Charter Communications Inc (CHTR) 2017 Q3 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2017 Earnings Call. (Operator Instructions)

I would now like to turn the call over to Stefan Anninger. Please go ahead.

Good morning, and welcome to Charter's Third Quarter 2017 Investor Call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section.

Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent proxy statement and Forms 10-K and 10-Q. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully.

Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future.

During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. We also may 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 on January 1, 2015, in order to provide a more useful discussion of our results.

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. Pro forma reconciliations are provided in the Exhibit 99.1 to our Form 10-Q filed on November 3, 2016. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis, unless otherwise specified. Additionally, all customers and passings data that you see in today's materials continue to be based on legacy company definitions.

Joining me on today's call are Tom Rutledge, Chairman and CEO; and Chris Winfrey, our CFO.

With that, I'll turn the call over to Tom.

Thanks, Stefan. In the past quarter, we remained focused on the integration of 3 large companies and increasing the high-quality sales with Spectrum pricing and packaging in the acquired footprints. We're creating one company with a unified and centralized operating approach, which puts Charter on a path to be able to grow faster over a multiyear period. The integration is going well and remains on schedule.

Our third quarter operating results were as planned despite all the complexity that comes with completely changing the way we do business in 75% of our footprint. We're growing our customer relationships by 4%. And our customer and financial growth will continue to improve as more and more of our customer base migrates to Spectrum pricing and packaging and all digital is completed and even better video and Internet product rolls out, and our unified service platform, which is a product in itself, is deployed.

In 2017, we're seeing all the short-term effects of implementing a sustainable growth strategy, including high churn from legacy products and temporary ARPU pressure from migration, partly offset by higher sales and better product. And our EBITDA growth is better than when we took Legacy Charter through a similar process.

Inside the businesses, we're executing well and have put the highest risks associated with our integration behind us. Hurricanes Harvey and Irma tested the integration of our people, processes and systems. All performed well, and we've recovered nicely and are essentially back to business as usual. The hurricanes did impact our customer net adds and financial results this quarter, but only marginally. Chris will cover these effects in a moment.

In the third quarter, our customer and individual product connects inside our new footprint were higher year-over-year, as they were in the second quarter. The higher connect activity shows that our Spectrum pricing and packaging is working. At the end of the third quarter, 41% of Time Warner Cable and Bright House customers were in our new pricing and packaging, up from 30% at the end of last quarter. And in areas where we've had Spectrum in place for at least 4 quarters, 52% of our residential customers have Spectrum packaged products.

We're selling and migrating better products with better and consistent pricing that drive higher customer satisfaction. Nearly all of our video connects and Spectrum migrations subscribe to expanded basic video product, which some people called fat basic, with VOD on every outlet. As of today, we offer minimum Internet speeds of 100 megabits in over 75% of our entire footprint, up from just 50% at the end of the second quarter. And we expect to offer minimum speeds in excess of 100 megabits in nearly all of our passings by year-end. We'll continue to increase our minimum speeds in 2018.

In a couple of months, we'll also launch gigabit speeds offering in several key markets using DOCSIS 3.1, with more launches planned through 2018. We expect 3.1 modems to be priced similarly to 3.0 modems when purchased at scale, and we'll begin to buy exclusively DOCSIS 3.1 modems and drive higher entry-level speeds. We'll also begin to deploy our Wave 2 WiFi router, which is similar to our Worldbox, having been developed and designed and specified by Charter. It has much faster speeds and even better propagation of reliability throughout the home. Our all-digital activity in Legacy Time Warner Cable and Bright House is accelerating, although the bulk of that activity will still take place in 2018.

At the end of the third quarter, we have deployed over 1 million Worldboxes across our national footprint. Worldbox is faster, smaller, cheaper and more flexible for QAM and IP video and Guide delivery, and it can be used across all 3 legacy footprints. Going forward, Worldbox will be the only set-top box we buy and will be the workhorse for our all-digital project.

The deployment of our Spectrum Guide also continues to progress. We've seen a significant increase in on-demand utilization by customers that have Spectrum Guide today, exposing the value of the content packages they already purchased. In 2018, we'll provide Spectrum Guide to new customers in Legacy Time Warner Cable and Bright House markets. Existing customers in those markets will, over time, have the choice to switch to Spectrum Guide at the push of a button. We'll deploy the same approach in certain Legacy Charter markets that are contiguous with Legacy Time Warner Cable or Bright House markets, what we call mixed markets, where we waited to roll out to the full DMA.

