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Charter Communications, Inc. (NASDAQ:CHTR)
Q1 2018 Earnings Conference Call
April 27, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 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. If you would like to ask a question during this time, simply press * and the number 1 on your telephone keypad. If you would like to withdraw your question, please press the # key. I would now like to turn the call over to Mr. Stefan Anninger. Please go ahead.

Stefan Anninger -- Vice President, Investor Relations

Good morning and welcome to Charter's first 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 we make on this call concerning expectations, predictions, planned, and prospect constituted 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. Additionally, all customer and passing data that you see in today's materials continue to be based on legacy company definitions.

Joining me on today's call are Tom Rutledge, Chairman and CEO, and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Thanks, Stefan. In the first quarter, our primary objective was to continue to integrate our operations and prepare to launch mobile. Our all-digital initiative is moving forward and is on schedule for completion by this year end. At the end of the first quarter, approximately 20% of legacy Time Warner Cable and 60% of Bright House Networks continue to carry full analog video lineups, with TWC, though, improving from approximately 40% at the end of year 2016.

The whole company will be fully digitized by the end of this year as we deploy fully functioning digital set-top boxes, mostly our WorldBox, on all remaining analog TV outlets that we serve. But while all digital is on track, it is disruptive, both to our operations and to our customers. It creates a large volume of short-term activity, which is inconsistent with our long-term operating strategy, reducing transactional volume. The all-digital project was clearly in the long-term interest of our business. It allows us to free up bandwidth and realize the full potential and capacity of our network as well as further improve the video product itself.

In the fourth quarter, we compared the expansion of our gigabyte speed offering to several new markets and launched those markets just a few days ago. We now offer gigabyte service to approximately 23 million passings, 45% of our total footprint, and except to have gigabyte available to virtually all of our footprints by year end.

Also this month, we've raised the minimum Spectrum internet speeds 200 megabytes in a number of additional markets at no additional cost to customers. We're raising our internet speeds faster than originally planned in order to maintain superior competitive position. We've compressed our capital spend to raise speeds and to launch 3.1 across our footprint and our strategy is working.

In the markets where we launched 200 megabytes as our minimum speed in December, sales are up, churn is down, and net additions have improved year over year, consistent with our experience with previous speed increases. Today, over 50% of our internet customers subscribe to tiers that provide 100 megabytes or more throughput. We don't offer anything less to new internet customers and it's now a 200-megabyte minimum offering, nearly a quarter of our footprint.

The rollout of Spectrum pricing and packaging remains on track. As of the end of the first quarter, 55% of Time Warner Cable and Bright House customers were in our new Spectrum pricing and packaging, which reflects the pace of integration and migration expected.

Over time, we expect Spectrum branded products to drive continued higher sales and longer customer lives. In the first quarter, we continue to see year over year improvement in sales and connect volumes. Although, higher year over year churn offset the higher sales volumes. The higher churn has been a result of some customer service system changes we've been making as part of our large and complex integration.

While we aren't executing a billing migration, last year, we collapsed 13 service environments based on our billing systems into 4 using our software isolation layer. In 2018, those 4 service environments will move to 2. That integration, execution, which will result in quality uniform services and efficiencies impacted both our customer qualification and collection of process, both resulting in higher non-paid disconnects and bad debt.

We corrected those processes, however, and both non-pays and bad debt should be back to plan levels by the end of the second quarter. Despite that self-inflicted disruption, we've grown total internet customers by 1.2 million, over 5% in the last year. In the quarter, we grew revenue by 4.9% year over year and adjusted EBITDA by 6.8%, excluding mobile start-up costs.

Coming to mobile, we remain on track to launch our new services in the middle of this near under our MVNO agreement with Verizon. We recently launched a field trial, which includes 5,000 employees who are going through an end to end sales acquisition and service process in May. We are building out our sales channels and service capabilities, including modifying several hundred of our 700 retail stores and setting up the call center environment. Ultimately, the goal is to use our mobile service to attract and retain cable-bundled multi-product customers.

And the partnership we signed with Comcast last week will accelerate our ability to scale our MVNO service offerings by stepping into a proven MVNO back office platform and improve the economics of our emerging mobile business. While our entry into mobile is new, we're already a wireless operator today with over 250 million authenticated wireless devices connected to our deployed small cell network. Our infrastructure design provides us with the unique opportunity to build the businesses based on how consumers use the service, what I'd called an inside out wireless strategy.

In addition to the continued advancements in Wi-Fi, throughput, and latency, we're testing in various bands, including 28 gigahertz and 3.5 gigahertz, which are going well and support our thesis that small cells, using unlicensed and licensed spectrum, including mid-band spectrum like 3.5 gigahertz working together with our widely deployed empowered terrestrial network and combined with DOCSIS products like full duplex and coherent optics will allow us to offer high-capacity, low-latency connectivity products both inside and outside the home, fixed wireless and mobile and with and without our superior video applications.

Ultimately, our strength is the connectivity provider comes from our powerful, easy to upgrade network. Its unique design allows for the most cost-effective deployment of new technologies, which will drive massive increases in the amount of data we can drive through that network. Over time, we will open up opportunities for new products.

