Charter Communications Inc (CHTR) — Q1 2018 Earnings Call Transcript

Good morning and welcome to Charter's first quarter 2018 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 filings, including our most recent 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. 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 passenger data that you see in today's materials continue to be based on Legacy Company definitions. 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. In the first quarter, our primary objective was to continue to integrate our operations and prepare to launch mobile. Our all-digital initiative is moving forward and is on schedule for completion by this year-end. At the end of the first quarter, approximately 20% of Legacy Time Warner Cable and 60% of Bright House Networks continue to carry full analog video lineups. With TWC though improving from approximately 40% at the end of the year 2016. The whole company will be fully digitized by the end of this year, as we deploy fully functioning two-way digital set-top boxes, mostly our Worldbox and all remaining analog TV outlets that we serve. But while all digital is on track, it is disruptive both to our operations and to our customers. It creates large volumes of short-term activity, which is inconsistent with our long-term operating strategy, reducing transactional volume. The all-digital project, though, is clearly in the long-term interest of our business. It allows us to free up bandwidth and realize the full potential and capacity of our network as well as further improve video product itself. In the fourth quarter, we prepared for the expansion of gigabit speed offerings to several new markets and launched those markets just a few days ago. We now offer gigabit service to approximately 23 million passings, around 45% of our total footprint, and expect to have gigabit service available to virtually all of our footprints by year-end. Also, this month, we raised the minimum spectrum internet speed to 200 megabits in a number of additional markets at no additional cost to customers. We are raising our internet speeds faster than originally planned in order to maintain a superior competitive position. We have compressed our capital spend to raise speeds and to launch 3.1 across our footprint, and our strategy is working. In the markets where we launched 100 megabits as our minimum speed, December sales are up, and net additions have improved year-over-year, consistent with our experience with previous speed increases. Today, over 50% of our internet customers subscribed to tiers that provide 100 megabits or more throughput; we don’t offer anything less to new internet customers and it’s now at a 200 megabit minimum offering, nearly a quarter of our footprint. Rollout of Spectrum pricing and packaging remains on track, as of the end of the first quarter, 55% of Time Warner Cable and Bright House customers were in our new Spectrum pricing and packaging, which reflects the pace of integration and migration expected. Over time, we expect Spectrum branded products to drive continued higher sales and longer customer lifespans. In the first quarter, we continued to see year-over-year improvement in sales and connect volumes. Although higher year-over-year churn offset the higher sales volumes, higher churn has been a result of some customer service system changes we have been making as part of our large and complex integration. While we are executing a billing migration, last year we collapsed 13 service environments based on our billing system into four using our software isolation layer. In 2018, those four service environments were moved to two. That integration execution, which will result in quality uniform services and efficiencies, impacted both our customer qualification and collection process. Both resulting in higher non-pay disconnects and bad debt; we corrected those processes; however, both non-pays and bad debt should be back to planned levels by the end of the second quarter. Despite that self-inflicted disruption, we’ve grown total internet customers by 1.2 million or over 5% in the last year. In the quarter, we grew revenue by 4.9% year-over-year and adjusted EBITDA by 6.8% excluding mobile startup costs. Turning to mobile, we remain on track to launch our new services in the middle of this year under our MVNO agreement with Verizon. We recently launched a field trial, which includes 5,000 employees who are going through an end-to-end sales activation of the service process in May. We are building our sales channels and service capabilities, including modifying several hundred of our 700 retail stores and setting up the call center environment. Ultimately, the goal is to use our mobile service to attract and retain cable bundle multi-product customers. The partnership we signed with Comcast last week will accelerate our ability to scale our MVNO service offerings by stepping into a proven MVNO back office platform and improve the economics of our emerging mobile business. While our entry into mobile is new, we’re already a wireless operator today with over 250 million authenticated wireless devices connected to our deployed small cell network. Our infrastructure design provides us with the unique opportunity to build businesses based on how consumers use the service, what I’d call an inside-out wireless strategy. In addition to the continued advancements in Wi-Fi throughput and latency, we’re testing in various bands including 28 gigahertz and 3.5 gigahertz, which are going well and support our thesis with small cell using unlicensed and licensed spectrum including mid-band spectrum like 3.5 gigahertz. Working together with our loyal employees and the power of our terrestrial network, combined with DOCSIS products like Full Duplex and Coherent Optics, will allow us to offer high capacity, low latency connectivity products both inside and outside of the home, fixed wireless and mobile, and with and without our superior video applications. Ultimately, our strength as a connectivity provider comes from our powerful, easy-to-upgrade network. Its unique design allows for the most cost-effective deployment of new technologies, which should drive massive increases in the amount of data we drive through that network. Over time, we will open opportunities to new products. Now, I'll turn the call over to Chris.