In the fourth quarter of last year, our Enterprise group launched new national pricing structures, designed to drive higher customer growth. That pricing structure is working well, and we saw higher year-over-year enterprise product net adds in the third quarter. The short-term revenue effects of that market share growth strategy are similar to what we've been seeing. We're making changes to pricing and packaging in residential and SMB markets.

We're also improving the product set for Enterprise, deploying our hosted voice product in 13 more states in the third quarter, with plans to launch that product across our entire footprint by the end of this year. And in the coming months, we expect to launch a software-defined wide area network solution that should increase our addressable opportunity and provide businesses with another choice as they migrate from legacy technologies.

We're on track to launch our wireless service in 2018 using our MVNO with -- agreement with Verizon. Our cooperation agreement with Comcast has helped with that process. When offered as part of our bundle, we expect Spectrum-branded wireless services to drive more sales of our core products and to create longer customer lives. Our next-generation wireless field testing is also going well. Our existing infrastructure puts us in a position to uniquely scale deployment of new wireless, small cell products. And we expect a number of emerging technologies, including better WiFi, 5G, public Spectrum brands and radio management protocols, will all support our ability to innovate new network-based product offerings for the foreseeable future using a technology transformation similar to what the cable industry has done in its infrastructure so many times.

Now I'll turn the call over to Chris to provide more details on the quarter.

Thanks, Tom. Before covering our results, a couple of administrative items. First, I wanted to remind everyone that when I reference third quarter 2017 customer results, I'll be comparing to the third quarter 2016 results that have been adjusted to exclude the seasonal program customer activity in the third quarter of 2016 at Legacy Bright House. We've provided that year-over-year comparison on Slide 6 of today's investor presentation. The Q3 impact is really modest. The Q2 was relevant, and we expect Q4 and the first quarter to also be relevant. Secondly, as Tom mentioned, our third quarter results were impacted by hurricanes Irma and Harvey, although not materially. In total, we estimate the impact was about 10,000 to 15,000 net residential customer relationships in the storm-affected areas, some of which may come back in the fourth quarter. Storms also reduced our third quarter revenue by $4 million in the form of residential customer bill credits. We also provided some modest SMB customer credits, and there were some impact to September advertising revenue, but difficult to say precisely how many orders would've been placed.

Our third quarter operating expenses were elevated by $8 million, mostly related to store cleanup and call center labor costs. And third quarter storm-related capital expenditures were about $20 million, mostly related to line and equipment replacements. We expect the similar amounts of storm-related CapEx in the fourth quarter, and we'll provide updates on those amounts and any material credits, if any, when we report our fourth quarter results. Some of these costs will ultimately be covered by insurance, but there's no potential claims impacting today's results.

Now turning to our results. During the third quarter, total customer relationships grew by 212,000 or 1 million over the last year, a 3.4% growth at TWC, 4.5% at Legacy Charter and 5.4% at Bright House. As Tom mentioned, 41% of TWC and Bright House customers were already in Spectrum pricing and packaging at the end of the third quarter. We're driving higher sales year-over-year into better products with more value, even as we migrate order churn legacy products, driving significant transaction volume.

Slide 6 shows we grew residential PSUs by 172,000 versus 322,000 last year. Over the last year, TWC residential video customers declined by 3.4%, pre-deal Charter has been about flat and Legacy Bright House improved its residential video customer loss to 0.6% year-over-year. TWC lost 25,000 more video customers than last year as we continue to see churn from the same low-value, limited basic packages, net of migration to a full video product. Importantly, limited basic losses were responsible for all of the video losses at TWC this quarter, with Legacy TWC's expanded basic video customer base growing by just over 50,000 in the third quarter versus a loss of approximately 130,000 expanded customers in last year's third quarter. That means there's 180,000 swing in the expanded video relationship development in the quarter at TWC. The better expanded basic performance was driven by higher connects and a better selling mix and from Legacy TWC limited basic customers migrating toward Spectrum pricing and packaging.

Legacy Charter lost 11,000 video customers in the quarter versus a gain of 19,000 a year ago, driven by our integration focus on the acquired footprints and some additional competitive build-out and price-driven promotional offers advertised by competitors. Bright House lost 7,000 video customers versus a loss of 9,000 last year. In total, we lost 104,000 residential video customers, primarily in TWC limited basic video relationships.

