Charter Communications held a conference call on Thursday, Jan 31 for their 4th quarter earnings of 2018. Below are the details and transcript of what went down.

Title: Q4 2018 Earnings Conference Call
Date and time: Jan. 31, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks

Prepared Remarks:
Operator: Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Charter’s Fourth Quarter 2018 Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Stefan Anninger. Please go ahead.

Stefan Anninger (VP of IR): Good morning, and welcome to Charter’s fourth quarter 2018 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section.
Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management’s current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future.
During the course of today’s call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis, unless otherwise specified.
Joining me on today’s call are Tom Rutledge, Chairman and CEO; and Chris Winfrey, our CFO.
With that, I’ll turn the call over to Tom.

Thomas M. Rutledge (Chairman and Chief Executive Officer): Thank you, Stefan. We performed well in 2018, while simultaneously completing the most customer-impacting phase of our integration. For the full year, we grew our total Internet customer base by 1.3 million customers, or 5.3%. We grew cable revenue by 4.7% in 2018 and cable adjusted EBITDA by 6.5%. With our integration now nearly complete, our goal is to accelerate customer relationship and cash flow growth going forward.
Following our transactions in May of 2016, we put three very large companies together in order to create a new company with a larger and more concentrated footprint, giving us the scale to innovate and grow faster. We are beginning to benefit from that strategy and all the ways we expected. When we started the process of pursuing additional scale in 2013, we knew that a fully benefit from any acquisitions, we would need to create a single operating entity with a unified product, marketing, technology and service infrastructure. We spent over 2.5 years doing that.
Slide Four of today’s presentation reflects the progress against the integration plan, we first showed in 2016. And the earlier than expected launches of DOCSIS 3.1, 1 gig service and Spectrum Mobile. While our integration and network upgrades have excellent long term benefits, they’ve been disruptive to our customers, our ability to execute and counter to our long-term operating strategy of reducing service interactions, as planned. That process though is now essentially complete. We still have some work to do, but virtually all of the customer facing initiatives related to our integration are now behind us.
We’ve migrated 70% of our acquired residential customers to Spectrum pricing and packaging, are all digital initiative is now finished with complete of the upgrade DOCSIS 3.1 and the launch of our gigabit speed offering across our entire residential and business footprint, our service infrastructure is national, specialized and consistent. Our call centers and service platforms will be fully virtualized across the company by year-end and our field operation and customer care in-sourcing are also nearly complete.
By the end of 2019, we expect to have completed the very last pieces for our integration. But as I said, most of this year’s integration activity is non-customer facing in nature. But the biggest integration initiatives behind us, we’re now in a position to drive long-term sustainable, customer relationship growth, EBITDA growth and significantly lower capital intensity, driving accelerating free cash flow growth.
As we look forward to 2019 — through 2019, we remain focused on a number of key strategic priorities, including driving higher sales volumes. We’ve made some key changes to our Double and Triple Play packaging in September, including the way we sell landline voice and including Spectrum Mobile in every sales opportunity. Those changes require that we retrain our sales force personnel in all sales channels. That process took through October to take hold and our sales effectiveness will continue to improve. Our fourth quarter results demonstrate the churn continues to show meaningful improvements as planned.
Spectrum Mobile is ramping up. We added over 110,000 mobile lines in the fourth quarter and we’re seeing a growing percentage of our new cable sales taking mobile service. We’re also up-selling mobile service to existing cable customers. Over the longer term, we expect consumers savings from our mobile offering to drive incremental cable sales, as we build branded product awareness for our Spectrum Mobile service and become a more powerful retention tool.
In December, we began the process of allowing customers to transfer their existing handsets to Spectrum Mobile from other service providers at some of our stores. Over the coming months, we’ll expand the Bring Your Own Device program to include a broader set of devices and to allow customers to bring their own device, process to do their own — Bring Your Own device process themselves without having to visit us in a store. Full Bring Your Own Device availability will expand our mobile market opportunity substantially.
In 2019, we are also well-positioned to reduce service transactions, with the vast majority of our integration behind us, we expect to see a meaningful reduction in network activity, CPE swaps, service calls and truck rolls. Service activity should also decline, as our better product and pricing and services, across a larger base, improves. And as we begin to benefit from enhanced online self-service greater levels of self installs. So in 2019, the lower level of activity will raise customer satisfaction, reduce churn and extend customer lifetimes.
Finally, 2019 is the year we’ll see a significant reduction in capital intensity. Our goal at the beginning of this process was to put our combined assets in a position to operate, as a single entity and to grow faster over the long term, as quickly as possible. As a result, we stepped up capital spending in the short term. The higher spending is now behind us and cable capital intensity will fall significantly in 2019, as planned, but also beyond 2019, as CPE spend per home declines, consumers increasingly install their own services, the reliability of our plant improves and our network becomes increasingly cloud-based and IP driven, all on higher expected revenue. While we continue to appropriately invest in our products and in our network.
Already in 2019, I expect the business and cash flow performance of our cable business will further demonstrate, the superiority of our networks and our assets, the returns of our recent investment, in the long-term benefits of our consumer-focused operating strategy on a larger set of assets.
I’ll turn the call over to Chris Winfrey.

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

Operator, we are now ready for Q&A.

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