Charter Communications Inc (CHTR) 2016 Q4 法說會逐字稿

Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to Charter's fourth-quarter 2016 investor call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Stefan Anninger. Please go ahead, sir.

Good morning, and welcome to Charter's fourth-quarter 2016 investor call. The presentation that accompanies this call can be found on our website, IR. Charter.com, under the financial information section.

Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent proxy statement and Form 10-K. 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 views only, and Charter undertakes no obligation to revise or update such statements, or 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. We will also refer to pro forma results.

While the Time Warner Cable and Bright House transactions closed on May 18, 2016, these pro forma results present information regarding the combined operations, as if the transactions had closed at the beginning of the earliest period presented, in order to provide a more useful discussion of our results. Please refer to the pro forma disclosures throughout today's materials, and the reconciliations provided in Exhibit 99.1 to our Form 10-Q filed on November 3, 2016.

Unless otherwise specified, customer and financial data that we may refer to on this call for periods prior to the third quarter of 2016 are pro forma for the transactions, as if they had closed at the beginning of the earliest period referenced. Please also note that all growth rates noted on this call, and in the presentation are calculated on a year-over-year basis, unless otherwise specified.

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

Thanks, Stefan. 2016 was a very big year for Charter. In May, we closed on a transaction which quadrupled the size of Charter. We now pass 50 million homes and businesses, and serve over 26 million customers.

While we spend most of our time on the execution of our operating plan because we believe it will create tremendous value, it's also becoming increasingly obvious that our network is the future of communications, as new standards like 5G are being developed for high-capacity low-latency, high-compute services, delivered over small cells, the way Wi-Fi is today. Since closing, we've been managing the complex process of integrating the three different companies, with over 90,000 employees and a network consisting of nearly 700,000 miles of physical infrastructure, and an annual revenue in excess of $40 billion.

Despite the complexity, our integration is going well, and as expected. Most importantly, we're growing in those parts of the service area where our operating strategy has been deployed, and we remain confident that our plan and the customer and shareholder benefits we expected will be met or exceeded.

Through the early stages of integration, our financial performance has continued to improve year-over-year. On a pro forma basis, we grew our total consolidated customer base by nearly 5%, and our full-year 2016 consolidated revenue grew by 7% to over $40 billion, and our full-year adjusted EBITDA, excluding transaction or transition costs, grew by 11.8% year over year to $14.6 billion, and we generated close to $7 billion of annual EBITDA less capital expenditures on a pro forma basis.

The best predictor of future performance in the new Company is to look at the path Legacy Charter took from 2012 to today. In 2016, Legacy Charter produced customer relationship growth of 6%, and residential revenue growth of close to 6%, with almost no price increases, while margins were improving and EBITDA was therefore growing even faster than customers and revenue, and while capital intensity declined.

In 2017, we are focused on several key goals and priorities. First is to complete the rollout of our Spectrum pricing and packaging in remaining new markets. We were approximately 50% complete at 12/31, we are approximately 75% complete as of today, and we will be essentially fully done in residential by the end of March.

And although churn and downgrade activity from the legacy TWC low-value product set remains elevated, we expected that to be the case. That churn and downgrade activity should slow, as customers migrate to better value offers. We're seeing the benefits of our strategy even faster in Bright House, which has had less of those issues.

On the small and medium business side, we will launch the full Spectrum SMB product pricing and packaging in TWC and Bright House markets in the second quarter, driving better customer growth. In the second quarter, we'll restart our all-digital deployment, featuring fully two-way advanced set top boxes to video customers in the approximately 40% of TWC and 60% of Bright House that are not yet all-digital, which allows us to offer more HD, interactivity on every video outlet, faster data speeds, and reduced operating costs. We should be 100% all-digital in less than two years.

We've now activated our MVNO agreement with Verizon, and we plan to launch a mobile offering in 2018 under that agreement. Our goal is to include wireless services in our packages and drive more customer relationship growth and longer customer lives at Charter. We're also launching high-capacity experimental 5G-like field trials using spectrum test licenses that were recently granted to us by the FCC.

We intend to use these field trials as learning opportunities to provide us with better insight into the capabilities of our wireline network, when attaching radios with high frequency licensed and unlicensed spectrum, and see how our various wireless network building blocks can be used in conjunction with one another to offer services that we'll develop over time. We believe our MVNO with Verizon is well suited for the shorter and medium term wireless goals we have. Over the long term, our goals in wireless and mobility and our wireless business plan will broaden.

