Charter Communications Inc (CHTR) — Q1 2020 Earnings Call Transcript

Good morning and welcome to Charter's first quarter 2020 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 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. 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.

Thank you, Stefan. First, on behalf of all of us at Charter, let me express our concerns for those who have been impacted by the COVID-19 crisis in our local communities we serve, as we endure together an extremely serious health, social and economic crisis. The hard work and dedication of Charter’s 95,000 employees has been remarkable. We're all proud of how we're serving our customers at this time. Charter's employees are in trucks, in the field, call centers, dispatch network operation centers, their homes, and retail stores, where we provide customer equipment and numerous support functions that enable our company to service our customers. We remain focused on our customers and communities and we've been able to deliver our connectivity services without interruption to our customers across the country. We know our role as a provider of communication services and the importance of keeping connectivity services fully functioning for both new and existing households and businesses, which enable social distancing, including remote working, distance learning, telehealth services and family communications. In mid-March as part of our effort to keep America connected during this crisis, we pledged to do a number of things. We committed to offer Spectrum Internet for free for 60 days to households with students or educators, who do not already have a Spectrum Internet subscription. We recently announced that we are extending the availability of this offering through June 30. As of March 31, we added approximately 120,000 customers connected under this offer, with many more installed in April. By the end of the school year, we expect that this offer will have helped approximately 400,000 students and teachers, and their families continue schooling through remote learning. For 60 days, we also committed to suspend collection activities, not terminate service for residential or small or medium business customers, who are experiencing COVID-19 related economic challenges. We also extended the availability of this offer to June 30. Additionally, we've opened our WiFi hotspots across our footprint for public use and we've prioritized over 1,000 requests from government, healthcare and educational institutions for new fiber connections, bandwidth upgrades and new services, that includes major hospital groups and the two U.S. Naval hospitals in New York and Los Angeles. And Spectrum News has opened its websites to ensure people have access to high quality local news and information. We've also donated significant airtime to run public service announcements to our whole footprint of 16 million video subscribers. Charter provides essential service, and we've been working to keep America connected working and learning, while at the same time, protecting our employees. We've instituted guidelines in our call centers that enhance social distancing between employees, including enabling a significant percentage of those employees for remote work. We've also altered our field operations protocol, by aggressively moving to customer self-installation. So while we continue to operate at nearly full capability, we're taking the necessary precautions to promote the safety of our employees. We're also providing our employees with outstanding benefits. We've implemented an additional two weeks of paid sick time for COVID-related illnesses, for when we ask an employee to self-quarantine. We've given every employee an additional 15 days of COVID-19 related flex time to address other COVID-related issues, including caring for children and dependents. In early April, we increased our wage for all hourly field operations and customer service call center employees by $1.50 per hour back to February. We also committed to raising our minimum wage for hourly workers to at least $20 an hour over the next two years. We are paying employees in parts of our business like residential and SMB direct sales, whose work has been put on hold, and to reinforce our commitment to employees we announced that for 60 days no employee will be laid off or furloughed. We have a great business with employees committed to our mission and that will ensure that we are able to excel through the eventual economic recovery. We continue to perform well operationally, both through the end of the Q1 and now. In first quarter, we added 580,000 residential and SMB Internet customers. We had a good quarter, driven by demand for our higher quality products. We also saw an increase in the number of residential and business customers, upgrading their speed. Our ability to provision the outsized demand we saw in the quarter, has been a result of the investments that we have made over the last several years in our insourced and onshore high quality workforce, significant systems integration and automation, our online and digital sales and self-service platforms and our self-installation program. In fact, we accelerated the expansion of our customer self-installation from 55% of sales at the beginning of the quarter to nearly 70% at the end of the quarter to over 90% today. Data usage and traffic on our network also grew significantly during the quarter. In March Residential data usage for Internet-only customers was over 600 gigabytes