Charter Communications Inc (CHTR) — Q4 2018 Earnings Call Transcript

Good morning, and welcome to Charter’s fourth 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 filed this morning. 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. 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. We performed well in 2018 while simultaneously completing the most customer-impacting phase of our integration. For the full year, we grew our total Internet customer base by 1.3 million customers, or 5.3%. We grew cable revenue by 4.7% in 2018 and cable adjusted EBITDA by 6.5%. With our integration now nearly complete, our goal is to accelerate customer relationship and cash flow growth going forward. Following our transactions in May of 2016, we put three very large companies together in order to create a new company with a larger and more concentrated footprint, giving us the scale to innovate and grow faster. We're beginning to benefit from that strategy in all the ways we expected. When we started the process of pursuing additional scale in 2013, we knew that to fully benefit from any acquisitions we would need to create a single operating entity with a unified product, marketing, technology, and service infrastructure. We spent over two and a half years doing that. Slide four of today's presentation reflects the progress against the integration plan we first showed in 2016 and the earlier-than-expected launches of DOCSIS 3.1 1-gig service and Spectrum Mobile. While our integration and network upgrades have excellent long-term benefits, they've been disruptive to our customers, our ability to execute and contrary to our long-term operating strategy of reducing service interactions as planned. That process though is now essentially complete. But we still have some work to do; virtually all of the customer-facing initiatives related to our integration are now behind us. We've migrated 70% of our acquired residential customers to Spectrum pricing and packaging. Our all-digital initiative is now finished. We've completed the upgrade to DOCSIS 3.1 and the launch of our gigabit speed offering across our entire residential and business footprint. Our service infrastructure is national, specialized, and consistent. Our call centers and service platforms will be fully virtualized across the company by year-end and our field operation and customer care in-sourcing are also nearly complete. By the end of 2019, we expect to have completed the very last pieces of our integration. But as I said, most of this year's integration activity is non-customer-facing in nature. With our biggest integration initiatives behind us, we're now in a position to drive long-term sustainable customer relationship growth, EBITDA growth, and significantly lower capital intensity driving accelerating free cash flow growth. As we look forward to 2019, we remain focused on a number of key strategic priorities including driving higher sales volumes. We made some key changes to our double and triple play packaging in September including the way we sell landline voice and including Spectrum Mobile in every sales opportunity. Those changes required that we retrain our sales force personnel in all sales channels. That process took through October to take hold, and our sales effectiveness will continue to improve. Our fourth quarter results demonstrate that churn continues to show meaningful improvements as planned. Spectrum Mobile is ramping up. We added over 110,000 mobile lines in the fourth quarter and we're seeing a growing percentage of our new cable sales taking mobile service. We're also upselling mobile service to existing cable customers. Over the longer term, we expect consumer savings from our mobile offering to drive incremental cable sales as we build brand and product awareness for our Spectrum Mobile service and become a more powerful retention tool. In December, we began the process of allowing customers to transfer their existing handsets to Spectrum Mobile from other service providers at some of our stores. Over the coming months, we will expand the Bring Your Own Device program to include a broader set of devices and to allow customers to bring their own device process to do their own bring your own device process themselves without having to visit us in a store. Full Bring Your Own Device availability will expand our mobile market opportunity substantially. In 2019, we are also well-positioned to reduce service transactions. With the vast majority of our integration behind us, we expect to see a meaningful reduction in network activity, CPE swamps, service calls, and truck rolls. Service activity should also decline as our better product and pricing and services across a larger base improve. And as we begin to benefit from enhanced online self-service and greater levels of self-installs. So in 2019, the lower level of activity will raise customer satisfaction, reduce churn, and extend customer lifetimes. Finally, in 2019 is the year we’ll see a significant reduction in capital intensity. Our goal at the beginning of this process was to put our combined assets in a position to operate as a single entity and to grow faster over the long-term as quickly as possible. As a result, we stepped up capital spending in the short term. That higher spending is now behind us and cable capital intensity will fall significantly in 2019 as planned, but also beyond 2019 as CPE spend per home declines, consumers increasingly install their own services, the reliability of our plant improves, and our network becomes increasingly cloud-based and IT-driven, all on higher expected revenue while we continue to appropriately invest in our products and in our network. Already in 2019, I expect the business and cash flow performance of our cable business will further demonstrate the superiority of our networks and our assets, the returns of our recent investment, and the long-term benefits of our consumer-focused operating strategy on a larger set of assets. I'll turn the call over to Chris Winfrey.

