Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Charter's Third 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..

Good morning and welcome to Charter's third 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 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, Chairman and CEO; and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom..

Thanks, Stefan. At the end of the third quarter 67% of our acquired residential customers were in our new Spectrum pricing and packaging, up from 62% at the end of the second quarter. So we’re delivering better products at better prices to more customers which will driver lower churn, faster customer growth and [Technical Difficulty] financial growth.

Over the last year we’ve grown our total Internet customer base by over 1.2 million customers or 5.3%. In video, net losses this quarter were lessened than the third quarter of ‘17. In the third quarter we grew cable revenue by 4% year-over-year and adjusted cable EBITDA grew by 5.5%.

During the quarter we rolled out our Gigabit speed offering to over 7 million homes passed, using very capital efficient DOCSIS 3.1 technology. Earlier this month, we launched our Gigabit service to more than 12 million additional homes passed.

So we now offer Spectrum Internet Gig to over 95% of our passings and we will be offering Giga service in nearly all of our 51 million homes passed by the end of this year, and over 80% of our residential Internet customers subscribed to tiers that provide 100 megabits or more of speed.

Our faster speeds are having our intended impact of driving Internet customer growth. In early September we executed a full market launch of our Spectrum Mobile service with the goal of accelerating connectivity relationship growth, and we expect our mobile product to be profitable on a standalone basis once it reaches scale.

We now offer mobile services to both new and existing Spectrum Internet customers on both Apple and Android devices.

Spectrum Mobile is being marketed via TV, radio, direct mail and through other advertising and marketing platforms and our selling machine is scaling across key existing sales channels including our stores, inbound call centers and online.

We offer our mobile services at prices that give new and existing customers the opportunity to save hundreds of dollars per year on their mobile bills. Our unlimited service costs $45 a month and our By the Gig service is $14 per gigabyte. So far our broader market launch has gone very smoothly.

Our mobile operations and the service itself are scaling and working well. We started selling the product after Labor Day, so our total customer base is relatively small at quarter end about 21,000 lines. But we’re seeing steady new sales growth and yield in traditional cable sales as we build brand and product awareness.

In the new next few months, we will enable customers to transfer their existing handsets. We also have a pipeline of product improvements that will extend through the middle of next year and which will continue to make our product more attractive and easier to switch and entire household’s mobile service package.

Ultimately the goal is to use Spectrum Mobile to save customers’ money via an integrated superior product offering, driving faster customer growth and better retention, higher penetration and greater [indiscernible] capacity. Shifting back to cable, our all-digital initiative is on schedule for completion by year end.

About 95% of our footprint is now all-digital. By the end of this year the whole company will be fully digitized as we deploy fully functioning two-way digital set-top box, mostly our WorldBox and increasingly third-party IP devices on all remaining analog TV outlets that we serve.

Simultaneous implementation of high touch integration projects and product improvements, which are nearly finished, is actually counter to our operating strategy of reducing service interactions.

The customer disruption that all-digital drives is well understood but the migration of millions of customers to Spectrum pricing and packaging, the different equipment and bills, installation of uniform business practices, the integration of various product, network IP and billing platforms, and parallel network upgrades and integration has also been disruptive to our sales, service, customer transactions and churn.

We said at the start of this integration that putting Charter in a position to operate as a single entity and grow faster over the long-term would impact our operating and financial outputs during the integration and drive outsized capital investment in the short-term.

But our integration is coming to a close and most of the disruption will be behind us in 2019, and we will quickly start to see the tangible benefits of our operating strategy to lower churn, continued higher sales and increasing operational efficiency, resulting in higher revenue per passing and lower operating costs.

The completion of our integration will also bring a meaningful reduction in capital spending. And as one company with a superior bandwidth rich network, a unified product marketing and service infrastructure, and value creation model as laid out on slide 4 of today's presentation, we believe we know what works.

We will be in a position to accelerate growth, and innovate faster than where we have been over the last few years. Now, I will turn the call over to Chris..

Thanks, Tom. A few administrative items before covering the results. So I mentioned on our last call we’re now reporting all of the results on a consolidated basis. There was a small impact to our Q3 results due to Hurricane Florence primarily in the Carolinas.

The impact to the customer base was a few thousand customers and the financial impact was about $5 million to each, revenue and operating expense. So a little over $10 million in adjusted EBITDA. We had a similar impact from storms during the third quarter of last year, so the year-over-year impact is not material.

We’re still in clean-up mode for Hurricane Florence and we are in restoration mode for Hurricane Michael. We will provide a similar update on our Q4 call as needed although we don’t expect material year-over-year impact from either hurricanes.

Finally as a reminder starting on January 1st of this year, we prospectively adopted FASB’s new revenue recognition standard.