per month, up over 20% since the fourth quarter. Our customers are benefiting from a continually decreasing price per gigabit. Peak traffic levels remain well below maximum capability. Our network, as well as those of other cable operators in the U.S., and performed better than networks in other countries, because of the significant investments we've made and continue to make in our plan, like the recent rollout of 1 gig everywhere. The pro-investment regulatory climate has made this possible. Over the coming years, we will invest in our network, as we built the lower density in rural communities and pursue our 10G plan, which provides a cost-efficient pathway for us to offer multi-gigabit speeds, lower latency, high compute services to consumers and businesses customers. With our inside-out strategy, we will continue to use and develop small wireless cells, powered by our network, together with our MVNO to connect customers in and beyond the home, delivering our throughput and economics for customers in fixed, nomadic and mobile environments. Our strategy will be enhanced by the FCC recently freeing up 1,200 megahertz of 6 gigahertz spectrum for WiFi. The FCC's action is a transformational step toward broadband in America. It was a bold move and we look forward to making significant use of the spectrum. Moving back to Q1 results, we also performed well from a financial perspective during the quarter. We grew adjusted EBITDA by 8.4% and combined with our lower cable capital expenditures, our first quarter free cash flow grew by over 100% year-over-year. As we look forward, we would expect that demand for our residential broadband product will remain strong as people work and learn from home and need to stay connected. Broadly speaking, the health of our residential business will be impacted by what happens to unemployment and income and how long and the impact that such factors will have on customers' ability to pay for service in the coming months, including government support to consumers. Slowing household formation may also play a role and our ability to drive new customer growth, by slowing activity for both new sales and also churn. We also recognize that the recent strength in video and wireline voice trends may be temporary due to lockdowns and reverse in an economic downturn. So our SMB business is more difficult. We serve approximately 2 million SMB customers and many of those customers are currently closed at least temporarily. As a result, SMB customer growth and revenue growth will be lower than our previous expectations. It will likely take time for this part of our business to recover, but it will and maybe with a faster growth rate than before the crisis. I expect our enterprise business to remain more stable than SMB. Enterprise customers are larger and most, but not all, will be able to withstand the recession more than smaller businesses that have less liquidity. But our expectations for enterprise customers and revenue growth have also been tempered, as enterprise customers with complex products are less likely to switch and grant installation access in this environment. Our advertising business is inherently local and primarily supported by small and medium businesses, which have been hurt in the crisis, but we still expect political advertising to be meaningful, which will help us, particularly in the back half of the year. So clearly our revenue growth rate will be less than what we anticipated. But as service transactions and sales slow for the market as a whole, and customer adoption of self-service accelerates, there are a number of operating cost improvements and capital expenditure delays that will help cash flow growth now and in the future. We also believe that on a relative basis, we're in a far better position than most companies, as the value and demand for our service is significant and we're operating efficiently in serving our communities well, as we always have in a crisis. Chris will cover the potential impacts to our 2020 financials and reporting in more detail, but I want to be clear that, while we don't know the depth and duration of the impacts of social distancing, we pressure tested our business model, our liquidity and balance sheet through various scenarios. Our analysis confirms what we have always believed that we remain well positioned. Overall, we fully expect to be in good shape over the long term and we believe our business will continue to do very well, given the assets and products we have and the continued investment in those assets, our customers and our employees. Before turning the call over to Chris, I'd like to thank Charter's employees for their hard work and dedication and diligence through this crisis. They've been asked to go well above and beyond their regular duties and they've delivered, easing the strain for millions of families. The positive feedback we've received from our customers is very gratifying and we continue to treat our customers with respect, compassion and support and continue to deliver great products and services. We will come out strong around the other side of this crisis. We still have a lot of work in front of us, but I am heartened by how we have risen to the challenge, and know that we will continue to deliver for our customers and for America, regardless of what comes our way. I'd also like to send my regards and best wishes to all of those listening to this call, may you and your families remain safe and healthy. Now, I'll turn the call over to Chris.

