Stefan Anninger - Vice President-Investor Relations Thomas M. Rutledge - President, Chief Executive Officer & Director Christopher L. Winfrey - Chief Financial Officer & Executive Vice President.

John Christopher Hodulik - UBS Securities LLC Bryan Kraft - Deutsche Bank Securities, Inc. Vijay Jayant - Evercore ISI Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC Jonathan Chaplin - New Street Research LLP (US) Philip A. Cusick - JPMorgan Securities LLC Mike L. McCormack - Jefferies LLC Craig Eder Moffett - MoffettNathanson LLC James M.

Ratcliffe - The Buckingham Research Group, Inc..

Good morning. My name is Phoenix and I will be your conference operator today. At this time, I would like to welcome everyone to the Charter's First Quarter 2016 Investors 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.

I would now like to turn the call over to Stefan Anninger; you may begin your conference..

Good morning and welcome to Charter's First Quarter 2016 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 proxy statement and Forms 10-K and 10-Q. 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, President and CEO; and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom..

Thanks, Stefan, and good morning. For some time now, we've been working to combine Charter-Time Warner Cable and Bright House. While I'm very pleased with our progress towards closing and integration, I'm just as pleased with Charter's core operating performance.

Our products, service, customer growth and financial results continued to improve as we deliver more value to our residential and business customers than ever before.

Our operating and financial results show the potential growth trajectory and our new operating strategies will drive on a larger set of assets following the close of our transactions and the positive impact that we can have on those communities that will ultimately be served by Charter.

At the end of the first quarter, Charter had 6.8 million residential and SMB customers. Over the last 12 months, we've grown our total customer base by 6%, with residential customer growth of 5% and small business customer growth of 18%. We continued to grow our video customer base in the first quarter.

Total video customers grew by 15,000, including 10,000 residential video, net adds and our all-digital video product enables HD and on-demand on every outlet. And we fully deployed our TV app for both mobile devices and media players for content delivery both in and out of home. We recently launched our cloud-based UI in St. Louis in addition to Reno.

It continues to scale well and is resonating with consumers. We also continued to grow our Internet business. Residential Internet customers grew by 9% over the last 12 months. During the first quarter, we added 141,000 residential Internet customers.

The strong demand that we're seeing for our Internet service is being driven by offering minimum 60-megabit speeds, quality service and consumer-friendly features, including unlimited data usage and no modem fees. Including voice, we added 186,000 PSUs in the first quarter, over 20% more than the 154,000 we added in the first quarter of 2015.

We also continue to see improving commercial customer net additions, with SMB PSU growth accelerating by 68% year-over-year in the first quarter. That customer growth improvement is being driven by the launch of new small business pricing and packaging in the first quarter of last year.

We also launched new pricing and packaging for enterprise in the fourth quarter, including a deeper gigabit service offering that's driving a significant increase in sales. During the quarter, we grew our total revenue by 7.1%, with even less reliance on rate increases.

Our first quarter adjusted EBITDA grew by over 10% year-over-year, whether you include transition expenses or not. So EBITDA growth continues to exceed our revenue growth as it has for several quarters now as we take operating transactions out of the business through investing in our network, systems and people.

We have a fully integrated operating strategy and business model which is based on a clear, centralized organizational structure, creating a superior product set, packaged at highly competitive prices to sell more product, unleashing the full capacity of our two-way interactive network by going all-digital, insourcing service operations, people, cloud-based services and product platforms and continuous product development to stay ahead.

As a result, the higher level of growth at Charter can be sustainable for a long period of time. It's also an indication of what we believe we can do at Time Warner Cable and Bright House.

That will require time and investment just as it did at Charter, but I believe it can happen faster because of the relatively better starting condition of the assets we're acquiring. And we'll also benefit from transaction synergies to help offset the investments to achieve those operating synergies.

I also believe our approach and track record here at Charter over the last several years will make the trends at New Charter easier for investors to understand over the next several years. So our customer growth and financial performance is very good as we had planned. Our sales were up and our residential churn is down.

And in the first quarter, we saw a 15% year-over-year reduction in billing and service calls as well as a 19% reduction in service truck roll volume. Our field service truck rolls are now 80% insources versus 50% in 2012 and it's increasing. And call center activity is now 90% insourced.