Thanks, Tom. Before covering our results, a few administrative items; first, we have reclassed all inbound sales and retention expenses from costs of service customers, marketing expenses for current and prior periods. We already provided a pro forma change schedule in our fourth quarter materials. I also want to remind you that when discussing first quarter customer results, I’ll be comparing these results to the first quarter 2017 results that have been adjusted to exclude seasonal program customer activity in the first quarter of 2017 at Legacy Bright House. That comparison is on slide six of today’s investor presentation. This is the last time we need to compare year-over-year quarters with these adjustments since we are now beyond the one-year mark from the seasonal program change. The customer statistics that you see in today’s materials continue to be based on legacy company definitions, and in the second quarter of this year, we will recap customer sets and our trending schedules using consistent definitions across all three legacy entities. The largest differences will be in TWC and Bright House Classification of customer types, particularly universities, moving between residential today whether reported on a doors basis, commercial accounts where we report on physical sites. TWC and Bright House also reported SMB and enterprise based on billing relationships, and these will convert to a physical sites methodology. When we report our second quarter results, we’ll report on the uniform definitions for Q2, in prior periods with the reconciliation scheduling. In the third quarter this year, I expect we’ll only report consolidated operating statistics and revenue results. At closing, we said, we will report at least five quarters of legacy entity top-line results following the close of our transactions. The second quarter of this year will be the ninth time we’ve reported legacy entity results. Finally, starting on January 1st of this year, we prospectively adopted these new revenue net recognition standards. There are a number of relatively small adjustments in the quarter related to the adoption of the standard, both in revenue and expenses, but in total, it had no material impact on revenue or adjusted EBITDA growth this quarter. Now, turning to our results, total customer relationships grew by 261,000 in the first quarter and grew 890,000 over the last 12 months, with 3.1% growth at TWC, 3.4% at Legacy Charter, and 4.6% at Bright House. Including residential and SMB, video declines by 112,000 in the quarter, internet grew by 362,000 and voice declined by 25,000. 55% of residential TWC and Bright House customers were in Spectrum pricing and packaging at the end of the first quarter. Customer connects were higher year-over-year, including our new markets; disconnects were also up year-over-year reflecting the non-linear progression of net adds I have often spoken about. TWC was the largest driver of higher year-over-year disconnects. Key drivers for higher non-pay disconnects from integration related system changes that Tom mentioned, where we’ve since conformed the customer qualification and collection process to our standard policy. Non-pay disconnects and the associated bad debt should be back to normal rates by the end of Q2, practically means the beginning of Q3. We also continued to roll off churn from legacy packages; these factors had a declining impact on our results as the quarter progressed and should continue to have less of a monthly impact as we progress through Q2. Slide six shows we grew residential PSUs by 157,000 versus 338,000 last year. Over the last year, TWC residential video customers declined by 2.3%, pre-deal Charter declined by 1.5%, and Legacy Bright House video was 0.3% lower year-over-year. In the quarter, TWC residential video customers declined by about 90,000, with higher additions offset by higher non-pay disconnects. Legacy Charter lost 32,000 residential video customers in the quarter versus a loss of 13,000 a year ago. Additional competitive build-out less year-over-year benefits from a struggling competitor kept sales relatively flat at Legacy Charter. Bright House video customers were flat during the quarter versus a gain of 13,000 last year. In residential internet, we added a total of 331,000 customers versus 416,000 last year, with high long pay disconnects for the reasons I mentioned responsible for all of the year-over-year decline in internet net adds at Legacy TWC. Total company internet sales were higher year-over-year and in the 17% of our footprint where we offer 200 megabits per second as our minimum speed at the beginning of Q1, there was year-over-year improvement in both sales and net additions. As Tom mentioned, we now offer 200 megabits per second as our minimum speed in nearly 25% of our footprint, and we offer gigabit service in approximately 45% of our footprint and expect to have gigabit service available nearly everywhere by the end of 2018. Over the last 12 months, we grew our total residential internet customer base by 1.1 million customers or 4.9%, with 4.8% growth at TWC, 4.9% growth at Legacy Charter, and 5.9% at Bright House. In voice, we lost 52,000 residential customers versus a gain of 30,000 last year, driven by fewer additions and higher churn of legacy packages and non-pay churn at TWC. As we’ve said before, our progress towards better customer growth will not be linear; we continue to expect higher sales and better retention over time as a higher portion of our base is now on Spectrum, we upgrade our video and internet capabilities, our service delivery platform improves, and as we work through our integrations. Over the last year, we grew total residential customers by 739,000 or 2.9%. Residential revenue per customer relationship grew by 1.6% year-over-year, given the lower rate of SPP migration, promotional campaign roll-off, and some minor rate adjustments, partly offset by higher levels of internet-only customers and better sales with selling at promotional rates. Slide seven shows our customer growth combined with our ARPU growth resulted in year-over-year residential revenue growth of 4.8%. Total commercial revenue SMB and enterprise combined grew by 5.3%, with SMB up 4.1% and enterprise up by 7.3%. Excluding cell backhaul and NaviSite, Enterprise grew by close to 11%. Sales are up in both SMB and Enterprise with SMB PSU net adds at TWC and Bright House up over 10% in the first quarter versus last year. Our revenue growth in the TWC and Bright House markets hasn’t yet followed the unit growth, and it won’t until we get the transition to more competitive pricing of both our SMB and Enterprise products. We expect that ARPU offset will continue through 2018, but the revenue growth will ultimately follow the unit growth. First quarter advertising revenue grew by 5.6% year-over-year, driven mostly by higher political revenue. In total, first quarter revenue for the company was up 4.9% year-over-year and 4.8% when excluding advertising. Looking at total revenue growth excluding advertising at each of our legacy companies, TWC revenue grew by 4.6%, pre-deal Charter grew by 5.2%, and Bright House revenue grew by 5.0%. Moving to operating expenses on slide eight, in the first quarter, total operating expenses grew by $254 million or 3.9% year-over-year. Programming increased 5.7% year-over-year, driven by contractual rate increases and renewals, and a higher expanded customer base and mix, partly offset