Charter Communications Inc (CHTR) — Q3 2019 Earnings Call Transcript

Good morning and welcome to Charter’s third quarter 2019 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 also our 10-Q 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 and they 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. On today’s call, we have Tom Rutledge, Chairman and CEO and Chris Winfrey, our CFO. With that, let’s turn the call over to Tom.

Good morning. Our product and service strategy is working well across all our service areas, and the benefits of the recently completed large integration are being realized through accelerated customer relationship growth, lower service transactions per customer, declining capital, cable CapEx intensity and significant free cash flow generation. Although our product mix is different today than it was several years ago, we're driving customer relationship growth given our superior products, pricing and network, combined with execution capabilities that continue to improve. In the third quarter, we had a net gain of 310,000 customer relationships with customer growth of 4% over the last 12 months. We also added 380,000 Internet customers in the quarter, and 1.4 million Internet customers over the last year. And we added 276,000 mobile lines, up from 280,000 additions last quarter. We grew cable adjusted EBITDA by 5% which combined with our lower cable capital expenditures yielded strong year-over-year cable free cash flow growth of nearly $850 million or 125% in the third quarter. Our consolidated free cash flow was up nearly $750 million even including our investment in spectrum mobile. We offer high-quality products packaged with good service and attractive pricing, which is our core operating strategy. That approach works with customers and leads to improving relationships, growth rates, profitability and cash flow over long periods of time. We continue to improve our products and service, and as a result of our pricing migration strategy, 85% of our residential Internet customers receive 100 megabits and higher speeds and over the past two months, we raised our minimum spectrum internet speed from 100 megabits to 200 megabits in a number of additional markets. We now offer minimum speeds of 200 megabits in approximately 60% of our footprint up from 40% previously. We continue to offer 400 megabit, our ultra-product and our gigabit speed tiers across our entire footprint. Demand for speed, throughput and low latency uniquely offered through our network today continues to increase. That demand will continue to grow as more devices attach to our network, more IP video is consumed, online gaming continues to grow and new technologies and applications emerge. Our network will evolve from an already low latency DOCSIS 3.1 to 10 gig symmetrical on an upgrade path we control and at relatively low incremental capital cost. Monthly data usage continues to rise rapidly. Our non-video Internet customers use over 450 gigabytes per month, which compares to average mobile usage of well under 10 gigabytes per month. That translates to a 50 times price per gig value advantage with truly unlimited service, high throughput, and reliability to all devices in the home and business. In mid-October, we launched our advanced in-home Wi-Fi in Austin, Texas. Given our network, software operating platform and top-rated subscriber support tool, we’re in a unique position to provide enhanced security, privacy and control over all IP devices in our customers' homes, easily managed by customers in a single app, while simultaneously delivering a superior customer experience through better in-home Wi-Fi coverage and managed Wi-Fi solutions through dynamic band switching and channel optimization within the bands. And over time, we plan to roll this product out to our entire footprint, starting with additional markets in late 2019. Our self-installation program continues to ramp quickly, with customers self-installations now representing 50% of our sales volume. Turning briefly to video. Over 90% of the time when we sell video, it is packaged with internet and it's an important attribute to our selling proposition for fixed and mobile connectivity services. And yet pricing and lack of security continue to be the main problems contributing to the challenges of paid video growth. Turning to mobile, our spectrum mobile products continue to perform well and our accelerating mobile line net additions are very encouraging. In the third quarter, Bring Your Own Device capabilities became fully available across all of our sales channels, and Own Devices. And we recently launched Spectrum Mobile services to small and medium business customers in all channels. Mobile remains a key area of our focus for Charter going forward and we're uniquely positioned to take advantage of wireline and wireless network convergence over time with our fully distributed wireline network, ultimately positioning us for long-term growth under the operating strategy I mentioned at the beginning of today's call: superior products, good service and attractive pricing. Now I'll turn it over to Chris.