Our approach is flexible. We'll use the advantages of our network and product development capabilities, combined with consumer demand and our MVNO, to drive our strategy in wireless with the goal of driving more growth and value creation for shareholders. Now, I'll turn the call over to Chris.

Thanks, Tom. Please note that I'll refer to our fourth-quarter 2016 actual results versus prior-year pro forma results. The customer and passing data that you see in today's materials continue to be based on legacy Company definitions.

During the fourth quarter, total customer relationships grew by 4.6% year over year, with 3.8% at legacy TWC, 6.1% at legacy Charter and 5.7% at legacy Bright House. As slide 7 shows, we grew residential PSUs by 345,000 versus 917,000 on a pro forma basis last year. The lower year-over-year PSU net adds was primarily driven by fewer PSU net additions at TWC, for the reasons Tom mentioned.

Over the last year, TWC residential video customers declined by 2%. Pre-deal Charter grew its residential video customer base by 1%, and Bright House lost 2.6% of its residential video customers, which is improving. TWC's video net loss was 159,000 worse than last year, with over 70% of the total 105,000 video losses in the quarter driven by churn from lower-value limited basic packages.

Let me give a few examples of what we mean by lower-value products. A limited basic video offer for $10 in the fall of 2015, and a double play of limited basic video and Internet for $45, also in the fall of 2015. Those historical offers were then coupled with high promotional rolloffs and annual rate increases, customer equipment fees, and previously unstructured retention policies that encouraged calls from customers.

Until we launch Spectrum pricing and packaging in a market, limited basic video sell-in at TWC has been 20% and higher, and we have to work through the migration or churn of these low value offers. Legacy Charter continued to perform well in video in fourth quarter, with 20,000 video customer net additions. Bright House added 34,000 video customers in the quarter, benefiting from seasonality and the strong performance of our new pricing and packaging.

In total, we lost 51,000 residential video customers in the quarter, driven by the losses at TWC. Spectrum pricing and packaging is going very well with year-over-year sales and connect activity solidly up in those areas we've launched Spectrum pricing and packaging, with good triple play sell-in and 99% expanded basic sell-in.

In residential Internet, we added a total of 357,000 customers in the fourth quarter versus 495,000 last year, and for the full year, our total residential Internet customer base grew by close to 1.5 million customers or 7.4%, with [8.8%] growth at legacy Charter. In voice, we grew customers by 39,000 in the fourth quarter versus 304,000 last year, with the lower growth largely driven by higher churn at TWC, in part driven by low-price voice offer in TWC markets in prior-year quarters.

Over the last year, total pro forma residential customers grew by over 1 million or by 4.2%, and residential revenue per customer was up by 1.4%, nearly all of which was driven by TWC rate increases in 2016, and promotional rolloff price step-ups, which impacted unit growth. Legacy Charter's customer ARPU declined year over year, primarily driven by the continued strength of Internet single play sell-in, and the lack of meaningful rate increases year-over-year.

Slide 8 shows our customer growth, combined with our ARPU growth resulted in year-over-year pro forma residential revenue growth of 6.0%, with a very different mix of rate and volume across the legacy entities. Total commercial revenue SMB and enterprise combined grew by 11.8%. SMB revenue grew by 13%, and enterprise, excluding cell backhaul and Navisite grew by over 14%.

Fourth-quarter advertising revenue exceeded 20% growth year-over-year, driven by political. For the full year, advertising revenue ex-political was about flat with 2015. In total, fourth-quarter pro forma revenue for the Company was up 7.2% year-over-year.

And looking at total revenue growth at each of our legacy companies, TWC revenue grew by 7.5%, with nearly half of residential revenue growth coming from rate increases. Pre-deal Charter grew by 6.4%, driven by continued strong customer growth. And Bright House revenue grew by 7.4%, with improving unit growth and less reliance on rate.

Moving to operating expenses, during the quarter we continued to remap certain costs to the right business unit expense line, and these reclasses have been made to prior periods in our trending schedules to provide pro forma results on an apples-to-apples basis. In the fourth quarter, total operating expenses grew by $259 million, 4.2% year over year, with transition expense accounting for $78 million of our total OpEx this quarter.

Programming increased 6.1% year over year, driven by contractual rate increases, partially offset by higher transaction synergies. While we're doing what we expected on programming, new deals remove a consistent program baseline for calculating synergies, really starting in 2017.