by a technical difficulty benefit. Excluding the one-time benefit this year, programming would have grown by 6.5% year-over-year or approximately 8% per video customer. Regulatory, connectivity, and produced content grew by 7%, primarily driven by our adoption of the new revenue recognition standard on January 1st, which also re-classed approximately $15 million of costs through this expense line in the quarter. Cost to service customers grew by 3% year-over-year, driven by the higher bad debt expense for the reasons I described. Excluding the temporary impact of higher bad debt expense, we are lowering our cost to service through changes in business practices and seeing early productivity benefits from the sourcing, all while growing our customer base and investing inward in-sourcing and training. Marketing expenses declined by 1.8% year-over-year as the prior year period included certain transition costs, and with or without that effect, our marketing and sales expenses are more efficient on higher sales. All other expenses were up 2.7% year-over-year, driven by higher ad sales costs, enterprise and product development costs, offset by lower overhead costs. Excluding mobile, adjusted EBITDA grew by 6.8% in the first quarter. The impact of the new revenue recognition standard and a few one-time and out-of-period items including the programming item I mentioned essentially offset each other. When including $8 million of clearly defined mobile startup expenses, our adjusted EBITDA grew by 6.5%. Turning to net income on slide nine, we generated $168 million of net income attributable to Charter shareholders in the first quarter. Adjusted EBITDA was higher, severance-related expenses were lower, we did not have any losses related to the extinguishment of debt as we did last year, and we had a gain on financial instruments from currency movements on our British pound debt and the related hedging. Those positive drivers were partly offset by higher depreciation and amortization and higher interest expense. Turning to Slide 10, capital expenditures totaled $2.2 billion in the first quarter, primarily driven by higher spending on CPEs, scalable infrastructure, and support capital. The CPE spend was driven by higher connect volumes, continued migration of legacy customers over to Spectrum who were frequently provided with new equipment. We also incurred $186 million of all-digital spend, which was primarily in the CPE category. The increase in scalable infrastructure was related to the timing of video spend and planned product improvements for video and internet, including the spending related to DOCSIS 3.1 launches. We also spent more in the support category on vehicles, tools and test equipment, software development, and facility spending, in each case some in-sourcing, some related to integration. Given the pace of all-digital DOCSIS 3.1 deployment and our overall state of integration and planning, the ability to spend capital more consistently as compared to last year is, in fact, a sign. For the full year, we continue to expect cable capital intensity for cable capital expenditures as a percentage of cable revenue to be a bit lower than in 2017. Slide 11 shows we generated $49 million of negative free cash flow in the first quarter versus $1.1 million of free cash flow in the first quarter of last year. The decline was largely driven by higher CapEx and working capital timing this quarter, where I provided a fair color on the overall working capital timing last quarter. The Q1 working capital headroom was primarily driven by the timing of our late fourth quarter CapEx spend, which drove early Q1 cash payments without offsetting intra-quarter CapEx timing. We finished the quarter with $70 billion in debt principal for run-rate annualized cash interest expense at March 31st, which is approximately $3.8 billion, whereas our P&L interest expense in the quarter suggests a $3.4 billion annual run rate. That difference is due to purchase accounting. As at the end of the first quarter, our net debt to last 12 months adjusted EBITDA was 4.46 times, within our target leverage range of 4 to 4.5 times. Earlier this month, we issued $2.5 billion worth of 20 and 30-year investment-grade notes, which will primarily be used to fund an upcoming maturity. During the first quarter, we repurchased 2 million shares in Charter Holdings common units for $683 million. The fact that we started the year at the high end of our target leverage range, as opposed to increasing our leverage in 2017, mathematically means that our 2018 buybacks will be less than in 2017, the same as I mentioned on the last call. We may also reduce our cable leverage somewhat over the course of the year to ensure that consolidated EBITDA remains at or under 4.5 times. Beyond the starting point leverage, other factors also play a role in the amount of 2018 versus 2017 buybacks, including the early pace of our mobile product launch, working capital effects, and consumer devices. I don’t expect that we can achieve the same level of working capital improvement for cable in 2018. Within those constraints, however, we remain opportunistic to preserve flexibility and create shareholder value. Turning to taxes on slide 13, we don’t currently expect to be a material cash income payer until 2021 at the earliest. Given the tax reform passed by Congress and signed into legislation last year, we estimate that the total present value for tax assets reflecting a later annual utilization against the lower rate has declined from just over $5 billion to about $3.5 billion. That decline is offset by the much larger value associated with net present value of tax reform, strides higher free cash flow and productivity. Before moving to Q&A, I wanted to reiterate the financial framework for the launch of Spectrum mobile service later this year. We believe that our entry into mobility can further accelerate customer growth and drive penetration. The more customer growth we generate, the more incremental revenue we’ll generate in mobile and through cable. Much of that revenue in the beginning will be device contract revenue, which is fully recognized on the contract date and similarly as costs of goods sold under EIP accounting, with the actual customer payments received over a longer period. Within the subscription business, there are upfront launch costs and acquisition activity which creates OpEx and CapEx, which exceed the gross margin benefits in the short term. The more mobile customer growth we generate early on, the more EBITDA and initial cash flow drag we will experience in the early days. Over time, we expect our mobile service to generate positive EBITDA and cash flow on a standalone basis, with broader growth benefits to our core cable services. Our mobile business will eventually be fully integrated as just another cable product in the bundle from a marketing care, billing and service perspective, so no different than internet or voice today, and it will not be a separate P&L or segment as such. To the launch phase, we will be able to create transparency around cable performance by disclosing mobile revenue, mobile operating costs and therefore mobile effects on adjusted EBITDA. We should also be able to isolate the launch’s working capital impact from the timing of cash flow from device costs and related to subscriber payments. We will provide additional details on the mobile business as we move through the year and as the business scales.