In total, since the beginning of 2012, we've increased our workforce by over 7,000 people, with the vast majority of the increase driven by insourcing. With our all-digital transition complete and secure two-way boxes installed on every residential outlet, in April, we began to perform electronic disconnects instead of physical truck rolls.

This change in practice also allows us to fully scale our self-install practices beyond what we did during all-digital. Electronic disconnects and self-installs will provide significant benefits to Charter Systems in the coming years.

It will also reduce operating costs and capital expenditures and raise customer satisfaction through greater control over the installation process and will also reduce the opportunity for service failure in a way that provides even better security.

Turning to the closing process with TWC and Bright House, on April 12, the administrative law judge assigned by the California PUC to review our transactions recommended that our transactions be approved by the California Public Utility Commission. We expect the CPUC to vote on the judge's recommendation on May 12.

All other states have approved our transactions. We're also pleased that the FCC Chairman has circulated an order approving our transactions and that the DOJ has filed a proposed judgment with the district court under which our proposed transactions may proceed.

Assuming we've received FCC approval, we would expect to officially close our transactions within just a few days of receiving approval from the California PUC. Next several months and quarters will be an exciting time for New Charter. And after a lot of creative thought, we've decided to call the new company Charter.

Our first priority is to get our people in the right roles and reporting structures with the right responsibilities. We've already announced Charter's organizational structure and leadership across the three organizations.

Our corporate organization, as well as marketing, sales and product development departments, will be centralized over a period of six months following close. Our field operations group, which is the largest organization, will be managed through 11 different regional areas.

Each of those regions has been designed to represent a logical combination of designated marketing areas. And these regions will be managed with largely the same set of field employees that are with the three companies today. Following close, customer care will continue to be operated as it currently is at each of the three companies today.

Over time, customer care will migrate to the Charter model of using virtualized U.S. based in-house call centers. This migration process is likely to take several years as it has here at Charter. A partial driver of the timing of our customer care transition is the pace at which our IT and network operations integrations progress.

Our goals with these integrations will be to minimize service disruptions and to enable the business to deploy superior products and services. Managing the all-digital transition at Time Warner Cable and Bright House will also be a key priority.

At close, we will briefly pause any new digital rollouts at both companies and then restart them, deploying fully enabled two-way set-top boxes everywhere and discontinuing D2A deployments. Concurrent with all-digital, we'll introduce new product in pricing and packaging.

We'll also launch our new pricing and packaging across those portions of TWC and BHM footprints that have already gone all-digital. We plan to complete all-digital and the launch of new pricing and packaging across all 36 million passings at TWC and Bright House by the end of 2018.

In historic Charter markets, we expect to make our new cloud-based user interface available in most markets by the end of 2016. We're still working through our Guide rollout plans for TWC and Bright House markets. That includes coordinating Guide rollouts with our market-by-market plans for all-digital and the launch of new pricing and packaging.

Ultimately, our goal is to offer our customers the significant Guide benefit as quickly as possible, but not at the cost of disruption to service operations or the customer. So, we'll have more to report on once we actually close and start running the businesses.

Our plans are in place and we're ready to go to work, and we remain confident as ever about the benefits that our transaction will bring to our customers, employees and our shareholders.

I'd like to thank Charter's employees for their hard work and dedication to getting us where we are so far and to our financial stakeholders, who have continued to support us. Now, I'll hand the call over to Chris to take you through the financials..

during the first quarter, we grew residential PSUs by 186,000 versus 154,000 last year. And in video, we added 10,000 residential customers versus a loss of 13,000 last year. In residential Internet, we added 141,000 customers versus 125,000 last year. And we grew residential voice customers by 35,000 versus 42,000 last year.

Over the last year, our residential customer base has grown by 318,000, or by 5%. And over the same period, residential ARPU was up by 1.4%, driven by a larger triple play base and step-ups and modest rate adjustments, partially offset by continued single play Internet growth.

As slide nine shows, our customer growth, combined with our ARPU growth, resulted in year-over-year residential revenue growth of 6.5%; that compares to 6.7% last year as our faster customer growth offsets lower rate increases as designed. In commercial, we added 32,000 SMB PSUs versus 19,000 SMB PSUs in the prior year.