Turning to regulatory, connectivity, and produced content expense, these direct costs were up 3.7% year over year, driven primarily by peering and interconnect costs, rights fees escalators, and franchise fees. Remember the Dodger's rights costs is only expensed during the regular MLB season, both in the past and today, and therefore unlike last quarter, we did not benefit from the purchase accounting adjustment in the fourth quarter.

Cost to service customers grew by 1% despite overall customer growth of 4.6%, which reflects lower service transactions at legacy Charter, the lack of all-digital activity at TWC this quarter versus last year's fourth quarter, and the benefit of less physical disconnects in all digital markets. Marketing expense declined by 5.5% year over year in the quarter, as we continued to drive synergies from our transactions as expected, and other expenses grew by 6.1%, driven by higher advertising sales and enterprise sales cost.

Adjusted EBITDA, which excludes non-cash share based compensation grew by 12.7% in the fourth quarter, and excluding transition cost in both years, adjusted EBITDA grew by 14.3%. We've identified over $150 million of hard transaction synergies realized within the fourth quarter, and in 2016, in other words from May, we realized over $300 million in hard synergies. We continue to expect over $700 million in run rate transaction synergies at the first anniversary of the closing of our transactions, and I believe we'll exceed $1 billion in synergies after three years from close.

Those transaction synergies are hard cost savings, and they don't include CapEx synergies or revenue, or OpEx synergies which flow from our operating model. Going forward, we will not continue providing quarterly synergy updates given the significant level of judgment around determining the appropriate baseline for rates, like programming; or volume, like procurement or marketing; as well as the challenge in isolating transaction synergies from the operating strategy benefits, and the upfront investments that we're already making to drive growth.

We don't provide subscriber or financial guidance. However, legacy Charter plus transaction synergies continues to be a good proxy for how we expect subscribers and financials to develop over a multi-year period in our new markets under our operating strategy.

As you think about the many moving parts in 2017, isolating pieces into 2016 results can be helpful. 2016 revenue benefited from both political advertising revenue, and large price increases at legacy TWC. Excluding those impacts, year-over-year revenue growth on a pro forma basis would have been slower and closer to 4.5%. Flowing through at very high margin, that translates to over 5% of our 11.2% EBITDA growth in 2016.

As we look to full-year 2017, we expect to accelerate customer relationship growth, but on the other hand, we won't benefit from political advertising and little from rate increases. Our full-year transaction synergies will be higher, along the lines I described, partially offset by the upfront investments in our operating strategy. You can use those data points to help you think about 2017 potential growth.

Turning to net income on slide 10, we generated $454 million in net income attributable to Charter shareholders in the fourth quarter, versus $130 million on a pro forma basis last year, with the growth driven by higher adjusted EBITDA and pension gains of $366 million, primarily due to the positive impact that rising interest rates have had on our accumulated benefit obligation. We also had a $73 million gain on financial instruments from currency movements on our British pound debt and related hedging, partly offset by transaction-related expenses, including severance and higher income tax expense.

Turning to slide 11, capital expenditures totaled $1.89 billion in the fourth quarter, including $187 million of transition spend. Excluding transition CapEx, fourth-quarter CapEx declined by $81 million year-over-year or 4.5%, with tradeoffs between all digital in the fourth quarter of 2015 and Spectrum pricing and packaging box placement in Q4 2016. For the full year 2016, our capital expenditures totaled $7.5 billion or $7.1 billion when excluding transition spending.

Slide 12 shows we generated $1.86 billion of free cash flow in the fourth quarter versus $80 million of actual, not pro forma, free cash flow in the fourth quarter last year. That growth was largely driven by higher adjusted EBITDA, given the closing of the transactions and a working capital benefit driven by the timing of CapEx payables, and a more robust working capital program at Charter. While we don't provide pro forma free cash flow for the fourth quarter of 2015, on a pro forma basis, adjusted EBITDA less CapEx grew by 24% in the fourth quarter, and for the full year, that figure grew by 15%.

We finished the year with $60 billion in debt principal. Our run rate annualized cash interest expense is $3.3 billion, whereas our P&L interest expense suggests a $2.9 billion annual run rate. The P&L difference stems from the revaluation of acquired TWC debt on our GAAP balance sheet as part of purchase accounting. At the end of the fourth quarter our total net debt to last 12 month pro forma adjusted EBITDA was 4.0 times, declining despite buyback activity.

Long-term target leverage remains at 4 to 4.5 times, and we continue to target the lower end of that range. In December, we refinanced our term loan A, H, I, and our revolver, and in January, we refinanced our term loans E and F. Those refinancings reduced the LIBOR spreads on each of these tranches, and removed all remaining LIBOR floors from our bank debt.