Thanks, good morning. Chris, I have two questions for you, one around the customer trends and one around ARPU. So on the customer side, you talked about elevated churn or I guess churn up year-on-year, due to disruption on all-digital, but also and maybe there related higher non-pay. So taking those two drivers and you look out into the rest of the year, do you expect net adds to be up year-on-year in the back half as presumably both of those headwinds particularly the non-pay piece fade? Obviously people are focused on subscriber trends. So any color there would be helpful? And then on ARPU, could you just help us as we think about the rest of the year whether you expect ARPU growth to be higher or lower than what we saw in Q1 directionally based on at least the timing of the rate adjustments you have implemented?

Sure, on customer trends, the main driver was the non-pay disconnect. Without that, customer net additions, especially in TWC for video and internet, would have been better year-over-year. Sales have increased across the company and particularly in TWC, which is the largest factor. The non-pay disconnect was the biggest issue. Additionally, since we've upgraded to DOCSIS 3.1, both sales and net additions have increased significantly year-over-year in those markets. The challenges mentioned by Tom regarding non-pay disruptions are expected to be resolved by the end of Q2 or early Q3. The disconnect situation is improving, and we anticipate continued improvement through Q2. We expect net additions to rise and sales are performing well. Hence, we believe that customer net additions will keep improving. Regarding residential customer ARPU, it’s important to note that there’s a considerable revenue reallocation involved in bundled pricing through Spectrum. Thus, while product ARPUs may seem less relevant, the customer relationship ARPU is crucial. The lower migration rate as we advance in the Spectrum pricing and packaging adjustment process has lessened the negative ARPU impact we've seen in recent quarters, leading to better sales and more services being offered. We’ve also implemented minor rate adjustments that will affect the remainder of the year. Without providing specific quarterly guidance, I think the ARPU challenges we faced during the initial SPP migration should diminish going forward. A significant factor is the impact of selling single-play internet packages; the absence of these significantly influences the overall customer relationship ARPU. We aim to engage customers more in video offerings if they are willing, which I would highlight as a factor to consider for ARPU.

