early to talk specifically about what might come out of that JV, but the intent is certainly enhance each of our products by developing products that take advantage of the fact that we're working together -- in other words, enhance the seamless integration of wireless and wireline.
So we're excited by that, too, but it's a little too early to talk specifically about it.
Jessica Reif Cohen - BofA Merrill Lynch, Research Division
Can you just say when you'd expect the approval, how long it will take?
Robert D. Marcus
Again, it's very hard to say how long that process will take. I know Verizon, yesterday, said -- earlier in the week, said something like midyear.
That's as good a guess as any, but we really don't have any specific date.
Operator
The next question, Doug Mitchelson of Deutsche Bank.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
For Glenn and Rob, another year has gone by. The video marketplace continues to evolve.
So I'm curious what your updated thoughts are regarding customers buying smart TVs and Rokus and Apple TVs and increasingly using someone else's user interface to access video content. Netflix last night, in fact, talked again how they're complementary to pay-TV rather than competing with it.
Are there any initiatives, on your end, underway to help customers get access to online video through your set-top boxes so they don't increasingly rely on other ways access video content on the TV?
Glenn A. Britt
Doug, there actually isn't a huge amount to report there. I think there's increasingly devices on the market that allow Internet connection.
We don't anticipate doing that anytime soon with our big base of legacy set-tops. They don't have that capability.
But we do plan to use, as you know, all these devices for our own products, and Rob went through some of what we're doing. We have not seen a huge impact of this on our video subscriptions, and all of the studies and surveys that we continue to see report that.
But it's something we pay a lot of attention to.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
I mean, just you sort of put a point to it. As you sit here today, do you think the price value of your products, to the extent that customers are using online video more and more on a stand-alone basis even if they're using a different user interface, that's not something you anticipate impacting your business looking forward?
Is that a fair way to put it then?
Glenn A. Britt
I think there are -- remember, the average TV in America is on for some very large number of hours a day -- what, 6, 7, 8 hours a day, whatever the latest number is. And this activity you're talking about is kind of sporadic, watching specific programs.
So most people watch a lot of TV and they like these packages of linear networks. And the services we're talking about are not, at this point, a substitute for that.
Having said that, there are people who don't watch TV very much and they're quite satisfied with just being able to watch a few shows now and then. And we all know a lot of those people, and I think that affects our perception of what's really going on in terms of the mass market.
Operator
Next question is from Phil Cusick from JPMorgan.
Philip Cusick - JP Morgan Chase & Co, Research Division
I wondered if you can talk a little bit about content costs, the acceleration to, I think you said 8% to 9% this year. Is that sort of a new normal or do you expect that to drop back down more to mid single-digits the year after?
Irene M. Esteves
I think it's more of an old normal. We saw this for a couple of years and then a slight dip in 2011.
We expect it to go back up, and it has to do with the contracts that we have already and the new contracts coming up. The old contracts have accelerators in them.
That's what we expect out of the new contracts, so it's going back to the old normal.
Operator
Next question, Vijay Jayant of ISI Group.
Vijay A. Jayant - ISI Group Inc., Research Division
Given the programming rate increases, can you sort of talk about what you think you'll do on video rate increases, as well as also broadband rate increases in 2012? It seemed that most operators are seeing the same programming rate increases.
So is there a chance that we see, excluding probably FiOS, less competitive intensity in terms of promotional activity in 2012, in your mind?
Glenn A. Britt
I think Rob may have some comments, too, but this is a very complicated subject. And in the old days, people saw this business as a quasi-utility, and they would quote rates and there was a big focus in newspapers on the rate increase every year.
We now have a very large array of products and different packages, and we price those market by market, taking account of the competition and competitive offers. So it's a very complicated matrix and it's not an across-the-board thing that you can easily characterize.
So Rob, I don't know if you want to add anything to that.
Robert D. Marcus
I think, more than anything else, our pricing strategy is dictated by what the marketplace will bear as opposed to what our underlying cost structure is. So while it would be nice to say we can always pass-through all increases in our cost base to customers, the ultimate driver is what the marketplace will bear.
And I can't really speculate about whether or not 2012 will be more or less competitive. I would argue it's been manageable to-date and we'll see where it goes.
Operator
Next question, Jason Armstrong of Goldman Sachs.
Jason Armstrong - Goldman Sachs Group Inc., Research Division
Just maybe a question on the guidance and thinking about the EBITDA or EBIT growth, operating income growth, you're talking about and how that translates into the EPS guidance that you gave. So high-singles operating income growth and then, effectively, a range of 12% to 18% normalized EPS growth.
The low end of that implies that buybacks decelerate further from here. I'm just wondering, is that what you intended to imply through this guidance, is that there's an actual risk to that?
Irene M. Esteves
As you know, we're not giving any guidance on pacing on buybacks. So that's not part of the guidance.
But it is an all-in number, and we think it's in keeping with our objectives of growing our operating income and having that drop to the bottom line. We did have, as you know, those special items in 2011 which we hope we've laid out in Note 1 to help get the apples-to-apples comparison.
Jason Armstrong - Goldman Sachs Group Inc., Research Division
Irene, is the appropriate base the adjusted $4.68 number for 2011?
Irene M. Esteves
Yes.
Jason Armstrong - Goldman Sachs Group Inc., Research Division
Okay. So as we think about the $5.25 to $5.50, it's 12% to 18% growth?
Maybe it's fair to think that the midpoint just sort of assumes the existing pacing, and that's how the 2 tie together?
Irene M. Esteves
Well, the guidance that we have given is that we expect to return over 100% of free cash flow. So we hope that's helpful.
Operator
Next question, Mike McCormack of Nomura Securities.
Michael McCormack - Nomura Securities Co. Ltd., Research Division
Can you just give us a little more color on the commercial services opportunity as far as what capabilities that you think you may need going forward? And then if possible, Irene, maybe some parameters around the cost impact as we progress through 2012, both CapEx and OpEx.
Glenn A. Britt
Okay, Rob, do you want to take the first one?
Robert D. Marcus
We highlighted, in our prepared remarks, some of the things we're doing on the commercial front to support what we expect will be, once again, robust growth. So capabilities we need.
We need to invest in our plan to ensure that we have more commercial premises on our network and we need to continue to expand our sales force. And I think those are both capabilities that we are able to deliver on an organic basis.
So I think we've got what we need to continue to grow this business.
Irene M. Esteves
And I think that drives to the second point, which is our operating and capital expenditures toward this business. As you said, we're aggressively investing behind it, both in capital -- we expect the capital intensity to go up in this part of the business, as well as operating expenses as we hire new folks to build out the business.
But that's all taken into consideration as we talk about our operating income growing at high single-digits. We're finding opportunities and efficiencies in the rest of the business in order to fund both the business services build-out, as well as the other new initiatives we talked about and still deliver that high single-digit operating income growth.
Tom Robey
Thanks, Mike. I think that's probably all we have time for this morning.
So thanks to everyone for joining us. And to give you a little advance notice, Time Warner Cable's next quarterly conference call, which will reflect our first quarter 2012 results, will be on Thursday, April 26, 2012, at 8:30 a.m.
Eastern Time. Thanks, and have a great day.
Operator
Thank you. That does conclude today's conference.
You may disconnect at this time.