In February, we also issued a 10 year 5 1/8% note, primarily related to call to $750 million of CCOH 6 5/8% callable paper due 2022. And in aggregate, on a like-for-like basis, these cumulative refinancings should save us over $40 million in interest costs per year, so meaningful savings.

During the fourth quarter we repurchased 4.0 million shares, Charter shares in the open market, totaling $1.1 billion, at an average price of $265 per share. Including the Advance/Newhouse transaction in late December, where we repurchased approximately 750,000 common units, we repurchased a total of 4.8 million shares and common units during the quarter.

For the full year 2016, we repurchased 5.8 million shares and common units for close to $1.6 billion, or about 2% of our combined total shares and as-converted, as-exchanged partnership units. From late in the fourth quarter until today we had a 10b5-1 program where the stock price was above the buying thresholds that we had previously put in place. So we haven't bought back shares yet in 2017, and our share repurchase activity will continue to depend on market conditions and other potential uses of capital. Our goal remains to keep full strategic flexibility, and not become trapped by formulaic capital allocation guidance on buybacks.

Finally, turning to our tax assets on slide 14, we estimated that our total value of these assets is approximately $6 billion, is comprised of our historical tax basis at Charter plus the Adelphia basis, large NOLs and a valuable tax sharing agreement with Advance/Newhouse. We don't currently expect to be a material cash income taxpayer until after 2018. Like you, we closely monitor the efforts in Washington to reform corporate tax policy in the US, which we believe could be a net positive for Charter.

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

(Operator Instructions)

Your first question comes from the line of Phil Cusick with JPMorgan. Your line is open.

I guess to start. Strong performance from the legacy Bright House markets. Was that due to the launch of the new pricing and packaging in the quarter, or more a issue of seasonality? Then in the Time Warner markets, the weakness, it sounds like it's more an issue of churn, but has gross activity been in line year over year, weaker or stronger? Or should we expect it really to not ramp until you get the new packaging in? Thank you.

In Bright House, it's our marketing process and sales process has generated significant activity, and so, yes, our pricing and packaging is driving the activity there. There is seasonality in the Bright House market, but we're exceeding year-over-year seasonality activity, with our marketing activity. So we're pleased with the response that pricing and packaging is generating there, as well as the response that general marketing and the expenditure of marketing dollars is achieving in Bright House markets.

Our experience in Time Warner markets, we're 75% of the way through with the rollout of pricing and packaging. We are experiencing good growth where we've rolled that out, and creating new customers that we think are valuable customers, and be less prone to churn than the customer base that's currently there. And the net of that, in the places where we've rolled out new pricing and packaging, is positive. So we're encouraged by our marketing strategies, and how they're being received by the marketplace.

Can you remind us of how long those really aggressive Time Warner offers went? Should we expect that there were -- as I remember, they were pretty aggressive through the fall of 2015 and into 2016, as well. Should we look for that churn to continue?

Yes, I think that would be reasonable. We're doing some things to mitigate it, that have taken us time to put in place, because of the complexity. There were 96,000 different promotional offers out there, and just the sheer logistics of managing that has been a challenge.

But we've gotten some control over it, and are getting better every day. So we can -- we think that we can mitigate some of the churn through better management of the step-up process. But you're right, in the fall of 2015, those offers were significant, and they obviously went through close and even a little bit afterwards.

Thank you.

And your next question comes from the line of Vijay Jayant with Evercore. Your line is open.

Obviously you don't have a strategy of using rate increases to drive the business, but in 2017, any color on any tiers of broadcast or sports that had some rate increase, so we can think of this underlying ARPU growth? And then just a more broader question. There's been some press reports about the Verizon unlimited offering, and how it may or may not impact your MVNO. Any color on that would be appreciated. Thank you.

Well, that last comment about the MVNO, we have an MVNO, and we don't think that the T-Mobile comments on it were correct, in the way they understand the way it works. We're comfortable with our MVNO, and think that we can use it to our benefit. I don't really want to say any more than that. And with --

On rate increases, the goal here really was much more around standardization for things like the broadcast surcharge, and whatnot. So it wasn't about significant rate increases. Relative to the total amount of rate increase that was in 2016, what's in 2017 is really a small fraction of what it was in the prior year. And that's what I was trying to convey through the comments.

The goal here is to drive customer relationship growth, and to drive high-quality growth. And if you look at legacy Charter, we're growing customer relationship growth at about 6%. We're growing residential revenue at around 6%. We think that's the right way, if you can go get it, to drive growth. And if you have pricing power today, it means that you are pricing power in the future. Our goal is to grow it now and to grow fast, and to create momentum in the marketplace.

