Charter Communications, Inc.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Charter Communications' Second Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Stefan Anninger. Sir, you may begin.

[Stefan Anninger:]

Thanks, operator. Good morning, everyone, and welcome to Charter's 2014 second quarter earnings call. This morning, we issued a press release over PR Newswire at 8 a.m. Eastern Time detailing our results. The press release, trending schedules and presentation for this call can be found on our website, ir.charter.com. As a reminder, there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent Forms 10-K and 10-Q. We encourage you to read them carefully. Various remarks that we make concerning expectations, predictions, plans and prospects constitute forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results and reflect management's current view only. Charter undertakes no obligation to revise or update such statements or make additional forward-looking statements in the future. We will present today certain information regarding the Comcast-Charter transactions. That information may be subject to various assumptions and uncertainties described in the presentation materials, including Slide 30. We will also be referring to non-GAAP measures as defined and reconciled in this morning's earnings release. These non-GAAP measures as defined by Charter may not be comparable to measures with similar titles used by other companies. On July 1, 2013, Charter completed its acquisition of Bresnan Broadband Holdings, LLC, and its subsidiaries. Unless otherwise specified, all customer and financial data referred to on this call are pro forma for the Bresnan transaction as if it had occurred on January 1, 2012. Finally, 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, President and CEO; and Chris Winfrey, our CFO. And with that, I'll turn the call over to Tom.

[Thomas M. Rutledge:]

Thank you, Stefan. Charter continues to perform well against its key objectives. We're driving deeper penetration of our services into the home, earning more revenue per household by selling more product at the point-of-sale and increasing ARPU over time. We are investing in quality service to reduce transaction cost per customer and extending customer lifetimes through better service delivery. As a result, we're growing market share, increasing cash flow per home passed and improving our return on investment. We added 27,000 new residential customer relationships versus 2,000 last year. We're selling more than last year with simple high-value offers that resonate with consumers. We're also selling more services at the time of sale, with PSUs per connect growing year-over-year and triple play sell-in to new video customers reaching 58% this quarter. Roughly 1/3 of our customer base now subscribes to our triple play service. And we have a large number of unserved opportunity passings, offering potential customer relationships and triple play growth, and we have a clear path to upselling single play customers to video and voice. Customer retention has also improved as a result of our more competitive product and service delivery. A key driver of our improving service reputation is the use of Charter-trained and -paid employees to create quality service transactions. Over the last year, we've grown our residential customer base by 4.5%, and including commercial, Charter now serves over 6 million customers. In the second quarter, we added 55,000 residential PSUs, double the number we added during the same period last year. Both our residential video and broadband net additions improved year-over-year. Total video net additions improved by 26,000 year-over-year, and over the last 12 months, we've grown our expanded basic video base by 51,000. We're growing our video market share versus the competition. Our improving video and Internet customer results are being driven by the value that consumers increasingly see in a fully digital HD 2-way video product and our superior broadband product, as we continue to widen the speed gap versus our competitors. Total second quarter revenue grew by 7.3% versus 4.6% for the same period last year, with the Residential revenue growing by 6.4% versus 4.3% last year, and adjusted EBITDA grew by 7.9%, given the accelerating revenue. Our single largest operational initiative this year is our all-digital transition. At the end of the second quarter, 60% of our plant [ph] was all-digital. Over 96% of our customers now have at least 1 2-way digital box in their homes, providing digital pictures, an interactive programming guide and full Video On Demand capability. We now have approximately 9 million boxes deployed across our footprint and expect to have over 10 million deployed by the end of this year. And while going all-digital can be a disruptive process, it's going very well, and we're on schedule. We're also introducing our new product suite under the Charter Spectrum brand across those portions of our footprint that have gone all-digital. Customers in those areas now have access to the Spectrum product, including over 200 channels of HD, minimum Internet speeds of 60 megabits and, in St. Louis, a minimum Internet speed of 100 megabits. Charter Spectrum is not just for new customers. Those customers that subscribe to the pricing and packaging structure we introduced in 2012 receive our Spectrum product suite once a market has transitioned to all-digital. By year end, we expect to be fully digital and all customers to have access to Charter Spectrum. Our Charter Spectrum product will continue to improve. Earlier this month, we launched our new cloud-based guide called Spectrum Guide to a subset of our Fort Worth, Texas, customer base. Over the coming months, we'll test the guide in front of a growing number of customers in several markets to gauge the guide's performance at scale. That guide works on existing and new boxes, avoiding the customer disruption and capital to achieve a modern 2-way interface across the full video customer base. So far, the results have been promising. We also continue to enhance the value of Charter TV, tablet and mobile applications. We're adding more national cable networks and local broadcast stations to the app, and we'll continue to bring live channel counts available on the app, up to 170 in most markets. We also plan to add Video On Demand content and other new features in the coming months. In late April, we announced a multipart transaction with Comcast. Since then, we've been working with all parties on developing integration, transition and service plans for the Time Warner Cable and SpinCo assets involved in the asset sale and swap. So we're making progress and we're just as pleased with the set of transactions as we were when we announced them. As a brief reminder, we have entered into 3 transactions, all to occur simultaneously and shortly after the Comcast-Time Warner Cable transaction closes. First, we'll execute a tax-efficient exchange of assets, whereby, Charter and Comcast will exchange cable systems, serving approximately 1.5 million Time Warner video customers for 1.6 million Charter video customers. Second, Charter will purchase Time Warner Cable systems serving approximately 1.5 million video customers. Lastly, Charter will purchase a 33% stake in a newly -- in a new publicly traded cable company consisting of the former Comcast systems serving approximately 2.5 million video customers. As Slide 7 shows, these transactions will create a highly efficient footprint for Charter in the Midwest and the Southeastern United States, much of which will be contiguous with or adjacent to SpinCo's footprint. Charter will divest systems in California, New England, northern Georgia, Texas, North Carolina, Oregon, Washington, Virginia and parts of Tennessee. These are regions where we have good and growing systems, but where we have only partial DMA coverage, which limits our ability to fully market our services efficiently. And we'll acquire Time Warner Cable systems in Ohio, Wisconsin, Kentucky and some smaller pieces of Indiana and Alabama. Additionally, SpinCo's footprint, primarily located in Michigan, Minnesota, Indiana and Alabama, will be adjacent or contiguous with much of Charter's wholly owned footprint, enabling Charter and SpinCo to provide key services to one another by a 2-way services agreement. At close, Charter will own or service over 8 million video customers, providing scale and operating efficiencies for both Charter and SpinCo. Between Charter and our equity ownership in SpinCo, we'll be operating a highly efficient footprint in communities that we find attractive and where we know we can compete well by delivering a highly valuable product set to customers, providing more effective local service and have a larger, more efficient capability in the local advertising market. We're also confident that from a regulatory perspective, these transactions will support the successful close of the Comcast-Time Warner Cable transaction. And with that, I'll turn the call over to Chris.