In Residential Internet, we added a total of 249,000 customers during the quarter versus 344,000 last year, with Legacy Charter declining from 121,000 in the third quarter last year to 70,000 this quarter, partly from the same drivers we saw in video at Legacy Charter and believe to be temporary in nature. We also had a strong Internet quarter last year, with each of our legacy footprints benefited from integration activity at key competitors. Over the last 12 months, we grew our total Residential Internet customer base by 1.2 million customers or 5.7%, with 5.2% growth at TWC, 6.4% growth at Legacy Charter and 7% at Bright House.

In voice, we grew customers by 27,000 in the third quarter versus 29,000 last year, with higher triple-play sales offset by higher churn and legacy promotional offers at TWC.

Over the last year, we grew total residential customers by 865,000 or 3.5%. Residential revenue per customer relationship was up modestly, helped by some $50 million of revenue from the August Mayweather-McGregor fight.

Similar to last quarter, ARPU growth remains muted by smaller price increases this year, continued stand-alone Internet sell-in and higher sell-in at promotional rates and migration activity of Legacy TWC and Bright House to Spectrum pricing and packaging. There was also a mechanical ARPU hit similar to Q2 from changes to the Legacy Bright House seasonal plan.

Before the close of our transactions, one of the biggest concerns of our investors was our ability to manage ARPU through the transition to higher-value Spectrum pricing and packaging, with generally lower pricing for our product, lower box fees, and then modem fees. We're now nearly 1 year in and should be 50% migrated by year-end. So that's a lot of product and retransactions. And a large portion of our base now has more value and less reason to call or churn. We've rationalized the promotional roll-off and the retention environment.

The ARPU and revenue still look pretty good despite that planned disruption. Slide 7 shows our customer growth combined with our ARPU growth, resulting in year-over-year residential revenue growth of 4.4% or 3.7% when excluding total pay-per-view in both periods.

Total promotional revenue, SMB and Enterprise combined, grew by 8%; SMB revenue by 7.4% and Enterprise up by 8.9%. Excluding cell backhaul and NaviSite, Enterprise grew by over 13%. Sales are up in both SMB and Enterprise, and we're managing the transition to highly competitive pricing in these service markets as well.

Third quarter advertising revenue declined by 11% year-over-year, driven by political advertising in the prior year. So excluding political, advertising revenue was still down about 2% year-over-year, given lower year-over-year barter in local revenue. That includes some hurricane-related effects, as I mentioned at the outset. In total, third quarter revenue for the company was up 4.2% year-over-year and 4.9% when excluding advertising.

Looking at total revenue growth for each of our legacy companies. TWC revenue grew by 3.8%. Pre-deal Charter grew by 5.2%, driven by customer growth. And Bright House revenue grew by 4.3%, given improving video and triple point selling.

Moving to operating expense on Slide 8. In the third quarter, total operating expense grew by $238 million or 3.7% year-over-year, with transition expense accounting for $23 million of our total OpEx this quarter. Programming increased 12.3% year-over-year, driven by contractual rate increases in renewals; a higher expanded mix, which accounted for roughly 2% of that growth; the cost of the Mayweather-McGregor pay-per-view fight, which accounted for a little over 1% of the growth; and the lapping of synergies generated in the third quarter last year. Regulatory, connectivity and produced content was up 1.6% year-over-year. And cost to service customers declined year-over-year, driven by the benefits from the combination of the 3 companies; productivity benefits, including from simplified pricing and packaging; and a higher in-sourced labor mix, partly offset by the higher labor costs during the recent storms. Marketing expenses grew by 5.6% year-over-year, given the higher level of marketing activity and a higher number of sales in the acquired footprints. And other expenses were down 2% year-over-year, driven by elimination of duplicate costs.

Adjusted EBITDA grew by 5.0% in the third quarter, and excluding transition costs in both periods, adjusted EBITDA grew by 4.7%.

Turning to net income on Slide 9. We generated $48 million of net income attributable to Charter shareholders in the third quarter versus net income of $189 million last year, with higher year-over-year adjusted EBITDA and lower severance-related expenses more than offset by higher depreciation and amortization, pension withdrawal and remeasurement charges and higher interest expense.

