Charter Communications, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Charter's fourth quarter 2019 investor call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's call is being recorded. If you require any further assistance, please press star 0. I would now like to turn the conference over to Stephan Anager.

Good morning and welcome to Charter's fourth 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 filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. Joining me on today's call are Tom Rutledge, our Chairman and CEO, and Chris Winfrey, our CFO. With that, let's turn the call over to Tom.

Thank you, Stephan. Our operating strategy continues to deliver strong results, and we remain focused on driving customer growth by delivering superior services and value to our customers, improving the quality of our operations by reducing unnecessary service transactions and truck rolls per customer, delivering sustainable free cash flow growth by driving EBITDA growth while reducing capital intensity, and finally, positioning our company for long-term customer relationship growth with current and new products by continuing to evolve a fully converged network that delivers high-speed, low-latency, seamless connectivity services inside or outside customers' homes and sedentary environments around the move. In 2019, we created over 1.1 million new customer relationships, substantially more than 2018. We added over 1.4 million new internet customers, also more than 2018. We grew our full-year cable-adjusted EBITDA by 6.6% in a non-political advertising year. And combined with our lower cable capital expenditures, our 2019 cable-free cash flow grew by over 100% year over year. We expect that our cable EBITDA growth, combined with our declining capital intensity and disciplined capital deployment strategy, will drive continued strong Our mobile business is a strategic extension of our core connectivity capabilities today and in the future, and it continues to grow. We now have well over 1 million mobile lines in service with over 900,000 of those added in 2019 at an accelerating pace. In 2019, we saw a substantial reduction in service transactions for customer relationships. And those improvements were reflected in lower per relationship repair calls, trouble call at truck rolls, and billing calls. We also performed fewer physical installation truck rolls, giving growing levels of self-installation activity. Looking forward to 2020, we're well-positioned to continue to reduce service activity per customer, given a higher level of customers inspecting pricing and packaging, the completion of our insourcing program, and increasingly experienced insourced call center and field operation workforces, the overall improving quality, reliability, and maintenance of our network, greater levels of online service activity, self-service activity, and growing levels of self-installation activity, as I mentioned, which in the fourth quarter exceeded 50% of sales. So in 2020, the lower levels of overall service activity for customer relationship should continue improvements in customer satisfaction, lower churn, and a reduction in cost to service customers for customer relationship. Our in-home connectivity product set also continues to improve with 85% of our residential internet customers now receiving minimum internet speeds of 100 megabits or more and nearly half receiving We continue to offer 400 megabits, our ultra product, and our gigabit speed tier across our entire footprint. We made our network capable of providing gigabit service everywhere we operate using DOCSIS 3.1 technology over the course of 13 months for $450 million in plant capital. Through our 10G plan, we also have a cost-efficient pathway to offer multi-gigabit speeds and lower latency to consumers and businesses that continue to attach more devices to our network, use more and more data on a daily basis, and are demanding greater network responsiveness and reliability. During the quarter, we also continue to deploy our advanced home Wi-Fi capabilities to new markets beyond Austin, Texas, including Dallas, San Antonio, and portions of Southern California. Our advanced Wi-Fi capability provides enhanced security, privacy, and app-based control over all IP devices in our consumers' homes, 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 band. So far, our deployment has gone well, and we plan to roll out this capability throughout our entire footprint. Our Spectrum mobile business continues to grow quickly, and we added over 280,000 lines in the fourth quarter, more than we added in the third quarter. While it's still early, we believe that our results so far indicate our mobile product drives core connectivity, customer satisfaction, and will generate standalone profitability at scale. We also continue to test dual SIM technology using CBRS Spectrum by a small sales monitor on our own, high-capacity two-way network. Our tests continue to go very well. We continue to add features and functionality to our Spectrum mobile product, and in the first quarter, we plan to offer 5G mobile service. Now we'll turn the call over to Chris.

