Charter Communications Inc (CHTR) — Q1 2017 Earnings Call Transcript

Good morning and welcome to Charter's first quarter 2017 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filing including our most recent proxy statement and forms 10-K and 10-Q. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures as defined by Charter may not be comparable to measures with similar titles used by other companies. We will also refer to pro forma results. While the Time Warner Cable and Bright House transactions closed on May 18, 2016, these pro forma results present information regarding the combined operations as if the transactions had closed on January 1, 2015 in order to provide a more useful discussion of our results. Please refer to the pro forma disclosures throughout today's materials including the reconciliations provided in Exhibit 99.1 to our Form 10-Q filed on November 3, 2016. Unless otherwise specified, customer and financial data that we may refer to on this call for periods prior to the third quarter of 2016 are pro forma for the transactions as if they had closed on January 1, 2015. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. Additionally, all customer and passings data that you see in today's materials continue to be based on legacy company definition. Joining me on today's call are Tom Rutledge, Chairman and CEO; and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom.

Thanks, Stefan. As we near the first anniversary of the close of our transactions, we're successfully integrating Time Warner Cable and Bright House, and our operating and strategic plans are on track. By the end of the first quarter, we have launched our pricing and packaging everywhere but Hawaii, where we will also launch shortly. As a result, we've finally turned the corner, and we are seeing higher year-over-year customer and PSU connect volumes, with nearly all of our video connects purchasing our expanded basic video product. Our minimum Internet speeds are either 60 megabits or 100 megabits depending on the market. Although churn and downgrade activity from the legacy TWC low-value product set remains elevated, we expected that to be the case; that the low-value product churn and downgrade activity will improve as more customers connect to our new pricing and packaging. As of the end of the first quarter, 17% of Time Warner Cable and Bright House customers were in our new pricing and packaging. In areas where we had the Spectrum in place for at least two quarters, 32% of our residential customers have had the Spectrum product set. That result is slightly ahead of our expectation and where we were at Legacy Charter at this point in our plan. Legacy Bright House is performing extremely well. Our Spectrum pricing and packaging, combined with a better starting point in terms of its service reputation, has allowed us to accelerate growth within that footprint more quickly. Legacy Charter also continues to perform. Customer relationships grew nearly 6% year-over-year, even though our focus was on integration. We remain very confident that there is a large and long-term customer and financial growth opportunity across all three Legacy companies. This quarter, we will restart our all-digital project in the 40% of Time Warner Cable and 60% of Bright House that is not yet all digital by putting two-way interactive boxes on every outlet and freeing up capacity to increase data speeds. That project should last through early 2019. The integration of our field operations, customer operations, and network operations is well underway and progressing as planned. We have been able to avoid customer disruption and we're increasingly insourcing our field operations and call center employees in Legacy Time Warner Cable and Legacy Bright House markets to improve our craftsmanship, plant, and service delivery. And we're already reducing reliance on third-party call centers and contractors. Our product development efforts also continue to move forward. We're working toward launching a wireless service in 2018 under our MVNO agreement with Verizon. We're also testing the capacities of our network with 5G-like services in a number of Spectrum bands and in a number of locations. We intend to use these field trials to provide us with better insight into the capabilities of our wireline network when using high-frequency licensed and unlicensed spectrum, and how our various wireless network building blocks can be used in conjunction with one another to offer services that were developed over time. Now, I'll turn the call over to Chris to provide more details on the quarter.