Thanks, Tom. Before covering our results, one administrative item. On September 6, we closed the sale of Navisite and the managed cloud services business within Spectrum Enterprise. We've not prepared the financials and for the next few quarters I'll discuss enterprise revenue growth, including and excluding Navisite. On an annual basis, Navisite generated roughly $150 million in revenue and its impact on their EBITDA and CapEx was not material. Turning to our results on slide five, we grew total residential and SMB customer relationships by over 1.1 million in the last 12 months and by 310,000 in the third quarter. Including residential and SMB, we grew our Internet customers by 380,000 in the quarter and by 1.4 million or 5.6% over the last twelve months. Video declined by 75,000, wireline voice declined by 190,000 and we added 276,000 higher ARPU mobile lines. 84% of our residential customers, including Legacy Charter, were in Spectrum pricing and packaging at the end of the third quarter. And residential customer relationship growth accelerated to 3.7% year-over-year driven primarily by higher growth at Legacy TWC and Legacy Charter with Legacy Bright House remaining the fastest growing. In residential internet, we added a total of 351,000 customers in the quarter, better than last year's third quarter, resulting in residential internet customer growth of 5.4% year-over-year driven by continued lower churn and improved connect performance. Over the last year, our residential video customers declined by 2.6%. Similar to Internet and overall relationship churn, we benefited from a decline in total video churn year-over-year, but that was more than offset by lower video gross additions. In wireline voice, we lost 213,000 residential customers in the quarter, driven by lower sell-in following our transition to selling mobile in the bundle and continued fixed and mobile substitution in the market generally. Turning to mobile. We added 276,000 mobile lines in the quarter, versus 208,000 in the second quarter, a nice acceleration. As of September 30th, we had 794,000 lines with a healthy mix of both unlimited and by gig lines. So we're pleased with the trajectory of Spectrum mobile, with less EBITDA loss per line as the business scales to the expected standalone profitability, even at an accelerating net addition rate. So more importantly, the cable connectivity service benefits and converged platform objectives we've laid out. Over the last year, we grew total residential customers by 974,000 or 3.7%. Residential revenue for customer relationship grew by 0.8% year-over-year given a lower rate of SPP migration and promotional campaign roll-off in previous rate adjustments. Those true benefits were partly offset by a higher mix of non-video customers, higher mix of choice and stream customers, within our video base and $30 million lower pay-per-view revenue year-over-year. Slide six shows our cable customer growth, combined with our ARPU growth resulted in accelerating year-over-year residential revenue growth of 4.4%. Keep in mind that our cable ARPU does not reflect any mobile revenue today. During the commercial, SMB revenue grew by 5.7% faster than last quarter as the revenue effect from the repricing of our SMB products and Legacy TWC and Bright House continues to slow. SMB customer relationships grew by 7.7% year-over-year, still healthy growth, but we're increasing speeds and modifying some promotions to re-accelerate SMB relationship growth. Enterprise revenue was up by 1.8% year-over-year or 4.4% excluding Navisite from both quarters given the divestiture. Excluding both cell backhaul and Navisite, enterprise grew by 7.1%, with nearly 9% PSU growth year-over-year. And so while our resell products and enterprise are growing fast, our wholesale business including cell tower backhaul is not, but just factoring into the relative growth rate. Third quarter advertising revenue declined by 10.6% year-over-year due to less political revenue in 2019. Non-political revenue grew by over 5% year-over-year primarily due to our advanced advertising capabilities and our recent abilities to efficiently sell highly viewed long-tailed inventory using our own anonymized much more detailed viewing data. Other revenue declined by 5.6% year-over-year driven by lower home shopping revenues related to video subscriber declines, and lower late fees, driven by lower non-pay churn, partly offset by video CPE sold to customers. Mobile revenue totaled $192 million with $123 million of that revenue being device revenue. In total, consolidated third quarter revenue was up 5.1% year-over-year or 5.3% when excluding Navisite. Cable revenue growth was 3.5% or 4.3% when excluding Navisite and advertising. Moving to operating expenses on slide seven, in the third quarter, total operating expenses grew by $423 million or 6.1% year-over-year. Excluding mobile, operating expenses increased 2.6%. Programming increased 0.4% year-over-year due to higher rates, and that was offset by a higher video subscriber decline or video to subscriber decline of 2.3% residential and SMB year-over-year. It is also offset by a higher mix of lighter video packages such as Choice and Stream, and