Now, I'll turn the call over to Chris.

Christopher L. Winfrey -- Chief Financial Officer

Thanks, Tom. Before covering our results, a few administrative items -- first, we have reclassed all inbound sales and retention expense from cost to service customers, marketing expensive for current and prior periods. We already provided a pro forma change schedule in our fourth quarter materials.

Also a reminder that when discussing first quarter customer results, I'll be comparing those results to the first quarter 2017 results that have been adjusted to exclude seasonal program customer activity in the first quarter 2017 and legacy Bright House. That comparison is on slide six of today's investor presentation. This is the last time we need to compare year over year quarters with these adjustments since we're now beyond a one-year mark from the seasonal program change.

The customer statistics that you see in today's materials continue to be based on legacy company definitions. In the second quarter of this year, we'll recast customer sets in our trending schedules using consistent definitions across all three legacy entities. The largest differences will be in TWC and Bright House classification of customer types, particularly universities, moving between residential today, where they're reported on a doors basis, commercial accounts, where they're reported on physical sites.

TWC and Bright House also reported SMB and enterprise based on billing relationships. These will convert to a physical sites methodology. When we report our second quarter results, we'll report on the uniform definitions for Q2 and prior periods with a reconciliation schedule. In the third quarter of this year, I expected we'll only report consolidated operating statistics and revenue results. In closing, we said we would report at least five quarters of legacy entity topline results following the close of our transactions. The second quarter this year will be the ninth time we reported legacy entity results.

Finally, starting on January 1st of this year, we've respectively adopted FASB's new revenue recognition standard. There are a number of relatively small adjustments in the quarter related to the adoption of the standard, both in revenue and expenses that in total had no material impact to revenue or adjusted EBITDA this quarter.

Now, turning to our results -- total customer relationships grew by 261,000 in the first quarter. It grew 890,000 over the last 12 months with 3.1% growth at TWC, 3.4% at legacy Charter, and 4.6% at Bright House. Including residential and SMB, video declined by 112,000 in the quarter. Internet grew by 362,000. Voice declined by 25,000.

55% of residential TWC and Bright House customers were in Spectrum pricing and packaging at the end of the first quarter. Customer connects were higher year over year, including on new markets. Disconnects were also up year over year, reflecting the non-linear progression of net assets often spoken about.

TWC was the largest driver of higher year over year disconnects. The key drivers were higher non-paid disconnects from integration related system changes that Tom mentioned, where we've since conformed to the customer qualification and collection process to our standard and policy. Non-paid disconnect and the associated bad debt should be back to normal rates by the end of Q2, which practically means the beginning of Q3.

We also continued roll off churn from legacy packages. These factors had a declining impact on our results as the quarter progressed and should continue to have less of a monthly impact as we progress through Q2.

As slide six shows, we grew residential PSUs by 157,000 versus 338,000 last year. Over the last year, TWC residential video customers declined by 2.3%. Pre-deal Charter declined by 1.5% and legacy Bright House video was 0.3% lower year over year.

In the quarter, TWC residential video customers declined by about 90,000, with higher additions offset by higher non-paid disconnects. Legacy Charter lost 32,000 residential video customers in the quarter versus a loss of 13,000 a year ago. Additional competitive buildout less year over year benefit from a struggling competitor kept sales relatively flat at legacy Charter. Bright House video customers were flat during the quarter versus a gain of 13,000 last year.

In residential internet, we added a total of 331,000 customers versus 416,000 last year with higher quantitative disconnects for the reasons I mentioned responsible for all of the year over year decline in internet net adds at legacy TWC. Total company internet sales were higher year over year and in the 17% of our footprint where we offered 200 megabytes per second as our minimum speed as of the beginning of Q1, there was year over year improvement in both sales and net additions.

As Tom mentioned, we now offer 200 megabytes per second as our minimum internet speed and nearly 25% of our footprint. We offer gigabyte service in approximately 45% of our footprint and expect to have gigabyte service available nearly everywhere by the end of 2018.

Over the last 12 months, we grew our total residential internet customer base by 1.1 million customers, 4.9% with 4.8% growth at TWC, 4.9% growth at legacy Charter and 5.9% at Bright House. In voice, we lost 52,000 residential customers versus a gain of 30,000 last year driven by fewer additions and higher churn of legacy packages and non-paid churn at TWC.

As we said before, our progress toward better customer growth will not be linear. We continue to expect higher sales and better retention over time. It's a higher portion of our basis now in Spectrum. We upgrade our video and internet capabilities. Our service delivery platform improves and as we work through our integration.

Over the last year, we grew total residential customers by 739,000 or 2.9%. Residential revenue per customer relationship grew by 1.6% year over year, given a lower rate of SPP migration, promotional campaign roll-off and some minor rate adjustments, partly offset by higher levels of internet-only customers and better sales when selling at promotional rates.

As slide seven shows, our customer growth combined with our R growth resulted in year over year residential revenue growth of 4.8%. Total commercial revenue, SMB and enterprise combined, grew by 5.3%, with SMB up 4.1% and enterprise up by 7.3%. Excluding sell backhaul and NaviSite, enterprise grew by close to 11%. Sales are up in both SMB and enterprise, with SMB PSU net adds at TWC and Bright House up over 10% in the first quarter versus last year.