Thanks, Tom. A couple of administrative items before covering our results. Like last quarter, the prospective adoption of the new revenue recognition standard lowered our EBITDA in the fourth quarter by about $7 million as compared to last year. In 2019, there should be less impact year-over-year, and we don't expect to continue to highlight the amount. As it relates to Hurricane Michael in Florence and the wildfires in California, we did have some recovery and rebuild costs in the quarter, but they were relatively small. And since we had storms in last year's fourth quarter, the negative impact of this quarter's EBITDA and CapEx on a year-over-year basis was minimal. Now turning to our results. Total residential and SMB customer relationships grew by 248,000 in the fourth quarter and 942,000 over the last 12 months. Including residential and SMB, Internet grew by 329,000 in the quarter. Video declined by 22,000, and voice declined by 56,000. Over 70% of our acquired residential customers were in Spectrum pricing and packaging at the end of the fourth quarter. Similar to what we saw at Legacy Charter, pricing and packaging migration transactions are slowing, which, together with the completion of network upgrades last year, means that in 2019 we’ll see lower CPE spending and meaningful churn benefits. For residential Internet, we added a total of 289,000 customers versus 263,000 in the fourth quarter of last year. Over the last 12 months, we've grown our total residential Internet customer base by 1.1 million customers or 4.9%. And we now offer Gigabit service to nearly 100% of our footprint using DOCSIS 3.1. Over the last year, our residential video customers declined by 1.8%. Sales of our Stream and Choice packages, which are primarily targeted at Internet-only, have continued to do well. Spectrum Guide is being deployed to the vast majority of new video connects, providing a better overall video experience. Our video product is available via the Spectrum TV app on a variety of platforms, including Android, Kindle Fire, Roku, Xbox, Samsung Smart TV, and computers. We also recently launched our Spectrum TV app on Apple TV with a Zero Sign-On feature for customers on Spectrum Internet. In voice, we lost 83,000 residential voice customers in the quarter versus a gain of 23,000 last year, driven by a lower triple-play selling mix. As Tom mentioned, we changed our voice pricing in mid-September to address wireline voice sell-in, retention at roll-off, and the launch of mobile. At acquisition, voice is now $9.99 with no change to that price when a customer rolls off a bundled promotion. With wireline voice as a $9.99 value-added service going forward, mobile is now positioned to be the triple-play value driver for connectivity sales, similar to what wireline voice did for cable over the last decade. These are meaningful changes to a large selling machine, but the transition went well in the fourth quarter. Turning to mobile, we added 113,000 mobile lines in the quarter with a healthy mix of both Unlimited and By the Gig lines. As of December, we had 134,000 lines. As we add new features and functionality including Bring Your Own Device capabilities, we expanded our marketable population as Tom mentioned. Over the last year, we grew total residential customers by 771,000 or 3%. Residential revenue per customer relationship grew by 0.9% year-over-year given the lower rate of SVP migration and promotional campaign roll-off and rate adjustments. We did grow subs in voice and video taxes in both revenue and expense with no impact to EBITDA in the past or now. Those ARPU benefits were partially offset by a higher mix of Internet-only customers. Slide seven shows our cable customer growth combined with our ARPU growth resulted in year-over-year residential revenue growth of 3.9%. Keep in mind that our cable ARPU does not reflect any mobile revenue. Turning to commercial, total SMB and enterprise revenue combined grew by 4.5% in the fourth quarter. SMB revenue grew by 3.6%, faster than last quarter as the revenue growth impacted re-pricing our SMB products in Legacy TWC and Bright House slowed. We've grown SMB customer relationships by over 10% in the last year. Into 2019, we expect a lower level of SMB ARPU decline for the re-pricing. Enterprise revenue was up by 5.7%. Excluding cell backhaul, Navisite, and some one-time fees, which were a benefit this quarter, enterprise grew by 6% with 13% PSU growth year-over-year. Our enterprise group is in an earlier stage of a pricing impact due to transition but it’s very similar to what we have done in our larger SMB and residential businesses over the last two years. The process of moving customers to more competitive pricing pressures enterprise ARPU in the near term. But ultimately the revenue growth will follow the unit growth as is beginning to happen in SMB. We remain very confident in the strategy in our long-term growth opportunity in enterprise. Fourth quarter advertising revenue grew by 34% year-over-year and political advertising accounted for all of that growth as it also utilizes traditional inventory. Mobile revenue totaled $89 million with about $80 million of that revenue being device revenue. As a reminder, under equipment installment plans or EIP, all future device installment payments are recognized as revenue on the connect date. Hence, the mobile working usage during the growth phase, which we highlighted. In total, consolidated fourth quarter revenue was up 5.9% year-over-year with cable revenue growth of 5.1% or 3.9% when excluding advertising. So, moving to operating expenses on slide eight. In the fourth quarter, total operating expenses grew by $446 million or 6.7% year-over-year. Excluding mobile, operating expenses increased by 3.6%. Programming increased 5.5% year-over-year and a mid-single-digit growth rate is probably a good baseline for 2019 programming cost growth. Regulatory connectivity and produced content grew by 11.8% driven by our adoption of the new revenue recognition standard on January 1, 2018, which reclassed some expenses to this line in the quarter as well as the voice and video tax and fee gross that I mentioned earlier. Finally, content costs were up given more Lakers games in the fourth quarter of 2018 versus the fourth quarter of 2017. Cost of service customers declined by 0.8% year-over-year compared to 3.5% customer relationship growth. Even excluding some bad debt improvement year-over-year, cost to service customers was flat year-over-year. We are essentially lowering our per-relationship service costs through changes in business practices and continue to see productivity benefits from in-sourcing investments. Cable and marketing expenses declined by 2.3% year-over-year and other cable expenses were up 7% year-over-year, driven by higher ad sales cost for political IT cost from ongoing integration, property tax and insurance, and costs related to the launch of our Spectrum News 1 channel in Los Angeles. Mobile expenses totaled $211 million and was comprised of device costs tied to the device revenue I mentioned, market launch costs, and operating expenses to stand up and operate the business, including our own personnel and overhead costs in our