Thanks, Tom. Before covering our results, a quick reminder that we closed the sale of Navisite, managed cloud services business within Spectrum Enterprise in September. We have not prepared for a form of financials, so our reported results include Navisite in the fourth quarter of 2018, but not in the fourth quarter of 2019. For the next few quarters, I will discuss enterprise revenue growth, including and excluding Navisite for comparability. On an annual basis, Navisite generated roughly $150 million in revenue, and its impact on our EBITDA and CAPEX was not material. Turning to our results on slide five, Over the last 12 months, we grew total residential and SMV customer relationships by over 1.1 million, or 4%, and by 268,000 in the fourth quarter. Including residential and SMV, we grew our internet customers by 339,000 in the quarter, and by 1.4 million, or 5.6%, over the last 12 months. Video declined by 101,000 in the quarter, wireline voice declined by 128,000, and we added 288,000 higher ARC through mobile lines. At the end of the fourth quarter, 85% of our residential customers were in spectrum pricing and packaging. And residential customer relationship growth accelerated to 3.8% year-over-year. As we look to 2020, our goal is to accelerate our full-year customer growth rate as we deliver highly competitive products with better service, driving connects, and reducing churn. In residential internet, we added a total of 313,000 customers into quarters. resulting in residential internet customer growth of 5.4% year-over-year, driven by continuing churn improvement. In residential video, we lost 105,000 customers in the quarter, primarily driven by lower video gross additions year-over-year. And in wireline voice, we lost 152,000 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 288,000 total mobile lines in a quarter, driven by the value of our mobile product offers, growing brand and product awareness, and increased sales effectiveness. As of December 31st, we had nearly 1.1 million lines, with a healthy mix of both unlimited and by-the-gig lines. Spectrum Mobile continues to scale, with less EBITDA loss per line, even at an accelerating net addition rate. And that does not include any benefits to our traditional cable connectivity business. Over the last year, we grew total residential customers by just over 1 million, or 3.8%. Residential revenue per residential customer relationship grew by 1.8% year-over-year, given a lower rate of SPP migration and promotional campaign roll-off and rate adjustments. Those R approved benefits were partly offset by a higher mix of non-video customers, higher mix of streaming and lighter video packages within our video base, and $29 million of lower pay-per-view revenue year-over-year in the quarter. Our cable ARPU does not reflect any mobile revenue, but Q4 especially benefited from the timing of the rate adjustment this year. As slide 6 shows, our cable customer growth combined with that elevated Q4 ARPU growth resulted in year-over-year residential revenue growth of 5.7%. Turning to commercial, SMV revenue grew by 6.3%, faster than last quarter, as the revenue effect from the repricing of our SMV products in legacy TWC and Bright House continues to slow. F&B customer relationships grew by 6.8% year-over-year. Enterprise revenue declined by 4.5% year-over-year, driven by the sale of Navisite and the one-time cell tower backhaul fees that we mentioned as a benefit in the fourth quarter of 2018. Excluding Navisite from the fourth quarter of 2018, enterprise revenue grew by 1.3% in the fourth quarter of 2019. And excluding both cell tower backhaul and Navisite, enterprise grew by 8.5%. I expect that retail portion of enterprise to continue to grow nicely, that the wholesale piece, including cell tower backhaul, will continue to be challenging. Fourth quarter advertising revenue declined by 23% due to less political revenue in 2019. Our non-political advertising revenue grew by 4.6% year over year, primarily due to our advanced advertising capabilities and recently deployed products that efficiently sell highly viewed, long-tailed inventory using our own anonymized, much more detailed viewing data. As we look to the full year 2020, we expect continued ad growth driven by our advanced advertising business and a healthy year of political revenue. Other revenue declined by 6.6% year-over-year, driven by lower processing fees and lower home shopping revenues related to video subscriber declines, partly offset by higher levels of video CPE sold to customers. Mobile revenue totaled $236 million, with $138 million of that being device revenue. In total, consolidated fourth quarter revenue was up 4.7% year over year. Cable revenue growth, excluding mobile, was 3.4% or 5.2% when excluding advertising in both years and Navisite in 2018. Moving to operating expenses on slide seven. In the fourth quarter, total operating expenses grew by $165 million, or 2.3% year-over-year. Capable operating expenses excluding mobile were essentially flat, or up 0.6% when excluding Navisite, and that's despite strong relationship and revenue growth. Programming increased to 0.6% year-over-year due to higher rates. That was offset by a video customer decline of 2.8% year-over-year. a higher mix of streaming and lighter video packages such as choice and stream, and lower pay-per-view expenses year over year tied to the $29 million of lower pay-per-view revenue I mentioned. Looking at the full year 2020, we expect programming costs per video customer to grow in the mid-single-digit percentage range. Regulatory connectivity and produced content grew by 4.3%, and that was driven by higher costs of video CDs sold to customers and original programming costs. Cost-to-service customers declined by 2.3% year-over-year compared to 4% customer relationship growth. So we're meaningfully lowering our per-relationship service costs through a number of operating, quality, and efficiency improvements, which is core to our strategy. Key metrics like calls per customer, truck rolls per customer, churn, and self-install rates all continue to move in the right direction, as Tom