Our revenue growth in the TWC and Bright House market hasn't yet followed the unit growth and it won't until we get the transition to more competitive pricing of both our SMB and enterprise products. We expect that R offset will continue through 2018, but the revenue growth will ultimately fall into unit growth.

First quarter advertising revenue grew by 5.6% year over year, driven mostly by higher political. In total, first quarter revenue for the company was up 4.9% year over year and 4.8% when excluding advertising.

Looking at total revenue growth excluding advertising at each of our legacy companies, TWC revenue grew by 4.6%, pre-deal Charter grew by 5.2%, and Bright House revenue earned by 5%.

Moving to operating expenses on slight eight -- in the first quarter, total operating expenses grew by $254 million or 3.9% year over year. Programming increased 5.7% year over year, driven by contractual rate increases and renewals and a higher expanded customer base index, partly offset. Excluding the one-time benefit this year, programming would have grown by 6.5% year over year or approximately 8% per video customer.

Regulatory connectivity and produced content grew by 7%, primarily driven by our adoption of the new revenue recognition standard on January 1st, which also reclassed approximately $15 million of cost to this expense line in the quarter.

Costs to service customers grew by 3% year over year, driven by the higher bad debt expense for the reasons I described. Excluding the temporary impact of higher bad debt expense, we are lowering our cost to service through changes in business practices and seeing early productivity benefits from insourcing, all while growing our customer base and investing in more insourcing and training.

Marketing expenses declined by 1.8% year over year as the prior year period included certain transaction costs. With or without that effect, our marketing sales expenses are more efficient on higher sales. In all other expenses, we're up 2.7% year over year, driven by higher ad sales costs, enterprise and product development costs offset by lower overheard costs.

Excluding mobile, adjusted EBITDA grew by 6.8% in the first quarter. The impact of the new revenue recognition standard and a few one-time and out of period items, including the programming item I mentioned, essentially offset each other. When including the $8 million of clearly defined mobile start-up expenses, our adjusted EBITDA grew by 6.5%.

Turning to net income on slide 9, we generated $168 million of net income attributable to Charter shareholders in the first quarter. Adjusted EBITDA was higher. Severance-related expenses were lower. We did not have any losses related to the extinguishment of debt as we did last year and we had a gain on financial instruments from currency movements on our British pound debt and the related hedging. Those positive drivers were partly offset by higher depreciation and amortization and higher interest expense.

Turning to slide 10, capital expenditures totaled $2.2 billion in the first quarter, primarily driven by higher spending on CPE, scalable infrastructure, and support capital. The CPE spend was driven by higher connect volumes, continued migration of legacy customers over to Spectrum, who are frequently provided with new equipment. We also incurred $186 million of all digital spend, which falls primarily into the CPE category.

The increase in scalable infrastructure was related to the timing of end of year spend and planned product improvements for video and internet, including spending related to DOCSIS 3.1 launches. We also spent more in the support category on vehicles, tools, and test equipment, software development, and facility spending. In each case, some related to insourcing, some related to integration.

Given the pace of all digital, DOCSIS 3.1 deployment and our overall state of integration and planning, the ability to spend capital more consistently compared to last year is, in fact, a good sign. For the full year, we continue to expect a cable capital intensity or cable capital expenditures as a percentage of cable revenue to be a bit lower than 2017.

As slide 11 shows, we generated $49 million of negative free cashflow in the first quarter versus $1.1 billion of free cashflow in the first quarter of last year. The decline was largely driven by higher CapEx and working capital timing this quarter, where I provided a fair amount of color on overall working capital timing last quarter. The Q1 working capital headroom was primarily driven by the timing of our late fourth quarter CapEx spend which drove early Q1 cash payments without offsetting intra-quarter CapEx time.

We finished the quarter with $70 billion in debt principle, our run rate annualized cash interest expense at March 31st, approximately $3.8 billion, whereas our P&L interest expense in the quarter suggests a $3.4 billion annual run rate. That difference is due to purchase accounting. As of the end of the first quarter, our net debt to last 12-month adjusted EBITDA was 4.46 times within our target leverage range of 4 to 4.5 times.

Earlier this month, we issued $2.5 billion worth of 20 and 30-year investment grade notes, which will primarily be used to fund an upcoming maturity. During the first quarter, we repurchased 2 million shares in charter holdings common units, $683 million. The fact that we started the year at the high-end of our target leverage range as opposed to increasing our leverage in 2017 mathematically means our 2018 buybacks will be less than 2017, the same as I mentioned on last call.

We may also reduce our cable leverage somewhat over the course of the year to ensure that consolidated EBITDA remains at or under 4.5 times. Beyond starting point leverage, other factors also play a role in the amount of 2018 versus 2017 buybacks, including the early pace of our mobile product launch, working capital effects and consumer devices. I don't expect we can achieve the same level of working capital improvement for cable in 2018. Within those constraints, however, we'll remain opportunistic to preserve flexibility and great shareholder value.