Like last quarter, there are a number of adjustments in the quarter related to the adoption of the standard, both in revenue and expenses, which in total lowered EBITDA by about $15 million this quarter as compared to last year. That year-over-year impact from the accounting change will go way after Q4. Now, turning to our results.

Total residential and SMB customer relationships grew by 234,000 in the third quarter to 903,000 over the last 12 months. Including residential and SMB, Internet grew by 380,000 in the quarter. Video declined by 54,000 and Voice declined by 77,000.

As Tom mentioned, 67% of our acquired residential customers were in Spectrum pricing and packaging at the end of the third quarter.

We expect to be above 70% by the end of this year and similar to what we saw at Legacy Charter Pricing and packaging migration transactions are slowing, which together with the completion of network upgrades this year means that in 2019 we will see lower CPE spending and meaningful churn [indiscernible].

In residential Internet we added a total of 266,000 customers versus 250,000 last year. Total Internet company sales were higher year-over-year. As Tom mentioned, we now offer Gigabit service in over 95% of our footprint, and expect to have that service available nearly everywhere by the end of 2018.

Over the last 12 months we have grown our total residential Internet customer base by 1.1 million customers or 4.9%. Over last year, our residential video customers have declined by about 1.6%, all of which have come from limited basic. Sales of our Stream and Choice vid packages which are primarily targeted at Internet only continued to do well.

In Voice, we lost 107,000 residential voice customers versus a gain of 26,000 last year driven by a lower triple play selling mix and lower retention at TWC. In September we made a change in the way we market and price wireline voice within our packages to address wireline voice selling, retention and rolloff and the launch of mobile.

In most of our markets our Internet and Video double play pricing will be $90 [indiscernible] targeted acquisition pricing elsewhere. In either case, wireline voice at acquisition is now a $10 add-on with no change to that pricing if a customer rolls off a bundled promotion.

With wireline voice, as the $10 value-added service going forward, mobile is now positioned to be the triple play value driver for connectivity sales, similar to what wireline voice did for cable over the last decade.

And even though the revenue per household for the new triple play will be higher, we will be saving customers more money with the best products. Turning to mobile then, as Tom mentioned, we executed the broader market launch for Spectrum Mobile product on September 4.

So our third quarter results include only short period of active marketing and sales of the product. As of the end of the quarter we had about 21,000 mobile lines with a mix of unlimited and By the Gig lines. We’re still focused on branding and awareness marketing that some of you may have seen.

As we add new features and functionality, putting greater device capabilities, the marketing will become more offer-driven. Essentially all of our existing sales channels will be activated and integrated for mobile over the coming quarters. All of which will help drive continued acceleration of mobile line adds and overall connectivity relationships.

Over the last year, we grew total residential customers by 734,000 or 2.9%.

Residential revenue per customer relationship grew by 0.4% year-over-year, given a lower rate of SPP migration, promotional campaign roll-off and rate adjustments, which was significantly offset by last year's third quarter Mayweather and McGregor fight, short over $50 million in revenue last year, a higher mix of Internet only customers and higher full year sales of promotional rates.

Excluding pay-per-view and VOD residential revenue per customer relationship grew by 1.1% year-over-year. Slide 7 shows our customer growth combined with our ARPU growth resulted in year-over-year residential revenue growth of 3.3%.

Excluding the impact of pay-per-view and VoD and some readjustments last summer, that were not mirrored this quarter, residential revenue grew by 4.4% so similar to last quarter's growth rate. Turning to commercial, total SMB and enterprise combined grew by 4.3% in the third quarter, with SMB up 2.8% and enterprise up by 6.4%.

Excluding cell backhaul and Navisite, enterprise grew by over 9% with PSU growth of 15%. Sales were up in SMB as well and we've grown SMB customer relationships by over 10% from the last year. Revenue growth in the acquired markets hasn’t yet followed the unit growth.

The revenue growth impacted repricing of our SMB products has slowed and our SMB revenue growth has essentially bottomed out over the last two quarters. In 2019, we expect less impact from the repricing on our SMB revenue growth.

Third quarter advertising revenue grew by 18% year-over-year political advertising accounted for all that growth as it also utilized its traditional inventory. We also continue to sell more overall spots with better inventory utilization and targeted selling. Mobile revenue totaled $17 million with essentially all of Q3 revenue in voice revenue.

As a reminder, under our equipment installment plans or EIP, all future device installment payments are recognized as revenue on the connect day. In total, consolidated third quarter revenue was up 4.2% year-over-year with cable revenue growth of 4.0% or 4.1% when excluding both advertising and pay-per-view and VOD.