mentioned earlier. Looking ahead, we expect further declines in cost-to-service customers on a per-customer relationship basis, but this quarter's level of operational productivity was exceptional, and it won't be replicated every single quarter. Cable marketing expenses increased by 2.1% year-over-year, and other cable expenses were down 1.4%, driven by lower ad sales costs, which reverses in a political year, and lower costs related to the sale of Navisite, which will carry through the third quarter of this year. Mobile expenses totaled $372 million, and they were comprised of mobile device costs tied to device revenue, customer acquisition and VNO usage costs, and operating costs to stand up and operate the business. Our 2020 mobile EBITDA probably looks similar to 2019 due to growth and the scale cost. But looking even further, our current expectation is that in 2021, our mobile service revenue will exceed all regular operating costs, excluding acquisition and growth-related mobile costs. Turning to EBITDA, we grew total adjusted EBITDA by 8.8% in the quarter, when including the mobile EBITDA startup loss of $136 million. Cable adjusted EBITDA grew by 8.9% in the fourth quarter, including a roughly 3% negative growth rate impact from advertising revenue net of its associated expense in both periods. Turning to net income on slide 8, we generated $714 million in net income for beautiful charter shareholders in the fourth quarter versus $296 million last year. The year-over-year increase was primarily driven by higher adjusted EBITDA and a loss on financial instruments in the prior year period, partly offset by higher income tax expenses. Turning to slide 9, capital expenditures totaled $2.3 billion in the fourth quarter, with our cable CapEx declining about $200 million year-over-year, driven by the same CPE trends, DOCSIS 3.1 benefits, and lower insourcing and integration costs I've mentioned throughout the year. We spent $151 million on mobile-related CapEx this quarter, which is mostly accounted for in support capital, and it was driven by software and development costs and retail footprint upgrades for mobile. In 2020, we expect our mobile capital expenditures to be similar to 2019 and then decline meaningfully in 2021 as that work will be behind us. That mobile capex outlook excludes any potential mid-band spectrum acquisition and build-out, which would be based on a separate ROI evaluation. In 2020, we expect our cable capex intensity to continue to decline from the 15% in 2019. And on an absolute dollar basis, we don't expect our cable capital expenditures to be meaningfully different from 2019 levels. Similar to what I just said about our mobile capital expenditures, if we find new high ROI projects during the course of the year, where that accelerated spend on existing projects would drive faster growth, we'd still do so. As slide 10 shows, we generated $1.6 billion in consolidated free cash flow this quarter, and excluding our investment in mobile, we generated $1.9 billion in cable free cash flow, up $700 million versus last year's fourth quarter. For the full year 2019, we generated $5.8 billion in cable free cash flow, up $3 billion versus 2018, despite a cable working capital headwind of $800 million this past year. For the full year 2020, we would expect cable working capital to improve significantly, with a neutral to slightly negative impact on our cash flow. We will still have typical seasonal swings, including the first quarter, in which our working capital is most always at use of cash. With respect to mobile working capital, we continue to add mobile customers at an elevated pace, which will continue to drive handset-related working capital needs in 2020. In any event, our free cash flow profile improved significantly last year, we're positioned to continue to couple our free cash flow growth with our return-focused investments and capital structure strategy. We finished the year with $78.4 billion in debt principal and $74.9 billion in net debt. Our current run rate annualized cash interest is $4 billion, and as of the end of the fourth quarter, our net debt to last 12 months adjusted even though it was 4.45 times at the high end or four 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 cable-only leverage, which was now 4.31 times at the end of the fourth quarter. During the quarter, we repurchased 5.6 million charter shares and charter holdings common units, totaling about $2.6 billion at an average price of $459 per share. For the full year 2019, we repurchased over $7.6 billion of our equity. And since September of 2016, we've repurchased over $27 billion, or a bit more than 25% of the Charter's equity, at an average price of $346 per share. Turning to taxes, on slide two, our tax assets are primarily composed of our NOL and our tax receivables arrangement with Advanced Newhouse. We now don't anticipate becoming a meaningful federal cash taxpayer until 2022. with some modest federal cash tax payments beginning in late 2021, as we expect the bulk of our existing NOL to be utilized by the end of that year. For the years 2022 through 2024, we expect our federal and state cash taxes to approximate our consolidated EBITDA, lesser capital expenditures, and lesser cash interest expense multiplied by 21 to 23%. That estimate would include partnership tax distributions to advance new houses, captured separately in cash flows for financing and financial statements. There are multiple factors that impact what I just described, and we're always looking for ways to improve our cash tax profile, but it's a good baseline for today. So we're pleased with our results, and we believe in our operating strategy, our network capabilities, and the balance sheet strategy, which all work in concert to create value over a long period of time. Charter is an infrastructure asset with strong growth characteristics and cash flow yields. We have a lot of ancillary products to use for and sell on top of, core connectivity services that when combined with good value and service will drive cash flow growth with tax advantage levered equity returns. Operator, we're now ready for Q&A.