Turning to taxes on slide 13, we don't currently expect to be a material cash income tax payer until 2021 at the earliest. Given the tax reform passed by Congress and signed into legislation last year, we estimate that the total present value of our tax assets reflecting a later NOL utilization against a lower rate has declined from just over $5 billion to about $3.5 billion. That decline is offset by the much larger value associated with net present value of tax reform, which drives higher free cash flow in perpetuity.

Before moving to Q&A, I wanted to reiterate the financial framework for the launch of Spectrum Mobile service later this year. We believe that our entry into mobility can further accelerate customer growth and driver penetration. The more customer growth we generate, the more incremental revenue we'll generate from mobile and from cable. Much of that revenue at the beginning will be device contract revenue, which is fully recognized on the contract date and similarly as cost of goods sold under EIP accounting with the actual customer payments received over a longer period.

As with any subscription business, the upfront launch costs and acquisition activity, which creates OpEx and CapEx, which exceed the gross margin benefits in the short-term. The more mobile customer growth we generate early on, the more EBITDA and initial cashflow drag we'll experience in the early days. Over time, we expect our mobile service to generate positive EBITDA and cash flow on the stand-alone basis with broader growth benefits to our core cable services.

Our mobile business will eventually be full integrated as just another cable product in the bundle from a marketing care, billing and service perspective, so no different than internet or voice today. It will not be a separate P&L or segment, as such.

Through the launch phase, however, we'll able to create transparency around cable performance by disclosing mobile revenue, mobile operating costs and therefore mobile effects on adjusted EBITDA. We should also be able to isolate the largest working capital impact from the time into cash flow from device costs and related subscriber payments. We'll provide additional details on the mobile business as we move through the year and as the business scales.

Operator, we're now ready for Q&A.

Questions and Answers:

Operator

If anybody has a question, please press *1 on your telephone keypad. Again, that would be *1 on your telephone keypad. Your first question comes from Ben Swinburne from Morgan Stanley. Your line is open.

Ben Swinburne -- Morgan Stanley -- Managing Director

Thanks. Good morning. Chris, I have two questions for you, one around the customer trends and one around RPU. So, on the customer side, you talked about elevated churn or I guess churn up year on year due to disruption on digital, but also -- and maybe they're related -- higher non-pay. So, taking those two drivers and you look out into the rest of the year, do you expect net adds to be up year on year in the back half as presumably both of those headwinds, particularly the non-pay piece fade, obviously people are focused on subscriber trends, so any color there would be helpful.

Then on RPU, can you just help us, as we think about the rest of the year, whether you expect RPU growth to be higher or lower than what we saw in Q1 directionally based on at least the timing of the rate adjustments you've implemented?

Christopher L. Winfrey -- Chief Financial Officer

Sure. On customer trends, we've talked at length, the big driver was the non-pay disconnect. Had it not been for that, customer net adds, particularly TWC, for video and internet would have been better on a year over year basis. So, it's entirely driven by that issue. Sales are up across the company and across -- in particular, which is obviously the largest driver. So, non-pay disconnect was the biggest factor.

The second piece that I would highlight is that where we've increased to DOCSIS 3.1, not only were sales up year over year, but net adds were up significantly year over year in those markets. The issues that Tom highlighted have been addressed for non-pay. It takes a little whole to get out of the system. So, by the end of Q2 or early Q3, the disconnect side is expected to improve. It was improving throughout the first quarter. We'd expect the same to continue through Q2. So, yes, we expect the net adds to improve. Sales are moving very well. Our expectation has been and remains customer net adds will continue to improve.

On RPU, the residential customer RPU, which is I think what you're referring to is the most relevant metric. There's still a large amount of revenue reallocation from bundled pricing that goes on through Spectrum pricing and packaging. So, I think the product RPUs are somewhat irrelevant but the customer relationship RPU is.

The factors that I went through in the prepared remarks, we had a lower rate as you get more mature into the Spectrum pricing and packaging migration process. You have a lower rate of SPP migration, which removes some of the negative RPU factor that we've had over the past few quarters, meaning it's a lesser impact. You have more services that are sales and so, all of that is flying through.

Then we did have some minor rate adjustments, which will carry through for the rest of the year. So, without sitting back and giving guidance specifically by quarter, I think the RPU headwinds that we'd had through the initial SPP migration should be less going forward. The one key thing I'd mention is that single play internet selling is the other one, the non-single pay internet liquidity has an impact to the overall customer relationship RPU. If we can get more of that for customers unwilling to take video, we will. So, I put that one category into the RPU.

Ben Swinburne -- Morgan Stanley -- Managing Director

That's good color. Thank you.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

Okay. Your next question comes from Jonathan Chaplin from New Street Research. Your line is open.

Jonathan Chaplin -- New Street Research -- Analyst

Thanks. Chris, I was hoping to get a little bit more color on the trajectory of wireless losses that you're expecting post the JV that you've announced with Comcast. We've been expecting similar losses to Comcast delayed by a year. I'm wondering if that's a reasonable place to set our expectations. How would the JV and sharing of costs change that?