Thanks, Tom. Our first quarter results were strong and reflect where we were heading as a company before the COVID-19 crisis started here in the U.S. Our residential customer relationship net additions increased versus the prior year in each month of the first quarter, and we were driving increasingly efficient operations given our customer-friendly operating strategy and growing our free cash flow quickly. Residential revenue grew by 4.2% in the quarter, primarily driven by accelerating relationship growth in similar PSU bundled and video mix trends we've been seeing over several quarters. SMB revenue grew by 5.4%. Enterprise revenue declined by 3.2% year-over-year, driven by the sale of Navisite and by continued pressure from the wholesale side of the business. Excluding both cell tower backhaul and Navisite, enterprise grew by 6.9%. First quarter advertising revenue grew by 5.7% driven by political. In the month of March, non-political advertising revenue declined by 18.7% year-over-year, primarily due to COVID-19 related softness, including the abrupt postponement of sporting events. Mobile revenue totaled $258 million with $131 million of that being device revenue. In total consolidated first quarter revenue was up 4.8% year-over-year. Moving to operating expenses in the first quarter; total operating expenses grew by $191 million or 2.7% year-over-year. Cable operating expenses excluding mobile grew by 1.1% year-over-year or 1.7%, excluding Navisite, that's despite faster relationship and revenue growth. Programming increased 0.9% year-over-year, reflecting the same rate, volume and mix considerations that we've seen and talked about in prior quarters and we also had over $20 million of non-recurring programming benefits this quarter. Regulatory connectivity and produced content expenses decreased by 1.7% year-over-year, driven by lower regulatory fees and a $20 million benefit from the timing of sports rights payments. Cost of service customers increased by 1.4% year-over-year, compared to 4.5% customer relationship growth. That expense includes roughly $30 million for recently accelerated hourly wage increases and COVID-19 benefits, as well as $25 million of incremental estimated bad debt for COVID impacts as of March 31st. Excluding bad debt expense in both years, Q1 cost to service customers declined by 0.7%. We continue to meaningfully lower our per relationship service cost. Cable marketing expenses increased by 4.2% year-over-year, driven by higher labor cost and commissions. And mobile expenses totaled $374 million and they were comprised of mobile device costs tied to device revenue, customer acquisition and MVNO usage cost and operating expenses. In total, we grew adjusted EBITDA by 8.4% in the quarter, when including our mobile EBITDA loss of $116 million. Cable adjusted EBITDA grew by 8.1%. We generated $396 million in net income attributable to Charter shareholders in the first quarter and capital expenditures totaled $1.5 billion. We generated $1.4 billion of consolidated free cash flow and excluding our investment in mobile, we generated $1.6 billion of cable free cash, up about $700 million versus last year's first quarter. During the quarter, we repurchased 5.2 million Charter shares and Charter Holding common units, totaling about $2.6 billion at an average price of $490 per share. Let me briefly turn to our customer results before addressing our business outlook in more detail. Including the impact of COVID-19 related customer offers and programs. We grew total residential and SMB customer relationships by close to 1.3 million over the last 12 months or by 4.5% and by 486,000 relationships in the first quarter. Including residential and SMB, we grew our Internet customers by 582,000 in the quarter, and by close to 1.6 million or 6.1% over the last 12 months. Video declined by 70,000 in the quarter, better than last year's first quarter decline of 145,000. In wireline, voice declined by 65,000, which was also better than last year's first quarter decline of 99,000. Through February, total customer relationships, internet and video net additions were all better year-over-year, and mobile net additions had continued to accelerate. By mid-March, due to increased social distancing practices and shelter-in-place orders throughout the country, demand increased significantly for our products, but we temporarily yielded less mobile, as sales call time focused on self-installation instructions and our mobile retail channel has been partially impacted. Also beginning in mid-March, we introduced three COVID-19 related offers and programs for our customers. In today's materials, we provided an addendum showing customer counts for each of these. I expect we'll continue to report this addendum for a couple of quarters to provide investors transparency on the impact of our COVID-19 related offers and programs. The first of three offers available for customers is our 60 day free Internet offer for new Internet customers with students or educators in the household. We launched the offer in mid-March and it accounted for 119,000 of our 582,000 total Internet net additions in the quarter. At the end of March, we still had a large number of pending connections in customers and the offer continues to grow at a fast pace in April. Interestingly, and uniquely, about 50% of the customers who participated in the offer in March chose to order additional products with immediate billing. The vast majority of these customers are taking our flagship Internet product at 200 megabits per second or 100 megabits per second, and a small minority subscribe to our low-income offer or our ultra and 1 gigabit premium offerings. The profile of these customers is very similar to the profile of our typical Internet customer acquisition stream, and while some of these customers will no longer subscribe to some of these services after 60 days, the payment trends for customers who took video and phone at the same time already indicate to us that most of these customers will remain. The second offer of our customer category reflects customers under our 60 day Keep Americans Connected pledge to the FCC. These are customers who have indicated inability to pay for the service for COVID-19 related reasons. As of March 31, 140,000 residential customers were in this program, many who would have been in a collection cycle in normal circumstances, and only 1,000 of which had passed the point in the collection cycle, where we'd normally disconnected their service at March 31. To give this some color, approximately 20% of the 140,000 customers today have balances that are fully current, and in total, nearly 50% have made partial or full payments entering into this protection program. However, approximately 65,000 of those customers now have past-due balances beyond the point of normal disconnections, meaning at the end of April. The number of customers requesting disconnection protection has continued to grow in April, and we expect it to grow further through the rest of Q2. We intend to work with these COVID-19 impacted customers to get them back in a good payment status, with the objective of fully continuing their service with us. The final category of customers we've isolated in our addendum is the SMB customers who have requested a seasonal suspension of service or temporary downgrade of a line of service, while their operations are closed or diminished. Certain restaurants, bars and hotels are good examples, where we've reduced service to a minimum level and reduced the monthly bill until these customers fully reopen. We also expect this category to grow in Q2. So what does all this mean beyond temporary ARPU dislocation and back-end subscriber risk? First, even if you exclude the impact of these offers and programs from our first quarter results, residential customer relationships and Internet grew at a faster pace year-over-year that remains our long-term opportunity. Second, customers may move in, out or between these categories over time, as the economy contracts and ultimately expands. Our issue is not demand for our products, it will be our customers' ability to pay and how we help