Moving to operating expense on Slide 8, in the third quarter, total operating expenses grew by $302 million or 4.6% year-over-year. Excluding mobile operating expenses increased 3.1%.

Programming increased 3% year-over-year, driven by contractual rate increases and renewals, offset by a lower base of total video customers and last year's Mayweather and McGregor fight which also reduced our year-over-year programming cost by 1.6%.

So excluding pay-per-view and VOD programming cost, in this and last year's third quarter, programming grew by 4.4% with 5.8% on a per video customer basis.

Regulatory connectivity and produce content grew by 4.4% primarily driven by our adoption of the new revenue recognition standard on January 1st which we reclassed some expenses to this line in this quarter. Cost to the service customers grew by 1.7% year-over-year compared to 3.4% customer relationship growth.

We are lowering our per relationship service cost through changes in business practices and continue to see early productivity benefits from ongoing investments. Cable marketing expense grew by 3.7% year-over-year driven by higher sales.

The cable expenses were up 5.5% year-over-year driven by ad sales cost, enterprise cost and IT cost from ongoing integration.

Mobile expense totaled $94 million and was comprised of device cost, market launch cost and operating expenses to stand up and operate the business including our own personnel and overhead cost and our portion of the JV with Comcast, we accounted for which we discussed on last quarter's call.

Device cost by device revenue, are immediately recognized but consumer payments for handsets are generally received over a two year period. Hence, the working capital headwind is highlighted. Adjusted cable EBITDA grew by 5.5% in the third quarter and when including the impact of mobile total adjusted EBITDA grew by 3.5%.

Turning to net income on Slide 9, we generated $493 million of net income attributable to Charter shareholders in the third quarter versus $48 million last year and that was driven by a pension re-measurement gain this quarter, lower depreciation and amortization expense, higher adjusted EBITDA and lower severance-related expenses, partly offset by higher interest expense.

Turning to Slide 10, capital expenditures totaled $2.1 billion in the third quarter, $275 million lower than last year. The decline was primarily driven by lower CPE and scalable infrastructure spend, partly offset by spend on mobile.

CPE was down given a year-over-year decline in the volume and migration of the acquired customers to our Spectrum pricing and packaging. We spent about $42 million in all-digital this quarter versus $47 million in the third quarter of last year and $88 million in the second quarter of this year.

The decline in scalable infrastructure capital is related to more consistent timing of in-year spend this year versus last. Line extension spending was up year-over-year as we continue to build out and fulfill our merger conditions.

We spent $66 million on mobile related CapEx this quarter driven by software, some of which is related to our JV Comcast and on renovation to create mobile product marketing areas in our stores. As I mentioned last quarter our CapEx spending is more level loaded this year than last.

For the full year we continue to expect the cable capital expenditures as a percentage of cable revenue to be similar or slightly lower than 2017. We also expect 2019 cable CapEx to be down meaningfully in absolute dollar terms and in terms of capital intensity.

The Slide 11 shows we generated $532 million of consolidated free cash flow in this quarter including $149 million of investment in mobile. Excluding mobile we generated $681 million of cable free cash flow compared to $594 million last year.

The increase was largely driven by higher adjusted EBITDA, lower cable CapEx year-over-year and lower severance expense. Now it’s partly offset by higher cash paid for interest and a negative contribution of cash flow from working capital.

A negative change in working capital is primarily the result of lower CapEx payables on our already declining year-over-year capital intensity. I also expect our working capital related reduction to cash flow in the fourth quarter at least as compared to last year.

If you recall that last year's fourth quarter working capital benefited from a much higher level of capital expenditures and from the end quarter timing of that capital expenditure both driving temporary outsized payables. Q4 of this year will not have that level of benefit due to the more level loaded CapEx spend this year.

And in the fourth quarter we will see the initial working capital investment in mobile device EIP sales where the associated revenue is recovered over a two year period. We will continue to isolate that impact within the overall mobile reporting as that trend accelerates in tandem with wireless subscriber growth.

Looking to next year we do expect a working capital related reduction to our cash flow in the first quarter of 2019 for cable and that’s due to lower CapEx and it shouldn’t be quite as pronounced as what we saw in the first quarter of this year.

We finished the quarter with $71.5 billion in debt principal, our current run rate annualized cash interest expense is $3.9 billion -- I am sorry annual cash interest payments annualized was $3.9 billion whereas our P&L interest expense in the quarter suggests a $3.6 billion annual run rate. That difference is primarily due to purchase accounting.

And as of the end of the third quarter our net debt to last 12 month adjusted EBITDA was 4.47 times at the high end of our target leverage range of 4 to 4.5 times. And at the end of quarter we held over $4 billion in liquidity and cash on hand and revolver capacity.