Christopher L. Winfrey -- Chief Financial Officer

Sure. It's a brand new business. We have a budget. We know what we plan to do. I think using Comcast is a proxy is as good as any at this point. The biggest driver there is the level of subscriber acquisition. There's a lot of upfront subscriber acquisition costs. These are MPV positive customer acquisitions. Once you get to steadier state growth, the business has not only a positive EBITDA, but a positive free cash flow contribution on the stand-alone basis. The faster we grow, the more short-term pressure we put onto EBITDA and free cashflow.

Having said that, Comcast has been extremely helpful to Charter as we go through establishing back office systems and the JV should continue to help us do that. Is there an opportunity that the go forward platform costs for companies are reduced by sharing in those expenses? That's the whole idea of getting into the JV. I think on a relative basis because of how we're cooperating now, could we do marginally better? Maybe. But I would say that both companies should benefit from the JV that we've signed together.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Yes, this is Tom, Jonathan. I agree with Chris that both companies should benefit by the joint venture from an operating cost perspective, therefore the business is more valuable as a result of that. We will not have the same marketing strategies and so we will diverge in terms of performance, most likely. So, really, the impact is driven by the speed at which we roll the business out and how successful you are in the market.

Jonathan Chaplin -- New Street Research -- Analyst

Great. Thank you.

Christopher L. Winfrey -- Chief Financial Officer

Thanks, Jonathan.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

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

Cathy Yao -- MoffettNathanson LLC -- Analyst

Hi, there. This is actually Cathy Yao in for Craig Moffett. My question is just looking at the stock reaction today, it seems to suggest that investors are calling into question the Charter story. Can you provide your own perspective on whether you think the long-term story has changed? Do you think video subscribership can still grow? Have your expectations about broadband growth changed? Then most importantly of all, can you talk about the free cashflow capability of the business? Has it changed longer-term and does wireless change that? Thank you.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Cathy, no. Simply, our vision of the business is what we expected several years ago and continue to expect going forward. We think from the superior infrastructure that allows us to stand up, highly competitive if not more competitive products than alternative networks. We've been successfully selling and marketing our product, but at the same time going to a very complex integration of three very large companies to get to a single surface platform. That integration is going quite well and pretty much as planned. It has lumpy aspects to it as we combine the companies in various ways, but generally, we are going exactly as we planned in creating the future value that we expect to great.

Since we told our initial story, obviously we've done the acquisitions and we've done an entry into mobility, which we think is a natural fit to our existing infrastructure and service infrastructure and will create additional value for the shareholders that wouldn't be created without doing it. So, we think the Charter story is fully intact and getting better as a result of the mobility.

In terms of capital intensity and free cashflow creation, I think there are -- obviously, we're in a capital-intensive trend at the moment as we integrate and as we make our networks all digital so that we can take advantage of the full capability of the network, which was planned, but the long on trend is less capital intensity and significantly less capital intensity as our need to buy CPD goes away and as CPD costs come down.

There are some forces there that are even greater than we had thought. Obviously, the change in video, the change in the video marketplace essentially requires less capital intensity in video because with the competitors that we face and with our profits in IP, you don't necessarily need new set-top boxes, you can move to an application-based delivery system in some situation. So, that along with declining prices improves marginally better than we might have thought previously.

The changes in the video business, they're significant and hard to predict, but we still think there's video growth capable inside of our asset base. It's fairly marginally insignificant, though, in this sense. There's very little margin in the video business. So, whether you're -- a million customers is relatively immaterial to our plan. While we think that we will make a great video product available to our customers and that great video product will continue to help us drive the overall connectivity business we have, if we're off in our forecast of that, it's not significantly financially material to our growth prospects.

So, I can't explain market reactions, but our activity and our project management is going as we expected and the kind of marketplace acceptance of our products is going as we expected.

Christopher L. Winfrey -- Chief Financial Officer

Cathy, maybe I can add two quick thoughts to this. One is if you take around the timing of a good quarter, off quarter as it relates to net adds for somebody's model, a lot of people are looking for a linear outcome. We've tried to be as clear as we can, but it's not going to be linear. If you take a look back at the legacy charter experience and look at an annual basis, it looks pretty linear, but if you go back and take a look at 2013 and 2014 in particular, it really was anything but linear.

That applies to net adds and it applies to the financial results. It looked choppy as we were going through it. In some respects, market reaction, which I haven't focused on that much yet as of this morning, it's a little bit of déjà vu. We're turning a lot of knobs, same as we did with legacy Charter. There's a lot of moving parts but the trajectory remains as good as ever.

The second one is on the impact of wireless. The conversations we've had with some investors is somewhat bifurcated. On one hand, there's a group of investors who get it and say, "Go as fast as you can. From a competitive standpoint, it's the right thing to do. It does have a positive MPV and it's an attractive business." Then there's another group who are very, very focused on the short-term impact to EBITDA and free cash flow and what that might do to an overall growth rate.

So, one, we are going to isolate that impact so people can focus on the core value creation of the cable platform and the option value, if you want to call it that, on the nobility business. But that investment relative to the overall size of charters, revenue or EBITDA, is relatively small and the potential outside match to that investment is significant. I think that's the piece that is missing in terms of understanding of putting that upfront investment into a perspective.