Turning to Slide 10. Capital expenditures totaled $2.4 billion in the third quarter, including $125 million of transition spend. Excluding transition, third quarter CapEx increased by $629 million year-over-year, primarily driven by higher spending on CPE, scalable infrastructure and support. The higher CPE spend was largely the result of higher connect volumes and 2-way set-top box placement rates now that Spectrum pricing and packaging has been launched across all of our markets. And we've already reduced our DTA footprint by over 30% since closing the transactions. All-digital spend was about $50 million in the quarter, primarily related to CPE. The higher scalable spend was driven by the timing of in-year spend and video and Internet product development. And the higher support spending is related to the timing of vehicles and tools and test equipment, software development and facility spending, in each case, some related to in-sourcing and some related to the transaction.

As Slide 11 shows, we generated about $600 million of free cash flow in the third quarter versus $1 billion in free cash flow in the third quarter last year. And the decline was largely driven by higher CapEx and a slower working capital benefit and the benefit in both years, at least year-over-year. And that was partly offset by higher EBITDA.

We finished the quarter with $66.8 billion in debt principal, and our run rate annualized cash interest expense at September 30 was $3.6 billion, whereas our P&L interest expense in the quarter suggests a $3.2 billion annual run rate. That difference is due to purchase accounting.

As of the end of the third quarter, our net debt to last 12-month adjusted EBITDA was 4.3x, in the middle of our target leverage ratio of 4 to 4.5x. In July, we closed on $1.5 billion of investment-grade notes. In August, we closed on $1.5 billion of high-yield notes. And in September, we closed on another $2 billion of investment-grade notes. And finally, earlier this month, we closed on another $1.5 billion of high-yield notes. The proceeds from these offers have and will be used for general corporate purposes, including potential buybacks. The weighted average cost of debt is now 5.4% with a weighted average life of 11.5 years, with over 90% of our debt maturing after 2019.

Through the third quarter, we repurchased 10.9 million shares in Charter Holdings common units, totaling $4.0 billion at an average price of $367 per share.

As Slide 11 shows, in the past 13 months, we spent $10.1 billion on repurchases, reflecting 10% of the company's equity on a fully diluted basis. I want to be very clear. Our share repurchases are not part of our programmatic capital return policy. Buybacks reflect confidence in the trajectory of the proven operating model as we head into the back half of our integration; positive cash flow, despite significant organic investment in attractive debt markets; and the high-quality capital structure, which provides us flexibility in different markets. Going forward, our share repurchase activity will continue to depend on other potential uses of capital for organic or inorganic opportunities and market conditions.

Turning to our tax assets on Slide 13. We estimate the total present value of these assets, reflecting our current NOL utilization, is over $5 billion. And we don't expect to be a material cash income taxpayer until 2019 at the earliest.

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

(Operator Instructions) Your first question comes from Craig Moffett from MoffettNathanson.

I'm not sure whether this is for Chris or for Tom, but I wonder if either of you could just speak about what really looks to be an industry-wide transition from, at least on the margin, to more single-play broadband subscribers. Your pricing for stand-alone broadband doesn't recapture as much margin from a lost video subscriber as the pricing does at, say, Comcast. I'm wondering, as you think about that growing going forward, how do you think about that? When is the right time to maybe adjust that pricing? Or is it more that you really do think that you can keep customers in double play and triple play bundles for longer than most in the market expect?

Craig, it's Tom. We still have a very rapidly growing, good business. And if you look at all these numbers, we're growing the company quickly. And the -- yes, the video business has pressure in it, and it has had pressure in it. We still think we can grow the video business going forward and expect to grow the video business going forward. And we expect to sell packaged products going forward, including data, mobility, landline voice and video. And it's true that there are lots of pressures on the video bundle, the biggest pressure being price. The second biggest pressure, which also contributes to the price-value relationship, is that many programmers now are distributors, whether they know it or not, whether it's through TV Everywhere or direct-to-consumer streaming services. And because of password sharing and multiple stream products to households that have -- there are 35 million 1-person households in the United States, so you have 10% of the population with almost 30% of the households. And multi-stream products being sold to those households allow consumers to purchase one product and share it among multiple users. That affects the price-value relationship of video in general, and that affects what people are subscribing to. And so there's an enormous pressure that comes out of the total price of content plus the availability of for-free that content is now being -- well, I should restate that. There's an enormous ability for people to receive free content because of the way content distributors are securing their product so ineffectively. And as a result of that, I think you'll see continued pressure on video, but we expect that we can still grow a rich video package inside our product bundles. And we think we'll do that at the expense of our competitors, and we think that the general category will continue to decline slightly. But to your broader question about pricing, we're happy with the way we're pricing our packaging today. We're happy with the way we're pricing our single-product services today, and we think we have an excellent growth trajectory based on our pricing structure.