them in that respect over time. So, until we have a better sense for the depth and the duration of the COVID-19 crisis and its economic impact, it's difficult for us to project what the help we offer our customers will look like. However, we think we could end up creating more value over the long term, as we continue to treat our customers and our employees well. With that in mind, I'd like to expand on Tom's remarks as it relates to our business outlook and where we're likely to see pressure and opportunities over the coming months and quarters, depending how and when the economy reaccelerates. For our residential and mobile services, the quality and value of our products are clear and demand is high, with Internet up in March significantly, even without the COVID-19 related offers. And video and phone also saw positive net adds in March, at least temporarily. Looking forward, the risk of the household formation growth will be impacted. The other issue will be customers' ability to pay either via their wages or extended employment benefits under the Cares Act or other stimulus packages. And if, how and over what period of time, you can get some customers to repay back balances when they are able to make payments again. So there are all kinds of questions here, about financial presentation, accounts receivables revenue recognition, bad debt provision, and write-offs, which really will reflect in Q2 and will work through in the coming months and quarters, and we intend to provide our investors transparency as we go through our unique reporting exercise. When the economy begins to recover and assuming our customers can pay us, I expect our residential business will be in good shape. SMB represented $3.9 billion of revenue for us last year or 8.5% of our total revenue. In the back half of March, we began to see softness in our SMB sales, where essentially our direct sales force has been on hold and that channel is a larger contributor to SMB sales than it is to residential. We estimate that less than 20% of our SMB customers are restaurants, hotels, bars, theaters and the like, many of which will struggle in this downturn. We are working with all of our SMB customers in this difficult time, and believe we can return to growth in an economic recovery. We expect to retail base for enterprise to be more stable. In March and April, we saw significant demand from healthcare and government segments to upgrade and add new services, which is taking the place of new connects and other areas. But we expect new sales to taper off in retail services growth in the short term, for enterprise will be moderated by customers' willingness to make changes, particularly for physical services in this climate. We will have an offsetting benefit in churn, but absent higher new sales, it will be difficult to grow retail enterprise significantly in the short term. For Spectrum Reach, our advertising group the second quarter will be challenging. March revenue was below our expectations by more than $30 million due to cancellations and the April variance was more than double that amount. We are proactively working with clients to move their advertising spend from sports events to reach their audiences in different places or to move out their orders generally. We believe there is an opportunity to both recover and earn more advertising business, once the economy picks back up. We still expect significant political spend in the back half of this year, so the full year impact won't be as dramatic on a year-over-year basis. Those are the short-term revenue challenges and the long-term opportunities. What are the potential offsets in our cost structure? Churn across all of our subscription services was already declining significantly before the crisis. Lower churn and voluntary churn are declining even more now, but new sales will also decline, all of which suggests that we expected much lower levels of service calls, truck rolls, installations, commissions and labor-related activity, that applies to residential, SMB and enterprise. As Tom mentioned, self-installation is now over 90%, up from 55% in the first part of the first quarter, and with utilization of digital self-care up over 30%, our integration investments and our self-service platforms and portals are paying off. The current crisis has accelerated customers' adoption curve for digital service, and we don't think it goes back to where it was. So outside of bad debt and some accelerated wage increases to our frontline, our cost of service will decrease with less activity. Employee turnover will decline and hiring activity is likely to slow across the business, which has direct cost and tenure benefits, and we think any remaining EBITDA shortfall relative to our plans would likely be offset by CapEx that would be lower than previously expected, due to higher self-installation, lower churn, the timing of scalable infrastructure spend and potential construction delays. So that's how we believe the model will flex. What we don't know is the depth and duration of a recession, but we like our business model, how we manage the business across various climates and we believe we can grow long-term. It's probably a good transition to the balance sheet and our liquidity profile. As Tom mentioned, we have done a lot of modeling to stress test our balance sheet under various economic scenarios. We finished the quarter with $2.9 billion of cash and $4.7 billion of availability under our revolver. In early March, at the beginning of the COVID-19 crisis, we priced a long-dated high yield financing at an all-time low coupon, and on April 17, we issued $3 billion of our tightest coupons ever for 10-year and 30-year investment-grade tranches. Pro forma for those investment-grade bonds and recently called debt at March 31, we had $8.4 billion of total available liquidity. As of the end of the first quarter, our net debt to last 12-month adjusted EBITDA was 4.4 times or 4.3 times if you look at cable only. In that respect we've already been deleveraging slightly. Pro forma for our recent financing activities, our weighted average cost of debt is only 4.9% and the weighted average life of our debt is 12.2 years, with more than 90% of our debt maturing beyond 2022. We have a schedule on slide 13 of today's presentation, which puts our maturity profile in perspective relative to last year's cable EBITDA. Together with our significant liquidity and positive free cash flow, we remain in a very good position to finance our operations organically, as well as through the capital markets, which remain open to Charter. As it relates to our stock repurchases, we've been under a 10b5-1 plan which was entered into right before the COVID-19 crisis began here in the U.S. Due to lower share prices in March, we purchased more than the target volume in March than April. We have never provided guidance on buybacks because we think it can encourage bad decision making relative to better alternative uses of cash over time. So we're going to be thoughtful and responsive to where we think the economy is going, our stock price, our liquidity and any organic or inorganic opportunities which may arise. While the current environment does suggest caution in the short term, we are not modifying our 4 to 4.5 times leverage target range today and we'll continue to monitor the economic climate and the interest rate market and regularly evaluating our leverage target. We know that we have a high quality resilient asset with dedicated employees across our local communities and we've invested significantly in our network and people over the years and there is high demand for our product across every part of our footprint, in both homes and businesses in good times and bad, which is why we continue to aggressively build out more broadband passings, and ensure that our network is well invested, ready and working for future opportunities. Our goal is to stay focused on what we do well, and execute a proven operating strategy that works for customers and employees across various economic and regulatory climates, to create shareholder value over the long term. Operator, we're now ready for questions.