portion of the JV with Comcast. Adjusted cable EBITDA grew by 7.6% in the fourth quarter. When including the mobile EBITDA loss of $122 million, total adjusted EBITDA grew by 4.6%. As we look to 2019, annualizing our fourth quarter 2018 mobile EBITDA loss is a good starting place for estimating our 2019 mobile EBITDA loss. That generalization assumes immaterial acceleration in mobile line growth, which drives high acquisition costs as well as our own growing start-up costs. As mobile lines and revenue scale relative to the fixed operating cost and variable acquisition costs, we continue to expect mobile will be a positive EBITDA and cash flow business on a standalone basis without accounting for the planned benefits to cable. Turning to net income on slide 9, we generated $296 million of net income attributable to Charter's shareholders in the fourth quarter versus $9.6 billion last year. The year-over-year decline was primarily driven by last year's GAAP tax benefit given the federal tax reform, higher interest expense and pension derivative, and other non-cash adjustments in this year's fourth quarter. That was partly offset by higher adjusted EBITDA and lower depreciation and amortization expense. Turning to slide 10 on CapEx. Capital expenditures totaled $2.4 billion in the fourth quarter; about $150 million lower than last year. The decline was primarily driven by lower CPE with less SPP migration and as we finished all-digital. We also had lower scalable infrastructure and support capital spend, given more consistent timing of in-year spend this year versus last, as well as the completion of various integration projects. That was partly offset by higher spend on line extensions as we continue to build out and fulfill our merger conditions. We spent $106 million on mobile-related CapEx this quarter, driven by software, some of which is related to our JV with Comcast and on upgrading our retail footprint for mobile. Most of the mobile spend is reflected in support capital. Following what I mentioned earlier, using the Q4 mobile CapEx run rate is a simple way to think about 2019 also works. We expect mobile CapEx will decline following the upgrade of our retail footprint. For the full year 2018, we spent $8.9 billion in cable CapEx or 20.4% of cable revenue, down from 20.9% in 2017, consistent with our previous expectations. As we look to 2019, Tom mentioned, cable CapEx will be down meaningfully in absolute dollar terms and in terms of capital intensity. We don't generally provide guidance, but with a significant decline in 2019 capital spend, I will tell you our internal plan calls for approximately $7 billion of total cable CapEx in 2019, down from $8.9 billion in 2018 for all the reasons we've said. Within that number, there's still single product and network development and some integration capital, including both software development and real estate improvements which we treat as CapEx. As usual, if we find new high ROI projects during the course of the year without accelerated spend on existing projects, we would continue to do so. Slide 11 shows we generated $885 million of consolidated free cash flow this quarter, including about $300 million in investment in our team. Excluding mobile, we generated approximately $1.2 billion of cable free cash flow, roughly the same as last year's fourth quarter. While this quarter we did have higher adjusted EBITDA and lower cable CapEx year-over-year, those were almost entirely offset by a lower cash flow benefit from working capital year-over-year. Recall that we spent a significant amount of capital in and linked within the fourth quarter of 2017. So we had a very large working capital benefit, nearly $700 million within the fourth quarter of 2017. Excluding the year-over-year working capital impacts, cable free cash flow was up by over $400 million year-over-year in the fourth quarter. For the full year 2019, I expect another year of working capital-related reduction to cash flow as we continue to add mobile customers, which drive headset-related working capital needs will continue to separate that. And as cable CapEx falls meaningfully already in the first quarter in 2019, which means we'll see an immediate and material full year step down in our cable CapEx payables balance, which could make our first quarter 2019 cable working capital look similar to the first quarter of 2018. The drivers for both of these working capital impacts are logical. And while over the longer term it's a question of timing, both drivers will have outsized quarterly and full year impacts. We finished the quarter with $72 billion in debt principal. Our run rate analyzed cash interest at year-end was $3.9 billion versus our P&L interest expense in the quarter's adjusted $3.6 billion annual run rate. That difference is primarily due to purchase accounting. As of the end of the third quarter, our net debt to last 12 months adjusted EBITDA was 4.45 times at the high end of our target leverage range of 4 to 4.5 times. We intend to stay at or below 4.5 times leverage, and we include the up-front investment in mobile to be more conservative when looking at cable-only leverage, which stands at 4.38 times and is declining. At the end of the quarter, we held nearly $3.4 billion in liquidity from cash on hand and revolver capacity. In January, we issued $3.7 billion in investment-grade bonds and bank debt as shown on slide 22, and we increased the size of our revolver, all of which will be used for general purposes, pending maturities and buybacks. Pro forma for the repayment of our $3.25 billion of investment-grade notes maturing in February and April, our weighted average cost of debt declines to 5.2%. Our weighted average life of debt is over 11 years. Over 90% of our debt matures beyond 2021 and over 80% of our debt will be fixed-rate. So we have a prudent and unique capital structure. And consistent with how we regularly evaluate our leverage target, we don't currently expect to be material cash income taxpayers until 2021 at the earliest, meaning $1 of EBITDA at Charter is not the same as elsewhere from our leverage of free cash flow perspective. We also had strong visibility on EBITDA growth and accelerating cash flow growth, meaning we can mechanically delever quickly if we see a permanent increase in refinancing cost, a change in business outlook, or investment opportunities. During the quarter, we also repurchased 4.3 million Charter shares and Charter Holdings common units, totaling $1.4 billion at an average price of $314 per share during the fourth quarter. Since September of 2016, we've repurchased about 19% of Charter's equity. Briefly turning to our taxes on slide 13, our tax assets are primarily composed of our NOL and our tax receivables arrangement at Bright House are worth over $3 billion. So we're looking forward to 2019, our customer revenue and EBITDA growth combined with a decline in capital intensity and the tax assets will drive accelerating free cash flow growth. We expect that free cash flow growth, combined with an innovative capital structure and reasonable leverage target and an ROI-based capital allocation to drive healthy levered equity returns. Operator, we're now ready for Q&A.