Your next question comes from Marci Ryvicker from Wells Fargo.

In the prior call, Comcast mentioned several times they were prepared for the change in the competitive environment. And I guess I would ask you, along those same lines, when you went into the Time Warner Cable and Bright House transactions, how much did you think about a potential change? I guess the stocks are telling us that the market thinks this is happening faster than they had expected. Do you think this is a case to get the competitive environment changed faster? And how prepared are you?

I guess we expect change. There is always change, but we don't think it's faster than we thought. We think that we're actually exactly on plan where we plan to be in our acquisition model, and we're happy with where we are. We've actually made a very complex integration of very large companies, and we're growing those companies. And we're actually in better shape transactionally than we were in Legacy Charter doing a similar kind of approach. And yes, the markets move. Our data speeds continue to improve. Our video product can continue to improve on a relative basis. And our voice products and mobility products are new additions that didn't exist in prior iterations of this operating model. So yes, markets move around. Competitive pressures change. We still think we have a very superior infrastructure relative to our competitors, and we can use that infrastructure to be a high-quality competitor, that we can move our mix of services and pricing and packaging around in an appropriate way to be responsive to the market and still grow rapidly.

Marci, I went back and looked for the past couple of quarters what we said on the earnings calls as well as on the transcripts. And in fact, the description that we gave of the model and the performance of units and the performance of revenues, again, in the back half of this year and into 2018 and what we look like in 2019, and I wouldn't have changed any of it. I think it's all still the case, and I don't think the markets have changed that dramatically in such a short period of time.

The only thing that I would add just to -- I mentioned in -- to Craig's question, there's a lot of unsecured video out there, which is impacting the value relationship of video in a dramatic fashion. And you would think that people would be responsive to that and sell video. And so markets correct as well.

Your next question comes from Vijay Jayant from Evercore.

So, Tom, based on your comments just now about price being the factor on video and these virtual MVPDs doing what they're doing, one, I think Charter is one company that has not used any video as a proposition in the market. And I think, if anything, you've gone the other way as you've been moving the Time Warner Cable cohort to the Spectrum pricing. So the question really is, so is that a lever you believe you need to pull to grow video longer term? And second, just a housekeeping question. With respect to the video -- with respect to the total revenue growth we saw in the quarter, which seemed to accelerate, but can you help us understand how much was the Mayweather fight on that -- on those numbers?

So as your fundamental question about our pull-through of video is, we are selling a rich package of video. We believe most consumers want as much video as they can get. Not everybody is paying for it, but people like lots of video, and we sell high-quality video service on incremental -- on new customers. So when you look at our programming expenses, a substantial piece of that is unit growth. We are actually growing customer relationships with high-quality, rich-featured, fully-serviced and fully-featured video products. We believe that those packages, properly sold and properly contained within another value proposition, the whole customer relationship proposition that we make from a pricing and packaging perspective, creates a more valuable long-term happier customer that creates value for us because of the link of that subscriber relationship. So that's our strategy. And on the edges, we're selling packages that have more targeted, less full-service component features, but the bulk of consumers that are purchasing video from us are actually buying richer packages than they've historically received from the legacy companies that service them.

Vijay, on the revenue, the biggest drivers in revenue are the -- really, the significant remigration activity that we have going on at TWC and Bright House. I mean, I gave the statistic, over 40% of our customer base at TWC and Bright House has been migrated. If you take that out, the roughly 20 million customer relationships, that means 8 million rate total call and, in many cases, equipment transactions taking place in the (inaudible) piece. So that's the biggest driver in terms of the negative impact, and it's temporary in nature. The further we get onto the progress of that, the less impact it has. But the Mayweather fight was -- also had a positive impact. So going in the other direction, $59 million in the quarter is what I mentioned in the prepared remarks. And then the other impact that I also mentioned in the prepared remarks was the amount of political advertising that was in last year's third quarter. But the biggest driver being the first one that I mentioned.

Next question comes from Phil Cusick from JPMorgan.