[Christopher L. Winfrey:]

Thanks, Tom. Let me start by briefly reviewing the quarter. And then I will add some additional color on the transactions, as well as how to think about the economics of the new Charter. As a reminder, unless otherwise stated, the results we're discussing and shown on today's slides are presented on a pro forma basis, as if we had acquired Bresnan on January 1, 2012. Turning to Slide 9 of today's presentation, as Tom mentioned, residential PSU growth during the second quarter essentially doubled compared to the same period last year. We lost 29,000 residential video customers during the seasonally weak second quarter versus a loss of 55,000 last year, a 26,000 improvement. Note that our second quarter residential video customer net adds included approximately 15,000 digital -- bulk digital upgrades versus 6,000 a year ago. In Residential Internet, we added 49,000 customers, up from 38,000 last year, and we added 35,000 residential voice customers versus 45,000 last year. Over the last 12 months, our residential customer base has grown by 4.5%. And second quarter revenue per customer relationship grew by 1.9% year-over-year, driven by higher product sell-in, first quarter rate adjustments and higher average seller step-up to promotional roll-off. As Slide 11 shows, our accelerating customer growth, combined with our ARPU growth, resulted in residential revenue growth of 6.4% year-over-year and just below the first quarter residential revenue growth of 6.5%, with first quarter benefiting modestly from the earlier rate adjustments as compared to 2013. Looking at commercial, we added 19,000 PSUs versus 18,000 last year. Commercial revenue grew by 19%, driven primarily by small and medium businesses. Excluding the lower growth hospitality video base, commercial telecom revenue grew by 22%. Now turning to expenses and adjusted EBITDA on Slide 12. Programming expense grew by $54 million, accounting for about 55% of the increase in total operating expense versus the prior year quarter. Programming cost grew by 9.8% on an absolute basis, driven by contractual rate increases and 1.3% growth in our expanded video customer base over the last 12 months. Costs to serve customers, which includes field operations, network operations and customer care costs, grew by 4% year-over-year compared to 7% revenue growth, and marketing spend increased by $8 million, up 6% year-over-year on higher sales. Other costs grew by $17 million or 9.6% year-over-year, driven by higher labor cost to support commercial revenue, as well as some additional corporate expense. In total, adjusted EBITDA grew by $58 million or 7.9% year-over-year. Note that our second quarter adjusted EBITDA did benefit from nonrecurring items in the second quarter, some of which came inside of our programming expense. Excluding these items, our second quarter adjusted EBITDA growth would've been just shy of 6%. Turning to Slide 13, second quarter capital expenditures totaled $570 million. Just over 50% of that spend was driven by CPE to support our all-digital initiative and new customer acquisition. $134 million of our total CapEx was dedicated to our all-digital initiative, with most of that spend inside CPE. For the full year 2014, we continue to expect approximately $2.2 billion in capital expenditures for the plan we've laid out, with $500 million of that spend to be onetime in nature for all-digital and our insourcing initiatives. The one caveat here is that as we put together integration plans, we will incur some incremental cost and go to CapEx and OpEx to position the company to serve roughly twice as many customers. That hasn't occurred in any material way today, but to the extent it does, we'll certainly reference it on these calls. We ended the quarter with $14.1 billion in net debt, with a weighted average borrowing cost of 5.6% today, and our leverage ratio fell to 4.6x on an LTM basis, just above our target leverage ratio of 4x to 4.5x. So that covers our second quarter operating and financial performance. But as Tom mentioned, we're planning the closing and integration activities for the announced transactions, both with Comcast and Time Warner Cable. That process is going well. Part of that process is for each company to prepare carve-out audited financial statements for the 1.6 million residential and commercial video customers we will swap to Comcast, the 3 million TWC video customers we receive in the swap and acquisition and the 2.5 million Comcast video customers which go to SpinCo. Those carve-out financial statements will be used for 2 purposes