That improvement follows the separation of our SMB and enterprise groups with new SMB pricing and packaging launched late last year. Total commercial revenue grew by approximately 12% and continues to reflect the same short-term ARPU pressure we saw in residential when we initially launched our new pricing and packaging in 2012.

Our advertising revenue was up about 9% year-over-year, driven by a $5 million increase in political. In total, our first quarter revenue was up by 7.1% year-over-year and the same when excluding advertising. Turning to first quarter operating expenses and adjusted EBITDA on slide 10.

Total operating expense grew by $85 million or 5.4% year-over-year, with transition OpEx accounting for $21 million of our total OpEx this quarter. Programming expense grew by $37 million, accounting for just under half of the year-over-year increase in total operating expense.

The 5.5% increase in first quarter programming was driven by contractual rate increases, growth in our video customer base over the last year, higher penetration of our tiers and the launch of new channels, including the Dodgers.

Excluding a one-time expense benefit and the growth in our video customer base year-over-year, programming expense would have grown by 6% flat versus the prior-year quarter.

Cost to service customers, which includes field operations, customer care, network operating costs declined slightly year-over-year, despite residential and SMB customer relationship growth of 5.9%. That ties directly to the operating metrics Tom highlighted and is both consistent and improving relative to what we've seen for several quarters.

Other costs grew by $34 million or about 18% year-over-year, driven by some additional corporate and administrative labor expense, including the insourcing of IT and software development resources and advertising and enterprise costs, property taxes on previous CapEx and the higher casualty claims due to a more in-sourced employee base.

Excluding a one-time non-recurring expense, this other expense category would have grown by 13% year-over-year. First quarter adjusted EBITDA grew by over 10% year-over-year, whether you include transition costs or not and continued to exceed our revenue growth.

As Tom mentioned, the continued growth of revenue per passing is an (16:52) operating improvement, is at an early stage for Charter Systems and has momentum. Moving to slide 12, first quarter capital expenditures totaled $429 million, with $53 million related to M&A transaction spend.

That spending began with the Comcast transactions and has provided us a head start to providing a uniform product and service package to TWC and Bright House customers beginning post-close.

Excluding transition CapEx in both periods, our first quarter CapEx was up by just over $39 million or 12%, driven primarily by our investments in product development and the in-year timing of the fleet purchases which falls into the support capital line.

For 2016, excluding the impact of transition CapEx and the pending acquisitions, we expect our CapEx as a percentage of revenue to continue to decline at Charter year-over-year.

First quarter free cash flow was negative $61 million and the year-over-year decline was primarily driven by the higher cash interest on our transactions-related debt in escrow and from higher CapEx for the reasons I just outlined.

If you exclude the impact of our transactions, specifically $21 million of operating expense, $53 million of CapEx, $259 million of cash interest in escrow and $14 million of transaction costs and other expenses, our free cash flow, adjusted for transaction spend, totaled approximately $280 million; that's up significantly versus last year on the same basis.

As of March 31, our net debt to LTM EBITDA was 4.1 times. The $21.8 million of cash sitting in escrow for our transactions, plus Term Loan A commitments in our combined liquidity at close fully finances our transactions, assuming TWC shareholders elect the $100 cash option.

At closing, we still expect to be levered at 4.5 times or less on an LTM basis and assuming the first 12 months run rate synergies of approximately $500 million. In February, we issued $1.7 billion of senior unsecured notes and in April, we issued an additional $1.5 billion of senior unsecured notes.

We intend to use the proceeds from these offerings to redeem Charter's currently callable outstanding higher-priced debt although part of the proceeds from the February offer could be used to finance our transactions if some of the TWC shareholders were to elect to receive $115 per share in cash rather than $100.

Turning to the pending transactions, we expect the second quarter would be the first quarter for which we will report our results following close and I wanted to give you a brief preview on how we expect to report and to mention a few things to better navigate our second quarter results.

With an anticipated mid-quarter closing, our second quarter results will reflect a full quarter for legacy Charter, plus stump (18:01) periods for TWC and Bright House. So year-over-year, our actual comparisons will really be helpful, but we will provide historical performance for the three companies under the historical management.

We intend to present Charter's quarterly trending schedule with pro forma data along the lines of what you receive today dating back to the beginning of 2014.