Thank you. Chris, thanks for breaking with tradition and giving CapEx guidance. I think it's extremely helpful. Just two quick questions, if I may, on CapEx. During the prepared remarks you mentioned that CapEx declines would continue. Did you mean that CapEx will continue at sort of around this level for cable of around $7 billion? Or is there a path for it to move even lower than that in future years? And then similarly on the cost side, you mentioned the reduction in activity now that you've got most of the customer-facing integration efforts behind you. Should we think of non-programming costs being stable at these levels with all of that activity behind you? Or could non-programming costs in sort of aggregate dollar terms come down a little bit from here? Thank you.

So Jonathan, it's Tom. On the CapEx guidance going forward, we do think that in general, going forward beyond 2019 and beyond our guidance that capital intensity will come down. That's a function of revenue growth and continued opportunities to be more efficient with our capital spending. But I think the best way to think about it is that it really depends on how fast you're growing to some extent and how fast the opportunities to become more efficient are in terms of your customer service infrastructure. We'll leave it as we said, that it's generally getting more efficient because of the operating opportunities that the network configuration provides us, meaning cloud-based services, IP-based services, lower CPE. Connected to your other question about non-programming costs, we think that that will also be down materially going forward as a result of our ability to self-service customers and provide a better customer service experience which will reduce transactions in general. That reduces capital and it reduces operating costs, so we actually think we end up in a world with higher margins and lower capital intensity.

