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Charter Communications Inc  (NASDAQ:CHTR)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 8:30 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 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.

Stefan Anninger -- Vice President, Investor Relations

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.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Thank you, 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 drive lower churn, faster customer growth and financial growth.

Over the last year, we've grown our total internet customer base by over 1.2 million customers or 5.3%, and video net losses this quarter were less than in the third quarter of 2017. 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 over 7 million homes passed using a 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 Gig service initially in (ph) 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 an intensive impact, driving internet customer growth.

In early September, we executed the full market launch of our Spectrum Mobile services with the goal of accelerating connectivity relationship growth, and we expect our mobile product to be profitable on a stand-alone 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 other -- 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 services 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 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 easy to switch an entire households mobile service package. Ultimately the goal is to use Spectrum Mobile to save customers' money via an integrated, superior product offer, driving faster customer growth and better retention, higher penetration and greater EBITDA per passing 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 was actually countered to our operating strategy reducing service interactions. The customer disruption that all digital drivers well understood with the migration of millions of customers to Spectrum pricing and packaging with different equipment and bills, the 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 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 a value creation model is laid out on slide four of today's presentation, we believe we know what works. We will be in a position to accelerate growth, and innovate faster than we're at where we have been over the last few years.

Now I'll turn the call over to Chris.

Christopher L. Winfrey -- Chief Financial Officer

Thanks, Tom. Few administrative items before covering our results. As I mentioned on our last call, we are now reporting all of our results in 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 2,000 customers and the financial impact was about $5 million to each of revenue and operating expenses. So, 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 was not material. We're still in cleanup mode for Hurricane Florence, and we are in restoration mode for Hurricane Michael, and we'll provide a similar update on our Q4 call if needed, however, we don't expect a material year-over-year impact in light of the hurricane.

Finally, as a reminder, starting on January 1 of this year, we prospectively adopted FASB's new revenue recognition standard. Like last quarter, there are 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 away after Q4.

Now turning to our results. Total residential and SMB customer relationships grew by 234,000 in the third quarter, 903,000 over the last 12 months. Including residential and SMB, Internet grew by 308,000 in the quarter, video declined by 54,000 and voice declined by 77,000. As Tom mentioned, 67% of our acquired residential customers are with Spectrum pricing and packaging at the end of the third quarter. We expect it 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'll see lower CPE spending and meaningful return of assets.

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've grown our total residential Internet customer base by 1.1 million customers or 4.9%.

Last year, our residential video customers has declined by about 1.6%, all of which have come from limited basic. Sales of our Stream and Choice packages primarily targeted Internet always continue to do well. In voice, we lost 107,000 residential voice customers versus a gain of 26,000 last year, driven by lower triple play sell-in mix and lower retention at TWC.

In this September, we made a change in the way we market and price wireline voice within our packages to address wireline voice selling, retention and roll-off and the launch of Mobile. In most of our markets, our Internet and video double play pricing will be $90 with some targeted acquisition pricing elsewhere. In either case, wireline voice at acquisition is now a $10 add-on, with no change that pricing the customer rolls off of bundle promotion. With wireline voice as a $10 value added service going forward, Mobile is now positioned to be the triple play value driver connectivity sales similar to what wireline voice did for cable over the last decade. And even though the revenue for 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 broad market launch for Spectrum Mobile product in September 4. So our third quarter results include only a short period of active marketing in sales and 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, (inaudible) and device capabilities, the marketing will become more offer driven. And essentially all of our existing sales channels will be activated and integrated to Mobile in coming quarters. All of which will help drive continued acceleration of mobile lineups 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 and promotional campaign roll off and rate adjustments, which was significantly offset by last year's third quarter Mayweather-McGregor fight which drove over $50 million in revenue last year, a higher mix of internet-only customers and higher full-year sales at promotional rates. Excluding pay-per-view and VOD, residential revenue per customer relationship grew by 1.1% year-over-year.

Slide seven 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 rate adjustments last summer, that were not mirrored this quarter, residential revenue grew by 4.4% 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% in the last year. Revenue growth in the acquired markets hasn't yet followed the unit growth. Revenue growth impact and the repricing for SMB products are slower, and SMB revenue growth has essentially bottomed out over the last two quarters. In 2019, we expect less impact from 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 utilizes traditional inventory. We also continued some more overall spots with better inventory utilization and targeted selling. Mobile revenue totaled $17 million, with essentially all of Q3 revenue in device revenue. As a reminder, under Equipment Installment Plan or EIP, all future device instalment payments are recognized as revenue on the connect date. In total, consolidated third quarter revenue was up 4.2% year-over-year, with Cable revenue growth of 4% or 4.1% when excluding both advertising and pay-per-view and VOD.