Going forward, we'll report similar customer, PSU and revenue data for Charter's three legacy entities for at least five quarters following close, both separately and of course on a consolidated basis. This approach is going to allow you to track the development of each of the three legacy entities.

We'll not show expenses or capital expenditures by legacy entity. It's not really practical given the shared nature of large key items like programming, overhead and significant centralized capital spend. We'll also continue to report transition expense in capital related to the integration.

And we'll provide updates or conference calls on certain items including estimates for the synergies we've realized so you can better isolate the organic growth of the business. We'd probably do that for about two years beginning in the first full quarter of results.

Our balance sheet and P&L will also be materially impacted by purchase price accounting and allocation. And part of that will be a significant fair market value step-up of TWC and Bright House assets, reflecting the fair market value of the consideration we provide as of the closing dates.

The step-ups will primarily be in PP&E, franchises, customer relationships and goodwill. However, none of the three companies' assets will be stepped up for tax purposes.

As a result of the difference between the stepped up GAAP basis and the existing tax basis at TWC, there will be a significant increase to our deferred tax liability on our GAAP balance sheet.

On a pro forma basis and as already reflected in our S4 and other filings, the GAAP basis step-up will also increase Charter's GAAP D&A charges above what the simple addition of historical D&A would be for the three legacy entities.

Purchase price accounting will also likely result in the posting of an opening liability on the balance sheet to reflect an estimate of the outer (21:53) market portion of TWC's RSN distribution agreement with the Dodgers.

There would be no change to the TWC cash payments as a result of that accounting, but future P&L expense would be lower as a result.

We'll also modify the value of TWC's legacy debt to its fair market value at closing and the difference between the fair value at closing and the actual principal amount will amortize over the remaining term of each tranche of debt, driving a difference between GAAP and cash interest expense.

So, those are some of the largest key items that result from purchase accounting, but there are a number of other key post-closing items that I'll mention that will impact the consolidated financials.

Our share count, which stands at approximately 112 million shares outstanding today will increase at close as we issue shares to TWC shareholders and to Liberty Broadband.

Given that Advance/Newhouse Partnership units are exchangeable at any time, it makes sense for investors to include those partnership units on an as-exchanged basis when evaluating Charter's total equity value and any Charter share-based metrics.

Also keep in mind that as part of the transactions, Charter will undergo what we refer to and explain in more detail in our S4 as the Parent Merger Exchange. This transaction will essentially haircut the number of shares outstanding for the entire company for all shareholders including Advance/Newhouse Partnership units by approximately 10%.

The Parent Merger Exchange will be value-neutral on all parties' aggregate holdings in Charter, but it will reduce the overall share count of the company, both on a shares outstanding basis and on an as-exchanged basis, again by about 10%.

In theory, New Charter's stock market price should reflect this reduction in shares with the commencement of share price increase on the day New Charter's stock begins to trade on the NASDAQ.

Slide 22 in the appendix of today's investor presentation should provide investors with a better understanding of Charter's share count and how the shares outstanding change for the Parent Merger Exchange and the Advance/Newhouse units on an as-exchanged basis. Moving on to some more post-closing, accounting and reporting housekeeping.

At close, TWC employees who currently hold TWC stock awards will see those stock awards replaced with New Charter stock awards which will mirror their current economics.

The post-closing vesting of these awards will increase stock compensation expense post-closing to reflect the updated fair value of these replacement stock awards as compared to their original grant value.

I should also mention that after closing, substantially all of the $3 billion valuation allowance which is posted against legacy Charter's deferred tax assets is expected to be removed as the use of our NOLs will now be accelerated in Charter's consolidated tax return.

The legacy Charter deferred tax asset account on the balance sheet today and net income in that quarter will both increase by approximately $3 billion as a one-time benefit. We'll also expense a quarterly charge of approximately $38 million in preferred coupon for Advanced/Newhouse's ownership of preferred partnership units.

That charge will be reported on a separate line as non-controlling interest expense.

We'll also have some transaction advisory expenses for both Charter and TWC, which are contingent and payable at closing, already disclosed in the S4 as well as the commitment and placement fees for our financing and we expect below-the-line restructuring and termination expenses through the integration process that will post below the EBITDA line as well.