We're going to isolate it along the way so people, if they see it as a bet, they can size up the size of that bet and understand the relative materiality. We think it's attractive. We think it's going to help us not only add EBITDA and free cashflow over time, but we think it's very constructed and helpful toward further internet growth in particular in the cable business.

Cathy Yao -- MoffettNathanson LLC -- Analyst

Okay. Thank you. So, from a free cashflow perspective, your long-term hasn't changed even if the mix shift to get there may have moved around a little bit with the video environment getting worse.

Christopher L. Winfrey -- Chief Financial Officer

No. The biggest free cashflow generation that you're going to see from 2019 CapEx when it comes down and that hasn't changed. This year, we're doing all digital. We're doing the DOCSIS 3.1. We still have a tremendous amount of integration capital that's inside these number. That essentially comes out next year.

In the meantime, despite some lumpiness on subscriber net ads from one quarter to the next, the financial results -- we mentioned Q4 would be the low point on EBITDA. The business is moving. It doesn't mean that it's going to be linear, so nobody should read it that way, but we did hit the low point already on the financials and the business is moving in the right direction.

Cathy Yao -- MoffettNathanson LLC -- Analyst

Okay. Great. Thank you so much.

Stefan Anninger -- Vice President, Investor Relations

Thanks, Cathy. Michelle, we'll take our next question, please.

Operator

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

Vijay Jayant -- Evercore ISI -- Managing Director

Thanks. Just following up on the prior question, when you were going to this transition on legacy charter and those disruptions in cashflow and all the inflection in cashflow on the Time Warner Cable transaction, but you also had pretty robust subscriber growth. You were getting the share. Obviously, the question is is the market environment changed enough that you have to revisit your strategy.

I think you have a lot of levers to pull on pricing and tiering and the like. I was just trying to see given the market environment that might get to the same free cashflow numbers at the end, if you can talk about is there some tweaking on strategy that needs to be done to do that given the market environment? Thanks.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Vijay, it's Tom. Obviously, the markets move through time. Our strategy moves with it. We think that we have needed to change our product and our mix in order to take advantage of our assets and compete in the marketplace effectively. We think that we can do that and are doing that and our sales volume and our connect volume and our management of our customer base pricing and packaging gives us confidence that we can continue to do that.

Take data speeds, for instance, with legacy Charter, when I came to Charter, our average data speed was s10 megabytes. We took the minimum up over time to 30 and created most of our subscriber growth at 30. Today, in this new model, we've just gone to 200 meg minimum speed in a significant part of our market and 100-megabyte speed in an even bigger part of our market, but that's shifting as we had rolled out this 3.1 technology.

So, we've taken advantage of the marketplace and the capacity of our network to change our data product so that it will continue to drive the results we expect it to get. But we're in the middle of the tooling of that process right now as we integrate the company. We have a vastly superior product almost everywhere we operate. We expect to get results from that. If we need to change that two years from now, we have the ability to do it at very small incremental costs, which is the beauty of the infrastructure that we've built out in this company.

So, I guess the answer to your question is we have the same high expectations for free cashflow growth in this entity now based in the current marketplace as we understand it now just like we did five or six years ago.

Vijay Jayant -- Evercore ISI -- Managing Director

Great. Thanks so much.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

The next question comes from Marci Ryvicker from Wells Fargo. Your line is open.

Marci Ryvicker -- Wells Fargo -- Managing Director

Thanks. I have to, I think, just staying on subscriber trends and the stock price, I feel like it sounds like maybe 2019 is when we get to stabilization in sub-trends and maybe that's when the market will start to give you a little bit more credit as we get closer. Is that a fair statement or thought?

And then secondly unrelated, as we dig into 5G, I think it's becoming more apparent that cellular backhaul is increasingly important. I guess how do you think this plays out over time and how can you better monetize this, especially with a larger platform?

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

So, Marci, I don't know when markets award you or don't award you. Ultimately, our job is to create a free cashflow that we expect from these assets and we think we're on track to do that. So, on track with the plan that we made, whether we'll get rewarded before that occurs or after it occurs, I don't know, but we expect to create the free cashflow.

In terms of the infrastructure that we have, we do think that we are the natural small cell provider and that we have the most efficient ability to provide small cell connectivity compared to any other infrastructure competitor that we have. We have 26 million small cells already connected to our network and we have 250 million wireless devices already connected to those small cells and we plan to continue to build out the small cell environment. How that relates to other business opportunities, it's hard to say, but we have them.

Marci Ryvicker -- Wells Fargo -- Managing Director

Thank you.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

Your next question comes from Jason Bazinet from Citi. Your line is open.

Jason Bazinet -- Citigroup -- Analyst

This is for Mr. Rutledge, I guess. I know the strategy is to get more people attached to your fixed cost network, but I had a question when I was going through the Ks of your competitors and yours and just doing benchmarking, whether I look at the relationships per employee or revenue per employee, Charter doesn't fair that favorably. You're sort of 10%, 20%, 30% below all your publicly listed peers.