Hi, thank you. I wanted to sort of take a bigger picture question for a moment, just given the strength of your results and the enviable position that you find yourself in of having a business that is relatively resilient in this kind of a market, what are the things that you can do, that sort of take advantage of the dislocation, whether it's more edge-outs, potentially acquisitions, a faster move in acquiring spectrum and trying to take some share in wireless, how do you think about using this dislocation as a way to make your business stronger, when we come out the other side of this disruption?

Craig, obviously we think about that every day and we have some cash on hand to be opportunistic, if there is an opportunity that would require investment. But, the biggest opportunity we see is to continue doing what we're doing and just doing it better and well and being able to execute better and well and continue to succeed in the marketplace. Our biggest opportunity as a company is to continue to create customer relationships, and we think that we have a great set of assets that we've put together and invested in properly and therefore, we have advantages in terms of the products that we can sell relative to others at the moment, and we have a high quality, high skilled workforce that's capable of generating and operating activity, and that's our biggest direct upside, and we think we could continue to operate well and execute well going forward and to the extent that we're better at that than others, we create more value, more quickly.

Thank you, that's helpful. If I could just ask another, maybe slightly more prosaic question just given all the attention being paid to sports right now, can you just talk about the way you'd like to see the issue of sports payments to RSNs and national sports networks work out and the pressure to rebate to customers and that sort of thing?

We've discussed for years the reality of programming costs, particularly how sports significantly contributes to these expenses. Currently, our average programming cost per customer is in the high $60 range. I believe that if sports were not a factor in these negotiations, the costs would be less than half of what they are now. Sports is the primary driver of content costs, making it challenging to sell the product, as it's quite expensive for consumers. We would prefer to pass the sports programming costs back to the customer if those costs aren't incurred or if the events don't take place. There's still uncertainty about whether games will happen, and if they do, it's unlikely that costs will be refunded to customers. At this moment, the industry operates under a structure that bundles and contracts content payments, leaving us with limited control over it. We hope our customers can find relief from these costs. Ultimately, the revenue goes to the athletes, and at some point, someone needs to reduce their compensation and return some of that to the customer, which has yet to happen.

Thanks, Tom.

Thanks, Craig. James, we will take our next question, please?

Thanks. Tom, given that you obviously have exposure across the country, can you just talk about how the markets are different for areas like New York and California, where lockdown started early and compared to the other markets, are you sort of seeing any sort of green shoots, as some of these states start opening up and any sort of change in direction of business? And then just a simple question on the network, obviously, it's highly resilient right now, but I'm assuming that from the work-from-home orders right now that data transfer is becoming more symmetrical and your upstream on your network is not conducive for that kind of thing, I think. Can you sort of help us think about, is there any stress on the network from that side and what needs to be done, if any? Thanks.

In terms of variation across different regions, there are obviously reopenings happening, and we are adapting our operations based on local regulations regarding permitted business practices. As an essential business, we have been operating continuously and need to maintain our operations under the strictest conditions. We are focusing on how to support our employees and customers effectively. As areas begin reopening, we are preparing to tailor our responses to local markets and assess our capabilities within each location. At this point, I don’t notice any significant differences among locations, although New York City is unique in many ways. Overall, we have been under lockdown everywhere until now.

We are growing market share everywhere.

We are growing consistently everywhere. Regarding the future of the network and the demand on it, we have been able to manage the rapid increase in demand effectively. Interestingly, while network utilization has surged, it has also been distributed across different areas. Networks are designed for maximum peak utilization rather than total utilization. It's similar to preparing for the highest demand day in the year. Our network has been built to handle what we consider a year’s worth of growth within just a few weeks. The trends we are observing now have been developing for quite some time, and we anticipate they will continue. We have a strategic plan concerning our assets that aims to shape the future of communications, which includes an increasing upstream capacity as upstream utilization rises. This aligns with what we refer to as 10G, or DOCSIS 4.0, in our specifications. We are actively enhancing our networks in smart and capital-efficient ways to ensure capacity growth and the creation of new products that are currently difficult to imagine. We believe we are well positioned for long-term success, which will require ongoing investment, though it will be significantly less than starting new builds. We are optimistic about making these investments and reaping the resulting benefits, leading to new products in both upstream and downstream areas, which we see as opportunities for the future rather than problems.

Thanks so much.

Thanks, Vijay. James, we'll take our next question, please.