[Operator:]

[Operator Instructions] Our first question will come from the line of Jason Bazinet with Citi.

[Jason B. Bazinet:]

I just had one question, more mundane, perhaps. On your triple play penetration, at least in my model, sort of continuing to rise. But I was just looking at the recent trends, it seems like it's moderated. Do you expect that to reaccelerate based on all your initiatives? Or do you think we're sort of [indiscernible] towards the steady-state?

[Thomas M. Rutledge:]

Jason, this is Tom. I think that our triple play penetration to video continues to increase and it won't increase at the rate it has over the last 2 years, but I think it'll continue to increase on sell-in for 2 reasons

[Operator:]

Your next question will come from the line of Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne:]

I have 2 questions. Chris, on the new Charter details, in your prepared remarks, I just wanted to make sure I understood how you think we should be thinking about the acquired assets. You talked about the growth looking like kind of '12 to '14 for Charter, which I think, at least on an EBITDA CAGR basis, is sort of -- looks like about 6% to 7%. It obviously was quite low in '12 and has ramped quite nicely. I just wanted to see if I was thinking about that the right way. And then on the CapEx front, any advice on how we should think about the all-digital cost or the capital intensity of that -- those acquired systems, relative to what we saw for you in '12 to '14? It sounds like it'll be lower because you're buying the boxes cheaper and the systems are just maybe further along than they were in 2012. But any help there would be great.

[Christopher L. Winfrey:]

Sure. For '12 to '14, really, we implemented the changes at the beginning of Q3 2012, and we are where we are today. I don't have the exact CAGR in front of me, that would seem to be a little bit high, what you mentioned, relative to what I recall from an EBITDA standpoint. I think the important thing, when I gave that outlook is think about the way that, when Charter made its transition, that it impacted the amount of triple play sell-in. The things that we made both positive and negative short-term impacts to sell-in channels, go-to-market, what that did to ARPU and what you saw through the Charter model come through over time. First and foremost, you saw the PSU growth related to triple play tick-up. Subsequently, you saw ARPU growth and you saw a combined revenue growth, and eventually, once -- as we started to migrate more of the base, eventually, you saw EBITDA growth. That's really the general point I was trying to make as opposed to a quarter-by-quarter example guidance. And the model will be applied in a pretty similar fashion as to how we go to market. You'll have repricing taking place, you'll have change in sales channels, you'll have a general disruption from M&A generally. But all just to give a little bit of indication that we're going to do the same things that we did at Charter. And it's going to be -- I think what most people haven't understood, it's going to be over 50% of Charter's customer base that is applied to in the new Charter. So we're not just adding a net 1.4 million customers. The key point I was making is that we're deducting 1.6 million of already fast-growing assets and we're adding 3 million of more moderate growth assets today that we're going to apply our operating strategy to. So there's going to be a transition in the consolidated results as a result of that, but there's a proven track record which you can apply. As it relates to capital expenditure, in the prepared remarks, well -- the operating model is designed to grow. We're going to implement the triple play operating strategy and we'll take systems all-digital, and that will drive CapEx. But I don't think that some of the support line and maybe some of the scalable infrastructure line spend that you've seen at Charter will necessarily need to be spent on the 3 million assets that we acquire in the same way. We will be spending on CPE, and the volume will be significant of boxes that we buy, so we expect to be buying them at a cheaper rate than when we started digitization efforts at Charter. And in fact, today at Charter, we're buying boxes at dramatically lower costs than what we started at Charter, and we'd expect that to apply or even improve as we incorporate the digitization of the 3 million systems. So I think the capital intensity on that vintage of growth issue will -- can be lower as a percentage of revenue relative to what it was at Charter.