Moving to operating expense on slide eight, 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 in last year's Mayweather-McGregor fight, which also reduced our year-over-year programming cost growth by 1.2%. So, excluding pay-per-view and VOD programming costs in this and last year's third quarter, programming grew by 4.4% or 5.8% on a per video customer basis.

Regulatory connectivity and produced content grew by 4.4%, primarily driven by our adoption of the new revenue recognition standard on January 1, which reclassed some expenses in this line in this quarter. Cost to service customers grew by 1.7% year-over-year compared to 3.4% customer relationship growth. We are lowering our per relationship service costs through changes in business practices and continue to see early productivity benefits from ongoing insourcing investments.

Cable marketing expense grew by 3.7% year-over-year, driven by higher sales, and other cable expenses were up 5.5% year-over-year driven by ad sales costs, enterprise costs, and IT costs from ongoing integration. Mobile expense totaled $94 million and is comprised of device cost, market launch costs and operating expenses to stand up and operate the business, putting our own personnel and overhead costs, and our portion of the JV with Comcast, they accounted for which we discussed on last quarter's call.

Device costs like device revenue are immediately recognized, but in repayments for handsets, they are generally received over a two-year period, as the working capital headwind which we've 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 nine, 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 remeasurement 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 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 our merger conditions. We spent $66 million on mobile related CapEx this quarter, driven by software, some of which is related to our JV with 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 expect -- we continue to expect the cable capital intensity or cable capital expenditures as a percent 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.

This slide 11 shows, we generated $532 million in consolidated free cash flow 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 and that was partly offset by higher cash paid for interest and a negative contribution to cash flow from working capital. That negative change in working capital was primarily the result of lower CapEx payables on our already declining year-over-year capital density.

I also expect a working capital related reduction to cash flow in the fourth quarter this year compared to last year and recall that last year's fourth quarter working capital benefited from a much higher level of capital expenditures and from the in-quarter timing of that capital expenditure, both driving temporarily 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'll see the initial working capital investment in mobile device EIP sales, where the associated revenue is recovered over a two-year period. We'll continue to isolate that impact within the overall mobile reporting, but 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, but 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. The current run rate annualized cash interest expense is $3.9 billion -- I am sorry -- annual cash interest payments annualized is $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, but leverage range of 4 times to 4.5 times.

And at the end of the 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. 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 impacting changes, including network upgrades will continue through the end of the fourth quarter. So we're looking forward to 2019 as the largest ever cable integration will be mostly behind us. Based on that -- based on both past experience and the operating metrics we already see, we expect continued strong demand for improving connectivity product set which includes faster internet speeds, a great mobile product which saves consumer significant money and high-quality, attractively priced bundled services, like video, wireline, and voice. 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 in our cable free cash flow potential.

Operator, we're now ready for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Vijay Jayant from Evercore. Your line is open.

Vijay Jayant -- Evercore Group -- Analyst

Thanks, good morning. Just wanted to first unpack the video trends, obviously the losses, it declined in the quarter. I think you called out that 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, just wanted to reconfirm your comments, which was that there was a $15 million hit from accounting changes and about $10 million from the hurricane, so the EBITDA impact was about $25 million. Thank you.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

So Vijay on the macro issue -- 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 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 products in video, at 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 was the strategy at legacy Charter, legacy cable vision actually even. 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 we 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've expressed before by high cost of content, the fact that the content is bundled the way it is as it's 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 of which puts pressure on price along with the whole value proposition of the content because of continually going up in cost. And I don't see those trends changing and so you see 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.

Christopher L. Winfrey -- Chief Financial Officer

Vijay on the accounting question. So we've had due to the adoption of the rev rec standards since the beginning of the year, we've had some small impact in Q1 and Q2. It's a little larger in Q3, so we just made -- mention of it. But you're right, it was $15 million on a year-over-year basis, meaning that there's 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 comparisons difference will go away. 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 going through, so just be careful when you're adjusting that on -- it's definitely relevant for forward-looking. On a year-over-year comparison, it's about the same if that makes sense.