In addition to that, Jonathan, if you're analyzing growth, the operating expenses per customer will significantly decrease, as Tom mentioned. Currently, we are growing our customer relationships by 3.5%, and we aim to improve that. When we discuss costs, we are focused on the cost per relationship, which is set to decline materially. Considering the higher bad debt we faced last year is now resolved, there is potential for a gross reduction as well. The main takeaway is that with the growth in customer relationships, the cost per customer relationship will see a substantial drop this year.

Thank you. Good morning. And just sticking with CapEx. Tom, could you talk a little bit about your vision for the video business, particularly as it relates to a sort of Bring Your Own Device. You guys have that Apple announcement recently. It seems like that's becoming a bigger part of how customers are consuming your product. I know your app is a top app on Roku. Just sort of theoretically and philosophically, how do you think about embracing that change, and what it means to the business? And then just for Chris, the CapEx step down in 2019 on cable is more significant than we were expecting. We know about 3.1 rolling off, all-digital, but those are relatively modest numbers in the grand scheme of the decline you're pointing out. So maybe if you could just enumerate the other drivers of that step down that are material just to help us think about what happened over the longer term? That would be helpful.

All right, Ben. So on the video business, which we talked about a lot, obviously, the video business is going through changes. But there's a lot of consistency as well in the video business in terms of the way bundled packages still remain the primary services that we offer. I think we embraced where the marketplace is going. And we want to have people use video services on our network. There are ways for us to be in the connected video business in a way that continues to provide incremental margins for us being in that business at the same time using the video business to drive our core business, which is connectivity. The mix of direct-to-consumer and the mix of direct-to-consumer hardware Bring Your Own Device in the video space, I think will change through time. We're going to allow it to change as the market dictates and try to make our products work best on every device that we provide. There are still significant opportunities for us providing CPE devices to consumers, bringing in all of their services together in one consistent way. That said, there are consumers that definitely want CPE and there may be CPE vendors that create great CPE. We're open to being a supermarket of video services, however those services develop. We think we can run our traditional models and new models simultaneously. When we look at video usage on our network, it's actually going up.

Ben, on the CapEx step down, the question remitted to the significant amount of step down, which is already going to start occur in the first quarter of this year. You hit at some of the big ones on the head. First, all-digital is now complete. DOCSIS 3.1 is now complete. Another item is that SPP migration naturally starts to slow. We now have over 70% of the acquired customers that are now migrating already to SPP, and just as you get further up the curve that level of migration slows. We've been in two and a half years of pretty intense integration, and a lot of those integration programs have either completed or the heavy expenditure related to them was completed. I'll give you one big example. A lot of the software development that we've talked about in order to be able to put all the call center field operations into a national standardized virtualized and specialized structure, a lot of that spend has occurred. While some of those platforms are still being rolled out during 2019 and there's capital associated with that the level of CapEx attached to that is lower. The same thing would apply for a lot of the in-sourcing where we've done – where there's tools, trucks, tools and equipment into big when there is also real estate when you think about call centers. It doesn't mean that some of the activity is not still going on in 2019. It is, but it's just at a significantly lower level. So those are big programs that are either wound up or winding up. There are a couple of other trends that exist inside the business that will be continuing to go forward to improve the capital expenditure per passing or the capital expenditure per customer relationship it. Some of it also ties to OpEx as well. We are increasing our self-installation rate. That has an impact both on OpEx as well as CapEx. The other area for a lot of the reasons that Tom just mentioned is we are having a lower amount of new video CPE per installation. So when that comes about because of the market trends that Tom was talking about, our ability to just service that marketplace, the other piece comes from the fact that we just deployed so much new CPE in the context of all-digital and through the SPP migration that you have a fully populated base of really capable video set-top boxes that are both qualm and IP-capable in the marketplace. That means on the Internet, when you're replacing a churning customer with a new customer, they need to go out and buy new CPE is significantly reduced for what it's been in the past couple of years.