Hey guys, thanks. Tom, maybe just a quick question on Spectrum. I know you mentioned the FCC's move recently. Does that change your appetite in any way for the CBRS spectrum auction later this year? And then thinking about sports rights, I know you touched on it briefly, but what are your thoughts, just more generally, on the value of sports rights coming out of all this? Thanks.

I understand your question about whether the FCC's 6 gigahertz WiFi spectrum impacts our valuation of CBRS, and the answer is no. These are actually separate concepts. I see the 6 gigahertz spectrum as being suited for in-house use; our products are all delivered wirelessly. The real consideration is between mobility and stationary use. The 6 gigahertz spectrum is intended for in-house, high-capacity applications for new product offerings. On the other hand, the CBRS spectrum enhances the efficiency of the mobile platform, at least from our perspective. While it can also be used indoors for mobile services and enterprise settings, we consider them as distinct and their values do not impact one another. As for sports rights, they are highly valued and are essential to maintaining a bundled offering. Assuming that sports return and leagues resume their activities, I believe the underlying trends will remain stable. Unless there is a drastic downturn in the sports industry, I do not anticipate significant changes.

Thanks, Mike. We will take our next question, James, please.

Thanks and good morning. I was curious if you could frame some of the scenarios that you were running for your SMB customers and trying to think through the exposure and how you frame the bad debt reserves in the quarter? Thanks.

Sure.

Yes, go ahead.

I just want to put things into perspective regarding the SMB segment, which accounts for 8.5% of our revenue. Even if we encounter some challenging scenarios, the impact on the company remains relatively minor, especially when considering liquidity and our balance sheet. However, it does influence the overall revenue growth rate. Based on the statistics I shared in the prepared remarks, it's important to consider how severely that particular segment, including bars, restaurants, and theaters, might be affected and for what duration. This will help you understand the potential worst-case scenario. We don't have any more insight than others regarding the depth and duration of the recession, which is why we provided those statistics to assist in your analysis. The first question was about SMB; what was the second question?

How you are seeing the bad debt.

Well, every company has had to modify to new GAAP standard, which requires you to estimate your bad debt reserves for the receivables that you have at a period of time, as opposed to when they age. And so you've heard everybody talk about that this quarter. We're no different. We had in total between cable mobile, about $30 million of additional bad debt as an estimate for what might not be payable on the accounts receivables that existed at the time of close. In Q2, let me start maybe back with the first objective. Our goal through all of this, is A, to do well by the customer, by providing good offers for remote education, as well as for in this case, keep America connected pledge. But our goal is also not to quickly get into a collection environment and cut them off. Our goal is going to be to keep these customers. And in the second quarter, to the extent that we work with the customer to right-size their receivable, some of that could impact the revenue recognition inside of Q2, and some of that for a financed portion that they may need to pay back over time, could impact our estimate for bad debt reserve. That will apply for residential and SMB. And so, when I mentioned in the prepared remarks that we're going to have a lot of technical accounting and reporting issues to deal with in Q2, it's true, but we're going to be focused on not the accounting outcome or how Q2 is going to look, we're going to be focused on what's the right long-term outcome for the customers, and for the company and make sure that the accounting does what's appropriate on the back end. But I think will be a little bit of noise and we'll make sure that we disclosed any revenue impacts in any bad debt impacts in our Q2 reporting.

So that's a bit of an accounting explanation. The way I view bad debt is by considering whether we've created customers and if we can retain them and if they make payments. If we create customers who pay, that's positive and leads to minimal bad debt. From my perspective on the customers we are bringing in, they're choosing our high-quality products in the residential market and their profiles align with those of our traditional customer base. They will undoubtedly be influenced by the broader economic environment, but we offer products that hold value for all income levels. We cater to both low-income and high-income individuals, and our diverse product range suits the entire market. Therefore, I believe we can build valuable customer relationships over time. In the small business sector, we are still acquiring customers, and even in the challenging restaurant industry, most customer connections remain strong. These businesses still desire websites and may have made operational adjustments, but the closure of a business does not diminish their interest in maintaining a relationship with us.

Thank you.

Thanks, Mike. James, we will take our next question.

Hey, thank you. When you all analyze the improvements in churn, what are the drivers of that other than the all-digital upgrade that we've talked about at length and the insourcing of customer service? I wonder if your performance in the Legacy Charter territories continues to provide any helpful data to answer this question?

What's good for churn? Before COVID, our churn was steadily decreasing, and everything we've done since then has aligned with our pre-COVID strategies, focusing on providing high-quality service, products, and skilled insourced workers in the United States. When you do this, you reduce activity, and the key factor that influences the cost to serve is that activity. Improved service and longer-lasting products naturally lead to less activity per revenue dollar, resulting in higher margins or lower costs to serve. Churn is an indicator of customer satisfaction and also reflects economic mobility, but when holding other factors constant, a decreasing churn rate indicates increasing customer satisfaction due to better products. This has been our goal for managing the company. Churn was declining across the legacy Charter, Time Warner, and Bright House platforms, and costs to serve were also decreasing thanks to self-installation and digital models that simplify the customer experience, leading to less friction during transactions. This supports a virtuous cycle: reduced activity and fewer failures in service, meaning fewer service calls and missed appointments, which enhances customer satisfaction and extends subscriber lifetimes, further reducing activity. That was the direction we were headed, and I believe we still are, despite some confusion from current volumes. Recently, we've seen a significant spike in activity due to sales, creating 10,000 new broadband customers a day over the past 60 days, totaling 600,000 new customers, all accomplished quite smoothly.