[Benjamin Swinburne:]

Got it. And I apologize, I hadn't adjusted for Bresnan. I took the 4.5% on our numbers.

[Operator:]

Your next question will come from the line of John Hodulik with UBS.

[John C. Hodulik:]

I guess, Chris, back to Slide 15. I guess the implied growth in '14 for the pro forma Charter, as you guys laid out, is about 6%. And obviously, there's a lot of moving parts in all the investment that you just talked about. So I mean -- I guess, obviously, you don't want to look too far out, but as we think of the playbook you guys applied to these assets, should that accelerate or decelerate through this investment period as you guys get these boxes out there and upgrade these networks? And then secondly, maybe for Tom. I know you talked about the tests you guys are doing with the cloud-based guide? I mean, if things proceed as expected and you have successful patterning [ph], when do you think that we could look for -- towards a commercial rollout of the new guide?

[Christopher L. Winfrey:]

So on the first question, these are not our guidance. What we've done -- these are actually your numbers, and that's what we've done, is we've taken consensus. Similar to what Comcast and TWC did in their joint S-4, we now are having to get to what could be the purchase price on the relevant assets. So we've applied Wall Street consensus to the relevant piece parts, and it's as good as anything at this stage. So that's all that -- all those numbers represent on Page 15. Obviously, if we thought it was entirely misrepresentative, we wouldn't put it there but it's really just the Wall Street consensus applied. I think when you think about the forward growth curve, are we done at Charter as it relates to growth on the existing assets that we have today? And the answer's no. We think we're continuing to improve on operating execution, and usually, financials flow when operations did well. As it relates to the new assets that are being acquired, as I mentioned to Ben, we're -- they're going to go through a process and it will get done at Charter. I think people tend to typically overestimate how quickly financials turn based on implementation of operating strategies. It takes a while to get the momentum going, and they tend to underestimate how long that momentum will go and the amount of growth that can be driven once you have momentum in the marketplace. That's just our general view.

[Thomas M. Rutledge:]

So with regard to the user interface, we have been testing it in Fort Worth. We're going to test it in other markets this year. We're pleased with what we're seeing. The attractiveness of the UI is that it's a state-of-the-art user interface, cloud-based, and it works both on new boxes and legacy boxes, and it works on whether or not the box has a DOCSIS modem in it or whether it's pre-modem generation CPE. And we think that it's going to be commercially launched everywhere we operate in 2015. And unless we find something in the testing that throws us off of that track, that's our intention. And we think that we'll be able to launch that same user interface across all of the assets that we're acquiring and servicing as part of this transaction. So it has a dramatic possibility in terms of completely changing the look and feel and upgrading the state-of-the-art user interface functionality across, not only the old Charter, but new Charter as well.

[Operator:]

Our next question will come from the line of Craig Moffett with MoffettNathanson.

[Craig Moffett:]

Question for Tom and Chris, just drilling down on ARPU a little bit. So this is now, I guess, a full year since you have now had some -- or 2 years, I mean, since you've had significant numbers of customers that were going into the new pricing plans. What are you seeing when they hit their step-ups? Have you learned anything new about retention rates and customer behavior as those customers get their price increases?