The one thing I would also add is that the mix of capital that we're allocating and the capital we do spend is increasing toward the network, which is the Internet, the speed, and the capability of the Internet. While video cost per byte, video CPE are coming down and the cost to provide customer connectivity in the home and service throughout the home are coming down due to the ability to self-provision relationships. The actual investment in the network capability itself is going up, all the while capital intensity is coming down in the aggregate for the home business.

Thanks, Ben. Michelle, we will take our next question.

Well, thanks so much. Tom, I know it's early, but are you seeing the benefits from the reduced service interactions so far in 2019 or perhaps better as would be per systems that have already completed customer-facing integration efforts previously? Any comments on sort of progress on customer comps would be helpful. And for Chris, I'm a bit confused on margins. If I look at Q4 advertising, it looks like margins are down slightly year-over-year. You talked about growth in customers, which is good for margins. There was – Tom, I think mentioned lower churn which is good for margin. But I have it right that investment in integration and in-sourcing is still hitting the margins in Q4? And if that's, how did that progress in 2019 does it get better right away in 1Q 2019, or does it get better throughout the year? Thanks.

Well, on the cost to service, we did say in the fourth quarter that we saw churn reductions. Those churn reductions come from our ability to manage the operation better, including how we create new customers but also the quality of the service infrastructure that we're providing and its impact on customer life. To the extent that we're able to create a satisfied customer base by creating products at reasonable prices that have low friction in them from a relationship perspective, meaning we have fewer service calls and we’ll have lesser friction in the transaction and scheduling of activity that creates an environment where the average customer life gets greater, and you have fewer transactions per consumer. That means you have lower cost per consumer. So you can have – so in a static environment without growth, you get significant margin improvements. In a growth environment, you get a less expensive growth environment. That’s how we see the business developing and why we made the investments we did.

Doug, your question on Q4 not looking at the analysis that you're starting to do, my guess is that you've either included mobile operating costs, or you haven't backed out advertising costs associated with political. Advertising, if you just took out the political advertising but didn't take out the expense related to that, you might be able to get to know where you were coming out. Our margins, when adjusted for political advertising, margin with leading mobile outside increased year-over-year. As it relates to 2019, our goal for the entire year 2019 is on the cable side to increase our margin and some of that will depend on product mix and rate of growth. But our goal is to increase margin year-over-year in the cable side despite, as you pointed out, the lack of political advertising inside 2019. That means organically quite a good development on the margin front. As it relates to a quarter-to-quarter, there's seasonality depending on the level of connects typical in most cable companies Q1 through Q4. I’d rather not get drawn into the seasonality and sequential development, but for the full year, that's our goal subject to some of the caveats I mentioned.

Thank you. A couple of questions. First, I guess the video question. NBC News direct-to-consumer potential offer seems really interesting for the pay-TV industry. I'm just wondering what your view is on that service; is it churn reducer or revenue generator? On advertising, I mean your growth while it may have been expensive; your growth is really at the top end of anybody's number. So wondering what you're doing differently? Finally, on 5G, would love to get your reaction to what AT&T said yesterday on their call that 5G will replace fixed broadband. Can you talk about your views of Charter positioning as 5G rolls out?