So our rates have moved around a lot incrementally compared to what they were in the legacy properties. When you net it all out, it's not a rate driven strategy. We changed the rates but we're really creating customers at similar ARPUs with a better package.

Next question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Tom, could I just ask you on your 5G or wireless tests that you're running, a lot of the 5G discussion in the market has been around fixed wireless, as essentially potential competitor to DOCSIS. Obviously that would not be a relevant, particularly relevant strategy for you, given you have the best last mile in your markets. So how are you thinking about the opportunity with these tests you're running around short distance, high frequency wireless? Is this about mobility or fixed, in markets that might be more cost effective rather than fiber or coax line extensions?

Just any more color on where you see all this headed in terms of the opportunity. You led in your prepared remarks with your network being the network of the future. I'd love if you could expand upon that.

I just had a quick one for Chris on leverage. Do you expect to go below your 4 times in 2017? I guess I'm trying to get a sense for how much of a line in the sand that is, as we think about capital allocation this year, given you're at the low end, at the end of 2016. Thanks.

So Ben, I would say it's -- we're experimenting with the actual technology itself first, to see how it works and what it's capable of doing. But what we know about it is that it's very short range, small cell, high capacity technology. And we have it working in labs, and we've obviously experimented with it in labs. These are actual field trials of use applications.

If you think about our architecture, we have 22 million approximately Internet customers. Almost all of them have a Wi-Fi router in the house, connected to the Internet service. There are over 200 million wireless devices connected to our network currently. Of those -- and many of those are actually cellular devices, meaning they're phones, and they have a contract with a traditional mobile cellular provider, but 80% of the bits or 75% of the bits on those devices are coming through the Wi-Fi platform.

We're a wireless provider of data services today. When you look at these high capacity networks of the future, and they're a way out, there are new products that we think will be developed with those low latency, high capacity networks, including virtual reality products, augmented reality products, and how that manifests itself in the world, product development is a little unclear.

But my sense is that many of those products will be not mobile products. They'll be fixed products in the dwelling or in the office. They'll be how you learn, and how you play. They're less about mobility than they are about capacity and low latency.

I think our networks, our Wi-Fi network and our distribution network sets up really well from a total capital cost perspective of creating those products. So that's how I see the market developing. Will there be a mobile platform? Will there be a fixed wireless platform?

I think there are fixed wireless opportunities, particularly in the enterprise area, and if you think about things like strip malls, malls in general, business services where you'd have to cut a parking lot to provide service with a traditional fiber wireline product, if you had a high capacity network that you could use wirelessly to connect those business service areas, I think there are opportunities of our network to expand its enterprise business through fixed wireless drops. So I think there -- how all the opportunities develop, I don't know, but I don't really see it as a mobile platform today. Whether that will be a mobile platform 10 years from now or not, I don't know, but I don't think the immediate product development cycle will be a mobile platform.

Thank you.

Ben, on the leverage, our goal is not to go below 4 times this year. There may be points in time where because of the timing of buybacks or the timing of refinancings that we may tick down, but I think our goal is to remain above 4 times if we can. When you start to run the numbers, that implies we've got to deploy a lot of excess free cash flow.

So that is the challenge, and to do it in a smart way. So I'm intentional in saying our goal it not to get below 4 times. Doesn't mean temporarily that we won't tick down, but our intent is not to do it.

Thank you both.

Your next question comes from the line from John Hodulik with UBS. Your line is open.

Maybe a question for Chris. Trying to get some sense of the near-term implications for restarting the all-digital initiative. Typically there's some sub trends, dislocation, but obviously, there's some cross current with the new product and packaging. Just wondering if you expect to see that in the KPIs? And then even working down the P&L, are there obvious impacts that we should expect in the near term for moving forward with that? Thanks.

Is your question more around CapEx or was it more around sub trends or something else, as it relates to all digital?

Really both. I mean, basically, I'm trying to get to a sense for whether the sub trends -- there was a number of components to your prepared remarks, but do you expect the sub trends to improve, or similar to what we've seen, given the --

Go ahead.

Sure. I was going to say. You would imagine there's costs associated with the all-digital movement both in the P&L and through CapEx, so whatever info you can gives us on that would be great.

The all-digital will restart in Q2, and it will go probably for around two years. But the bulk of the activity though is going to be taking place next year, so we'll be doing all-digital from Q2 to the end of this year, but the bulk of it's going to be in 2018. There will be some CapEx associated with that rollout.