Vijay Jayant -- Evercore Group -- Analyst

Great, thanks so much.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

Okay, our next question is Phil Cusick from JPMorgan. Your line is open.

Philip Cusick -- JPMorgan -- Analyst

Hey guys, thanks. Two things around pricing and revenue. First, can you compare the price increases that we've seen in the last week to last year's 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 in the next few years. I know you're not going to give guidance, but you've talked about an acceleration. I think it would help to put some framework around it. We don't -- 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.

Christopher L. Winfrey -- Chief Financial Officer

Hey, so this is Chris. It sounds like you're looking for a lot of guidance. We don't blame you for trying and with the -- there were -- our core pricing and packaging, other than what I mentioned on our double play pricing and what we're doing with voices and that on our core pricing and packaging hasn't changed. You're right that we've had a few small increases on different services around the edges, but it's not really material. The full impact of which won't in our numbers until December. So I know that 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. That's what we've done today. It doesn't mean that ultimately that's where we'll be for the full year in 2019, but it is a slightly lower amount than what have been rolled through this year. And the last year, so I think I mentioned in my comments. We took, so meaning in 2017, we had some small rate 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've got some small around-the-edge rate increases, which you've highlighted, and I know you've written about it as well. But they won't be fully impacted until December and during the course of 2019, we'll see where we are. But if you were to just take that and say, how does that compare to what we did in January of this year, it would be 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 wont 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 those contracts roll.

So, and then next year as well, we're going to have the absence of political advertising, which you need to keep in mind as well. What remains when you put all those pieces together is how fast can you grow the customer relationship growth, and some very small level of rate increase that we just talked about. We think we can grow customer relationships. We think the step-ups will continue to play in as we've been in a high acquisition mode with a lot of customers going into promotion, which then roll-off. But a lot of that -- the political advertising, SMB and enterprise, which I just covered, and the remainder really ties to customer relationship growth and promotional roll-offs.

From EBITDA, and there is a lot of -- 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 we just lost, and that generates not only incremental revenue, but higher EBITDA. Our cost to serve 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's a big opportunity that still sits in front of us. That's about as good as I can.

Philip Cusick -- JPMorgan -- Analyst

No, that's helpful. Thank you.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

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

Craig Moffett -- MoffettNathanson -- Analyst

Yes, hi. I wonder if you could just a little bit about the wireless business. Tom, you've 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 -- what might you need to do to ensure that MVNO sort of satisfies your needs ?

Thomas M. Rutledge -- Chairman & Chief Executive Officer

All right. Good question, Craig, and I've read some of your materials recently on that as well. And I would say this. 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 network and it certainly has limitations on our ability to get owners' economics in some ways. Although, we can shift traffic onto our own network through WiFi and increasingly look more likely through new spectrum that will be available to us also in a public way like WiFi in the form of the CBRS 3.5 spectrum, some of which will be public and some of which will be sold at auction. There are 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 in MVNO simultaneously on the same device which is an interesting thought as you go forward, in terms of what you could do and how you could manage traffic and how you could do that efficiently. So that the -- that the MVNO was good for us and fit the consumers' needs, but we could manage our own network and traffic on our 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'd like it to do and -- but it's more than we have -- more than we had a couple of 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 with -- our product bundle is superior in terms of its total capability to what others are providing in the marketplace. And so therefore, we think we 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'll ultimately be able to take advantage of.

Craig Moffett -- MoffettNathanson -- Analyst

Thank you. That helpful.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

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

Ben Swinburne -- Morgan Stanley -- Analyst

Thanks, good morning. Just going back to your prepared remarks, where you talked about the integration having been disruptive to the business and that you expect to quickly see benefits in customer growth and meaningfully churn -- 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 2019. 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 a lack of a better phrase without the complexity of this integration is that literally January is a phase in over the course of the year. I just think helping without -- without giving guidance, we can hear your enthusiasm for the business coming around the turn of the calendar, but putting maybe a little more specifics about it would be helpful.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Sure, Ben. Look, I think the biggest impact on the financials in 2018 of the integration was in capital spending. And that -- and that ties into disruption in the operations. So let me explain. We spent a lot of money to upgrade the network to all-digital. We purchased Time Warner Cable and BrightHouse which you got to remember too was 3 times the size -- Charter is one quarter the size of the -- 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 and it -- but it doesn't require a 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 -- 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 outlets 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 virtuous from a consumer perspective, meaning the consumer gets the products they want with less activity. They last longer, so there's 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 digital set-top boxes that the consumers don't necessarily want and outlets 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 of that impacted both 2017 and 2018.