And during the third quarter we repaid $2 billion of debt maturity and we also raised $2 billion in the investment grade market. Also during the third quarter we repurchased 3.5 million Charter shares and Charter Holdings common units totaling $1.1 billion at an average price of $303 per share.

Since September of 2016 we’ve repurchased about 18% of Charter's equity. And we intend to stay at or below 4.5 times leverage on a consolidated basis, including the impact of mobile on our financials.

So looking ahead, the level of integration activity, capital expenditure and service impact and changes including network upgrades will continue through the end of fourth quarter. So we’re looking forward to 2019 as the largest ever cable integration will be mostly behind us.

Based on that -- but based on both past experience and the operating metrics we already see, we expect continued strong demand for improving connectivity products set, which includes faster Internet speeds and great mobile product that saves consumers’ significant money and high quality, attractively priced bundled services by video and wireline voice.

And that growth combined with lower integration activity beginning in 2019 and declining capital intensity will demonstrate long-term benefits for our customer-focused operating strategy and our cable free cash flow potential. Operator, we’re now ready for questions..

[Operator Instructions] Your first question comes from Vijay Jayant from Evercore. Your line is open..

Thanks. Good morning. Just wanted to unpack the video trend, obviously the losses decline in the quarter, I think you called out Stream and Choice packages become a bigger piece and that limited basic is moderating.

Can you just help us understand sort of what's really going on, on the video competitive landscape and the growth on the expanded basic product? And then for Chris, I just wanted to reconfirm your comments, which was that there was 15 million hit from accounting changes and about 10 million from the hurricane.

So, the EBITDA impact was about 25 million? Thank you..

So Vijay, on the macro issues, I guess there are two things to explain. One is that our desire to sell feature-rich high-value video products as part of our overall market-facing strategy, meaning when we sell or create a customer, we like to -- we believe it's appropriate to try to give that customer the full capabilities of our service.

And then through time, as a result of that, keep that customer and satisfy that customer fully. In order to implement that strategy, we sell full packages of product in video which means we don't sell video or basic-only products generally incrementally. And therefore, as we grow, we're growing rich products and shrinking our broadcast-only base.

And so that, that was a strategy at Legacy Charter, Legacy Cablevision actually. And so we’ve been implementing that through this transaction successfully. So if you're actually a programmer receiving funds from us, we're growing in your eyes, because we’re growing expanded basic as part of every acquisition we make generally.

Every new customer to get. So that’s our product strategy.

In terms of where the overall marketplace is, I think it continues to be pressured for all the reasons we expressed before by high cost of content, the fact that the content is bundled the way it is as is wholesale to us and the fact that it's not very secure incrementally on the IP level meaning that you can get it without paying for it, all this puts pressure on price along with the whole value proposition of the content because it’s continually going up in cost.

And I don’t see those trends changing. And so you see a continued erosion of the overall marketplace for bundled video. That doesn’t mean we can't be successful in that marketplace using video to drive our overall customer relationship growth.

And that our video products can be relatively better than other companies’ video products and that we can achieve share shifts as a result of that..

Vijay, on the accounting question. So we've had due the adoption of the rev rec standards since the beginning of the year. We had some small impact in Q1 and Q2. It's a little larger in Q3, so we just made a mention of it.

But you are right it is $15 million on a year-over-year basis meaning that there is a $15 million hit to EBITDA this quarter as compared to last year. As we get into Q1 of next year that year-over-year comparison difference will go away. And the other item that you mentioned is that over $10 million related to the storms.

That is true that it lowered our EBITDA this quarter but it's also true that in the third quarter of last year we had a pretty similar amount that was flowing through. So just be careful when you are adjusting that on -- it's definitely relative for forward-looking, on a year-over-year comparison, it's about the same.

Does that make sense?.

Right. Thanks so much..

Thanks, Vijay. Michelle, we will take our next question please..

The next question is from Philip Cusick of JP Morgan. Your line is open..

Two things around pricing and revenue. First, can you compare the price increases that we've seen in the last week to last years and any impact higher or lower on broadband or video revenue this year? And then second, can you help us sort of think about your expectations for revenue and EBITDA on the next few years.

I know you are not going to give guidance, but you've talked about an acceleration, I think it would help to put some framework around it. We understand you don't expect revenue to grow 4% and EBITDA 5.5% from here. But what's the level of increase we could expect in the next few years as you come out of the transition? Thank you..

Hey, Phil. This is Chris. It sounds like you are looking for a lot of guidance. There were – our core pricing and packaging other than what I mentioned on our double play pricing and what we are doing with it [indiscernible]. Our core pricing and packaging hasn’t changed.