Thanks, Tom. During the first quarter, total customer relationships grew by 4.3% year-over-year on a pro forma basis with 3.4% at TWC, 5.8% at Legacy Charter, and 6.3% at Bright House. Slide 6 shows we grew residential PSUs by 365,000 versus 757,000 on a pro forma basis last year. The lower year-over-year PSU net adds were primarily driven by elevated customer and product churn from the Legacy customer base at TWC. As Tom mentioned, at the end of the first quarter, 17% of TWC and Bright House customers are now in Charter's pricing and packaging. This is available everywhere for residential customers except Hawaii, which launches next month. Bright House markets were completed first back in November, and together with a better value and service proposition in the Legacy base, we can see the positive effects of our new pricing and packaging already. In those TWC markets that had launched Spectrum as of December 31, relationship and video connects were up versus last year's quarter with better quality product and sales, as Tom mentioned. At the same time, Legacy TWC promotional offers in the past have been rolling to high rates on lower-value legacy products, which is why TWC billing and retention call rates have been 50% to 60% higher than Charter's. As we've implemented consistent retention policies nationwide, we're managing through higher churn at TWC in the short term. As we migrate and replace the legacy base through a disciplined approach, legacy TWC churn will improve. Over the last year, TWC residential video customers declined by 3.2%. Pre-deal Charter grew its residential video customer base by 0.5%. Bright House lost 1.1% of its residential video customers but continues to significantly improve its year-over-year video results. TWC's video net loss was 129,000, worse than last year, with over 90% of legacy TWC's 108,000 net video losses driven by churn from lower-value limited basic packages. Legacy Charter lost 13,000 video customers versus a gain of 10,000 a year ago. Bright House added 21,000 video customers in the quarter versus a loss of 7,000 last year. In total, we lost 100,000 residential video customers in the quarter, primarily driven by the losses at TWC. In residential Internet, we added a total of 428,000 customers during the quarter versus 520,000 last year. Over the last 12 months, our total residential Internet customer base grew by close to 1.4 million customers or close to 7%, with over 8% growth at pre-deal Charter and over 9% at Bright House. In voice, we grew customers by 37,000 in Q1 versus 213,000 last year, with the lower growth largely driven by higher churn at TWC, partly driven by a low-price promotional voice offer in TWC markets in prior-year quarters. Over the last year, total pro forma residential customers grew by 951,000 or by 3.9%. Residential revenue per customer was virtually flat year-over-year given much smaller price increases this year versus last and continued standalone Internet sell-in. Legacy Charter's customer ARPU declined year-over-year primarily driven by the continued strength of Internet single-play sell-in and the lack of meaningful rate increases year-over-year. As slide seven shows, our customer growth combined with our ARPU growth resulted in year-over-year pro forma residential revenue growth of 4.2%, with a different mix of rate and volume across the Legacy entities. Total commercial revenue, SMB, and enterprise combined, grew by 10.8%. SMB revenue grew by 11.3% and enterprise grew by 10.1%. Excluding cell backhaul and NaviSite, enterprise grew by 15%. Enterprise launched the new national pricing structure at the end of last year designed to drive higher customer growth, and we'll do the same with SMB at Legacy TWC and Bright House in the middle of the year. First quarter advertising revenue declined by 7.7% year-over-year, driven by political advertising in the prior year. Excluding political and barter, advertising revenue was down about 2% year-over-year. In total, first quarter pro forma revenue for the company was up 4.3% year-over-year and up 4.8% when excluding advertising. Looking at total revenue growth at each of the Legacy companies, TWC revenue grew by 4.1%, driven by a mix of customer and ARPU growth. Pre-deal Charter grew by 4.4% driven exclusively by customer growth. Bright House revenue grew by 5.4% with improving unit growth and little reliance on rate. Before moving on to expense, I wanted to note two items which impacted our revenue growth in the quarter. In March, we decided to provide bill credits to certain TWC residential customers. Last year's first quarter TWC and Bright House revenue benefitted from a contractual settlement. Excluding the impact of those items, total revenue growth would have been 4.7% of consolidated Charter or 5.2% excluding advertising. Moving to operating expense, in the first quarter total operating expenses grew by $201 million or 3.2% year-over-year with transition expense accounting for $51 million of our total OpEx this quarter. Excluding programming and transition, operating costs were essentially flat given the realization of transaction synergies and continued operating efficiencies at Legacy Charter. Programming increased 8.2% year-over-year driven by contractual rate increases and renewals and a higher expanded mix, partially offset by transaction synergies. Regulatory connectivity and produced content expense declined 1.5% year-over-year as we start combining the company's networks and contracts. Cost to service customers was essentially flat year-over-year despite 4.3% total customer relationship