Finally, turning to our tax assets, as we indicated on our last call, we don't expect Charter to be a significant cash taxpayer until 2018, and even then, our cash taxes as a percentage of GAAP pre-tax income should be below statutory rates for several years thereafter.

And when I refer to GAAP pre-tax income, we are excluding the impact of the pending purchase price accounting that will have on GAAP depreciation and amortization expense going forward. We do expect the transactions to trigger a change of ownership under Section 382 of the Tax Code.

And while that change in ownership will again restrict the pace at which our NOLs will become available, I don't expect it to negatively impact the net present value of our tax assets similar to last time, as the transactions here will create a larger base of taxable income, ultimately accelerating the utilization of our NOLs versus standalone Charter today.

Operator, with that, we're ready for questions now..

Your first question comes from John Hodulik from UBS. Your line is now open..

Okay. Thanks, Tom or thanks. Question for Tom. Can we – we talked a little bit about the migration of the Time Warner Cable base to the new pricing and packaging. You mentioned it a little bit on the call, but over what time period do you expect it to take place and what kind of impact can we expect on the top line of the new assets? Thanks..

Well, it will take – it will take some time to roll out new pricing and packaging across Time Warner and Bright House.

The plan is to, as I described, to continue the all-digital project that is going on currently at Time Warner and to initiate a similar project at Bright House in the Tampa area, and as we do that to roll out new pricing and packaging behind it.

We also intend to launch, within a matter of four months or so, new pricing and packaging against the parts of the company that have already gone all-digital and to get it rolled out over the period of time it takes to do all-digital, which could take through the end of 2018..

And through that period, do you expect any meaningful change on – that Time Warner Cable just posted a pretty solid top-line growth number, do you expect any impact on the growth rate of those assets?.

I think, yes. We're going to have to integrate those assets into our packaging and pricing, and we're going to have costs associated with that. And we – our objective is to actually accelerate the growth rate.

And in order to do that, we're going to spend more capital by going all-digital and putting two-way interactive boxes on every outlet, and we're going to package in such a way that we think we get longer-term revenue growth and get that revenue growth over a longer period of time with the quality of the products that we're selling into the market.

So, they've done very well, which we're very pleased with. The assets are in better shape than we'd even planned for, which is a great relief. But we do have plans to spend money and spend capital in order to have a uniform product that we think creates a longer-term growth prospect that will produce consistent long-term growth rates..

Okay. Thanks..

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

Bryan Kraft of Deutsche Bank. Your line is open..

Okay. Good morning. Thank you very much. I guess I had one question in the context of CapEx.

The JV that you have with ARRIS, can you talk about the full scope of the JV and the advantages it brings to Charter, I guess, both from an innovation standpoint and also how it impacts your ability to more efficiently deploy capital? And then I just had one another question, just on the synergies.

Chris, based on what you were saying about timing, it sounds like you expect to fully realize the synergies on a run rate basis in about two years. Is that the right interpretation of what you had said? Thanks..

So, let me start with the second one. No, that's not the right interpretation, although I'm glad you asked it because it should highlight for people. I was giving a commitment that we'll report that amount on a going-backwards basis of how much is realized inside the quarter for two years.

It could end up being longer depending on where we're actually at. I think what we've said in the past is that we expect synergies could be – over the course of three years, could be fully baked into the actuals and that wasn't a change of where I think I could be. So, after two years, we'll evaluate where we are.

But I wanted to give people some clarity about how we were going to report the business in the upcoming two years at a minimum. On the ActiveVideo JV that we have with ARRIS, it's a productive relationship that we have both with the management team at ActiveVideo as well as ARRIS who owns 65%. We have a couple of board seats on that investment.

We're treated as an independent third-party vendor inside the relationship with ActiveVideo. So, I guess the benefit would be the ability to see what the pipeline of product that they have coming in the future and to have oversight in terms of how that's being developed elsewhere.

But we saw an attractive product that we were using, amongst other vendors in our Spectrum Guide platform, and we thought it was an interesting equity investment, but also of strategic importance to Charter..

And to further answer your question, that ActiveVideo technology platform allows us to use existing set-top boxes and put a state-of-the-art user interface on those already deployed boxes and not have to replace those boxes so that they essentially become state-of-the-art boxes. And that's the capital advantage of having that vendor relationship..