The other thing we did, you know, 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 1 gig upgrade across the entire footprint in a very short period of time. That was also very capital intensive. And as a result of that also requires a lot of activity in head-ends and hubs, where we had to sort of replumb the architecture and reallocate the spectrum that we received back from the 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 rearchitected 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 through -- 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. That doesn't mean there is no activity going forward in 2019. There are -- 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 1 gig rollout this quarter. We're still putting billing systems together this quarter, and we will -- the billing system integration will follow out a little bit into 2019. But, by and large, most of it's behind us, 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 the pure financial impact of not having to spend all our capital on all 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.

Christopher L. Winfrey -- Chief Financial Officer

And, what Tom was just describing, I've -- it feels like year and a half, two years now, I've been talking about non-linear or choppier quarter reported. We've been turning a lot of that and making lot of changes, some of which have an immediate positive impact. A good example of that would be in last year fourth quarter, we started to roll out some of the streaming products which costs us less. On the other hand, at different stages through all the things that Tom just described, it had an impact on service transactions and churn. On the Internet, that customer facing should go away in Q1. It doesn't -- are we at full steam in Q1, no, because the impact of what we've been doing over the past two 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 look better through the year.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Well, the activity is going down already.

Christopher L. Winfrey -- Chief Financial Officer

It is.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

And churn is going down as we would expect. And -- so we see the metrics, the operating metrics, and have confidence that the strategy will do what we think it will do.

Ben Swinburne -- Morgan Stanley -- Analyst

Yes. No, that's helpful. I think the questions from myself and others are all aiming at the same thing, which is we're heading toward the payoff from this acquisition, and I think people are wondering how much revenue growth benefits the CapEx that I think is pretty straightforward, but it sounds like there has been enough in the system going on that has impacted net adds, maybe even ARPU, and we're sort of going to come out of that, so thank you for all that color. Appreciate it.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

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

Mike McCormack -- Guggenheim Partners -- Analyst

Yes, thanks. So I mean, just a comment, we heard, obviously from AT&T this week, pretty weak results of DIRECTV now, and significant losses on the linear DIRECTV products. I suspect we'll see similar 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. Is that going to become a slowing threat (ph) do you think, and then clearly the losses in AT&T is there an opportunity for you guys, have you taken some share there? Thanks.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Well, Mike, I've said it all along that I thought that the shrinking of the satellite business would be -- would benefit our video business. But then you've got these other 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've been selling products below cost it appears, and even they had to admit that that was driven and raise some of their rates, which will impact the overall competitive landscape.

I mean, if you go -- 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 flat packages and the content companies insure through their contracts that -- that retailers like us carry that product in big bundles. We're not allowed to carry it without carrying other services similarly situated in the same packages or unless we don't want to carry it at all.

And if you look at the product sets that most MVPDs have, they're similar. So that price driver in the fact that content companies have been able to price through that puts enormous burden on a lot of people don't -- can't really afford television. And that affects the propensity to use passwords and the things of that nature to get product without paying for it, and by the content companies going over the top without having the experience of being distributors. They've done that in a way without securing their content, which any distributor would theoretically do if they know what they were doing, but that hasn't been the case.

So you have free service all over the country through passwords, and it's not always that easy to deal with in regard to your television (ph) 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 of over-the-air 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 of 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 proportion of that that comes to us.

Mike McCormack -- Guggenheim Partners -- Analyst

Yes, we clearly share that concern on the faster stuff. But maybe just one follow, Tom, just on the mobile stuff, I think there has been may be somewhat 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.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

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 so it -- 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, the whole marketplace is available to us.

Mike McCormack -- Guggenheim Partners -- Analyst

Got it. Thanks Tom.

Stefan Anninger -- Vice President, Investor Relations

Thanks, Mike. Michelle, next question please.

Operator

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

Jason Bazinet -- Citi -- Analyst

Just a question for Mr. Winfrey. You mentioned mobility would -- 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 low-high, in terms of how many subs you think you need before it does reach profitability.

Christopher L. Winfrey -- Chief Financial Officer

Thanks, Jason. And look, the question of breakeven is somewhat academic, because it has to be entered in the context of your growth rate, but absent additional growth costs, we expect the mobile business on a stand-alone basis, without the benefits of cable, which we think are significant, we'd expect no growth and no 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. I don't want that to be a guidance of where we are 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 benefits 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're taking on which I've expressed in the past, either going to be wildly profitable and have very high NPV or relatively low cost option for the company. And we think it's going to work really well, both on a stand-alone basis as well as creating value for cable.