So, my question is if the unit growth sort of evaporates from the ecosystem or if you're unsuccessful getting the attach rate up, do you think there's a potential cost element? Said another way, is there something materially structural about your footprint or your systems that would make you less productive, if you will, vis-à-vis your pure cable companies? Thank you.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

That's a very interesting question. The short answer is no. In fact, we think we'll be more productive, but we're in the middle of a transition where we're moving from an outsourced environment to an insourced environment and we're creating a more professional -- that is designed to provide higher quality service which will improve subscriber lives and reduce transaction volume ultimately in our business so that we'll have less transactions per customer.

If we have less transactions per customer, which we're trending toward every day as our operations improve and as the skillsets that are needed are developed inside the company. So, if you think about what I just said, insourcing and outsourcing, at the moment, we decide to move calls from the Philippines to St. Louis, for instance. We have to stand up a brand new call center in St. Louis. We have to build it out physically. So, there's capital involved.

Then we have to higher a workforce and train that workforce to take the calls. In the meantime, we're still outsourcing to the Philippines until that workforce is up and running and skilled. Once the workforce is skilled, though, then the number of transactions that occur as a result of having a higher skilled workforce goes down. We think that the transaction volume goes down faster than the cost structure goes up by having an insourced call center.

When you have less transaction per customer, you actually have happier customers. So, not only are they less costly to serve, they're happier. Because they're happier, their average life extends, which means the average value per sale that you create goes up. The number of transactions, connects and disconnects per dollar of revenue that you spend goes down.

So, we're still in the middle of a transition process that has operating expense in it as part of the strategy. Our expectation down the road, which is part of the free cashflow driver of the business is that you get this virtuous growth strategy where you get better-served customers who cost you less and are happier. That benefit is said to be realized from our activity today, but it is part of our plan and our expectation. The numbers we expected to generate today that will prove out that thesis are occurring, as we expected.

Christopher L. Winfrey -- Chief Financial Officer

Just add the way that you can tie it to the P&L, the metric. I think the metric you're using is not right because it's apples and oranges. So, if you think about the Time Warner Cable call center infrastructure. At one point, you could have over 50% was outsourced. Today, over 85% of that insourced. If you're taking a look at employees, you're completely ignoring the amount of contract labor that's inside there. So, it's an apples and oranges comparison between the two different types of operating models.

If you look at cost to service customers, the other way to think about, we have all of the investment that Tom just spoke about, but despite having all of that investment and despite having customer relationship growth of over 3%, our cost to service customers gross is actually coming down, excluding that temporary effect. So, our cost to service customers, which is where the vast majority of labor costs exists is already coming down on a gross basis and on a net basis, meaning a per customer basis, it's actually coming down dramatically, despite the amount of upfront investment we're making that Tom highlighted.

I think you have to normalize for what's -- you can't just look at in house labor. You have to add in the contract labor, which has come down dramatically. For some companies, comprises a very, very significant portion of their overall labor costs.

Jason Bazinet -- Citigroup -- Analyst

Understood. Thank you.

Stefan Anninger -- Vice President, Investor Relations

Michelle, next question, please.

Operator

Your next question come from John Hodulik from UBS. Your line is open.

John Hodulik -- UBS -- Analyst

Great. A couple questions -- first of all, Chris, from your comments on the non-pay disconnect, it sounds like you're already starting to see some acceleration in PSU transactions. If you could just confirm that or whether we'll have to wait another quarter before we see that inflection as that issue lapses.

Then two, maybe for Tom, it sounds like you guys are seeing some improving underlying fundamentals in the HSD side when you go to 200 megabytes in a market. I think you said you're at 25% now, but when do you get to 100% and maybe you can give us some more detail on what you see when you get to 200 megabytes as a base and whether or not you feel you have additional pricing power in those markets given the competitive landscape there. Thanks.

Christopher L. Winfrey -- Chief Financial Officer

So, on the improvement, yes, we had less of a negative impact from the non-paid disconnect issue, which has since been addressed throughout the quarter. The last of the systemic changes we needed to make for that to take place occurred inside of April. We expected to continue to ameliorate during the course of Q2 and be fully out by the beginning of Q3. So, the trends are improving in that particular area and I don't want to get drawn into guidance, but we wouldn't have said what we said if we didn't feel that particular issue was declining In its materiality.

John Hodulik -- UBS -- Analyst

Great.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

So, John, I think we said we got 200 megabytes in front of 25% of our customer base. We have built out as of this moment, 43% of our footprint to 1 gig speed capability using 3.1 DOCSIS capability. By the end of the year, we'll have 100% of our infrastructure capable of 1 gig or 200 megabytes or 400 megabytes. We haven't said where we'll roll out 200 megabytes, but it's in a substantial amount of markets today and we're getting good results from it.

We're also getting good results from our higher ultra-tier. So, while I don't want to give you a forecast of where we go, from an infrastructure perspective, the entire network will be capable of this product mix this year.

John Hodulik -- UBS -- Analyst

Okay. Thanks.

Stefan Anninger -- Vice President, Investor Relations

Thanks, John. Michelle, next question, please.

Operator

Your next question comes from Kannan Venkateshwar from Barclays Capital. Your line is open.