If I can, a follow-up and then a question. First, I think there's a disconnect between what you expect and how investors read your comments. Last quarter, you talked about having turned the quarter on subscriber momentum, but this quarter showed weaker numbers year-over-year in every segment. How should we think about this as a competitive issue versus the sort of natural evolution in the base? And how can we better understand your plans going forward? And then, Chris, if you could expand on your thinking behind the buyback pace. I understand returning the cash flow, but talk about the confidence in the business and why you lever up the company to buy back stock in the quarter where shares are elevated on M&A speculation and your numbers were trending weaker year-over-year.

Right. So if you go back and take a look at everything I said at recent investor conferences as well as on the call, what I said is the back half of this year, subscriber net adds would improve. We're not through the back half. We weren't through Q3. And we said we had turned the corner -- we were either turned at the point where we had bottomed out and turned the corner or very close. That's specifically what I said at the investor conference, all of which is true. Our sales were up year-over-year. And we've mentioned that the TWC churn continued to be highly elevated, and the point at which that could subside was after we have crossed the 50% mark. So somebody who's reading in and wanted to look for monthly guidance, that's not how we operate, and we talk about things in terms of longer-term time frame. The back half of this year is going to be significantly improved. The revenue effects of that will continue through 2018. And the benefits of the transactions, the operating and the transaction synergies, the next wave will fully flow through by 2019. And we're going to spend a lot of capital in the back half of this year, which I mentioned on this call as well. And we're going to spend the capital next year, too, for all-digital. I mean, if you go back and take a look at the way that I described the business, it was written for analysts to be able to put a model together. And we stand behind every thing that we said and the optimism that was there. I think people are taking a look at it in too short of a time frame, and that's never how we've talked about the business in the way that we operate it. And as it relates to the balance sheet, because of all the things that I just said, we have a fundamental view on the value creation that's going to take place at Charter over time. We're not stock pickers. We don't understand the vagaries in the marketplace from day to day, and we have a fundamental view on what the long-term value creation of the company is going to be. Looked cheap then, looks cheap now. I haven't looked today, but it's probably a little bit cheaper than it was and -- but at the end of the day, the value creation is going to be significant either way. And the capital markets are good. We have a full understanding of how mixed things would look for a period of time as we got through the operating integration. That applied to Q2 results. It applies to Q3 results and probably still applies a little bit to Q4 results, although it continues to improve. And so it's a great opportunity, and it's a good time for all those reasons, including the debt markets being available to kind of do everything that we've been doing.

And just to clarify something that Chris said. We have turned the corner in terms of our operating strategy, which will produce future revenue growth in excess of current revenue growth. And the reason we've turned the corner and the way we know we've turned the corner is we have more sales than we had year-over-year and we have less disconnects. And that translates ultimately into more customers, higher-quality customers, too, through time that produce revenue and produce net gains as well. And so given the way we budget at this business and the way we operate this business, it's almost exactly on the screws as to where we thought it would be.

Tom mentioned it on the prepared remarks. When you take a look at it from an EBITDA growth, and it's performing better than what we did at Legacy Charter. And here, we have said multiple times, when we did it at Legacy Charter, it's 2012 and 2013, same comment, not going to be linear, it's going to be very choppy along the way. We know what to expect and have confidence, and that's why we've been buying back stock as well.

We also said that we thought that these assets were in better shape than Legacy Charter, and they are. And therefore, we should have a little better performance.

Next question comes from Jason Bazinet from Citi.

I don't know if this is for Mr. Winfrey or Rutledge, but I'll just throw it out there and however you want to address it. When the buy side, I think, sort of segments and thinks about buying the cable stock, those that pick your stock are, I think, willing to take more leverage because they see faster growth. This year, it doesn't look like you've grown revenue or EBITDA demonstrably faster than the industry. And so as you sort of look at all of the internal metrics that you guys are looking at that get you excited, without giving an absolute number, how much faster do you think you will end up growing than the industry grows, whatever that grows at, as we move out to '18 or '19?

It's a very smart way of asking for guidance. I give you credit, Jason. And -- but -- which (inaudible). But what we've said before remains the same, is that we -- the operating model that we have allows us to drive customer relationship growth in the, call it, 5%, 6%, 7% range, depending on the quarter, on an annualized basis. And with very little rate increase, that means that your revenue growth is going to be somewhere north of that, and that Legacy Charter had demonstrated the ability to deliver double-digit EBITDA growth as a result of the operating strategy that we have that actually increases sales and reduces service costs and reduces churn, which creates further penetration on a fixed set of base and drives operating margin, leverage, operating leverage and EBITDA margin. And none of that's changed. And so the type of things that we did at Legacy Charter is exactly what we're doing here, and we expect the same type of results, maybe even better because of the significant synergies that the scale of the 3 companies combined could potentially bring.