At this time, I'd like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Again, if you'd like to ask a question, please press star, then one on your telephone keypad. And we'll pause for a moment while we compile the Q&A roster. And our first question comes from the line of John Hodlick from UBS. Go ahead, please. Your line is open.

Great. Thank you. Chris, you gave a lot of good detail on some of the cost metrics as we look out into 2020. And the 200 basic points you guys saw in cable margin improvement this quarter, especially with the advertising headwind, I think was really the highlight. But putting it all together in terms of the programming, the cost assured continuing to come down, how should we think of cable margin trends heading into 2020 here? Thanks.

Sure. Look, on one hand, you had a headwind, as you mentioned, political advertising not being in the fourth quarter of 2019. On the other hand, we had some fairly exceptional pieces that were taking place as well. The timing of our rate increase was earlier inside of Q4 2019 than it had been in prior years. And so, you know, I think that results in a higher R group for customer relationship growth than would have been sustainable either prior to that quarter or inside of 2020. So you need to take that into account. I think that growth rate, you know, given the subscriber mix, could look a lot more like what we saw for the full year of 2019 than it would what we saw in Q4. The second thing I'd mention is that programming had done very well on a gross and per-customer relationship basis. I think it'll still do well relative to other years. But we expect mid-single-digit per-customer relationship growth in programming costs in 2020. And then finally, as I mentioned, the cost to serve. It was exceptional in the fourth quarter. Our cost to serve per customer relationship has been declining. It's going to continue to decline as our expectation. But to have an actual gross decline, a significant one inside of a quarter, was a big step down. And I just wouldn't coach people to replicate that every single quarter. So then working against that, again, I'm not giving guidance, but ways to help you to build a model, particularly later in the year. We expect this to be a pretty good year for political advertising. So all in, I think it's going to move around and it's not something that we actively manage inside the business. What we're managing is can we grow customer relationships faster and that's our goal, which would then drive better revenue growth, which continues to be our goal to go faster. And it has been our experience and continues to be our goal to grow EBITDA at a faster rate than our revenue growth rate with or without a political advertising year. So that's I think the right way to think about it and not to get particularly hung up in a particular quarter of year-over-year comparison on a margin rate, but what's happening with the underlying trend.

All right, great. That's helpful. Thanks.

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

Our next question comes from the line of Philip Cusick with J.P. Morgan. Go ahead, please. Your line is open.

Thanks, guys. Following up there, Chris, you talked about lower video gross ads year over year. Is that a result of fewer promotions and changed incentives? And you said the goal is to accelerate customer growth rate. How do you expect that to go from in terms of gross ads insurance going forward? And then quickly, a follow-up, if I can, on the insourcing program. You talked about it in your commentary. Where are we on the completion of that? And and how much in terms of costs are still being duplicated as you insource labor and everything else? Thank you.

Sorry, Phil, what was your second question? So first one is lower video growth, third one is status insourcing program, and you double up. What was the second one?

That was the gist of it.

Okay, well, I thought there was a second. But anyway, lower video growth, I think it's more a function of the marketplace more than anything else. We still believe in video as an attractive piece to the connectivity package that we offer. It's an important attribute. We continue to invest in it both in a traditional set-top box sense as well as all of our IP platforms. I don't know if Tom wants to add any more on that.