Okay that’s good color. Thank you.

Mitchell, we’ll take our next question please.

Thanks. Chris, hoping to get a little bit more color on the trajectory of wireless losses that you are expecting post the JV that you guys have announced with Comcast. So we have been expecting similar losses to Comcast delayed by ER. And I am wondering if that’s sort of a reasonable place to set our expectations? And then how would the JV and the sharing of costs change that?

Sure, and look it’s a brand new business and we have our budget, we know what we plan to do, I think using Comcast as a proxy is as good as any at this point. But the biggest driver there is about subscriber acquisition; there are a lot of upfront subscriber acquisition costs. These are NPV positive customer acquisitions once you get to a steady growth business that has not only positive EBITDA, but a positive free cash flow contribution on a standalone basis. So the faster we grow, the more short-term pressure we put onto EBITDA and free cash flow. Now having said that, Comcast has been extremely helpful to Charter as we go through establishing back office systems and that JV should continue to help us do that. So is there an opportunity that the go-forward platform cost for companies are reduced by sharing in those expenses? That’s the whole idea of getting into the JV. I think on a relative basis because of how we’re cooperating now, could we do marginally better? Maybe, but I would say that both companies should benefit from the JV that we signed together.

Yes, this is Tom, Jonathan. I agree with Chris that both companies should benefit from the joint venture in terms of reducing operating costs, making the business more valuable as a result. However, we will not use the same marketing strategies, so we will likely see differences in performance. The overall impact will depend on how quickly we roll out the business and our success in the market.

Great, thank you.

Thanks, Jonathan.

Hi there, this is actually Kathy Owen for Craig Moffet. My question is just looking at the stock reaction today; it seems specific that investors are calling into question the Charter story. Can you provide your own perspective on whether you think the long-term story has changed? Do you think video subscribership can still grow? Have your expectations about broadband growth changed? And then most importantly of all can you talk about the free cash flow generation capability of the business? Has there changed longer term, and does wireless change that? Thank you.

Well, Kathy, no, simply our vision of the business is what we expected several years ago and continue to expect going forward. We think that there is superior infrastructure that allows us to stand out, having now more competitive products than alternative networks. We’ve been successfully selling and marketing our product, but at the same time going through a very complex integration of three very large companies to get to a single simple platform. That integration is actually going quite well and pretty much as planned. It has lumpy aspects to it as we combine the companies in various ways, but generally we are going exactly as we planned and creating the kind of future value that we expect to create. Since we told our initial story, obviously we’ve done the acquisitions and we’ve done an entry into mobility, which we think is a natural fit to our existing infrastructure and service infrastructure and will create additional value for the shareholders that wouldn’t be created without doing it. So we think the Charter story is fully intact and getting better as a result of mobility. In terms of the capital intensity and free cash flow creation, I think there are obviously we’re in a capital-intensive trend at the moment as we integrate and as we make our networks all-digital, so that we can take advantage of all capabilities of network, which was planned. The long-run trend is less capital intensity and significantly less capital intensity as our need to buy CPE goes away and as CPE costs come down. There are some forces there that are even greater than we had thought; I mean, obviously the change in video, the change in the video marketplace essentially requires less capital intensity in video because with the competitors that we faced and with our own process and IT, you don’t necessarily need new set-top boxes. You can move to an application-based delivery system in some situations. So within that, along with declining prices for CPE, mean capital intensity improves maybe marginally better than we might have thought previously. The changes in the video business are significant and hard to predict, but we still think there’s video growth capable inside of our asset base. It’s fairly marginally insignificant though and since in this sense there is very little margin in the video business. Whether you are right to optimize 1 million customers is relatively immaterial to our plan. While we think that we will make a great video product available to our customers and that that great video product will continue to help us drive the overall connectivity business we have. If we are passed in our forecast of that, it’s not significantly financially material to our growth prospects. I can’t explain the market reactions, but our activity and our project management is going as we expected and the kind of marketplace acceptance of our products is going as we expected.

Okay, got it.