lower pay-per-view expenses year-over-year tied to the $30 million lower pay-per-view revenue that I mentioned. Regulatory connectivity and produced content grew by 12.3% driven by franchise and regulatory fees, original programming cost, and cost of video CPE sold to customers in that order. Cost to service customers grew by 2.2% year-over-year compared to 4% customer relationship growth. Excluding bad debt, cost-to-service customers were essentially flat. The elevated amount of bad debt in the quarter relates to billing simplification changes we made earlier this year, which pushed out the timing of previous cash collections and resulted in a higher account balance for disconnects and higher bad debt provision in the third quarter. So we're meaningfully lowering our per relationship service cost, through a number of operating, quality and efficiency improvements, which is core to our strategy. Key metrics, like calls for customer, truck rolls per customer, and churn all continue to move in the right direction. And as Tom mentioned, customer self-installations represented 50% of our sales volume in the third quarter. Cable marketing expenses increased by 0.4% year-over-year and other cable expenses were up 6.7% driven by software cost, enterprise labor cost, and insurance. Mobile expenses totaled $337 million and were comprised of mobile device costs tied to the device revenue, subscriber acquisition and usage cost, and operating expenses to stand up and operate the business, including our own personnel and overhead cost, and our portion of the JV with Comcast. When including the mobile EBITDA startup loss of $145 million total adjusted EBITDA grew by 3.4% in the quarter. Cable adjusted EBITDA grew by 5% in the third quarter, including a roughly 1.7% negative growth rate impact from advertising revenue, net of its associated expense in both periods. Similarly, cable margin expansion year-over-year would have been 90 basis points versus the 60 basis points we're showing today excluding the effect of advertising sales. Turning to net income on slide eight, we generated $387 million in net income attributable to chartered shareholders in the third quarter versus $493 million last year. The year-over-year decline was primarily driven by a non-cash pension measurement gain in the prior year period, and higher interest expense, partly offset by higher adjusted EBITDA and lower depreciation and amortization expense. Turning to slide nine, capital expenditures totaled $1.65 billion in the third quarter, with our Cable CapEx declining by over $500 million year-over-year, driven by lower CPE and installation CapEx due to fewer SPP migrations year-over-year and the completion of all digital in 2018. There's also the positive capital effect of increasing self-installations, lower video sales and a higher mix of boxless video outlets. Scalable infrastructure also declined, driven by the completion of DOCSIS 3.1 last year and the associated benefit in 2019. Support spending for cable was also lower, driven by declining investments related to insourcing and integration. We did spend $100 million in mobile-related CapEx this quarter, which is mostly accounted for in support capital, and was driven by retail footprint upgrades for mobile and software, some of which is related to our JV with Comcast. Despite likely spending a bit less than the $7 billion of total Cable CapEx in 2019, we expect our Cable CapEx intensity to continue to decline next year. As a percentage of revenue, we're becoming very efficient with capital expenditures, despite our continued products, network, and service quality investments. Slide 10 shows; we generated nearly $1.3 billion of consolidated free cash flow this quarter, including just over $250 million in investment in the launch of mobile. Excluding mobile, we generated over $1.5 billion of cable free cash flow, up nearly $850 million versus just last year’s third quarter. We finished the third quarter at $74.2 billion in debt principal. Our current run rate, annualized cash interest, pro forma for financing activity completed in October is $3.9 billion. As of the end of the third quarter, our net-debt to last twelve months adjusted EBITDA was 4.47 times. We intend to stay at or just below the high end of our 4 times to four and a half times leverage range. And when calculating our leverage, we include the upfront investment in mobile to be more conservative than looking at capable-only leverage, which was 4.34 times at the end of Q3. During the quarter, we repurchased 7.8 million in charter shares, and charter holdings common units, totaling $3.1 billion at an average price of $398 per share. Since September of 2016, we've repurchased $25 billion or 23% of Charter’s equity at an average price of $337 per share. As I've said before, our operating model, network capabilities, now in the future, and our balance sheet strategy all work together over long periods of time. We expect our results to reflect the growing infrastructure assets with a lot of ancillary products to use for, and on top of our core connectivity services, with good value and service to our customers to grow cash flow with tax-advantaged levered equity returns.