Well, yes. The lower gross ads, I think, are a function of the marketplace. It's not material to what drives our economic model, but it is a nice small addition to our broadband connectivity business.

And then on the insourcing program, you know, the insourcing is essentially complete. We have well over 90% of our service calls are handled in-house and onshore. And then in the field service side, you need to have some contract labor available for peaks and valleys, but we're well over 75%. of our labor being insourced there, and that's been the case for both of those for some time now. So there's very little in the way of double-up cost anymore that's in the system. I do think that it's going to continue to get better for all the reasons that Tom mentioned. The tenure of our employees gets longer, which means they get more experienced and better and higher-quality transactions with our own employees. We have a career path at Charter. The amount of self-installation is going up, The number of calls and truck rolls are going down. The churn is going down. And the amount of digital transactions, which Tom talked about, is also going up, which means less labor-intensive service infrastructure. And I think that trend is going to be with us for a long period of time.

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

Our next question comes from the line of Brett Feldman with Goldman Sachs. Go ahead, please. Your line is open.

Thanks. And, Tom, you just mentioned how video still can be very complementary to your core broadband product. There are a number of new direct-to-consumer video products coming soon, whether it's HBO Max or Peacock, and those providers have all said they're looking for distribution, including through MVPDs. I was hoping you could give us your updated thoughts around that, being a partner for some or all of them, and maybe some of the factors that you have to think through as you decide whether it makes sense, whether it's the economics, if there's technical issues, or just some strategic considerations that are weighing on whether or not you intend to do this. Thank you.

All right. Well, Brett, you know, yes, there's an opportunity in us marketing direct-to-consumer products in our relationship with programmers, and those relationships in many cases are – are also operating under the old model, too, which is the bundled cable model. And we can hold both thoughts in our head at the same time and sell bundled products, which I think we'll be selling for years to come, but also selling direct-to-consumer products. And because of our customer relationship, because of the way we can package those products into our overall product mix and the user interfaces that we develop, it's which products like Flex are designed to help enhance, we have an opportunity to create and help programmers sell their content and do that in a way that's mutually beneficial to both of us. And so we're working through those models with the various companies. We have already placed direct-to-consumer products like Netflix on our user interface, and customers can purchase products directly from our user interface, a la carte product, so to speak, which we've been doing for a long time, by the way. In many ways, I look at these products like I look at Pay TV. There are opportunities to enhance the video experience and part of the customer relationship. So we have ongoing discussions with all of the entities out there, and fundamentally, I think, while there's a lot of, dislocation going on in the video business, there's an opportunity in there for us. Great.

Thank you.

Thank you, Brett. James, we'll take our next question, please.

Our next question comes from the line of Ben Swinburne with Morgan Stanley. Go ahead, please. Your line is open.

Thanks. Good morning, guys. Two questions for either of you or both of you. Tom, any change in how you're thinking about pricing today? the video business in particular. I don't know if you would characterize your rate adjustments in the fourth quarter as, you know, a change from prior philosophy or not, but at least it seemed to us like a more aggressive increase in your video pricing than you've done in the past. I'm just wondering if that reflects a change in your mind about how you manage the business. And then Chris mentioned in his prepared remarks sort of mid-band spectrum and any acquisition build out there. I was just curious where your guys' collective head was at on that opportunity, if that's something that's becoming more likely, less likely, or just how we should be thinking about that as we go through this year and think about some options coming down the road.

You know, Ben, I think fundamentally we haven't changed anything with regard to our pricing strategy, which is price isn't the major component of how we drive our revenue growth. It's subscriber growth. And we have accelerating subscriber growth. And we expect to continue to have accelerating subscriber growth because we have the price strategy we do with the product strategy we do. And the bulk of our revenue growth comes from that. So, you know, we have been passing through things like retransmission consent fees and other things in the video business and and looking at the margins in the video business and the competitive environment in the video business and how we're priced, but our fundamental strategy is not different.

Got it. Any other wireless?

Mid-band spectrum. We're interested in mid-band spectrum. There's an auction coming up for CDRS. We're likely to participate in that auction. I think there's an opportunity for us. The FCC has been helpful in positioning that spectrum in a way that's an opportunity for us, and so we're carefully considering our options.

Well, the discipline, as you'd expect, about an ROI approach to the spectrum that's acquired, the cost to acquire, the cost to build it, and what's the financial return for the from doing so, and where would you do it? So I think, you know, people should expect that we will be disappointed around the approach, but we think it's pretty attractive. And clearly, the more mobile lines that we have, the more attractive that ROI is. Right.