But just in terms of preparing the company to be in that position requires some capital in excess of what normal capital expenditures in the business would require. Going all-digital, freeing up Spectrum, opening up additional Spectrum for high-speed data to take speeds up, to improve product sets, to remain competitive, to differentiate on a speed basis from other wireline competitors our data business, all of that requires investment. And it also requires repricing and repackaging of the business, which means that we have to shift customers out of existing rate structures into new rate structures and do that in a way that doesn't cause our revenue to go backwards hopefully, and to do it in as revenue-neutral a way as we can possibly do it and continue to grow our customer base going forward so that we have long-run value propositions for the consumer. That cost money. And in order to get to a high-quality service operation, we're in-sourcing people, which means that we have to have costs associated with that while we stand up new buildings to house these people, while we train these people in duplicate with the offshoring costs that we currently have. As those people come online and become productive, costs drop away; EBITDA growth accelerates. But we're in a moment that was planned, where we would make these capital investments and make these operating expense investments and repricing investments in order to put ourselves in a position to get the double-digit growth that Chris just spoke of and which we've produced in the past and -- the double-digit EBITDA growth. And so we are a high-growth company, and we're executing our plan as we envisioned it.

A final point for you, Jason. I think it's been now 5 years, 4 or 5 years, but if you go back and take a look at Legacy Charter at this stage, the EBITDA growth was 0, minus 1%, plus 1%. It was choppy then, and it wasn't linear. And so we're actually -- we're at the point where we're seeing all of that and -- to be growing at 5% EBITDA growth throughout that. And we had a similar capital structure philosophy back then too. It all is consistent and just requires taking a look at it on an annual and multi-annual -- multiyear view as opposed to a quarterly view.

Your next question comes from Brett Feldman from Goldman Sachs.

I want to talk about wireless. You mentioned you're still on track to launch the wireless product in the first half of next year, and you noted that you're actually leveraging the cooperation agreement with Comcast. So I was curious if you can maybe elaborate on that. To what extent are you guys actually doing cooperative work? And are you starting to discover that there may be ways you guys can actually collaborate together in wireless on a long-term basis beyond the scope of the 1-year agreement you have in place?

Yes. Well, as part of that agreement, we said that we were going to work together to try to form a cooperative relationship to manage the WiFi -- or to manage the MVNO that we jointly both share with Verizon. And we've made a good headway with our relationship with them, and we've learned a lot from them. And we have an opportunity together to run the business more effectively from a back-office perspective. And so we're looking forward to entering the wireless business by the second quarter of next year and being operational. We're doing field testing today with our own employees. We're also doing other kinds of wireless testing that is unrelated to this MVNO entry. But the learning that we've received from Comcast has been very helpful to our implementation strategy. And we share many of the same, if not all the same, vendors from an operational and provisioning and back-office infrastructure perspective. So we're using their experience today to make our experience and our customer service experience better.

Is there any actual joint collaborative operations? Or is it still all sort of consultative and informative and educational at this point?

I think there's a potential for something along those lines, but there's nothing to announce here today.

Your next question comes from Ben Swinburne from Morgan Stanley.

Tom, just continuing on wireless. You sound particularly excited or interested in looking at fixed wireless, some of the small-cell stuff you were mentioning. I'm curious if you could expand on how you think about deploying that in your business and what the kind of revenue opportunities are and if this 3.5 gigahertz CBRS spectrum is of potential interest to the cable industry and to Charter. And then, Chris, just going back to the quarter, can you give us a little more color on the Legacy Charter subscriber performance? I think you mentioned you thought some of the year-over-year declines in broadband and video were temporary in nature, might mentioned some comp issues. But just any more color, since we all look to that performance as a bit of a leading indicator for the rest of the business.