Thank you.

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

Thanks. Two quick ones, if I may. Tom for you, you mentioned that the importance of the secular trends in sports haven't changed. I'm wondering if you can touch on some of the secular trends in the business that you think have changed, how the business is going to look different when we come out of the current environment? And then, Chris, I think you said that non-programming costs were down year-over-year when you exclude the COVID impact from wages and bad debt, is that a trend that you would have expected to continue throughout the year, but for the impact of the pandemic? And then, should we annualize that $30 million and $25 million of COVID related impact or does it sort of flow differently as we go through the year? Thank you.

So Jonathan, regarding long-term changes, I would put it this way: I don’t believe they are permanently altered, but they have definitely progressed significantly. We’ve condensed years of development into a very short time frame, and we aren't reverting to the previous patterns. It seems we have simply shifted up the trajectory. Network utilization and customer self-service, along with the associated service costs, are prime examples of this. We were already well on our way with the self-service model, and when we faced the challenges we did, combined with our marketing strategies, we managed to adapt effectively. At the start of the quarter, we were around 55% for self-installation, and by the time circumstances changed, we were nearing 70%, and now we've surpassed 90% in self-installation. Being at 70% allowed us to efficiently reach 90%. We were fortunate to be prepared for that situation. I believe this represents a significant transition for the business moving forward, and the increased use of Zoom and other interactive communication tools in home work environments has likely accelerated by several years for the long term.

And Jonathan, please proceed.

I was going to say, just a follow-up on that and this is probably directed at you Chris, going from 55% to 90%, what does that do for margins in a year or maybe two years when we get out of this environment? How much are margins structurally higher because of that?

I don't want to delve into a percentage margin discussion, but the cost of a self-installation is roughly one-third of the cost of a professional installation, which positively impacts both operating and capital expenditures, depending on the type of installation. It's important to note that we were already at 55% and would have reached 70% by the end of the quarter if not for the acceleration in activity. Regarding your second question about non-programming expenses, there are costs related to marketing, advertising, and enterprise expenses. I prefer to consider the cost to service customers, which mainly includes residential and small business expenses for network operations, field operations, call centers, and billing. This makes up the bulk of our costs. As I mentioned earlier, when excluding the bad debt, that cost was down year-over-year both in total dollars and on a per relationship basis. I've previously emphasized that our commitment is to continue reducing the per relationship cost to serve. However, I've been cautious about stating that the dollar cost to serve, excluding bad debt, will also decline in absolute terms. Clearly, it has decreased year-over-year in Q1, and we expect that once we move past April, which has been a month of high activity, we will see sales transactions and service operations slow down. This could further accelerate the year-over-year decline in the cost to serve, particularly on a per relationship basis. I believe the trends are positive and there is an increase in our labor expenses due to our accelerated move to a $20 minimum wage, which was a $30 million cost for just a month and a half. This will be annualized appropriately, but it's a relatively small amount compared to the volume of transactions we handle. Our operating strategy supports this, and the increased adoption of self-service and self-installations is beneficial for all stakeholders.

Great. Thanks, Chris.

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

Thanks, good morning. I just want to ask you both about two comments you made in the prepared remarks. Tom, you've been in the business for a long time and you've been through lots of cycles and I don't think I'm breaking news to say that the cable company historically has not had the best customer reputation and even reputation with sort of regulators and politicians. And you mentioned sort of the reputational benefits that the company is seeing, I'm just wondering if you have sort of conviction in that being sustainable or any real data behind that, because obviously that has not been the lens with which cable operators historically have been looked at? And then, Chris, you were talking about capital allocation and the buyback. You mentioned organic or inorganic opportunities. Just wondering, if you could just take a minute to remind us of kind of your M&A framework and sort of the kinds of things you guys historically have talked about either being interested in or not interested just so we can flesh out that comment a little bit more. If you're willing? Thanks.