Makes sense.

Thank you, guys. Thanks, Ben. James, we'll take our next question, please.

Our next question comes from the line of Craig Moffitt with Moffitt Nathanson. Go ahead, please. Your line is open.

Thank you. Two questions, if I could. First, on the wireless business, if I could just continue down that line of thinking, how much, just given what you know today, how much traffic do you think you will eventually be able to offload? We're sort of thinking about it as percentage of total, maybe. That you'd be able to offload onto your own facilities, if you think about where it might make sense to build, where you'd have aerial infrastructure to be able to build. And is there any scenario where you would ever want to go to a full facilities-based strategy where you would own your entire network. And then just back to the video question for a second. How do you think differently about programming renewals, just given the change in tone around your video strategy?

So, look, on the wireless situation, it's really a math question of, you know, what's it cost to – to pay for your MVNO rate, and what's the cost of gold, where's the traffic, and how does all that work? And that's the discipline that Chris was talking about. So as we think about it, it depends on what you're paying for mobile traffic and what the economic traffic zone is inside of a particular area. and how you would switch that traffic. So there's no immediate plan to change our fundamental relationship with our carriers. But over time, as the market evolves and speeds go up and capacity goes up, the economics may change, and we'll take advantage of those through time as the marketplace unfolds. With regard to programming, you know, obviously the biggest issue in the bundled package is price, and a lot of people have been priced out of the market, and we continue to negotiate contracts, and as penetrations in the overall distribution change, the relative value of the content changes, and it changes the relationship, and... changes how much programming's worth to you as an operator. I don't expect the general circumstance of distribution to precipitously change over the next couple of years. I think we'll still have a big bundled product, but the relative pieces of that are changing in value and will act appropriately in the marketplace.

Greg, you had a sub-question on the wireless side that asked if there was any scenario where we'd want to own it all the end-to-end network. And so far, we haven't seen anything that really demonstrates that need. We have a very good partner with Verizon. It's going very well. And they have a very strong, accurate self-power network. And so I don't think that there's any economic case that we've seen today that says we need to own all of that. And I think that we, you know, partners with NBNO, partners for years to come.

Thanks, Chris.

Thanks, Bob.

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

Our next question comes from the line of Jonathan Chaplin with New Street. Go ahead, please. Your line is open.

Thanks. Just to follow it on the questions around cost of service, I just want to make an application. You said we shouldn't. impute the same improvement in cost of service that we saw year-over-year this year, or we shouldn't assume the same cost of service, that there's something that would drive cost of service up from here, or something one time in the quarter that depressed it. And then, later than that, I'm wondering if you can give us an update on where the legacy Time Warner churn is relative to the legacy Charter churn. and whether legacy charter churn is finally bottomed out or there's still opportunities for that to come down because it seems like the churn improvement drove a big component of the improvement in cost of service.

So you were a little garbled there, Jonathan, but on the cost to serve, the cost to serve trend continues to go down on a per customer basis. There are all sorts of reasons that's true. I think Chris was trying to say that what the pace of that is and how that will manifest itself quarterly isn't something that you should straight line extrapolate. But the fundamental arc that we're on in terms of customers self-serving, using high-quality service operations with well-skilled people doing the work is reducing overall transaction volume As is the digitization and the definition of the network as a software-defined network and many of the operations becoming software-defined, all of those things are taking fundamental operating costs out of the business and the capital expenditures that we made over the last three years as a result of the integration puts us in a position to realize that upside. So that's the fundamental notion that he was trying to express.

And legacy TWC churn, uh, continues to be, uh, both elevated relative to legacy charter, but, uh, continues to be declining at a faster rate than legacy charter continues to decline.

So they're converting the gap. Now it used to be, it would be the

And, Jonathan, you've got really bad cell signals, and so this time around we couldn't hear anything on that question.

Okay. Thanks, Jonathan.

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

Our next question comes from the line of Jessica Reeve-Ehrlich from Bank of America. Go ahead, please. Your line is open.