Thank you. I'm wondering if you can contextualize the pace of wireless growth we're seeing at the moment. Chris, there was obviously a phenomenal acceleration quarter-over-quarter. Is that driven by the new iPhone cycle or is this sort of a run rate of growth that you think can continue, or can you even continue to accelerate from here?

Jonathan, it's Tom. I'll answer the question. You know, I guess the short answer is we expect it to accelerate. And the reason that is as we've really just got all of our marketing and operating tools available across all the platforms that we operate in, and as we look at the yield that we're taking out of each sales channel we have, and we look at things like Bring Your Own Device and its implementation and its effect on sales, we think that will continue to accelerate the growth rate. And things like store build-out and other kinds of activities are not complete. So in terms of our marketing footprint, it's not completely deployed yet. And when we look at the kinds of yields we're getting in those channels, our expectation is that our mobile yield will continue to accelerate.

And Tom, how much of a pull through is that having on the broadband business at the moment?

It's hard to say, but we think it is having an effect. And we hope that that will accelerate broadband growth as well.

Thanks. Tom, you've been talking for many quarters now about mitigating piracy and you brought that up again today with some of your carriage deals talk about working together especially with the Disney and the Fox deals on addressing that. Can you sort of talk about what can be done? When is it getting done? Is it something we should expect improving video trends? And second, obviously you've seen some of your competitors of your peer group launch products that enable your broadband customer like the Flex product at Comcast. Is that something that you guys are considering too? Thank you.

Yes. I feel like I'm reiterating the same points regarding piracy, password sharing, and pricing, but these issues are interconnected. There is some awareness in the programming industry that they are now distributors, which means they need to understand how their content is being used, something that hasn't been part of their approach before. Streaming services have often been offered with multiple streams and lack location-based security. Most households in the United States have two or fewer residents, leading to more available streams than households that are paying. The combination of password sharing and the lack of location-based or subscriber-based controls, alongside the ability to access content through various virtual MVPDs, makes it too easy to obtain content without payment. Data shows that video consumption remains high even when people disconnect from paid services, complicating the price-value relationship when content is available for free. To address this issue, content owners must establish security standards and ensure they know where their services are being accessed, while also developing a viable business model. This will require effort and collaboration, and while we will continue to advocate for this change, it is progressing slowly.

Second question is for Flex.

Flex. Yes, I'm sorry. We have discussed that with Comcast and it's an interesting idea, and so I would say that, if we were considering it and it has advantages. We have a significant number of app-based relationships that we've developed on multiple devices, and that strategy is working for us. And putting inexpensive devices out with your service makes some sense to us.

Good morning. Could you all please talk about how you're measuring and analyzing the benefit of the large investments that you've made in customer-facing personnel in the acquired systems? In particular, I wonder if the results in the Legacy Charter footprint tell us anything, whether it's the level or the trend of profitability and productivity about the future for the acquired system? Thank you.

Yes, Peter. Our strategy focuses on employing high-quality, well-paid workers with strong skills who can effectively interact with customers to ensure satisfaction on the first contact. This approach leads to fewer transactions, reduced repeat service calls, longer customer tenure, and increased satisfaction. Consequently, we experience fewer churn rates, which decreases our cost to serve, even though the cost per transaction may rise. This strategy has been in place since Legacy Charter and has been applied throughout the company's integration. As a result, our cost to serve trends are declining, reflecting lower activity levels, which in turn makes our customers happier and enhances cash flow per customer. We anticipate ongoing growth in Legacy Charter, particularly in customer satisfaction, customer base expansion, increased margins, and lower service costs. This positive trend is evident across our entire operation as we have implemented this strategy for some time now. We have successfully brought most offshore transactions back onshore and rebuilt call centers. While we faced challenges related to capital and operating intensity due to necessary duplications in establishing a new workforce in the United States, we have largely overcome those obstacles and expect to see the benefits soon.