growth, reflecting financial benefits from the combination of three companies and lower service transactions per customer and churn Legacy Charter. Marketing expense declined by 1.5% year-over-year as we continue to drive synergies from our transactions, and other expenses were also down year-over-year driven by elimination of duplicate costs. Taking a step back on expense, the full elimination of duplicate costs will take another two years as we fully integrate the platforms of three companies and multiple billing, provisioning, and network environments. In areas of the business with labor and third-party costs tied to systems, we've actually been temporarily adding cost as we maintain legacy systems and processes and prepare for back-office integration. That's all according to plan, and so similar to subscriber, revenue, and cost to service trends, our expense development will not be linear. But our views on the long-term growth and profitability potential for Charter remain the same. In fact, our confidence has grown. Same applies to the transaction synergies I outlined on the last call. Adjusted EBITDA grew by 6.4% in the first quarter, and excluding transition costs, adjusted EBITDA grew by 7.3%. If you further exclude the two revenue items I mentioned, both in 2016 and 2017, EBITDA would have grown by over 8%. Turning to net income on slide nine, we generated $155 million of net income attributable to Charter shareholders in the first quarter, versus net income of $179 million on a pro forma basis last year. This higher year-over-year adjusted EBITDA in the first quarter this year was more than offset by higher depreciation and amortization, driven by purchase accounting and last year's CapEx and other below-the-line operating expenses, including transaction-related severance costs. Turning to slide 10, capital expenditures totaled $1.56 billion in the first quarter, including $76 million of transition spend. First quarter capital intensity as a percentage of revenue of 15.3% should not be straightlined as we had timing delays on some big network projects, facilities, and truck spend, as well as vendor delays and staging CPE. Excluding transition CapEx, first quarter CapEx declined by $302 million year-over-year or 17%, with lower spending on scalable infrastructures, CPE, and support capital, mainly driven by timing. As slide 11 shows, we generated $1.1 billion of free cash flow in the first quarter versus negative $61 million of actual, not pro forma, free cash flow in the first quarter last year. That growth was largely driven by cash flow from acquired systems. Working capital did not have a meaningful impact on our free cash flow this quarter, and there are often large quarterly swings. But for the full year 2017, I'd expect working capital to have a neutral to slightly positive impact on our free cash flow. We finished the quarter with $61.3 billion in debt principal. Our run rate annualized cash interest expense is currently $3.4 billion, whereas our P&L interest expense in the quarter suggested a $2.9 billion annual run rate. That difference is due to purchase accounting. At the end of the first quarter, our net debt to last 12 months pro forma adjusted EBITDA was 4.0 times, and our long-term leverage remains at 4 times to 4.5 times. In February and March, we issued a total of $2 billion of 10-year 5.125% notes at CCOH, with the proceeds being used to call $750 million of CCOH 6.625% notes and repay $2 billion of 5.85% TWC notes. On March 30, we concurrently offered and priced $1.25 billion of notes in the high-yield market and at the same time $1.25 billion of notes in the investment-grade market for a total of $2.5 billion. The proceeds from those notes will be used for general corporate purposes, including potential buybacks. Our weighted average cost of debt is now 5.4%. The weighted average life of 11.6 years, with 90% of our debt repayable after 2019. Our hybrid debt structure gives us access to the bank, investment-grade, and high-yield markets, providing us with significant operating, financing, and strategic flexibility. During the first quarter, we repurchased 2.5 million shares in Charter Holding common units, totaling approximately $826 million at an average price of about $324 per share. I mentioned on our last call that from late in the fourth quarter through Q4 earnings in February, we were not buying shares due to parameters set in an earlier 10b5-1 program. Share repurchase activity will continue to depend on other potential uses of capital and market conditions. Turning to our tax assets on slide 13, we estimate the total value of those assets is approximately $6 billion, and we don't expect – we don't currently expect to be in the general cash income tax payer until 2019 at the earliest. So, getting ahead of next quarter's reporting, I wanted to note that we have now aligned Bright House's seasonal customer program with that of Legacy Charter and Time Warner Cable, which provides a reduced monthly charge instead of one-time suspend and restart fees historically at Bright House. As a result, seasonal customers at Bright House will now remain as reported customers throughout the year, which will reduce both the negative net adds impact in Q2 and the positive net adds impact in Q4 when comparing to historicals. In the second quarter of 2016, there were approximately 60,000 seasonal customer disconnects, with most of the seasonal reconnected volume currently in Q4. We'll do our best to quantify the year-over-year one-time reporting effect at Bright House when we report Q2 and Q4.