And you are right that we've a few small increases on different services around the edges but it's not really material. The full impact of which you won’t see in our numbers until December. So I know that's starts to roll through some of the billing cycles in November but full impact really won't be there for a full month until December.

And that's what we've done today.

It doesn’t mean that ultimately that's where we will be for the full year in 2019 but it is slightly lower amount and what has been gone through this year and the last year so I think I had mentioned in my comments, we took, so meaning in 2017 we had some smaller increases that went in January, we had some smaller increases that went in August, certainly that impacted the comp for this year Q3 on Q3.

We have got some small around the edge rate increases, which you’ve highlighted, I know you have written about it as well, but they won’t be fully impacted until December and during the course of 2019 we will see where we are.

But if you were to just take that and say how does that compare to what we did in the January this year, it would do slightly less than that. Revenue and EBITDA acceleration without giving guidance, the first one ties purely to customer relationship growth and from SMB having bottomed out. We think SMB is going to continue to improve.

Will it be at the full rate of customer relationship growth next year? No, it won't because there’s still repackaging and pricing that’s going on. Enterprise is going through a similar phase, slightly behind SMB and certainly behind resi in terms of where it was just given the way that’s contractual.

So -- and then next year as well we are going to have the absence of political advertising which you have to keep in mind as well. What remains when you put all those pieces together is how fast can you grow your customer relationship growth and some very smaller rate increase that we just talked about. We think we can grow our customer relationships.

We think the step ups will continue to play in as we have been in a high acquisition or with a lot of customers going into promotion which then roll off. But a lot of that political advertising, SMB and enterprise which I just covered and the remainder really ties to customer relationship growth and some promotional roll-offs.

From EBITDA, there's a lot of benefit that comes from taking transactions out of the system, not only in the cost of those transactions but also reducing churn which means that the same marketing and sales dollars can be applied to new sales as opposed to replacing the customers that you just lost.

And that generates not only incremental revenue but higher EBITDA. Our cost of service today continues to go down on a per customer relationship basis. We think that continues to go down, maybe even accelerating in terms of how efficient we can become.

And as much noise as we think we are taking out of the system as it relates to transactions in TWC both the number of calls and service calls and churn at TWC is still significantly higher than it is at Legacy Charter, which means there is a big opportunity that’s still sits in front of us..

Michele we will take our next question please..

The next question comes from Craig Moffett from MoffettNathanson. Your line is open..

I wonder if you could just -- a little bit about the wireless business. Tom you have talked in the past about some limitations technologically with respect to the network controller and your ability to direct traffic between Verizon's network and your own network.

How do you think about the MVNO in terms of sort of strategic sufficiency for your ambitions in wireless? And what might you need to do to ensure that MVNO sort of satisfies your needs?.

We are a wireless company today and have over 300 million authenticated devices on our network prior to the launch of our MVNO.

And as we move through the MVNO it does have limitations on our ability to manage that networking and certainly has limitations on our ability to get owners economics in some ways, although we can shift traffic onto our own network through Wi-Fi and increasingly look more likely through new spectrum that will be available to us also in a public way, like Wi-Fi in the form of the CBRS, so we got five spectrum, some of which will be public and some of which will be sold at auction.

There are our new technologies coming along with dual SIM and eSIMs in mobile devices, which will allow somebody with an MVNO like us to actually run their own network and an MVNO simultaneously on the same device, which is an interesting thought as you go forward in terms of what you can do and how you manage traffic and how you can do that efficiently so that the MVNO was good for us and fit the consumers’ needs.

But we could manage our own network and traffic on network in a more efficient way than we can today. But today we have a limited MVNO and it doesn't do what ultimately we would like it to do and -- but it’s more than we have -- more than we had a couple months ago. So it enhances the total value of our product.

We can still save our customers tremendous amounts of money on their wireless bill every month and give them more services than they are currently getting because we can package that with the products that we have.

And back to what I started the conversation with Vijay was, our product bundle is superior in terms of its total capability to what others are providing in the marketplace. And so therefore, we simply can grow our business. And we look at our current mobile relationship, our MVNO as a way to do that.

But that doesn't mean that there aren’t opportunities going forward technologically that we will ultimately be able to take advantage of..

Thanks, Craig. Michelle we will take our next question please..

Your next question comes from Ben Swinburne from Morgan Stanley. Your line is now open..

Going back to your prepared remarks where you talked about the integration having been disruptive to the business.

And as you expect to quickly see benefits in customer growth and meaningful churn benefits, maybe you guys could just spend a minute talking about where that disruption showed up in the 2018 financials and customer metrics? And so it would help us think about the improvements you should see as we head into ‘19 and I don’t know if it makes sense, but it also be worth hearing from you really when you think this company is operating sort of full steam ahead, for lack of a better phrase, without the complexity of this integration, is that literally January, is the phase-in over the course of the year.