Peter, one thing I'd add to that. We've virtualized our entire call center and the field operations service infrastructure, but we still have visibility obviously into the Legacy Charter franchise areas and DMAs. And so what you can see is that Legacy Charter metrics, operating metrics whether it's calls for customer, billing calls for customer, retention calls for customer, truckloads for customer, all remained significantly below Legacy, TWC and Bright House despite Legacy, TWC and Bright House having significant improvements. Part of that is because of the previous investments in the Legacy Charter, Infrastructure. Part of that is Legacy Charter has continued to get better and better every year and quarter-over-quarter continues to make pretty significant improvements. So it’s a moving target, which just means that when you make that upfront investment in service, it’s a virtuous cycle of continuing to get better and better and while we don't report or track the P&L of Legacy Charter because the service is virtualized, if it had one at our cost to serve there would have been continuing throughout the cycle. They continue to go down dramatically on a per-relationship basis and we expect the same for the rest of the company.

Yes. It bodes well for the long term. We've had continuous improvement in charter over seven or eight years and we expect similar kinds of results throughout the infrastructure.

Thanks. Good morning. Tom, you talked a lot about the advantage that the cable infrastructure and architecture brings to your charter and cable companies you run in the past. I'm just wondering if you could talk about the next several years of network evolution for the business. You've been throwing more speed at customers. You talk a lot about 100 and 200 megabit minimums. How are you thinking both from a kind of a network architecture perspective that would help us think about kind of product opportunities and also capital intensity? I think there's a debate in the market about DOCSIS 4.0 versus deep fiber. I'm just wondering where do you take the network and therefore the product offering on the broadband side over the next couple years and what might that mean for capital intensity? And I just quick one for Chris, just more short-term, you guys had some rate adjustments in the fourth quarter that a lot of folks have focused on. I'm just wondering how you would describe those in the grand scheme of charter's philosophy and whether there are sort of incremental enough that we should be thinking about incremental ARPU and incremental churn in Q4 maybe in Q1 next year since obviously there's been a lot of press coverage and sort of interest in those changes. Thank you.

So, Ben, I think if we look over the next couple of years the best place is to start with the last couple of years. And we did the DOCSIS 3.1 rollout over a two-year period which took our capability from a couple of 100 megabits per customer up to one gig per customer everywhere we operate. And there's still more upside out of that infrastructure deployment that we made with DOCSIS 3.1 in terms of both speed and things that we can offer from a product perspective, but one of the great things that's coming out of that, that we didn't really talk about as we did, is our ability to manage traffic in the network and therefore reduce network investment associated with increased consumption. We've had a regular budget item associated with network consumption in our capital planning and related to the growth in overall average consumption of data per customer and 3.1 has allowed us to manage that less capital-intensive way. So you have that project. And if you look at it, it was taking a massive speed increase on a legacy infrastructure at a capital cost of about $9 for home passed, a fairly small investment for home passed with a massive output. And that's the fundamental notion behind our 10 gig strategy, DOCSIS 4.0 strategy, which allows multiple pathways for development depending on how deep you want to take fiber or whether you want to improve your bandwidth in your legacy coaxial network. Both options are available in that specification to upgrade your network as products evolve and in a way that's very capital efficient and strategic to the assets you deployed. So what would we need to do over the next couple of years? We're still – we just completed DOCSIS 3.1, so we've got a lot of headroom from the last investment cycle we made, which was quite efficient. We also have been launching as I mentioned the product of in-home Wi-Fi management which allows customers to manage their privacy, their security and to know what is connected in their house and what its connected to and to be able to manage that in an efficient way to not only privacy but for parental control and quality of the network itself throughout the home. So, we're continuing to invest in the customer experience in the product set itself.

That's helpful. Thank you, Chris.