Thanks to you both. Appreciate it..

Thanks, Bryan..

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

Your next question comes from Vijay Jayant from Evercore ISI. Your line is open..

Thanks. A couple please. First on synergies, now that the deal is pretty much done, we've always thought that $800 million was kind of conservative.

Is there a newer view on that? And is it fair to still assume that the programming step-downs on the Charter base will happen pretty much immediately on the deal closing? And then just on the all-digital plan, I think – I've estimated that there's about 13 million, 14 million DTAs and analog boxes within Time Warner Cable and Bright House, is that sort of the right base that we could see being transitioned to all-digital? Thank you..

Maybe I get the first two, we can tag team the third. On the $800 million, I think there was a general misconception right from the get-go as what we call synergies; $800 million was a three-year run rate of transaction synergies.

What we don't include in that is the amount of operating synergies that come from taking a different philosophy towards pricing and packaging and insourcing service and lowering the amount of transactions.

So, the transaction synergies, we're not getting an update on our thoughts around that other than to think that it was – other than to say that we always thought it was conservative; we still do.

But that's really tied to the elimination of duplicate overhead programming and other transaction-related synergies of just putting the companies together; it's not a change in the operating strategies which is how you get an additional profitability for passing over time.

So, one can argue and say, well, the synergies are obviously much, much higher than the $800 million and I would agree with that; but that's really a change in the way that the businesses are operating as opposed to M&A transaction synergies, which is what the $800 million refers to.

On programming timing, yes, we believe we'll step into the Time Warner Cable rate card in the appropriate places effectively at close. And on DTAs, I don't have the number in front of me..

I'm not sure that that – I can't verify that your number is correct off the top of my head. So – but our plan will be to let them come out of the marketplace in a natural way and we're not going to go force them out.

So as we transact business and move people into new pricing and packaging, we'll give the new customer base on the new pricing platform two-way boxes on every outlet. So, there will be DTAs in some of these markets for years to come..

Great; thanks so much..

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

Ben Swinburne of Morgan Stanley. Your line is now open..

Thank you. Morning.

Tom, I don't know if you want to shed some light for us on the FCC's approach around the set-top box, NPRM and also the special access noise that's been going on lately given how much time you spent in DC over the last few months and year? If you could just tell us how you think those two may or may not impact the new company going forward.

And then Chris, cost to service was, I think, down in the quarter. I don't know if that's a clean number or if there were anything one-time in there.

But I'd love if you could just talk about the operating leverage you're seeing in the existing Charter business since that's obviously an important lens for us to look at as we think about the new company down the road..

Well. Ben, you're right. I've spent a lot of time there, but focused on other things. From Charter's point of view, we don't charge for modems and we try to keep our box prices low, relatively speaking. And we have made our applications available on other set-top boxes that consumers can purchase.

And so, from a – if you just look at it as people being concerned about the price of boxes, we think that our operating practices fit with that goal. The control of copyright and the control of privacy are real issues and we have strong views that they should be protected.

With regard to special access, we haven't seen the full scope of that yet, only what's been publicized and we're a nascent player in that market with – the whole cable industry I think is less than 10% penetrated against that very large marketplace. And so it seems premature to me to be thinking about regulating a new entrant to a marketplace..

Makes sense..

On the cost to service, no, there's not any one-time benefit that's sitting inside the number, that's real operating leverage, if you want to use that term. It is directly a result of lower service calls to the call centers and significantly lower service truck rolls out in the field.

And so what that means is that your ability to have a larger number of customers with a higher amount of revenue and a lower underlying operating cost because you have fewer calls and truck rolls taking place, that continues to improve at Charter.

And we've just made some additional changes that Tom mentioned in terms of stopping to do hard disconnects now that we have the plant secured (36:24)..

Hard disconnects mean a truck trip to telephone pole and then a reconnect on every transaction. So, it's really your churn rate times two transactions..

Correct..

Yeah..

So, it's a significant reduction in cost going forward..

And that's not in the numbers as of yet..

Yeah. But I think the operating cost strategy that we have is something that we've been working on for a long time and I'm very proud that it's actually showing up now before we get a lot of confusing numbers going forward.

We have been working on a pricing and packaging strategy that reduces activity all through the marketing process and the activation process of customers is designed to increase the life of subscriptions.