Maybe if we could just talk about the Legacy Charter markets. You saw a 13,000 sub-decline in the quarter, and I guess it's driving the ARPU, sort of accelerating decline. Any color on sort of what's going on in the market? Is it cord cutting? Are you seeing some sort of economic weakness or – it doesn't seem like it's competitive issues. But maybe how you expect those sub-trends to develop over the course of the year and have we seen the worst in terms of the ARPU decline? Thanks.

It's Tom. Look, I think given all the integration activity, the year-over-year Charter Legacy would have been positive if we weren't doing all this activity. We moved a lot of assets around, with different management structures during the period and a slight change in the direction of the video customer growth. Subscriber growth in general is still performing well in the marketplace as we expected, and I think you'll see that accelerate in the future. So, I don't think it's a significant issue, but I also think it is an effect of our integration process more than anything else or any specific change in the market. Our opportunity with regard to video, I think there's market share shift from satellite to us. I do think there is a general decline in the MVPD marketplace that is mostly price-driven, and I think that those trends are unlikely to change in the near term, but not to particularly accelerate. I think that the Charter opportunity in video and subscriber growth in general in Legacy and in the new footprint continues to improve.

From an ARPU perspective, the big driver there really isn't anything that's happening systemically in the market. It's really just about the amount of single-play Internet sell-ins. So, if you take a look at the percentage of the non-video customer relationship base and the percentage growth in the new, compare that to total customer relationship growth, there are ways that you can mathematically get to figure out what the full effect of that mix shift is. And that's really what the big driver there is on ARPU.

I think the other thing about ARPU that's significant and in the way our numbers work is that there is virtually no rate increase in these ARPU numbers. So, it's all driven by subscriber growth. We want it that way. We think in this environment of integrating three companies and introducing ourselves to lots of new customers and customer relationships, that that's the appropriate approach.

Operator, we'll take our next question, please.

Great. Thanks, guys. Tom, maybe just a comment. We've seen a lot of over-the-top launches. We saw this report yesterday, obviously, and we know what the mix is. But just thinking about the threat of that and how much of an impact you're seeing from that. And then maybe secondly, your thoughts on the Charter plans. There's been a lot of discussion around 5G deployments and how you see yourselves playing it out over time. Thanks.

Right. Well, as I said, I think obviously we sell more than video, and we're creating lots of customer relationships. We expect to continue to do that. We expect to be able to continue to create video customer relationships too because we think that our two-way interactive footprint and our capability of providing SVOD in an appropriate user interface, along with the kind of linear channels we've historically provided and other on-demand services, makes us a more compelling product than our competitors. So, we expect to grow video. What the overall share of over-the-top providers will be over the next five years, I don't really know. But none of them have a product that is better than ours that we can see in the marketplace. So, we expect to succeed in the marketplace going forward. Regarding 5G, we've been experimenting with frequencies. But basically, our view of it is that small cell connectivity to our high-capacity network is our future and current state of wireless. We have Wi-Fi devices in almost every home. The speeds that you can get out of our current Wi-Fi routers incrementally are in the range of a gigabit, and we expect that to accelerate with the addition of additional frequencies in the millimeter waves type spectrum that 5G is proposed in and other spectrum that will become available in the future. So, we think that speeds will continue to increase in the home and in the workplace. And if we need to put that into a mobile environment, that our plant in and of itself, that as well in the long run. At this point, those kinds of 5G opportunities are still a number of years away, and they're certainly even farther away from a market-wide deployment perspective. But we are using experimental licenses to test our capabilities across the spectrum.

Operator, we will take our next question, please.

Thanks a lot. Because I'm wondering if you could just expand on your ARPU comment from M&A. I'm wondering specifically what the growth in broadband ARPU is in the Legacy Charter footprint. And I understand not wanting to take rates while you're going through the integration and seeding a new base with new packages and pricing. When do you think you'll be in a position to start pushing up rate again and accelerating ARPU growth? My last question will be; now that we're sort of one year—we've lapped the one-year mark on the integration. But we're at the sort of the most difficult part at this point in shifting subscribers over to the new pricing and packaging such that we should start to see an improvement in the back half of the year, or is that still a quarter or two away?