You asked about rates, so here are some thoughts. Our third quarter residential ARPU doesn’t include the recent rate increases we've implemented; those will start at the beginning of Q4, so it won’t be a full impact for that quarter. The increases are mainly in video due to rising programming costs and some non-promotional Internet rates. Looking at our Q3 results, we believe we still have significant opportunities for Internet and customer relationship growth, so this shouldn't be over-interpreted. We have consistently believed that fostering more customer relationships is the best way to ensure long-term cash flow. Throughout the integration process, we've been cautious about initiating more billing calls or service transactions from these rate increases. Additionally, we are managing the profitability of our overall customer relationships, utilizing video as a means to enhance them. While these rate increases are not significantly different from those in the past, many of our customers still benefit from year one and year two promotional rates that are unaffected by these changes. Moreover, we have a growing number of customers in wider video packages that do not include the same increases. Our aim is to stay competitive across all products, focusing on growth by volume rather than solely by rate, which remains unchanged. Regarding the impact in Q4, similar to previous rate increases, we don't expect any significant negative effect on net additions for the quarter. I want to remind you that last year's fourth quarter was quite strong for us, and we anticipate that the latter half of this year, including Q3 and Q4, will perform better regarding Internet and customer relationships. However, we do expect a good fourth quarter this year as well, just as we did last year.

So I would say, just to sum that up, our strategy with regard to growth with rates and customers is unchanged. We believe the majority of the revenue growth that we'll produce will be through growth in new customer relationships and our pricing and packaging is designed to give consumers a better value than they can get with the individual products priced as they are in the marketplace. If you look at how much money we're saving people from a mobile perspective, it's significant. Our products are valuable products and they're designed to drive customer relationships.

Hi. Thanks. I have two questions. There has been a lot of discussion lately about your interest in CBRS Spectrum and a strategy to offload traffic for your wireless business. Can you provide more details on that and share your current thoughts on traffic offload and what that network deployment might look like in the coming years? The second question is more practical. Regarding the business services lines, you've been working on repricing Legacy Time Warner Cable customers for quite some time. When do you anticipate finishing the repricing process so we can start seeing a normalization in business services revenue growth compared to others, and how does that align with your projected volume growth?

I'll address the latter part of your question first. We've been seeing growth in business services where revenue growth and customer acquisition are aligning, which was not the case when we first initiated our pricing and packaging strategy. However, now, when we analyze the changes quarter over quarter, it's clear that the revenue growth is primarily driven by customer growth, not just the rate of new customers. The growth isn't arising from new customers at that growth rate; instead, the numbers are converging as revenue growth equals customer growth. Regarding CBRS, we’ve discussed the potential of dual SIM technology and our optimism about its capabilities. We're also encouraged by opportunities to make selective investments where traffic patterns justify the move of services we currently pay for onto our own platform. This is already happening with Wi-Fi, as a large majority of our customers are consistently using Wi-Fi, which is very efficient. In fact, around 80% of all mobile data is transmitted via Wi-Fi networks, indicating further opportunities for shifting traffic in this way. We’ve been experimenting with various methods, and CBRS has shown excellent results. Additionally, there’s a substantial amount of free CBRS spectrum available that we’re utilizing. We are conducting experiments with this spectrum in fixed wireless connectivity, particularly for real clients in rural, low-density areas, making it a valuable asset. There is also private CBRS spectrum that will be auctioned next year, and we are currently assessing our potential involvement in that. However, a lot of spectrum is already accessible, and generally, having more cells means you need less spectrum.

Thanks Tom.

Hey guys. Thanks. I wonder if we can unpack a little bit the broadband some momentum improvement. Is that being driven mostly by better churn as you had forecasts or by better connect volumes as well? And have there been any changes in the promotional pricing that are being offered to those customers. Thanks.

So you know the churn improvements that we've talked about in the past, they continue on a year-over-year basis for Internet with also an improvement in Connect as a service provider, what you said it was a combination of both. There have been no major or dramatic change in the pricing or go-to-market as it relates to broadband. And we have a generally now 60% of our footprint, footprint to now 200 megabits per second minimum speed. We also go-to-market with Ultra which is at 400 and as a headline with availability, but not that much take up as a one-gig service and that's the 400 and the one-gig are nationwide. So there's been no dramatic change to promotional pricing beyond what we've typically done in the past.