Oh, thanks. I have follow-ups. I think it was Tom who said that you – will accelerate or you expect to accelerate customer growth rate this year? And I just wonder if you could elaborate on that. Do you mean high-speed data only or are you including video in here? And then you also, Tom, mentioned Flex. And I don't know if it was just in the context of direct-to-consumer services, but do you have plans to offer a service similar to Comcast Flex? Or can you talk about how you're thinking about the evolution of your broadband product that would differentiate, you know, that would make it more different, besides speed, what else would differentiate it?

Right, well, when I spoke of accelerating growth, I was talking about high-speed data and customer relationship growth accelerating. So that's what I meant by that. And in terms of flex or similar products, yeah, the answer is yes. There are a variety of IP relationships we have. We have one with Apple selling IP devices through Apple. We have Roku devices that our product is on. We've got millions of customers who subscribe to us directly through an app-based product. And so our video product on the Internet or IP-delivered cable TV and IP-delivered over-the-top products are all being delivered through a variety of new technology platforms. Flex is one of those. And so the answer is we're pursuing all the various opportunities in video that are available to us and including those in our broadband strategy. In addition to our broad, you know, we've enhanced our broadband through speed differentiation and taking our minimum speeds up. More than half of our customer base now gets minimum speeds of 200 megabits as the slowest speed we sell. And we've enhanced that with our advanced Wi-Fi products, which deliver high-quality service throughout the house, allow you to manage all the devices in your house, see what the service quality of those devices is and how they're connected to the network, as well as allow you to manage the privacy or the utilization of any of those devices throughout your house so that you're secure, private, and getting a high-quality service everywhere inside your property and on the go. And so we continue to invest in the broadband platform to make it a better platform, and we continue to invest in legacy video and we continue to invest in the way legacy video transforms itself into a IP platform.

Thank you. Thanks, Jessica. James, we'll take our next question, please.

Our next question comes from the line of VJJ Ant with Evercore. Go ahead, please. Your line is open.

Hi, it's James Radcliffe for VJ. Two, if I could. First of all, Tom, you mentioned a you know, 10G is sort of the next phase with the 3.1 rollout done. Can you give us any idea of the timing or magnitude of that sort of deployment? I mean, I assume it's a differing in kind, not just degree to the nine bucks or a home pass or so that 3.1 was. And secondly, in the slides you mentioned that, you know, the strategy in the business is not dependent on M&A. Can you talk about what you see the M&A landscape looking like both – Any opportunities for horizontal or if there are any incremental vertical acquisitions that would make sense? Thanks.

Sure. Well, with regard to 10G, you know, we just upgraded the whole network to one gigabit everywhere. That was the $450 million capital project that I mentioned over a 13-month time frame. 10G is a set of technology specifications that the industry has developed that allows us to ultimately get to 10 gig symmetrical services which are provided at very low latency delivery specifications and allows you to put high computing capabilities throughout your network and there is no immediate need to deploy a new upgrade in the marketplace today, but it's an evolution that we can invest in as we go forward. And it allows us to do that incrementally in a very cost efficient way, a lot less cost than it would cost to build a brand new network. And so we have no immediate capital deployment associated with it, but it's a variety of tools to incrementally get you to at least a 10 gig symmetrical. There's, you know, there's, we have already surpassed that capability in our laboratory testing. And so that's just a stake in the ground in terms of what the potential of our existing infrastructure is. With regard to M&A, you know, first of all, we don't have anything that we're about to talk about. But, you know, the cable business is owned by control shareholders mostly through the the United States and I think we have a great business and lots of opportunity. And with the right combination of assets, there's always value in scale and market approach. But there's nothing for us to say at the moment.

Great. Thank you.

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

Our next question comes from the line of Brian Croft with Deutsche Bank. Go ahead, please. Your line is open.

Thanks. Good morning. I wanted to ask you a couple questions on CapEx. Can you talk about some of the puts and takes in scalable infrastructure capital? It was down quite a bit in 2019 from the prior couple years. Just wondering how we should think about that spending category in the coming years relative to history. Is there a sort of normal level, if you will? And then secondly, on CapEx, as you reach the end of the FCC commitment for new homes pass, what should we expect in terms of a normal homes pass growth rate? Will it kind of be the, you know, just the rate of home growth in your footprint the way it's, you know, been maybe historically over the years, or do you see opportunities now to extend the network to existing premises that are currently off-net? Thanks.