Well, I've always loved the cable industry and what it represents. I believe it has consistently delivered great things. If you reflect on the improvements to our reputation, we have transformed telecommunications. Just 15 or 20 years ago, the typical wireline phone bill in the New York area was $75; now it’s $9.99. Additionally, consider the cost of broadband, especially on a per-gigabit basis. Back in 2001, when AOL dial-up was prevalent, it cost $20 a month for a 56K connection. The price of broadband has significantly decreased, and the benefits resulting from the investments made by the cable industry have been substantial for consumers. People generally dislike paying their cable bills and the costs associated with programming, which has always posed challenges in our business due to competition in video, particularly with the emergence of satellite providers. This led the cable industry to divest its programming because of vertical integration rules. Programming costs have soared, given that programming operates as a copyright—a legal monopoly—giving it pricing power over competitive video services, and consumers feel the impact of that. However, the growth of à-la-carte direct-to-consumer programming through services like Netflix, Warner Home Media, and Disney has allowed many customers to select the video they prefer at prices they find acceptable. Therefore, I believe that the primary challenge for the cable business has been the cost of video, but that situation is starting to change. Overall, I remain optimistic about our position and, when assessed objectively, we have achieved great things. The facilities-based competition model in our country has effectively produced high-quality communication services for consumers.

On the M&A front, while there are more actionable prospects on the organic side, as Tom has previously mentioned, the inorganic side regarding M&A remains unchanged. We remain interested in cable and would pursue it at the right price, including smaller acquisitions and larger deals. However, most opportunities today are family-controlled, meaning the decisions are not ours to make. We have explored content opportunities but have not found anything that aligns well with our assets and capabilities, aside from some local news expansions that have proven beneficial, especially in the current environment. We have considered wireless options, leveraging our existing assets like small cell deployments and our attractive MVNO, but have not identified a favorable scenario in that sector. We see potential for growth in enterprise or wireless technology through minority investments and joint ventures with Comcast, along with advertising, but these will not materially affect our financials or liquidity. This leads us back to focusing on organic opportunities, and if acquiring external cable stocks isn’t feasible, we may consider repurchasing our own stock in the future.

Thank you, both.

Thanks, Ben. James, will take our next question, please.

Thanks. I was just wondering, if you could talk about maybe some of the new offers for customers? I think I saw something that you're doing with Sirius. Could you talk about any plans you have for Peacock? Do you need to wait for your NBCU renewal at the end of the year? And then finally in terms of customer offers does the AT&T promo offer for HBO impact the way you would sell or offer HBO?

Regarding our offer strategy, I cannot disclose specific details before they are implemented. We continuously test various offers over time. While I do not want to downplay our marketing capabilities, the key factors that influence our sales success are the quality of our products and their value. We are always experimenting with marketing tactics, including our collaboration with Sirius, but we do not have any announcements regarding future strategies at this moment. As for Peacock, we are in ongoing discussions with NBC, but nothing has been finalized yet. On the subject of HBO Max, we recently completed an agreement with AT&T, and we plan to transition our HBO customers to the new product while marketing it as part of our overall video offerings. We are excited about this development.

Thanks, Jessica. Operator, we'll take our last question please.

Great. I'll make it quick. First, I guess just two quick ones. First, Chris on the comment on the March advertising I guess – or April advertising I guess you said it's twice as – variance is twice what you saw in March. Is that – I mean that were down sort of 36% so far in April and any color you could give on what you think – how the quarter is going to shape up there? And then on the CapEx question, you said given the outbreak, it will likely come in lighter than you previously expected, which is already lower capital intensity. Any magnitude of change there and if you could give us any color on the buckets would be great too? Thanks.

The comment I made in April wasn't actually about the year-over-year decline percentage; it was more about the difference from our expectations. We had $30 million come off the books in March, which was already sold, and for April, more than double that amount came off. We believe April will likely be the lowest point, with a slight recovery starting in May, depending on how openings occur, and June may show improvement. The second quarter is going to be difficult for advertising. While advertising isn’t a major part of our business, it will be a challenging quarter. We expect that as business resumes, there will be pent-up demand for local advertising, which has been growing for us at about 3% to 4% year-over-year. Once the market reopens, much of that demand will depend on the health of small and medium-sized businesses and when distancing measures start to ease. The second quarter will be the toughest period, after which the latter half of the year will include political advertising, which should help lessen the impact we’re seeing in the second quarter. Our situation is not unusual in this regard. Regarding capital expenditures, it’s still too early to provide specifics. We are currently focused on various activities, and some of our programs might experience slight delays. Construction could be postponed, and while installation capital expenditures may be lower due to reduced unit costs from self-installation, the volume of installations is quite high. There are many factors at play, but if I had to estimate, we will likely spend slightly less than initially planned. Craig asked early on in the Q&A if there are areas where we could accelerate spending due to our strong balance sheet and business position. We will be shifting from a reactive to a proactive approach, considering ways to leverage our assets for the long term. For now, it appears we may spend a bit less than initially intended.

The thing I would say about capital spending is we talked about it in terms of pressure testing really, and we haven't changed our commitment to the projects that we're building and the products that we're building, and we're continuing to take the business forward. But a lot of our capital is success-based, and so it's modulated automatically by customer creation. And so to the extent that the market moves around based on the macroeconomic effects, so does capital.

Got it. Thanks guys.

Operator, that concludes our call.

Thank you all very much.