Good morning. Thanks for the question. If we look at the footprint expansion it was about 2% across the different products in the quarter which is above average rate of household growth in the country. So, how important is that growth at driving some of the strength in broadband? And how long can it continue at this elevated pace? And the final part of that is if it were to slow down, does that significantly help your capital spend? Thanks.

Yes. So Michael, it's a good question. Passings, and it's not unique for Charter rates across the board is really estimated marketable homes, and it's not a direct correlation one-to-one as it relates to new build. And so as we go through the integration of three different companies in the systems and the definitions and even our go-to-market homes passed is, we're adding stuff into the builder as potentially marketable and sometimes that rate is not always and you'd only find out once you go and actually market trying to sell. So there's a lot of cleanup, that's still going on in that, and we're not alone. So I wouldn't take that as 100% new build or household formation, but it's true and it's directionally still right. It may not be completely correct, but it's directionally correct. And we've been building more particularly into rural areas and our new build there you can see that through the CapEx line extension line item that's grown over the past couple of years and accelerated as we meet our commitments. And we have good ROIs to developing a broadband footprint in these more rural areas. New household formation is helpful to the overall growth rate. There's been a lot of work done around that. We think that our growth is not just a function of new household formation that we are gaining significant share not only in Legacy DSL but as some of the U-verse and U-verse like whether it's AT&T or CenturyLink. There's some of the previous U-verse's speeds turned into looking more and more like DSL as our speeds increase over time. So we're taking significant share and that tends to be the bulk of where we're adding as opposed to just new household formation.

Thanks very much.

Thanks, Michael.

Thanks. Two questions, first for Tom. You've mentioned 10 gigs quite a bit. Can you just talk about when this might be available and what kind of boost to ARPU you might be expecting? Is this another step up at some point in time? And then second for Chris, is there anything which we should be thinking about in terms of programming expenses for Q4 or 2020 as we update our models? Thanks.

10G is a set of specifications we’ve created for our networks that enables 10 gigabit symmetrical speeds. Currently, there are no residential products that require this level of capability, so it's part of a long-term evolution for our network that allows us to achieve these capabilities efficiently from a capital perspective. Analyzing historical data usage trends shows that unless there are significant changes in the next 20 years, we will eventually need this capability, and products such as virtual reality applications, high capacity, low latency content including games, entertainment, and education will be developed, along with innovations like light field products and holograms that could transform communications. Our network is positioned to deliver these products at a favorable investment rate. The timing for deployment will depend on market development. There is no immediate need for capital investment regarding 10G, and we can leverage aspects of it as opportunities arise. Additionally, we still have significant capabilities within our current DOCSIS 3.1 deployment, which we now refer to as DOCSIS 4.0. This rebranding reflects the historical capital investments we've made to enhance our network and our commitment to continued improvements in the future.

Marci, on programming, we've been low this year relative to our expectations on year-over-year growth and part of that is maybe we've done okay on some of our renewals. But the bigger piece is that we've had a subscriber decline of Resi and SMB of 2.3%. There's been a mixed shift as it relates to Stream and Choice products, which just have less channels inside of them. And then on top of that the pay-per-view environment particularly the past two quarters has not been particularly good on the revenue side, which means that your costs are going down year-over-year for pay-per-view and all of that is packing into a current 0.4% year-over-year growth in programming. But your actual unit cost has expanded cost per customer relationship. It's kind of been what it's been for many years in the mid-single digit range. And we've had some pretty big renewals as publicly announced tied to some of the security and password sharing collective efforts, so you know which those are. So there will be some step-up associated with that. But I think as you look out through next year there's nothing we see today that causes there to be a dramatic change from where the overall marketplace has been for the type of rate increases that we expect to see on that product. And as we've talked about before, historically we've not passed all that through to our customers and we're evaluating our ability to continue to do that even as we use the video product to drive connectivity services. And we've just spoken about some of that as it relates to the most recent rate increases. So, I don't expect any big dramatic changes other than growth is a big factor, mix is a big factor, the pay-per-view market has been under some challenge past two quarters which is lower than programming expense, it's unclear how much that'll continue. But absent the volume and mix issues, so I don't see anything dramatic changes.