Sure. There's a lot there. On the NBCU opportunity, I think they have a good point and there is a huge opportunity in creating advertiser-generated programming services for the business and they're less expensive. I think there are details to work out, but I think that conceptually it makes a lot of sense. In terms of our ad sales growth, I do think we have created, using analytics and other methods, a better advertising model that allows us to create higher CPMs for our advertising business and therefore to generate more money out of that business than other advertisers in the broadcast space who don't have those capabilities. We have a unique two-way interactive plant. We have the ability to target advertising and to help our advertising customers get more effective advertising in the television space. We're taking advantage of that. We've also built a great sales force and we're on the streets. We own a lot of local markets in terms of our capabilities as a sales group. We’ve reaped the benefit of that in our ad sales growth in 2018. Regarding 5G, we're going to 10G, and our network is highly capable. We have a pathway to 10-gig symmetrical, now spaced out, that we announced at CES as an industry. We just went to 1-gig as you know in 2018 and rolled that out across our footprint. That's faster than the 5G fixed wireless deployments that have been spoken about so publicly. We believe that broadband consumption, data consumption, will continue to grow at a very fast rate and that our network is easy to upgrade, inexpensive to upgrade, and quick to upgrade to take advantage of the future marketplace that this mass of data throughput will require. While we look at 5G as a fixed mobile business, it's possible to use it that way. It's not very efficient from a capital expenditure perspective in our view, because you need to spend a lot of capital to get close enough to the home to actually make 5G work effectively. We're comfortable with our network and its capability and that broadband data consumption will continue to grow rapidly and that we can provide a better broadband experience at less cost than alternatives.

Thanks. Just wanted to come back on the video product. Can you just talk about where we are on the Spectrum Guide rollout? Has it sort of been a real differentiator in terms of reducing churn and sort of take-up? And then, obviously, your broadband product has really improved over the last year. Can you talk about how share shifts are trending in markets where there is a fiber alternative by the telcos versus taking your share? Where is the real fight coming out right now? Thank you.

So, Vijay, we're rolling our guide out incrementally as a result of the transaction and the bringing of the networks together, which were all somewhat incompatible from a CPE and network architectural perspective. We changed our guide architecture to some extent. We're now rolling it out incrementally pretty much everywhere, and it is a significant improvement. Not that our existing experience in most of our markets isn't good, but the guide that we have is better. We think without a lot of data yet that it will provide a more lasting experience for the consumer. We've also put that guide on our apps and in our CPE that was retailing and in the CPE that others are retailing for us, and it's actually getting distributed quite rapidly in that space. We think it's an excellent consumer experience and that it will add to our ability to do what I said earlier in the video business, which is to both sell bundled packages, Stream packages, à la carte packages, and to do those in a way that is coherent and consumer-friendly across all devices in the home including our own mobile devices. In terms of share shift, we continued to shift share pretty much everywhere we operate. I guess some more than others, but our share is generally with very few exceptions shifting toward us.

Hey, thanks guys. Nice to see that we're coming out of this transition and I'm thinking about churn. You said churn is coming down; it's what we'd expect. Can you remind us how churn in the Legacy Time Warner and Bright House basis compare now to Charter? And I'll go from there.

So across all three legacy entities, Phil, churn is coming down year-over-year, which means that Charter just continues – the Legacy Charter just continues to get better. There's still a market difference between the churn rate of Legacy Charter, which is the lowest in TWC and Bright House. Bright House in Florida, the market probably has a more elevated churn just due to the mover ratio that exists in those markets. The service –

There's no good effect.

That's right. I think there's still a long runway for both TWC and Bright House, and Charter, even over the past three and a half years, has continued to get better and better on a churn ratio. However, there's at least a 10% differential that exists in the churn rate of Legacy Charter compared to many of those other entities.

But just to put that in context, Legacy Charter, the SPP or the pricing and packaging that we use is well into the high 90% range. You get the effect of lower churn in that environment, and we're seeing the churn come down consistent with historic trends in Legacy Charter. Interestingly, Legacy Charter comes down while Time Warner and Bright House come down. The whole trend is improving, but there's still more significant upside in Time Warner.

And the first derivative is bad debt. Can you remind us where bad debt was sort of early in the process versus on 4Q? And I guess that will continue to come down as well.

Fourth quarter was a reduction year-over-year and I expect that to improve.

And last thing. You are very clear that the fourth quarter was a tough comp year-over-year on subs. Should we think of 1Q as a fairly easy comp? Or is anything else going on which you'd consider?