The bigger portion of CapEx this year is going to be driven by a higher amount of CPE and placement costs for Spectrum pricing and packaging connects, because A, we expect sales in connects to be higher, as we've already seen in the markets where we've gone. B, when we do an install under Spectrum pricing and packaging, there's a higher number of devices that we're placing in the home because of our two-way set top box strategy, as well as our strategy not to charge for modem rental, and to have reasonable router fees, which means that you're going to put more capital into the home on an average transaction, and we expect to have higher transactions. So that's going to be a bigger driver in 2017, offset by some transaction synergies that we have on the CapEx side, as well.

From a customer perspective, going all digital is disruptive. Upfront if anything, it does put friction into the business, which is one of the reasons that we tend to be thoughtful about how we go market by market, and that's factored into the timing of the all-digital program that I outlined before.

So net-net, you end up with a better product, better network and speed capabilities in the marketplace, by taking out analog, but there's friction for the customer base as well as OpEx and CapEx when you do it upfront. But I expect the actual growth model this year to be more of a factor for both the KPIs as well the CapEx than I do for all digital.

The only thing I would say too, is incrementally we're all-digital already.

Your next question comes from the line of Jonathan Chaplin with New Street Research. Your line is open.

Wondering if you could give us a little bit more detail about the process for launching a wireless product, if you triggered the MVNO already. My understanding is within six months, you can use it. I'm wondering if you could just run through the he details of where your wireless organization stands today, what you still need to put in place, and what the steps are between now and a commercial launch? It just seems like you should be able to launch earlier than 2018.

We have put the -- we have triggered the MVNO with Verizon, and we're now working through the process of creating a business plan and some test processes that we plan to work through in this year to be ready to launch broadly next year. That isn't to say we wouldn't have any commercial activity this year, but to integrate a wireless business into a high volume transaction business that we already have is the major challenge.

Now, we also have to enter into contracts with instrument providers and billing systems, and we have to consider our store front capability. We have 700 stores in the new company. Is that enough? Where should we be, from a retail perspective?

And so we're still working through all of those issues. So in order to actually do it at a relatively small scale is pretty easy. The issue is, how do you do it at massive scale quickly?

Got it. So one of the questions we've been getting a lot in the wake of Verizon and others going to unlimited is whether the terms of the MVNO make economic sense in an unlimited world? I know you said that the T-Mobile understanding of the contract was wrong. Is it the case that your wholesale rates step down index to retail rates?

Well, I don't really want to discuss the details of our plan, other than to say that T-Mobile doesn't understand it, and we're comfortable with the current world and pricing world of data in mobile, to continue on with our MVNO approach. So we think it will work for us.

Great. Thank you very much.

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

Just a question for Mr. Rutledge. Given your comments about the market waking up to your terrestrial network playing a key role in the future of communications, would you mind just giving us a bit of color in terms of the number of route miles you have that are fiber versus coax and where you are in terms of node density? In other words, what's the distribution of 500 homes per node versus 250 versus 125?

Well, I don't have the -- I don't have the answer to your question off the top of my head anyway, other than to say our average node size is around 500 homes, and we have a lot of fiber in the network. We have the ability to take that fiber deeper. We have the ability incrementally to take the network to a passive network, and to do that at reasonably efficient capital costs through time, and to do that in very targeted ways, where we need the capacity.

So we're very comfortable with the extensibility of our network, and the ability to put high capacity anywhere in our network. We have a cable labs project, which is an industry association organization, that has developed 10-gig symmetrical products in the lab that are capable of running on our nodal architecture. To get to those speeds, we may need to go deeper with our fiber, but we can go to 5G symmetrical with less deep fiber penetration. So we think we have a very flexible architecture that allows us to grow significant capacity, without a lot of capital investment.

Do you anticipate your homes per node falling, say over the next five years, 10 years, to 250, 125?

Yes, particularly, we said we have an average. There are some that are above average. I think that it's really a market demand-driven process.

There are a bunch of ways you can manage capacity on our network. We can do what are called virtual node splits. So what that means is if you clear spectrum electronic -- take off analog spectrum and go all-digital, and you have excess capacity in your network, and you have demand that would say, I need to put more capacity in a node, there's two ways of doing it.

One way is to physically split the node into a smaller node, which requires the placing of an electronic device in the field, and maybe the expansion of some fiber, depends on how the architecture of that is structured, but it's a relatively -- it's inexpensive on a grand scale capital perspective, but a lot more expensive than a digital or virtual node split. You can do those if you have channel capacity, by just recreating additional DOCSIS paths, you can create a virtual node, essentially.