Hey guys. Thanks. Maybe Tom just a quick comment on the Stream product, what you're seeing there as far as perhaps cannibalization of traditional linear. And then why not use that as a more aggressive tool because the pricing for that double play is a lot more attractive than some of these synthetic bundles out there with offerings. Then, sorry if I missed this, but on the wireless side any comments on Altice's pricing. And then I guess thinking about the pacing of ads obviously a big ramp up. How should we think about that as we go into 4Q? Thanks.

In terms of Stream, we've been selectively selling it to financially constrained individuals, which is a significant issue in the video market. The traditional bundled product is very costly, and its actual unit price continues to increase, putting it out of reach for many consumers. Additionally, it's freely accessible to numerous consumers who have friends sharing passwords. Consequently, our ability to market that product is ultimately limited by our relationship with content providers. We must navigate the power dynamics that content companies have regarding bundling options. Thus, our video offerings are quite restricted. Long-term, the majority of our video customer relationships will remain centered on expensive, large bundles of content, as that’s how we’re sold these options. Regarding Altice's pricing, it’s beneficial. Our pricing offers significant savings for consumers annually, and we believe it promotes growth. Altice wants to sell their product for $20, which we see as positive. Their pricing is appealing, representing a different mobile virtual network operator with unique features and timing. Overall, it's favorable for the cable industry that they're promoting such an aggressive product.

Yes. I believe Tom was asked a question by Jonathan earlier about our growth pace. We are still finding our full potential. You mentioned that all of our BYOD was completely implemented by the end of the quarter, while the SMB program had just begun to launch and wasn't fully operational by that time. Our store footprint will continue to grow.

All of our sales channels continue to perform better…

To get better our yield continues to get better. So I'd say, it's still a relatively new startup business and so there's some risk in saying what we're saying, but we don't see any reason that it shouldn't continue to get better and to have more sales and more yield and more net additions over time and add more value to cable.

Great. Chris, I just want to follow up on your comments that the company is getting more efficient in its use of capital. A, does that suggest a sort of another step down in capital intensiveness as we look out to 2020? Can you give us some examples of how that's the case and is that your view that the business model in general is getting more capital efficient as we move more towards a connectivity model and then less from – and away from a video-centric model?

Yes, John, you're trying to get me to discuss 2020 capital guidance when we mentioned we would address that sometime in 2019. I'm not going to specify a dollar amount for 2020 because it's too early for that, and I’m not sure we’ll even do that. However, what I can say is that our cable capital intensity, which is cable capital expenditure as a percentage of revenue, is expected to continue declining into 2020 for several reasons we've discussed before. The integration spending is decreasing and will essentially be nonexistent next year. Additionally, the capacity from DOCSIS 3.1 that Tom mentioned previously plays a role here. The shift towards more boxless video, which is tied to the IP Internet product, is making our operations less capital intensive. Several factors within the business are driving us towards lower capital intensity, such as increased self-installation, the available capacity in the network, a reduction in customer premises equipment per connection, and the use of existing connections rather than needing new boxes. The average age of our current equipment allows for straightforward replacements instead of buying new units. Furthermore, decreased customer churn also lowers capital needs. All of these elements create momentum in the business that helps in reducing costs associated with customer relationships, impacting both operating and capital expenses. A significant portion of our capital expenditure is fixed for the network, and with higher penetration rates, you’re likely looking at one of the fastest-growing cable companies in the Western world. This growth and expansion allow us to enhance efficiency in our capital and operating expenditures, and we are starting to see the benefits of this approach.

Okay, thanks guys.

All right. Thank you everyone. We look forward to doing the same next quarter. Take care.