That was a mouthful. Let me start to answer the broadband ARPU question. My comment earlier was more about total customer relationship ARPU. The impacts that multiple PSUs per relationship have on that. To the extent that you have a higher mix of Internet stand-alone or non-video bundles, then it has the impact of artificially pulling down your customer relationship ARPU. It wasn't so much about that ARPU per PSU. We actually don't manage the business that way. Our goal is to get as much ARPU per household by providing high-value products as possible. We haven't done anything to materially impact at Legacy Charter the broadband ARPU, other than having a slightly higher amount of single play which, if you were to look at as stand-alone PSU ARPU, would suggest that the broadband ARPU is increasing slightly. The fallacy of that is that we sell, for the most part, broadband inside of a bundle and at that point it's just an allocation of revenue across the different products on the bill. It's really, from our perspective, more about pricing all the services in the household and putting as many of those services in as we can. Pricing, I think if you can take a look back to what Charter's historically been able to do is, with very minimal price increases, be able to grow total customer relationships by 6%, and residential customer relationships by 5%. If you see the opportunity to go get that type of growth and have that type of market share shift, introducing pricing can stunt that growth. It doesn't mean that you've lost pricing power or rate power over time. In fact, one might argue that it's actually increased because of the larger base. If you have the opportunity to grow, we think it's much better to grow. If you stop growing and need to get revenue growth, you always have the ability to take rate. But that's not really Charter's strategy. We see the opportunity to grow, and I think that's the better path. Tom, I don't know if you would add anything to that?

No. I think it's been our strategy to create high value, high-quality products that improve the life of the customer. That results in not necessarily ARPU growth that comes from rate, but ARPU growth that comes from the creation of customers. It also reduces costs and so increases EBITDA relative to ARPU at a better rate if your customer service experience adds to average customer lifetime length. What that does is it reduces transaction volume, which means that for the same amount of revenue, you have a higher EBITDA because your costs, connects or servicing the customer go down. Our view of the model is that it's much more virtuous to have high-quality, high-value products that last in the marketplace, meaning customers like the products, think they're fairly priced and continue to subscribe to us without looking around and trying other competitors and increasing your cost of operation. While we expect to grow our ARPU and our customer base, we expect most of that to occur because the quality of our products stand in the marketplace and people want to subscribe to us as opposed to trying to use temporary friction in the marketplace to get a rate. Well, we had one year—we have a multiyear strategy. As I said in my remarks, we have turned the corner in terms of year-over-year growth in connects. That's a good sign, and it's the first sign that you expect after you change every price and package and process involved in the selling of a business with 26 million customers and growing at 4%.

The more customer relationships that we have in Spectrum pricing and packaging, the more protected we are for all the reasons that Tom mentioned, and that's why we read out that statistic. It's in line with what we had at Legacy Charter at this stage. In fact, it's actually slightly above. We're pleased. But until you either migrate or churn the legacy base that has low-value, high-priced products, you're going to have a little bit of volatility from one quarter to the next. But that number's increasing, it's growing well, and I agree with Tom.

Thanks, Jonathan. Kim, we'll take our next question, please.

Hi. Tom, now that the incentive auction is over and Comcast bought Spectrum and its footprint, not nationally, that leaves you without a coverage layer of low frequency. Can you talk about that at all? Was that part of your plans, or is it still part of your plans to think about a coverage layer to augment the MVNO, or is the MVNO a satisfactory full solution to wireless beyond your Wi-Fi network?

As you know, that low frequency opportunity is still, from a practical point of view, a number of years away. So, it has no impact on sort of a short or midterm opportunity in the marketplace. We think that the MVNO does have that potential. We're happy with our MVNO. We're happy with going forward with it and don't feel today that we have any need for that kind of spectrum. We think that if we ever do have such a need that opportunities will be available.

Thanks, Craig. Kim, we'll take our next question, please.

Thanks. So, two questions. First, on the video product. Tom, you talked about how video trend should accelerate. Can you talk about some of the initiatives that you're working on, perhaps the programming, exclusive agreements with AMC, maybe Netflix or YouTube into the box? Just some of the things that you're working on in the pipeline that we should be thinking about. My second question is on cost. Can you just give us an update, Chris, on kind of the synergies and where we are in that $1 billion mark? Thank you.