I just think helping without giving guidance we can hear your enthusiasm for the business coming around the turn of the calendar but putting a little more specifics about it would be helpful?.

Sure, Ben. Look I think the biggest impact on the financials in 2018 of the integration was in capital spending. And that ties into disruption and the operations too, so let me explain. We’ve spent a lot of money to upgrade the network to all-digital.

When we purchased Time Warner cable and Bright House, which you’ve got to remember too was 3 times the size, Charter is one-quarter size of the new company put together. And it had -- that new company in most of the acquisition footprint still had analog television on and analog television is very fat but doesn’t require set-top box.

And so it has two negative attributes to -- three negative attributes to our ultimate strategy. One, it eats up channel spectrum that we ultimately want to use for high-speed data and IP video.

It is an inferior picture and without a -- and in order to fix it you have to put a set-top box on the customers’ televisions, which in itself is very disruptive.

So we decided that it was necessary to get the spectrum back for the long run benefit of the business, even though it meant that we were going to have to go out to millions of customers and put new set-top boxes on analog outlet so that we could recover the spectrum.

That all-digital process is completely contrary to our operating strategy, which is to provide superior products packaged in an appropriate way that takes activity out of the business, so that the overall customer relationship is less transaction intensive and therefore longer life.

And as a result of that virtue is from a consumer perspective meaning the consumer gets the price they want with less activity, they last longer, so there is more revenue per transaction and it's a much more satisfying form of business.

Completely contrary to that is to go visit millions of customer houses and put the digital set-top boxes that the consumers don’t necessarily want an outlet that they may not even know they have.

So that was one -- that capital to buy the set-top boxes, to roll the trucks and the disruption in the operating business and the impact that has on phone traffic and service calls, and therefore the ability to focus on sales, all that impacted both 2017 and 2018.

The other thing we did because of the changing marketplace, we thought it was necessary to take our speeds up. We have a superior infrastructure almost everywhere we operate, and we need to make that superior infrastructure available to our customers in terms of its capability.

And so we did the 1 gig upgrade across the entire footprint in a very short period of time. That was also a very capital intensive.

And as a result of that, also required a lot of activity in head-ins and hubs where we had to sort of replumb the architecture and reallocate the spectrum that we received back from all-digital project to our high speed data product.

And if you think about the way Time Warner operated as independent divisions for years and years and Bright House, these were separately built companies that had separate architectures, in many cases 50 divisions at one point. And so all of that had to be re-architected electronically into a uniform environment.

We did the same thing with our call centers, sales centers, stores. We had multiple systems, building systems throughout the footprint in a very decentralized way. And we built an infrastructure over top of all of that so that we could operate in a uniform way.

That was also very disruptive because we were changing practices for our employees which required retraining the whole workforce. So essentially all of that activity related to integration and to take a very decentralized set of assets and put them into a uniform set of assets in a very customer disruptive way will be finished by the end of 2018.

It doesn't mean there is no activity going forward in 2019. There is some but the bulk of it in terms of its financial impact is behind us by the end of this year. We still have to finish the all-digital project this quarter. We still have to finish the DOCSIS 3.1 gig rollout this quarter. We are still putting billing systems together this quarter.

And we will -- and the billing system integration will follow out a little bit into 2019, but by and large most of it’s behind, particularly the customer-facing disruption will be behind us by the end of this quarter.

And so going forward, our ability to execute and just a pure financial impact of not having to spend all that capital on those projects will terminate. And so it’s going to be a different operating model going forward, both financially and from a physical execution perspective..

And what Tom was just describing, it feels like a year and half two years now I have been talking about non-linear choppier in a quarter-over-quarter. We have been turning a lot of knobs and making a lot of changes. Some of which have an immediate positive impact.

As an example last year fourth quarter we started to rollout some of the streaming products which cost less. On the other hand at different stages through all the things that Tom just described that has an impact on service transactions and churn. On the Internet, that customer-facing should go away in Q1.

Are we at full steam in Q1? No because the impact of what we have been doing over the past few years will stick for a little bit. But I don’t think it will be Q1 but I think that incremental activity goes down in Q1 and starts to a look better through the year..

Well, activity is going down already, yes, and churn is going down, as we would expect. So we see the metrics -- the operating metrics and have confidence that the strategy will do what we think it will do..

That’s helpful. I think that the question from myself and others are all aiming at the same thing which is we are heading towards the payoff from this acquisition and people are wondering how much revenue growth benefits to CapEx? I think is pretty straightforward.