We manage our network for the future based on the actual load on the network, as opposed to some theoretical issue, and there are other ways of getting capacity out of all-digital networks. Like for instance, most of our set top boxes now are capable of IP delivery. They're also capable of MPEG4 delivery, which means that we can squeeze the capacity out of our video business, and get more DOCSIS capability in our network, which means we can do more virtual or electronic node splitting than we might have done a couple of years ago.

And that's a function of our CPE strategy. So we're managing all of those things together to get capacity. But in any model we get to, some future state, where there's a whole new product set that requires massive capacity that currently isn't required, we would take our fiber deeper and go to a passive network, and go to the symmetrical 5 or 10 gig that I talked about earlier.

Jason, from a financial perspective, just so it's clear to those thinking about the CapEx implications, we've been doing virtual and physical node splits for years. We continue to do it. And we've been going, particularly at TWC and even at Bright House for new builds and now at legacy Charter, new build with fiber to the premise. The things Tom is talking about are already in the numbers, and it's the type of activity we did today, and the boxes, we're actually buying with those IP capabilities at cheaper prices.

And MPEG4, higher density digital compression.

Makes perfect sense. Thank you.

And your next question come from the line of Mike McCormack with Jefferies.

Tom, maybe a comment just on the changes in Washington from a regulatory standpoint, what that might mean for Charter. And then also maybe the associated potential tax reform, what that might mean for your tax asset? Chris, if you don't mind, just a little more color on the stock above a certain threshold, how often is that threshold evaluated? Thanks.

Sure. Look, we had a lot of headwinds in the previous administration, from a regulatory point of view, we got Title II. It didn't really affect us but had the potential of affecting us. I think that there's a good probability that could be reversed, which would be a good thing for us.

We were prepared to live in that world, so it's better to live in a world where you have more visibility into your investments, and how they might be regulated in the future. The set top box issue was really about Google and other companies getting access to video content without paying for it, and that appears to not be an issue going forward. And so the general proposition for a better FCC has already manifested itself in the appointment of Ajit Pai as Chairman of the FCC, and the processes that he's reforming and reviewing all look to be better for us than the previous regime.

Tom, on the pay prioritization, is there an opportunity there from a revenue standpoint for you?

You mean if net neutrality went away as opposed to Title II? They're really different concepts. One's a legal structure.

We had net neutrality without Title II previously. I'm not sure net neutrality goes away. We don't have a business model, or we didn't have a business plan to use pay for prioritization. I'd rather not have any regulation than have regulation, just as a general proposition.

Right.

And let markets develop. I think that's good for us because I think we have great assets, if we can manage them well. But the bigger issue for us at least today is Title II, and its implications to other regulatory follow-on issues, as opposed to what actually is going on in the market. We're actually quite comfortable with the way we sell and service our products today.

On the tax reform, we're in favor of tax reform, both to make it more efficient and more simple, and in most scenarios it's a significant positive for Charter, even despite our large NOLs. The one piece that we think should be socialized more us is the interest deductibility and how that's applied, because of the implications it has for infrastructure investment generally, and when you have large network builds, which is what we do, as well as other types of infrastructures that get built across the US which is a priority for the administration, the way you finance it matters and interest deductibility plays in, and I think having the right incentives to make those investments is helpful. But we're hopeful we'll get an ear to listen to that, and think through the best way to achieve the best for both.

You asked about the price threshold on the 10b5. Without going into -- I don't want to detail into how we think about buybacks, because it's flexible and it changes over time, but generally you put a 10b5-1 plan in place when your window is no longer open, whether that's for an executive or an insider, or whether that's for the Company itself.

And it's at that point in time that you set some general guidelines as to how and when, and at what volume you'd be buying stock. After that point, it's very difficult to go back in and modify it, until you have a clearing event, for example, like an earnings or other type of 8-K. So that's the technical background behind a 10B5.

Okay. Thanks.

And your next question comes from the line of Jessica Reif with Bank of America Merrill Lynch. Your line is open.

Couple of questions. How far along with you in terms of your programming resets, as a combined Company?

Do you mean synergies from programming? Is that what you mean by resets?

As you've gone along, you've obviously renegotiated rates.

That's why we said we wouldn't forecast future synergies. We think we got the synergies that we said we would get. I think it was a little over $400 million we thought we'd save. Isn't that what we said?