Kathy, maybe I would just add a few quick thoughts to that. One is if you think around the timing of a good quarter, off quarter as it relates to net adds for somebody’s model. A lot of people are looking for a linear outcome, and we’ve tried to do as best as we can, and it’s not going to be linear. If you take a look back at the Legacy Charter experience, if you look at it on an annual basis, it looks pretty linear. But if you go back and take a look at 2013 and 2014 in particular, it really was anything but linear. That applies to net adds, and it applies to the financial results. It looks choppy, as we were going through. In some respects, market reaction, which I haven’t focused on that much this morning, it’s a little bit of déjà vu. We’re turning a lot of the same miles as we did with Legacy Charter and the integration. There are a lot of moving parts, but the trajectory we think remains as good as ever. The second one is on the impact of wireless. The conversations we’ve had with some investors are somewhat bifurcated. On one hand, there is a group of investors who get it and say, go as fast as you can from a competitive standpoint, it’s the right thing to do, it does have the positive NPV and it’s an attractive business. Then there is another group who are very, very focused on the short-term impact to EBITDA and free cash flow and what that might do to an overall growth rate. So one, we are going to isolate that impact so people can focus on the core value creation of the cable platform and the optional value, if you want to call it that, on the mobility business. But that investment relative to the overall size of Charter’s revenue or EBITDA is relatively small, and the potential upside impact to that investment is significant. I think that’s the piece that is missing in terms of understanding and putting that upfront investment into perspective. We are going to isolate it along the way so people, if they see it as a bet, they can size that bet and understand the relative materiality. But we think it’s attractive; I think it’s going to help us not only add EBITDA and free cash flow over time, but we think it’s very constructive and helpful towards further internet growth in particular in the cable business.

Okay, thank you. So from a free cash flow perspective, your longer term interest hasn’t changed even if the mix shift to get there may have moved around a little bit with the video environment getting worse?

No, I mean, the biggest free cash flow generation that you are going to see from 2019 CapEx when it comes down, and that hasn’t changed. This year, we are doing all-digital, we are doing the DOCSIS 3.1. We still have a tremendous amount of integration capital that’s inside these numbers, and that essentially comes out next year. In the meantime, despite some lumpiness on subscriber net adds from one quarter to the next, the financial results we mentioned Q4 would be the low point on EBITDA during the whole identification; the business is moving, it does mean that it’s going to be linear, so never treat it that way. But we did have the low point already on the financials, and the business is moving in the right direction.

Okay, great. Thank you so much.

Thanks, Cathy. Mitchell, we will take our next question please.

Thanks. Just following up on the prior question. When you were going to this transition on legacy Charter and there was disruption on cash flow and obviously with all the inflection in cash flow on the Time Warner Cable transaction. But you also had pretty robust subscriber growth and you were getting the share. Obviously, I think now the question is, if the market environment changed enough that would you have to revisit your strategy, given I think you have a lot of levers to pull on pricing and tearing and the like. So I was just trying to see given the market environment, we might get to the same free cash flow numbers at the end, and really sort of if you could talk about is there some tweaking on strategy that needs to be done to do that given the market environment? Thanks.

Vijay, it’s Tom. Obviously, the markets move through time; our strategy moves with it. We think that we have needed to change our product and our mix in order to take advantage of our assets and beat the marketplace effectively. We think that we can do that and are doing that, and our sales volume and our connect volume and our management of our customer base, pricing and packaging give us confidence that we can continue to do that. Take data speeds for instance: with Legacy Charter, like Charter, our average data speed was 10 megabits, and we took the minimum up over time to 30 and created most of our subscriber growth at 30. Today in this new model where we’ve just gone to 200 meg minimum speed in a significant part of our market 100 megabit speed. Even bigger part of our market, but that’s shifting as we rolled out this 3.1 technology. So we’ve taken the advantage of the marketplace and the capacity of our network to change our data product so that it will continue to drive the kind of results we expected to get. We are in the middle of the tooling of that process right now as we integrate the company. We have a vastly superior product almost everywhere we operate. We expect to get results from that. If we need to change that two years from now, we have the ability to do it at very little or very small incremental costs, which is the beauty of the infrastructure that we built out in this company. So, I guess the answer to your question is we have the same high expectations for free cash flow growth in this entity now, based in the current marketplace as we understand it now, just like we did five or six years ago.

Great, thanks so much.

Thanks, Vijay. Michelle, we’ll take our next question please.

Thanks. I have two, I think just staying on subscriber trends and the stock price, I feel like it sounds like maybe 2019 is when we finally get to stabilization in sub-trends and maybe that’s when the market will start to give you a little bit more credit as we get closer. So is that a fair statement or thought? And then secondly, unrelated, as we dig into 5G, I think it’s becoming more apparent that cellular backhaul is increasingly important. And I guess how do you think this plays out over time, and how can you better monetize this especially with a larger platform?

So Marci, I don’t know when markets award you or don’t award you. Ultimately, our job is to create the free cash flow that we expect from these assets and we think we are on track do that. We’re on track with the plans that we made. Whether we’ll get rewarded before that occurs or after it occurs, I don’t know, but we expect to create the free cash flow. In terms of the infrastructure that we had, we do think that we are the natural small cell provider and that we have the most efficient ability to provide small cell connectivity compared to any other small cell competitor we have. We have 26 million small cells who are already connected to our network and we have 250 million wireless devices already connected to those small cells, and we plan to continue to build out the small cell environment. How that relates to other business opportunities is hard to say, but we have them.