Kannan Venkateshwar -- Barclays -- Analyst

Thank you. I have a couple. Tom, firstly, when you look at all the changes in the ecosystem right now, your peers are responding differently, slightly differently compared to you, where when you think about price increases, other cable companies have been a lot more aggressive and strategically, there's been a lot more pivot, with AT&T buying Tim Warner and Comcast buying Sky. So, when you think about the ecosystem as it is set up today, do you think you need to do something different compared to what you're doing right now longer term.

Then Chris, from your perspective, when you look at normalized CapEx in the proxy, I think in the proxy, it was about 12% of revenues in 2019. Like you mentioned earlier on the call, you expect CapEx to drop next year. But right now, it's at 19%. So, when we go into 2019, without getting into specific numbers, could you give us some sense of scale in terms of what CapEx could be like. Thanks.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

So, this is Tom. As far as the ecosystem goes, I think we're strategically complete in the sense that we think we can execute our business plan with the assets that we have. I don't think we need to own content to do better. That doesn't mean there aren't opportunities that might arise that are priced properly that would be synergistic with us, but I think we are fairly confident that we can execute our strategy, which from our perspective, we're a connectivity company selling connectivity relationships.

Video is not material from a margin or EBITDA-driver perspective as a stand-alone product, but it is material in terms of product attribute to the overall relationship that we create with customers. So, we will have access to video. We've launched Netflix on our network. We plan to integrate all the video products into our UI and make us the best place to get video of every kind, but that doesn't require us to own video assets, per se.

Christopher L. Winfrey -- Chief Financial Officer

The capital expenditure, there was a proxy that was over three years ago with our board that ended up being publicly disclosed. I don't' want to go back in time and start looking at that other than to say we expect 2019 capital expenditure to be a materially lower amount of gross dollars of CapEx and in a growing new business, therefore materially smaller amount is a percentage of revenue. We will still have integration activity going on inside of 2019.

So, that means that we expect it as a percentage of revenue. We'll expect to have solid revenue growth for many years to come, which means your capital intensity continues to decline. I think 2019 will be a big move and I think it continues to get better as a percentage of revenue from there. I am speaking about cable capital expenditures, percentage of cable revenue. I don't think wireless or mobility is that big, given all the factors that I described before, where it moves through the P&L, but I think 2019 starts to fully expose the free cash flow capabilities of the company.

Kannan Venkateshwar -- Barclays -- Analyst

Thank you.

Stefan Anninger -- Vice President, Investor Relations

Thanks, Kannan. Michelle, we'll take our last question, please.

Operator

Your last question comes from the line of Brett Feldman of Goldman Sachs. Your line is open.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking my questions. Really two clarifications for Chris -- you referenced your prior commentary around first quarter being a low point for EBITDA and I wanted to clarify if that's all in EBITDA or EBITDA exclusive of anything you may spend on wireless. Another follow-up -- when you were discussing the buyback potential this year and how it would be mathematically lower, you cited the way you were going to manage leverage this year and it sounded like you may be managing leverage a little lower. I don't know if I appreciated the nuance of what you were trying to communicate, so I was hoping we could revisit that. Thank you.

Christopher L. Winfrey -- Chief Financial Officer

I'm glad you asked the first question in case, I don't think I did, but in case I misstated. What I said in the fourth quarter is the fourth quarter of 2017 was the low point of EBITDA. I did not say the first quarter was the low point of EBITDA. First quarter of EBITDA was actually pretty good. Yes, it will continue to improve over time, but that doesn't mean that will be linear. That certainly wasn't what I was implying.

My comment from the fourth quarter 2017 which I reiterated today was that the fourth quarter 2017 EBITDA was the lowest EBITDA growth. In terms of managing leverage, what we're trying to make sure that we do is that we stay 4.5 times, inclusive of the short-term launch cost from mobile and any working capital impacts from the launch of mobile. What that means is you need to create a little bit of headroom on your cable EBITDA leverage so you can accommodate that upfront cost.

So, the faster we go with wireless means you might need to pull in your cable EBITA leverage and that's the only distinction I'm making. Make sure the consolidated leverage remains at or below 4.5 times. We're a large issuer in the debt capital markets as well and we have investment-grade debt. We've made commitments to that market as well that they intend to keep and that's to make sure they stay in line from that perspective.

Brett Feldman -- Goldman Sachs -- Analyst

Thank you. That was very helpful. I appreciate it.

Stefan Anninger -- Vice President, Investor Relations

Thanks, Brett. Michelle. That concludes our call.

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Thank you, everyone.

Operator

This concludes today's conference call. You may not disconnect.

Duration: 60 minutes

Call participants:

Thomas M. Rutledge -- Chairman and Chief Executive Officer 

Christopher L. Winfrey -- Chief Financial Officer

Stefan Anninger -- Vice President, Investor Relations

Ben Swinburne -- Morgan Stanley -- Managing Director

Jonathan Chaplin -- New Street Research -- Analyst

Cathy Yao -- MoffettNathanson LLC -- Analyst

Vijay Jayant -- Evercore ISI -- Managing Director

Marci Ryvicker -- Wells Fargo -- Managing Director

Jason Bazinet -- Citigroup -- Analyst

John Hodulik -- UBS -- Analyst

Kannan Venkateshwar -- Barclays -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

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