So, Ben, we have an existing WiFi business, meaning that our data business is delivered by WiFi. There are 200 million WiFi devices currently connected to the Charter high-speed data plan physical infrastructure. So we operate small-cell, high-capacity networks in homes today, which is what 5G envisions to be and some of the new spectrum that may become available envisions to be able to provide. We think that the WiFi technology that we deploy will get better and allow us to take speeds up over 1 gig in the home with better control over those devices connected to the WiFi network in the home. We think that outdoor deployment of WiFi will enhance our ability to reduce our MVNO costs as well as our ability to reduce those MVNO costs in the home. And we think that new services will come along which will allow us to use the new spectrum in a mixed way using 5G technology. And we think of the mixed way meaning a combination of licensed spectrum with WiFi spectrum, and I called that jokingly 6G the other day. But we have an opportunity to use all of the tools at our disposal to create products that we think work on our network better than any other deployed network currently in existence. And so we think that there's a tremendous opportunity not just to have an MVNO and a mobile business but to create new products in a fixed environment. And that may mean specific point-to-point products that allow us to get to buildings that we don't serve currently in a less expensive way. That's a simple sort of across a parking lot for commercial services-type deployment, but also to reaching unserved rural areas and also to creating brand-new products that don't even exist today that require high-capacity, low-latency, high-compute networks, what people think of as virtual reality kind of product. So we're going down the path in investing in our network for a future that we see as very bright, which is high-capacity wireless attached to high-capacity wireline. And we have a pathway, a development pathway, to get to 10 gig symmetrical on our wireless, WiFi and wireline networks. And we think we can get there relatively quickly. And when we do, a whole new set of products will become available on that technology platform that don't exist today, as well as all the existing products that we do have will work better.

Second question was on Legacy Charter.

Yes. Legacy Charter is the fastest-growing piece we have in this business. And it is -- it has quarterly challenges year-over-year, including the hurricanes, including the fact that one of our biggest operations -- many of our operations in Legacy Charter were subsumed into Legacy Time Warner operations. Like our L.A. footprint, for instance, had our second-biggest operating platform go into a Legacy Time Warner platform from a managerial point of view. So those transition issues affect our year-over-year growth, but our year-over-year growth is good in Legacy Charter. And yes, there -- and there are some competitive changes that have occurred in the wireline business. AT&T has expanded its footprint. It's consistent with its commitment to the FCC and the DIRECTV acquisition, and we've had to respond to that. It's a -- but the general situation is that business is performing nicely. The change year-over-year isn't significant on a relative basis, and it's still performing better than any part of the company we have, and we expect that to continue. But some of the change that would've occurred in Legacy Charter didn't occur because of the transition process. The user interfaces in the Los Angeles branches are still the old ones, and because of the integration issues, we had to delay that. So generally, I would say that everything we expect out of Legacy Charter is working. There are some additional competitive pressures, but in the grand scheme of things, it's pretty much on track.

Our final question for today will be John Hodulik from UBS.

Great. Maybe just 2 quick ones. First, for Chris, the -- given the equation that you laid out in terms of attractive capital markets and the discount in stock and confidence in the numbers as we look out to '18, is it -- what are the chances that you guys could actually exceed that 4.5x leverage limit, at least temporarily? So that's number one. And then number two, I guess similar to Ben's question, if we drill down a little bit on the video losses, maybe this time in the Time Warner Cable markets. There, I think you pointed to some churn in the limited basic set. Can you give us a sense of how far through that process we are? I mean, maybe you don't want to give us how many limited basics you have in the base, but how long do you expect that trend to continue?

Look, we're committed to the target leverage range of 4 to 4.5x. And then I won't -- while it is tempting, if you see a few market opportunities open up, but I think the credibility that we have to debt capital markets is equally important to what we have with the equity capital markets. And we're not going to sit here and willy-nilly just to start ripping that around. So we're committed to the target leverage range that we have. It'll move at the bottom end as it has. It will move to the top end over time and then back, and depending on the strategic organic and inorganic opportunities that are in front of us. So that's our target leverage range. We have talked at length in multiple occasions about what are the factors that we look at that would cause us to alter that, and none of that's the case. And for TWC, I'll take the benefit of looking back at what I said in the past couple of quarters. It's the same I said before on limited basic. The minute we get over 50% migration into Spectrum pricing and packaging, the weight of those declines starts to subside. And particularly, as the sales continue to increase year-over-year and -- then the pressure really goes away. So that crossover point will be reached relatively fast. We're already starting to see, as you would expect, continued better sales, a better output from the base that's been migrated, and things from a Legacy TWC perspective will just continue to get better from here. Difficult to project the exact month or day that you'll cross over, but I think Legacy Charter, in terms of its migration path, has been nearly spot on in terms of how we're migrating the space and continues to serve as a good proxy in that regard.

Thanks, John. That's it for our call today. Back to you, Michelle.

Thank you, everyone.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.