So, Amy, in terms of things we're doing with the product and AMC, the AMC opportunities and experiment to see if we can create some high-value product for our customers for a period of time, and we think it's an interesting opportunity to put original programming to our customers and still allow the marketplace realities in terms of the cost of amortizing programming to work over a bigger marketplace over time. We are interested in finding ways to improve our video product, and we have lots of thoughts about those. AMC is one step in that direction. Netflix is being integrated into our user interface, and we plan to launch it. We've had similar discussions with YouTube. Our view is that the user interface that we're deploying across our footprint will allow a seamless integration of content. Fundamentally, we expect customers to subscribe to services like Netflix, Hulu, and other over-the-top products in combination with our MVPD products, and maybe over-the-top products that we also provide. We think having a common user interface that allows that to work on all the devices in the house makes a lot of sense. Our fundamental obligation to our customer is to make that customer's life easy in terms of using video. When we look at our whole relationship to content and the customer, we come out toward the customer side of the equation, meaning while we'd love to create new content, we'd even more love to have happy subscribers who have access to all the content that they can get. That's what our user interface is designed to do.

On the synergies, on the last call I mentioned after the first year we expected to be over $700 million and that after a three-year period, we expected to be over $1 billion. That three-year period is really what I was highlighting about the time it takes to combine network provisioning, billing activities, which takes time, so that's the driver for that. We're not going to report quarter-by-quarter how much is in the number because frankly, once we go out to January 1, it became a little more challenging for two reasons. One is that in order to hit those synergies, a lot of times it requires operating investment to combine platforms, systems, and people. And then secondly, the programming side, you have to take an estimate of what you think your renewals— your contractual rate increases for renewals would have been without the deal. So, it becomes a little bit more art than science. We wanted to get away from that and provide our best view at that time. But there's nothing that's impacted our optimism as it relates to the transaction synergies. Programming was one of the harder ones. Since I know that will be the next question, I'll try to hit that one head-on, which is we don't comment on the details on programming agreements, but we are generating the synergies we expected. Sometimes that can be obscured by escalators and existing agreements and renewals. Those renewals generally include better starting points, better CAGRs or growth rates. They have longer terms when we want them. We're getting better rights than we believe Charter, TWC, or Bright House would receive previously. You’re going to see it from one quarter to the next—accounting for the economics of these deals including what some third party may see as past or future. It can be complicated, and at times, payment streams can be lumpy along the way. We're focused on the overall economics over the longer term, and we're getting the strategic and financial benefits of the transactions as we laid out.

Kim, we're ready to take our next question.

Good morning. As you think about the rest of this year, I think you mentioned that connect volumes are up year-on-year. Well, you've rolled out Spectrum pricing and packaging which is almost done. With that, are you able to look at the churn which are on the pool of Time Warner Cable legacy customers that you would argue are on sort of the wrong package or low-value services? And how big that pool is and how long it will take to churn them out or get them into the right place? Because if the connects are growing and that churn issue is sort of finite in length, then it would help us think about when we might see PSUs start to improve on a year-over-year basis. I don't know if you'd want to talk to some of those puts and takes, but we'd be interested in any comment. And I just wanted to ask, Chris, if the expectation that CapEx is up year-on-year pro forma is still the right one? I know you mentioned before not the run rate Q1. But just want to throw that out too.

Yeah. Well, it's the same issue that we faced with Legacy Charter beginning late 2012. Right now, at the end of Q1, 17% of the TWC and Bright House was in Spectrum pricing and packaging, which means we're in a much better position at that 17%. The flip side is we've got 83% of the base that continues to be in legacy pricing and packaging offers. That has elevated churn and it's going to, as long as that number remains high. But it will decrease, and the amount of customers in Spectrum pricing and packaging with a better term profile will increase. The real question is when you get a tipping point, that's already started to get better from here on out. I think right now, it looks like it will follow a very similar path as to what we saw at Legacy Charter in terms of subscriber development. Your second question was—Ben, what was your second question? I think we lost Ben. Did you make a note of it, Stephanie?

Yeah.

Oh, CapEx.

Yeah, year-over-year – are we still up year-over-year?