So, for the same dollars of revenue, with longer customer life, meaning less churn, same dollars of revenue, you have less costs per customer because you have less physical activity per dollar of revenue.

And though by maintaining our plant properly and by improving the quality of our craftsmanship by our employee base which we've been hiring and training, we reduced service calls. And that further improves customer satisfaction which improves subscriber life and all of those things are taking transaction costs out of the business.

Even though our labor costs on a per-transaction basis are going up, our transaction reductions are exceeding that rate of increase in cost per transaction, and overall costs of running the business are going down. That's a very virtuous cycle..

Yeah. So, 5% customer growth with flat cost to service is actually how you guys sound like you can sustain for a bit, not necessarily those numbers, but at least directionally..

That's our goal..

Thank you..

Ben, you'll remember what it took to get there. So, it took a lot of quarters of higher investment both in CapEx and OpEx, patients on the revenue line to develop as you went after growth for the reasons that Tom talked about and to put in the right operating practices.

So similar to what we had at Charter, as we go put that in place on a larger set of assets at Time Warner Cable and Bright House, those Charter shareholders have been around with us for a while, we'll recognize that and new shareholders will need to look back to what we did and how it developed to see the progress..

Thank you..

Operator, next question, please..

Jonathan Chaplin of New Street Research. Your line is now open..

Thanks. First of all, Chris, thanks for giving us all the detail that you did today around future disclosure; that's hugely helpful.

A quick question for both – I guess both Chris and Tom, looking ahead at both your assets and the assets that you're taking over, where do you think broadband and Pay TV penetration can ultimately get to? And then when we look at the difference in revenue per relationship between the Time Warner Cable properties and your properties, sort of leaving the penetration gap aside, is there anything structural accounting for that difference or do you think ultimately you can get their revenue per relationship up to where yours is?.

Yeah. I don't know how high broadband penetration can go. I think it continues to rise. I think there are other – there are substitution possibilities on the margins that are already occurring. But I think that we have a better infrastructure and we've invested in that better infrastructure, and I think we have an opportunity to take significant share.

Broadband or high-speed data as a product is in the 80% of households penetration rate already. I think that'll slowly grow. But our share of it has substantial upside and we intend to take advantage of our assets and try to get there as fast as we can..

On the....

So, Tom, I was thinking of penetration in the context of – your penetration of your households, so sort of low 40%s now.

Can that go into sort of the mid 50%s to high 50%s over time?.

I think what we're trying to do is avoid giving a guidance because typically we don't. And we think we can grow, and that structurally between TWC, Bright House and Charter, there shouldn't be that much difference in terms of where the penetration can get through amongst the three set of assets..

Got it..

On ARPU, there are structural differences between Time Warner Cable, Bright House and Charter and that's really a function of how they've gone to market. The biggest one is just the amount of single, double and triple play, which I think we and TWC both disclosed if you work through the numbers there.

They've been going to market over the past year, year and a half with a pretty similar triple play, but they still have a very different box for equipment pricing model.

And that's one of the areas that we're going to have to work through with new pricing and packaging to put that into the Charter format so that you can have longer-term growth with lower amount of equipment rental and in some cases, no equipment rental in the case of modem fees, and so that does make a difference, and it's pretty similar to Time Warner Cable and Bright House.

So there are structural differences in the ARPU. And our goal would be to make sure that as we go through new pricing and packaging, that we actually don't hurt revenue along the way as that continued to grow, both through subscriber volume and customer relationship volume as well as additional PSUs per household..

Great. Thanks guys..

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

Phil Cusick of JPMorgan. Your line is now open..

Hi, guys, thanks. I wonder if you can clarify for us the $2 million broadband expansion on the FCC concession including the $1 million home overbuild. I think there's a lot of questions about that. Thank you..

We'd be happy to discuss that once the transactions have finally been approved and all the documents and information are public. But I don't think right now is the time to discuss it..

Okay, if I can try a different one. On wireless, my understanding is that you're not registered for the auction, and yet we keep hearing people talk about it.

Is there any way you can get back involved in that auction?.

I don't think so currently, although there have been cases where auctions have been reopened. But as far as I know, no..

Thanks, Tom..

Operator, next question please..