So with regard to scalable CapEx, Brian, the – you know, we are getting advantages from the 3.1 deployment. And I think that those advantages, which are in, what the advantage is, is that the growth in Internet utilization on a per-customer basis is a continuous investment required by us. And the 3.1 so expanded the capacity of the plant that some of that scalable infrastructure capital that might have been in prior periods isn't required right now. But that opportunity continues for a while yet because, one, it's a function of the rate of data usage per unit per customer. And interestingly, our internet-only customers now are using over 500 gigabytes per month, a half terabyte, of data usage So it is something that continues to climb. And that's relative to a wireless average customer of eight, to put that in proportion. But the capital expenditure, you know, I think will stay in that space, similar to what it is now for some period of time, clearly 2020. because of the capacity that's been built by 3.1. And the evolution of traditional video toward DOCSIS, any of that opportunity. Home's past. Look, we build everything that we can build from a home's past perspective without regard to the requirements of our consent decree. So we've accelerated and actually built more passings than the consent decree required. And there's nothing going forward that would change the rate at which we're building other than the rate of household formation.

Brian, just on the CAPEX, Tom mentioned we're temporarily depressed in 2019 and probably in 2020 for the continued DOCSIS 3.1 benefits. But if you think about the different line items for CAPEX or CPE, which includes traditional install, which is now growing higher self-install, our CP is declining. And already, you know, the majority of that mix of CP is more tied to Internet-related products as opposed to video products. As Tom mentioned, we've been building at an accelerated pace on the line extension, so I think that will continue to be elevated with positive ROI attached to that build-out. The scalable, you know, while lower last year and probably this year as well, Over time, that's an area that we'll continue to invest like we have in the past. And then in support, we continue to have, you know, not the same magnitude that we've had the past few years, but there's still a fair amount of integration, back-end integration capital that's going on, and you'll see that in the support category, whether that's through real estate or through IT systems. And so whereas scalable may be temporarily lower, I think support is temporarily still higher. you know, over the short to medium term.

Great. And on balance, continued declines in capital intensity as you look beyond 2020 for the most part?

Correct. We don't see anything that changes the arc that we're on. And mobile will have its own trajectory, which I talked about in the prepared remarks, which we expected to step down significantly in 2021, but for any ROI-based investment in Spectrum and or build up. Great, thank you.

Thanks, Brian. James, we'll take our last question, please.

And our last question comes from the line of Doug Mitchelson with Credit Suisse. Go ahead, please. Your line is open.

Oh, thanks so much. I wanted to dig in more specifics on a couple topics. Tom, I think to ask the question directly that, you know, I think folks were trying to get to, will you need to subsidize OTT video services to compete in broadband in the future against the likes of AT&T? That's going to include... you know, an HBO Max for certain customers. So, you know, one, the competitive outlook going forward in broadband. Two, on spectrum, it's super interesting the conversations you've been having with us around wireless and the lack of a need for a physical network. I guess my question is, how much spectrum do you need? Because if you're just going after high-capacity areas, I think you could do that with, you know, a small amount of CBRS or C-band spectrum, 10 or 20 megahertz. But if you're going to build out 10 or 20 megahertz, you might as well build out more because the cost to build is, is sort of the same regardless of how many megahertz. So I'm just curious how you think about quantity of spectrum relative to that return on invested capital dynamic. Thank you.

Well, on the subsidization of OTT, you know, that's really just price, what you're selling broadband for. And I think that we have a relatively good competitive posture from a price perspective. in the marketplace. And so I don't see us changing that. Whether we'll do promotional offers that have a price effect in them, a cost in them. I won't say never, but it's just a marketing technique. It doesn't mean you change your fundamental pricing strategy. And with regard to wireless, you know, you're into the math of what's the value of the physical network pieces, and that's a function of a lot of things. It is the cost to build. It's the cost of what your rented network is and how those two things interact with each other. And so I'd say, you know, your thinking is correct, but we haven't decided exactly what we'll do.

If I could just follow up on that, Tom, do you need updated MVNO with Verizon or a new MVNO to maximize taking advantage of building out mid-band spectrum in high-traffic areas? Does there need to be any evolution in that relationship for you to be able to switch to your spectrum?

We have a good relationship, and we're happy with our MVNO relationship with Verizon. And I'm sure it will evolve through time.

I thought I'd try. Thanks so much, guys.

Thanks, Doug, and thanks to everyone who listened to our call today. That concludes our call.

Thank you very much.

And this does conclude today's conference call. We do thank you for your participation. You may now disconnect.