So much passion on the first topic. Everything I said about CapEx last quarter still remains the case. I mean, we're a little bit behind in terms of where we'd like to be on spending on CapEx just because it's timing-related issues. So, in a weird sense, it's going to be tough to hit the plan we have for CapEx this year. Our intent is still to be able to be in a position to spend more than we did last year. I don't think capital intensity will be that different from where it was last year just because of revenue growth, but nothing's changed. Since we want to spend the capital so we can grow faster and quicker, our goal is to spend as much as we can this year. But just on the CapEx issue just to give the speech again, the customer life and less activity ultimately related to servicing a base of more high-quality customers with high-quality products is, if you have a high-quality service organization, you ultimately end up spending less capital as well as less operating costs, and your capital intensity comes down. It comes down due to operational efficiency, but it also comes down due to our ability to go all digital and once that project is completed, to have a lower capital intensity and less activity that is also capitalizable associated with.

Thanks, Ben. Kim, we'll take our next question, please.

I have a quick one, and then not so quick one. On the quick side, can you quantify just the TWC credits? We're trying to isolate the revenue and ARPU impact. Also, talk about if these will continue. The second question is, with customers migrating to the single-play offering, do you notice behavior differing among the Charter, Time Warner Cable, and Bright House markets? We can act if maybe the streaming bundles are taking advantage of the disruption in TWC markets. Thanks.

The amounts of the credits, we didn't provide it in the Q. So, I don't want to provide preferential disclosure here. But I think if you take the comments we had about the amounts of revenue growth absent those two items, the two items being the credits in 2017 and the one-time contractual settlement in 2016, you can solve for the combination of the two. You also have, if you wanted to go back and take a look, I'm pretty sure TWC would have disclosed the amounts of the contractual settlement with the programmer that resulted in higher revenue in Q1 2016. So, I'm laying you out a very convoluted map to get there.

Got it.

I wish you luck. The two items combined is what drove that differential revenue growth that I highlighted in the prepared remarks. I didn't follow the second question, which was more about customer analysis market by market.

The idea that we're being ticked off in certain places where we have operating issues, we've seen no evidence of that fact. At this point, we have a fully featured product set in every market we will, other than Hawaii, which we'll have shortly priced and packaged the way we want it. So, we're in the right competitive posture, but we're in the posture we want to be anyway.

Thanks, Marci. Kim, we'll take our next question, please.

Thanks. Two questions. Can you go back to some comments you made earlier about SMB and setting national pricing for the enterprise business? Can you give us some color on where you see the potential upside from your perspective, what the margins could be in that business and how we can measure success or the milestones that we should look for? The second question is just on programming cost; can you give us an idea of what to expect for programming cost for the full year versus the 8% in the first quarter?

On programming cost, I knew it would come up, which is why I said what I did. It's going to be lumpy throughout the year. We don’t provide guidance generally. I think providing it on one single line item would be somewhat strange to not provide an overall revenue, EBITDA, or CapEx guidance and then start on the single expense line. We're seeing synergies in the programming side. We are seeing renewals as well. We're getting longer terms, better rights, longer terms where we want them, shorter terms where we want them, and getting better rights along the way. Beyond that, it's not something we're going to go into great detail on.

Jessica, with regard to SMB, we have a similar strategy with SMB, to what we have with residential in many ways, which is to create high-value, high-volume opportunities in the marketplace. We price and package our SMB product in such a way that we've accelerated unit growth significantly, and the revenue growth and ARPU growth catch up with that. That we expect to have happen just like we do in our residential base. We've also done that in a new way going forward in the new company with our enterprise business as well. We’ve gone to a lower-priced, higher-volume, higher-quality product mix with a service infrastructure to reduce installation times for all fiber products to businesses. By creating more high-value, high-volume products with the capability of getting them installed in a short period of time, we think we can start to move some of that share which we have a very minuscule piece of today. We’re very excited about the future of both SMB but also of enterprise as well.

The PSUs is the way that you'll see that manifest itself through accelerated net adds growth. Over time, as the volume catches up to the pricing, you'll see it come through revenue.

Thanks, Jessica. Kim, we'll take our next question, please.