Mike McCormack of Jefferies. Your line is now open..

Hey guys, thanks. Tom, maybe just a comment on programming deals. Seems like the regulators are gung-ho on direct to consumer and sort of trying to limit distribution power, I guess, over programmers, which is, I think, kind of silly.

But I'm just trying to get your sense on how you sort of approach those thoughts and whether or not it will have an impact on the cost of programming longer term..

Right. Well, the DOJ's consent decree is actually public, and they made comments in their release stating that there wasn't anything in our particular practices that was concern of theirs. But it was more things they discovered in some of the Time Warner agreements.

So, our go-to-market strategy and our programming relationships are designed to encourage the sale of our existing products and the development of over-the-top products. Our broadband package and the capabilities of our broadband service are realized when customers use it. And they use it when they subscribe to over-the-top services.

Video is the most bandwidth-intensive product there is. So, we have a superior network, which we've invested to make superior. We've cleared it to create more spectrum available for broadband.

We've taken broadband speeds up and capabilities up, and the way that our drive into the marketplace is accelerated is by people perceiving the value of our broadband, and the way they perceive that value is through over-the-top. So, we can hold all those concepts in our head at the same time and go to market, and we do.

And we do think that there – that the market is evolving and the price value of products are evolving, and we look to take advantage of that where we can, using our scale and using our strategy with programmers and our relationships with programmers to be as efficient as possible..

Great. Thanks, Tom..

Operator, next question please..

Craig Moffett of MoffettNathanson. Your line is now open..

Hi. If I could just get a little bit of a clarification on the – on the DOJ piece then as long as it's public. So in the limitation on ADM clauses, I just want to make sure I understand, that wouldn't limit in any way your ability to recognize that the economic value of content is different if it's widely distributed than if it's narrowly distributed.

Is that correct?.

That's correct..

And then a question on enterprise.

How do you see the opportunity in enterprise as you look forward and think about stepping up into larger businesses beyond the sort of SMB opportunity that you've worked on so far and how much does that require coordination with Comcast?.

Well, I don't think if it requires any coordination per se, but it does – it is a huge opportunity and we're very underpenetrated, which goes to my comment earlier which is that from our perspective, we're a new entrant, a nascent entrant into an established market.

And it's a big market and our penetration is low and our ability to provide high-quality products and to grow that business is good. And so, we don't think it should be necessarily regulated any differently than it is today, but especially for new entrants..

Are there specific products for enterprise customers that you say are more attractive for you initially like, would you say that, first it would be primarily Gigabit Ethernet type of service that you'd be providing and then you would try to sort of move up the value-added stack or have you not really articulated a strategy for large enterprises yet?.

No, I should be clear that we serve the business enterprise space today and we sell 10-Gig Internet products, Ethernet products. And we can sell those through a large portion of our footprint. So, from a technology platform perspective, we're highly capable.

And we can create new products and take speeds up, whatever the theoretical threshold speeds are, optically we can do and we can efficiently build fiber optics to enterprise customers. So, we already have a full range of customers and full range of products, but our penetration is relatively low..

Okay. That's helpful. Thank you..

Operator, we have time for one last question..

James Ratcliffe of Buckingham Research Group. Your line is now open..

Hi, thanks for taking the question. If you could go and take a look at the SMB market for a second, where do you think you are in terms of the process – of the impact of the revised pricing and product structures on ARPU in that space and when do you think you kind of lapse that impact? Thanks..

Yeah. So I – the way to think about it isn't really to think about ARPU, but to think about the growth rate which we set an accelerated 68% year-over-year.

So, we actually created lower priced bundles of packages and we're driving much faster and deeper into the marketplace and the revenue growth associated with that will begin to show up in the following quarters and it will track from a curve perspective very similarly to what we've done in the residential business..

Yeah..

It's really a revamp of our strategy to go to a more fast-growing market share strategy in SMB, just like we do in residential..

And should we expect then once that's all through that you actually start seeing ARPU start to step up in commercial as you add on services and the like?.

Yes, yes absolutely..

Great. Thank you..

Thanks, everyone for taking the time to do the call. And we look forward to speaking to you at the Q2 results hopefully as the New Charter, which we've decided to call Charter. Thanks again..

This concludes today's conference call. You may now disconnect..