But -- and it sounds like there has been enough in the system going on that has impacted net adds maybe then ARPU and we are sort of going to come out of that. So thank you for all that color. Appreciate it..

Thanks, Ben. Michelle, take our next question please..

Your next question comes from Mike McCormack from Guggenheim Partners. Your line is open..

Yes, thanks. Tom, just a comment we heard obviously from AT&T this week, pretty weak results of DirecTV now and significant losses on the linear TV product. I suspect we will see some results from dish as well. But just maybe your view on the overall video landscape what you're seeing out there from the over-the-top guys.

If that can become a slowing threat do you think? And then purely the losses of AT&T, is that an opportunity for you guys, have you taken some share there? Thanks..

Mike, I have said it all along that I thought that the shrinking of the satellite business would benefit our video business. But then you got these another trends as well. Including recently price increases in the virtual MVPD space which probably impacted their results too.

We have had competitors in the virtual MVPD space who have been selling product below cost to the peers and even they had to admit that that was driven and raised some of the rates which will impact the overall competitive landscape.

I mean if you step up above it all and look at the whole marketplace, you still have the requirement to sell most must-have programming in fat packages and the content companies ensure to their contracts that, that retailers like us carry that product in big bundles.

Were not allowed to carry it without caring other services similarly situated in the same packages or unless we don't want carry it at all. And if you look at the products sets that most MVPDs have, it’s the same, they are similar.

So that price driver and the fact that content companies have been able to price through that, puts an enormous burden on a lot of people, don't -- can't really afford a television and that affects the propensity to use passwords and other things of that nature to get product without paying for it.

And by the content companies going over-the-top without having an experience of being distributors, they’ve done that in way without securing the content which any distributor would theoretically do, if they knew what they were doing, but that hasn’t been the case.

So you have free service all over the country through passwords and yes -- and it’s not always that easy to deal with and you got to deal with television and so there are impediments to that as well but the reality is television can be had fairly easily without paying for it and that’s true over the Internet TV as well.

If you think about people charging retransmission fees for free over the air content, eventually that drives people to get antennas. So all those forces are still out there.

On the other hand, satellite is very high priced single product with $100 kind of ARPUs in a world where the content is devalued and so I think you'll see continued erosion of that business and some of that will shift to us.

And the question is when you look at all of that what’s the portion of that comes to us?.

We are fairly sure that concerns on the password stuff. But maybe just one follow-up just on the mobile stuff. I think there's been maybe some of a dismissive attitude on the wireless carrier side.

What kind of customers -- I know it’s early days but what kind of customers you’re picking up, is it the value seekers, is it prepaid migrations or is it really very quality -- high quality customers? Thanks..

I can’t describe that yet. I don't have enough information about the individual sales that we have. But look this is a fully distributed product, mobile is. It’s fully penetrated and like us everybody has one and everybody wants one.

And so we think that mixing those products into our product set in the right proportions and the right prices that the whole marketplace is available to us..

Thanks, Mike.

Michelle, next question please?.

Next question comes from Jason Bezenett with Citi. Your line is open..

Just a question for Mr. Winfrey. You mentioned mobility would achieve profitability once it gets to scale.

As you go through sort of all the variables, mix of customers and wholesale payments and handset revenue recognition, all that stuff, what's a reasonable bid ask in terms of the low high, in terms of how many subs you think you need before it does reach profitability?.

Thanks, Jason. Look the question of breakeven is somewhat academic because it has to be in a context of your growth rate.

But as to the additional growth cost, we expect the mobile business on a standalone basis without the benefit of cable which we think are a significant, we would expect new growth and new benefits to cable to reach financial breakeven around 2 million mobile lines which would be when you take customer relationships into account about 5% penetration of our Internet relationships.

And I don’t want that to be a guidance of where we're going to breakeven because the reality is we expect to be growing and continue to grow well beyond that. I also think there’s meaningful benefit to cable.

But as an academic or analytical framework that gives you a sense of where the business needs to be but it also hopefully shows our confidence around the NPV of mobile and frankly the level of risk that we are taking on of which I've expressed in the past either going to be widely profitable and very high NPV, or relatively low cost option for the company and we can think that’s going to work really well both on a standalone basis as well as creating value for cable..

Michelle next question please..

Your next question comes from Brett Feldman from Goldman Sachs. Your line is open..

Hi, thanks. Another wireless question. You were talking about your interest in the CBRS spectrum some of which will be available on a license basis. I'm curious if that's your desire to actually use and own the license spectrum because actual case is obviously you have to show up in dollars to gain access to it.

So do you anticipate that that could be significant enough of an outlay that it might disrupt your capital returns program? And then obviously a follow-up is, if you are going to gain access to more spectrums you have to build it out. How does that factor into your outlook for material improvement in your CapEx going forward? Thanks..