Thanks. A couple of bigger picture questions. Tom, obviously, you have an IP-only product that I don't think you really market. But we've seen Comcast talk about probably doing something there, and you have the satellite guys doing it. Is that something that we should sort of see as a product set in the next few months or are you happy with the current strategy? Just a question that we get and to sort of understand this Time Warner Cable churn that we're seeing and, obviously, over time you will have the gross adds with the pricing and promotion at Spectrum. Why can't there be a more seamless transition? Are these customers so poor in quality that you wouldn't want to save them, so let them churn, then have gross adds? Again, I'm just trying to understand why we have that sort of disconnect rather than a seamless transition?

Let me take the second one first. The TWC churn, somebody was given a $10 unlimited video basic package, where can you move them? They have an exploding offer. It was a promotional offer. Where can you move them that's a satisfactory place relative to what they were given before? Same thing exists across voice. We've spoken at length about that before. Now, that we have Spectrum pricing in packaging in place across the entire footprint, is there a better path to migrate them into that? Yes. Can we completely solve the issues that were installed in the base? Maybe; maybe not. Your first question was – more directed at Tom, but I didn't capture which product you were talking about.

IP security?

We don't actively market.

No. An IP-only TV product.

Oh, IP-only video product? Look, we do have an IP-only video product. Our entire cable service is IP-only delivered if customers want to receive it that way. So, IP is a format. All our products can be delivered on any device, in the home, all our TV Everywhere products can be delivered outside the home anywhere depending on the service relationship and contractual relationship with the provider. To the extent we want to sell over-the-top products inside our footprint—or outside—in some cases, we have those rights. We haven't done that because we don't really see any opportunity to create new customer relationships out of that that have a high value to us, but we certainly have the capability of doing that. When you say IP, all of our app-based products are IP. All of our products are now service, including our video on demand infrastructure. 50,000 titles are capable of being delivered in IP to any device. The real question is what's the footprint of the service area? That depends on the right structure. TV Everywhere obviously can be delivered nationally, and is. The story from the programmer since some of the virtual MVPD operators was that this was going to grow the market, and the programmers had thought the same as well. I think you should take a look at the evidence so far. The current OTT offerings that are out there right now just seem to be cannibalizing the same satellite providers and base. It's just a shift in what's the base as opposed to actually growing the market. Charter has all the rights and has all the technical capabilities and it has the programming. If we can put together packages that will generate incremental customers, I think we're uniquely positioned to do that over time.

Operator, we'll take our next question, please.

Just a quick question from Mr. Winfrey. You mentioned all your synergies are on track including programming synergies. I was just wondering if you could remind us on Fox. If I remember, there was sort of a little bit of a debate around who is the surviving entity. I just didn't know where that stood and what I really care about is sort of how are you booking it now, and is there any risk of sort of an adverse outcome where things get recast adversely, I guess?

Yeah. Look, I understand the interest, but we're in the middle of litigation with a few different programmers right now, so I don't think it behooves us to go—we never have gone to a data programmer-by-programmer detail, and I think even more so now that doesn't really—in our interest to do that. We're confident that we'll have successful programming relationships for years to come, and we're taking all the appropriate steps we need to from an accounting perspective.

Guys, a couple of quick ones. First, Chris, can you expand on – you said something about network and vendor delays and CapEx in the first quarter? Second, can you remind us of transition expense expectations and timing from here? Thank you.

Sure. I don't want to overplay that. At the beginning of every year, there's an operating plan at a detailed project-by-project level that's getting put in place, and it drives orders. Sometimes those orders get delayed either from internal submission of the orders or from vendors. There’s nothing more than that other than we have a lot of moving parts with a lot of projects, and to get that organized in place takes a little bit of time. We have had some supply chain issues as it relates to set-top boxes, none of which has been customer impacting so far. I don't expect it to be. It just means that we're running a little bit light on inventory compared to where we'd like to be, and that has an impact on capital expenditure in a particular quarter. It also means that when the supply chain flips the other way, you can end up a little heavy on CPE relative to connects just as you go do that. It's just timing. On transition capital expenditure, we'd expect to be through all of that, essentially this year. It doesn't mean that there won't be—continue to be some going on beyond. Our goal would be to have it down to a stage where there's not a need to separate that anymore beyond 2017 and look at it from a consolidated basis at that point.

Thanks, Phil. That concludes our call.

Thank you, everybody, for dialing in.

Thank you.