Thank you.

Michelle, we will take our next question please.

Thanks. This is for Mr. Rutledge, I guess. I know the strategy is to get more people attached to your fixed cost network, but I had a question when I was going through the case of your competitors and yours and just doing benchmarking. Whether I look at the customer relationships per employee or revenue per employee, Charter doesn’t fare that favorably; you are sort of 10%, 20%, 30% below all your publicly listed peers. My question is, if the unit growth sort of evaporates from the ecosystem or if you are unsuccessful sort of getting the attached rate up, do you think there is a potential cost element? Said another way, is there something materially structural about your footprint or your systems that would make you less productive vis-à-vis your peer cable companies? Thank you.

Yes, that’s a very interesting question. The short answer is, no. In fact, we think we will be more productive. But we are in the middle of a transition where we are moving from an outsource environment to an in-source environment. We create a more professional workforce that is designed to provide higher quality service, which will improve subscriber lines and reduce transaction volume ultimately in our business. So it will have less transactions per customer. If we have less transactions per customer, we believe and which we are trending forward every day as our operations improve and as the skill sets that we need are developed inside the company. So if you think about what I just said, in-sourcing and outsourcing at the moment, we decided to move costs from the Philippines to St. Louis for instance. We have to stand up a brand new call center in St. Louis, we have to build it out physically, so there is capital involved, and then we have to hire the workforce and train the workforce to take the costs. In the meantime, we are still outsourcing to the Philippines so that workforce is up and running and skilled. Once the workforce is skilled, though, the number of transactions that occur as a result of having a higher skilled force goes down. We think that the transaction volume goes down faster than the cost structure goes up by having an in-sourced call center. When you have less transactions per customer, you actually have happier customers. They are less costly to serve; they are happier, and if they are, because they are happier, their average life extends, which means that the average value per sale that you create goes up. The number of transactions connect and disconnect per dollar of revenue that you spend goes down. We are still in the middle of a transition process that has operating expense in it that’s part of the strategy. But our expectation down the road, which is part of the free cash flow drive of the business, is that you get this virtuous growth structure where you get better served customers who cost you less and are happier. That benefit is yet to be realized from our activity today, but it is part of our plan and our expectation. The numbers that we expect to generate today that will prove out that thesis are occurring as we expected.

You need to connect it to the profit and loss statement. The metric you are using is incorrect because it’s a comparison of different things. For example, at one point, more than 50% of the Time Warner Cable call center infrastructure was outsourced. Now, over 85% is managed in-house. If you consider just the employees, you are missing the significant amount of contract labor involved. It’s an unfair comparison; they operate under different models. When looking at the cost to serve customers, despite the investments mentioned by Tom and a customer relationship growth of over 3%, our gross cost to serve is actually decreasing, excluding temporary bad debt effects. The primary labor costs associated with customer service are already declining both on a gross and net basis. On a per-customer basis, these costs are significantly dropping despite the substantial upfront investments we’re making, as Tom pointed out. It’s essential to adjust for all forms of labor; you can't only consider in-house labor, as contract labor, which has also decreased dramatically, constitutes a considerable part of total labor costs for some companies.

Understood, thank you.

Thanks, Jason.

Michelle, next question please.

Great, a couple of questions. I guess first for Chris, from your comments on the non-pay disconnected it sounds like you’re already starting to see some acceleration in PSU trends. If you could just confirm that or whether we have to sort of wait another quarter before we see that inflection as that issue sort of lapses? And then two, maybe for Tom, it sounds like you guys are seeing some improving underlying fundamentals in the HSD side. When you go to 200 megabits in a market, and I think you said you are 25% now, and I may have missed it, but when do you get to 100%? Maybe if you could give us some more detail on what you see when you get to 200 megabits as a base and whether or not you feel you have additional pricing power in those markets given the competitive landscape there? Thanks.

So on the improvement, yes, we had less of a negative impact from the non-pay disconnect issue, which has since then been addressed throughout the quarter. The last of the systemic changes we needed to make for that took place inside of April, and so we expect it to continue to ameliorate during the course of Q2. It should be fully out by the beginning of Q3. The trends are improving in that particular area, and I don’t want to get run into guidance, but we wouldn’t have said what we said if we didn’t feel that particular issue was declining in its materiality.