So Brett. First of all we don’t think that spectrum will be auctioned until 2020. And so from a timing perspective that's probably the case.

And one of the nice things about the way that auction will work is that it will be done on a county-by-county basis which we’re pleased to see so that in terms of the need for that spectrum, the ability to bid on it in footprints that make sense to us as conventional cable operators, makes a lot of sense.

That said there's also a free spectrum available to us. And yes there would be capital, there would be cost if you’ve got spectrum and there would be capital associated with it.

And back to Craig's question, it's really a question about if you had an MVNO business and had a certain cost level and you had a technological solution that was more efficient than that, gave you a return so to speak because you had less MVNO cost as a result of putting the capital out. That would be a good business opportunity.

And so when we evaluate whether we want to buy spectrum or whether we want to put capital or put radios and CBRS, our strand or however, we want to do the deployment or physically by some location we would look at the traffic and the cost of the MVNO and say to ourselves what would the capital do from a cost perspective.

If it is more efficient to spend the capital and reduce our expenditures on the MVNO, that would be good return on investment. So we will look at that as it comes up..

Thanks, Brett. Michelle, we have time for one last question..

Okay. So your final question will come from John Hodulik from UBS. Your line is open..

First, you guys have been helpful talking about the decline in capital intensity we should see as we sort of come out of this integration tunnel. And then on the call here, I think the focus has been more on sort of the revenue impact. But if we could just talk a little bit about the margin side.

You have seen some margin improvement but you still trail Comcast by about 300 bps. Should we see a corresponding sort of improving trend in terms of margin increases as we get through this integration cycle because we talked about the OpEx spending that goes along with all-digital and sort of duplicative cost.

So if you could give us a little bit more color there, it’s not as evident as it is in the sort of the CapEx line? And then over on the business side, Chris, your comments talking about the improving revenue trends as we start annualizing some of these -- the repricing of the Time Warner cable business segment.

And I think you mentioned Navisite and cell backhaul there as playing a role in the deceleration we saw this year.

Can you just give us a little color on sort of what's happening there and sort of how it looks coming out of this repricing?.

So I'll start John, with cost to serve and margin. As we come out of the integration we pick up -- we do -- our margins -- well all other things being equal, our margins would improve as a result of the fact that our churn is going to go down. And the reason our churn is going to go down is because our service is actually better.

We are not visiting customers and creating more transactions that are necessary, our repeat service call activity will go down, which means that there are less physical transactions per dollar revenue or per customer relationship.

If our churn goes down because our products work better and our relationship with our customer is better and more satisfying, the product mix is correct the pricing and packaging is correct, then our churn goes down because the satisfaction goes up.

That means that for the same dollar of revenue with a lower churn rate or the same customer account with the lower churn rate you have a less connects and less disconnects which means you have less activity which means you have lower cost. So we have expectations that we will have significant reductions on cost to serve.

And obviously going forward technological change too and the way we’ve put the company together from a scale perspective and our service infrastructure from a scale perspective, our ability to handle more customers more efficiently gets better through time.

So, we expect that we will be able to generate faster EBITDA growth tan revenue growth as a result of the satisfaction that we create through the asset deployments that we've done over the last couple of years..

Not just in 2019 improvement but that carries through..

It’s multiple years, yes..

John the question regarding enterprise, so rough order of magnitude that’s $3.5 billion business and well over $600 million of it is cell backhaul and Navisite, which are flattish. That’s the only point that we’re bringing out that.

So there is a portion of it which naturally isn’t growing at the same pace as the rest of the business and the remainder is growing faster from a relationship standpoint 15% PSU growth.

But the same thing that we have done in residential, that we’ve done at SMB, really past year we’ve been going to market in more aggressive way on pricing, around whether it's fiber Internet access or Ethernet or Metro Ethernet or voice. We’ve been more aggressive in the marketplace to grow and to try to compete and accelerate growth, which is worth.

But we're doing that not only with better service but better pricing and that has an impact on your revenue growth rate as the existing base comes out of contract and there’s new pricing and packaging on enterprise.

So same story, just a little later start and it’s going to be more prolonged or slow in terms of where it bottoms out and returns to growth just given the nature of the contracts that exist in enterprise..

So there is another thing I would say about revenue growth, so just to finish that off is that we’re selling in -- we're going to be selling in mobile which does have a higher revenue component to it in packaging going forward and the consumer from a total cost to them perspective will be getting savings.

So we think that’s pretty interesting opportunity overall for us..

Thanks a lot, John. Mitchell, that concludes our call..

Alright. Thanks, everyone..

This concludes today’s conference call. Thank you for your participation and you may now disconnect..