Little less. We said -- when we originally did the -- when we originally announced the transaction, we said $800 million over three years, a little less than half might come from that.

Right. So we got the synergies, we believe, as a result of the closing of the transaction and our management of the contracts that were in place then. Now we have to go forward, and we've renegotiated an NBC deal over the fourth quarter, and other deals throughout the Company.

And so, we do think we've achieved what we thought we would, and now we're in a world where the question is, what's the future growth of programming and content costs, and how does that work. I think there's -- that's a difficult thing to -- a rich subject.

Anything else on that? I have two other follow-ups.

I'll just say that we don't expect the current business model to fall apart tomorrow, and we think that historic trends are more indicative of the future than a brand-new world, with regard to programming. So what are your--?

Okay. Then just to follow up on two other topics that you already discussed. One on regulatory reform. Is there -- it does seem like there's a likelihood of significant change. So, one, does it change the way you guys think about M&A, either as a buyer or a seller, and does it open the door at all to renegotiate some of the conditions that you had to agree to?

I don't know about the second part of your question, with regard to our conditions. We have optionality in our conditions, by the way, that could be shorter, and we have the right to petition. So in a better regulatory climate, there would be a greater likelihood of achieving those reductions, you'd hope.

But we were bullish on the business before the change in administrations, and prepared to live in the regulatory environment that was there. It appears to be better, which is good for us, and makes us more excited about the future of our business than we were previously. Does that affect our valuation of other M&A opportunities? It's hard to say, but we like our business.

But the question was, as a buyer or a seller, since there's been tons of speculation both ways.

We don't speculate on M&A, generally. I don't really know what to say. We like our business.

Just the last thing, the last question was on wireless. You have made a lot of comments on the call, much more clarity than you've given in the past. But you did say something in your prepared remarks about longer-term plans. I just wonder, could you give us some color how you're thinking about that? Were you implying you might want owner economics or you really -- it's clear it's the MVNO in the near to medium term. Just wasn't longer term.

What I was really trying to distinguish on the high capacity, low latency networks that we're experimenting with, which we think are the future of communications in many ways, how significant, at a significant point in time, five years or more, that our network and our infrastructure is probably the best infrastructure on which to develop those products that exist. And we're working toward understanding all of the implications of the technologies, so that we can create an atmosphere where those products develop.

Is it about -- it's not about a business model yet. But we do own our plants, and we think that these assets will work on our plant. So by implication, that's owners economics in a new product. It's not a mobile. It's not what is considered mobility today, 4G, which we think is a bridge to a different kind of wireless world going forward.

Our final question comes from the line of Bryan Kraft with Deutsche Bank. Your line is open.

Just had a couple of questions. First, could you provide any more color on what you're expecting for capital investment levels this year, and also wanted to follow up on programming cost. Do you expect to it be in the same range as last year on a pro forma basis in terms of growth, or will we see some acceleration based on the renewals?

And then separately, just wanted to follow up on an earlier question on 5G. Some think that 5G backhaul actually requires fiber, that coax isn't sufficient, which I don't think is right, but wanted to see if that was something that you could weigh in on.

I'll answer the last one. We think 5G-like products doesn't necessarily require fiber in every location. It requires a high capacity interconnection between the cells, and that can be wireless too, it can be fiber, and it can be coax. But it's a high capacity inter-cell connection, if that's what you mean by backhaul. And it can be -- there's more than one way to do it.

Bryan, on CapEx, we're not providing CapEx guidance, just because we approved a budget internally which is what we want to operationally deploy this year. It could be less than that, just because of what practically can be done, or it can be in a position to accelerate. But from our perspective, it doesn't make sense to really set an artificial target, try to wag the dog for what's ultimately right.

But if you think back to what I said in 2017, we will be spending more on Spectrum pricing and packaging through that higher CP placement for connect. We will restart all-digital. We will be insourcing. But offsetting some of that increase will be the benefit of synergies.

So without giving specific guidance, 2017 is probably a bit higher in terms of absolute dollars than what we were pro forma in 2016, but it shouldn't be a dramatic change in terms of capital intensity or CapEx as a percentage of revenue. And I think your second question was in terms of programming outlook?

Yes.

Yes, we don't provide guidance in general. So getting into one specific line item, I don't think it's really helped for us to do it on a single line item basis, like programming. We're doing what we expected to generally, and we were not surprised by where we are, and we like it.

Okay.

As much as you can when you --

Got it. Okay. Thank you.

All right. Thank you everybody.

Thanks, everyone.

Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.