I wouldn't describe it as an easy comparison. However, I want to clarify that just because we reached January 1st and many programs and disruptions have eased significantly, it doesn't imply a drastic change happened overnight. Similar to what occurred at Legacy Charter, there is a buildup of momentum in the market. Most customers, whether they are current subscribers or not, do not suddenly decide on January 1st to either keep the service or sign up just because the disruptions have lessened. I anticipate that improvements will be ongoing over a longer duration. While it's neither an easy nor a difficult comparison, nothing suggests it will be an easy comparison in the first quarter year-over-year. We expect to keep improving throughout the year.

Great. Could you discuss the implications of your new sales approach that shifts voice from wireless to wireline? First, should we anticipate increasing losses in traditional voice services, or are we at a stable performance level? Secondly, are there any margin impacts, or will they be outweighed by your efforts in the non-programming area? Lastly, regarding margins, you still have a significant difference between your cable margins and those of larger competitors. How do you foresee this changing over time? Is there any reason to believe that this gap won't narrow as you address overlapping costs and implement your non-programming initiatives? Thank you.

Yes. I'll speak to the mobile selling question. Yes, it's a significant transaction change, which changed in our model. Yes, it has implications for wireline. We've seen – as you know, we – as part of that, we reduced the cost of wireline to less than $10 with the idea that it was a bolt-on product to a triple play with mobile. It has some implications for what will happen to wireline sell-in. We look at our wireline performance relative to all other wireline providers, it's significantly better. How much of an impact that marketing change will have against a general trend of wireline substitution is hard to say, but we don't think it's that material a driver of our economic performance. We do think it's a good value for a lot of consumers.

I think it gives you a good retention price point over time. Those new customers coming in are not subject to the same rate roll-off discussion because it's a $10 add-on both at promotion as well as a roll-off, so it's always a tack-on value-added service. The $10 is less attractive to turn it off at a later point in time. In terms of the margin implications, John, in the majority of our markets, our double-play acquisition pricing is at $90, whereas our triple play in the majority of our markets used to be $90. I don't think there's any dramatic margin implications on an incremental basis going forward. So we sell double play in the majority of our markets in video and Internet at $90, plus the mobile add-on, to the extent that somebody values the voice – fixed line voice service, it's a $10 tack-on from there versus an attractive price, and it's not subject to some of the roll-off churn that you would've seen in the past. Regarding the cable margin gap, I don't see anything between us and, for example, another large-scale cable operator that prevents us from being able to get similar cable margins over time. The only caveat I'd say is that we are a triple play cable operator, which means all of our corporate and overhead costs are embedded inside. When you look at cable for us, it's there. There's a bit of a dissimilarity which is inherent; if we were a conglomerate and had a whole host of different businesses and Tom Rutledge and Chris Winfrey equivalents wouldn't be inside the cable business per se.

But we're not going to get margins on that much.

No. That's good. So that's the only thing I'd add. But I think as a general notion, we've always said that we thought there was an ability to, despite having programming cost increases year-over-year, to be in a business that could generate over 40% EBITDA margins in cable, and our view on that hasn't changed.

Thanks, John. Operator, we have time for one last question, please.

Thanks. Chris, I guess, just following up on the voice question. Can you help us think through ARPU going forward? There just seems to be a lot of moving parts. It looks like you pushed through a surcharge, but you're obviously also retooling the sales process. Just wondering how we should think about going forward. Thank you.

Look, given what I just said to John, I don't think the voice changed itself. From a total relationship perspective, it's going to have that much impact on customer relationship ARPU. If anything, you might argue that it could be slightly positive. The GAAP allocation of revenue amongst these products is a hornet's nest. And I, for years, said I think the best way to take a look at what's happening with ARPU is take a look at ARPU per customer relationship and the trend there. When you get down to that, then it's pretty simple. You have the promotional pricing of the bundle of products you sell, you have the roll-off, and you have any rate increases. The big one that folds in there and is pretty easy to model is the amount of single-play Internet sell-in, which even though it's attractive, has the impact of lowering your per-relationship ARPU. That is the biggest offset to the other factors that I just mentioned. So I would not try to model individual product line ARPUs because I think it's a pretty deep GAAP allocation question. I'm not sure if that's useful to the public. I think the customer relationship ARPUs is the way to look at it, which is why we talked about that as opposed to some of the others.

Got it. Thank you.

Thanks, Amy. That concludes our call. Thanks everyone.

Thank you, everyone.

Thank you.