Jason Bazinet -- Citi -- Analyst

Thank you.

Stefan Anninger -- Vice President, Investor Relations

Michelle, next question please.

Operator

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

Brett Feldman -- Goldman Sachs -- Analyst

Thanks. Another wireless question, you were talking about your interest in the CBR 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 licensed spectrum, because if that's the case, obviously, you have to shell out some dollars to gain access to it. So do you anticipate that could be significant enough of an outlay that it might disrupt your capital returns program and then obviously a followup is, if you're going to gain access to more spectrum, you have to build it out. How does that factor into your outlook for a material improvement in your CapEx going forward? Thanks.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

So Brett, first of all, we don't think that spectrum will be what -- 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 were pleased to. 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 free spectrum available to us, and yes, there would be capital if you -- there would be costs, if you bought 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 it 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'd 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 GPRS on our strand or however we want to do the deployment or physically buy 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 was more efficient to spend the capital and reduce our expenditures on the MVNO, that would be a good return on investment. So we'll look at that as it comes up.

Brett Feldman -- Goldman Sachs -- Analyst

Great, thanks for the color.

Stefan Anninger -- Vice President, Investor Relations

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

Operator

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

John Hodulik -- UBS -- Analyst

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 talk a little bit about the margin side, you've 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 -- in terms of margin increases as we get through this integration cycle because -- we've talked about the OpEx spending that goes along with the all-digital and sort of duplicative costs. If you could give us a little bit more color there, because 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 -- 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. If you could just give us a little color on sort of what's happening there and sort of how it looks coming out of this repricing?

Thomas M. Rutledge -- Chairman & Chief Executive Officer

All right. 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 -- with 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're not visiting customers and creating more transactions that are necessary. I repeat, service call activity will go down, which means that there are less physical transactions per dollar of 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 count with a lower churn rate, you have less connects and less disconnects, which means you have less activity, which means you have lower costs. So we have expectations that we'll have significant reductions in cost to serve, and obviously going forward, technological change too and the way we 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'll be able to generate faster EBITDA growth and 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.

John Hodulik -- UBS -- Analyst

Years, not just in 2019 improvement, but that carries through.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Yeah, yeah, it's shows multiple years. Yes.

Christopher L. Winfrey -- Chief Financial Officer

John, the question regarding enterprise. So rough order of magnitude, it's $2.5 billion business. Well over $600 million of it is in Cell Backhaul and NaviSite which are flattish. That's the only point that we're bringing out there is that, there is a portion of it which naturally isn't growing at the same pace to the rest of business. The remainder is growing fast from a relationship standpoint, 15% PSU growth, but the same thing that we've done in residential and that we've done in SMB really for the past year. We've been going to the market in a more aggressive way on pricing around whether it's fiber internet -- fiber Internet access or Ethernet, metro Ethernet or voice. We've been more aggressive in the marketplace to grow and try to compete and accelerate growth which has worked. 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 outs of contract and enters into the 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.

Thomas M. Rutledge -- Chairman & Chief Executive Officer

So the one other thing I'd say about revenue growth to just finish that off is that, we are selling in -- we're going to be selling in mobile, which does have a higher revenue component to it in packaging going forward, and yet the consumer from a total cost to them perspective will be getting a savings. So we think that's a pretty interesting opportunity overall for us.

Stefan Anninger -- Vice President, Investor Relations

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

Thomas M. Rutledge -- Chairman & Chief Executive Officer

All right, thanks everybody.

Stefan Anninger -- Vice President, Investor Relations

Thank you everyone.

Operator

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

Duration: 59 minutes

Call participants:

Stefan Anninger -- Vice President, Investor Relations

Thomas M. Rutledge -- Chairman & Chief Executive Officer

Christopher L. Winfrey -- Chief Financial Officer

Vijay Jayant -- Evercore Group -- Analyst

Philip Cusick -- JPMorgan -- Analyst

Craig Moffett -- MoffettNathanson -- Analyst

Ben Swinburne -- Morgan Stanley -- Analyst

Mike McCormack -- Guggenheim Partners -- Analyst

Jason Bazinet -- Citi -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

John Hodulik -- UBS -- Analyst

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