So John, I think we said that we've got a 200 megabits in front of 25% of our customer base. We have built out at this moment 43% of our footprint to 1 gig speed capability using DOCSIS 3.1 capability. By the end of the year, we’ll have 100% of our infrastructure capable of 1 gig or 200 megabits or 400 megabits. While we haven’t said where we’ll rollout 200 megabits, it’s in a substantial amount of markets today, and we’re getting good results from it. We are also getting good results from our higher ultra-tier, which is 100 megabits, and it’s selling in at a substantially higher rate than our previous set. So, while I don’t want to give you a forecast of where we got from a infrastructure perspective, the entire network will be capable of this product mix this year.

Okay, thanks.

Thanks, John. Michelle, next question please.

Thank you. I have a couple, Tom. Firstly, when you look at all the changes in the ecosystem right now, your peers are responding differently, slightly differently. When you think about the price increases, other cable companies have been a lot more aggressive. Strategically there’s been a lot more pivot with AT&T buying Time Warner and Comcast buying Sky. When you think about the ecosystem as it is set up today, do you think you need to do something different compared to what you are doing right now longer term? Secondly, Chris, from your perspective when you look at normalized CapEx in the proxy, I think in the proxy it was about 12% of revenues in 2019. Like you mentioned earlier on the call, you expect CapEx to drop next year, but right now it’s at 19%. So when we go into 2019, without getting into specific numbers, could you give us some sense of scale in terms of what CapEx could be like? Thanks.

So this is Tom. As far as the ecosystem goes, I think we’re strategically complete in the sense that we think that we can execute our business plan with the assets that we have. I don’t think we need to own content to do better; that doesn’t mean there aren’t opportunities that might arise that are pricing property that would be synergistic with us. We are fairly confident that we can execute our strategy, which from our perspective we are a connectivity company selling connectivity relationships. Video is not material from a margin or EBITDA driver perspective, but it is a standalone product, but it is material in terms of product attribute to the overall relationship that we create with customers. With a lot of access to video, we have launched Netflix on our network; we plan to integrate all the video products into our UI and make us the best place to get video of every kind. But that doesn’t require us to own video assets per se.

On the capital expenditure, there was a proxy that was over three years ago used with our Board that ended up being publicly disclosed. I don’t want to go back in time and start looking at that, other than to say we expect 2019 capital expenditure to be a materially lower amount of gross dollars of CapEx. In a growing new business, therefore a materially smaller amount as a percentage of revenue. We will still have integration activity going on inside of 2019, and so that means that we expect to have continued solid revenue growth for many, many years to come. It seems like your capital intensity just continues to decline. I think 2019 will be a big move, and I think it continues to get better as a percentage of revenue from there. I am speaking about cable capital expenditures, as a percentage of cable revenue. I don’t think wireless or mobility is that big given all the factors that I described before where it moves through the P&L. I think 2019 starts to fully expose the free cash flow capabilities of the company.

Alright, thank you.

Thanks, Kannan. Mitchell, we will take our last question please.

Thanks for taking my questions. Just two really clarifications for Chris: you referenced your prior commentary around first quarter being a low point for EBITDA, and I just want to clarify if that’s all in EBITDA or EBITDA exclusive of anything you may spend on wireless? Then, just another follow-up, when you were discussing the buyback potential this year and how it will be mathematically lower, you cited the way you are going to manage the leverage this year, and it sounded like you may be managing leverage a little lower. I don’t know if I appreciate the nuance of what you are trying to communicate. So I was hoping we could just revisit that. Thank you.

Sure, so I am glad you asked the first question in case I misstated. What I said in the fourth quarter, the fourth quarter of 2017 was the low point of EBITDA. I did not say that the first quarter was the low point of EBITDA; first quarter EBITDA was actually pretty good. Yes, I think it will continue to improve over time, and that doesn’t mean that that will be linear. So that certainly wasn’t what I was implying. My comment from the fourth quarter 2017, which I reiterated today, was that the fourth quarter of 2017 was below for cable EBITDA growth. In terms of managing leverage, what we are trying to make sure that we do is stay within four and a half times inclusive of the short-term launch cost for mobile and any working capital impacts from the launch of mobile. What that means is that you need to create a little bit of headroom on your cable EBITDA leverage so that you can accommodate that upfront cost. The faster we go with wireless means that you might just need to pull in a little bit on your cable EBITDA leverage. That’s the only distinction I am making to make sure that the consolidated leverage remains at or below 4.5 times. We’re a large issuer of the debt capital markets as well; we have investment-grade; we have made commitments to that market. As well that intend to keep them and to make sure that we stay in line from that perspective.

Alright, thank you. That was very helpful. I appreciate it.

Thanks.

Thanks, Brett. Mitchell, that concludes our call.

Thank you everyone.