[Thomas M. Rutledge:]

I wouldn't say we've learned anything new. We are getting the kind of retention that we expected, and the pricing is working. We still have -- we're about 75%, including Bresnan; 80%, without Bresnan, new price and packaging. So we're getting less and less of a base remainder going from legacy to new pricing and packaging, which will have an impact in a favorable way toward growth of ARPU going forward because the mix of side grids, so to speak, from legacy to new won't go down. But in terms of the core strategy, which is to put a better product in front of the customer and a promotional offer and have the ability to step that pricing up through time, because the product is good and it stands competitively in the marketplace even at the higher pricing, that is working. And it's working well and it's working the way we planned it and the retention rates are what we expected.

[Craig Moffett:]

And if I could just follow up, Chris, to put a finer point on the TWC systems conversation that you gave us, are we right in assuming that when you feel like the product is there, that you'll do the same thing in those systems and move those customers on to promotional prices and then step them up at years 1, 2, 3?

[Christopher L. Winfrey:]

Yes. I mean, obviously, we'll go look at all the pricing and packaging variations that exist inside those assets, and we may not do exactly the same, but the general notion of using the network in its fullest capacity in an all-digital way with better video than satellite can provide, better video than our phone competitors provide, higher data speeds and a low-cost fully functioned -- fully featured voice product, all put together in a package that saves consumers real dollars in a competitive sense and gives them the superior product, that's our strategy. And we think if we do that, use the network effectively, that we can -- we need promotional pricing to break the inertia of the marketplace. But once we do that, we think we do have pricing power within the product mix.

[Operator:]

Your next question will come from the line of Jeff Wlodarczak with Pivotal Research Group.

[Jeffrey Duncan Wlodarczak:]

For Chris, your costs to service customers and marketing were higher than I forecast. How much of that was one-off expense related to the move to all-digital, and I guess, the Spectrum rebrand? And then how much disruption do you temporarily see to your video base when you move a market to all-digital?

[Christopher L. Winfrey:]

Sure. Well, let's pick those apart one -- I don't know your model, but -- marketing was up, my recollection around 6%. We're selling more, so we think that's good, and we're selling more and we're spending more to go get it, and that's positive ROI. From a customer operations or costs to serve perspective, we've grown our customer relationships year-over-year by 4.5%, and our costs to serve is up by 4%. We're selling more with more early tenure customers who tend to have higher operating costs in the first year of operation. So I think we're still seeing margin enhancement as it relates to the costs to serve line. You introduced a very good point, which is, in spite of the significant activity of all-digital, so I think the operating team has done a really fantastic job despite all the disruption, providing better service and all the transition that was already taking place in the business, plus all-digital. And to have costs to serve only up by 4% when you have a 4.5% customer growth really is a pretty big accomplishment in my mind.

[Thomas M. Rutledge:]

And just to put a little color on it, many weeks, we do 100,000 homes, where we change out a digital box or add a digital box. Logistically, it's quite complex, and it does cost money and it does cause friction. I mean, we have to make appointments with people, we have to create service calls, we have customer education issues that go with this transition. And we're handling all of that, growing our business and growing our EBITDA at the same time. But once the digital transition is complete, we think that some of those operating costs come out, as well as capital costs.

[Operator:]

Your next question comes from the line of Vijay Jayant with ISI.

[David Carl Joyce:]

It's David Joyce here. I was just wondering if you could provide some other color commentary on the response that you've seen on your subscriber base when you've been going all-digital. Are you seeing a lifting of subscribers yet? Also, with the momentum that you're seeing with the pricing and packaging, are you seeing any sort of incremental response from the competitors? Has that been changing to any degree yet?

[Thomas M. Rutledge:]

I'll answer the last part of your question. Chris [ph] -- the competitive environment hasn't materially changed, and we continue to see better performance, where we've gone all-digital than where we haven't.

[Christopher L. Winfrey:]

I think that answered both your questions, so...

[Operator:]

Your next question will come from the line of Phil Cusick with JPMorgan.

[Philip Cusick:]

Can you talk about the business ETF program that was launched a couple of weeks ago? Has that been a real barrier to entry? And then second, as you think about the acquired markets, are there capabilities coming there that will help accelerate the overall business mix? Or what needs to be done in those markets?

[Thomas M. Rutledge:]

Right. Well, with regard to the early termination fee or buyout of contract offer that's going on in commercial, it's already a very rapidly growing area for us, small business on the coaxial plant [ph]. And our objective is to go faster. And we think that our marketing strategy, along with some product simplification strategies that we have for commercial, will improve our ability to execute our marketing strategy and to reduce our operating costs and make our service better by having a faster-growing, more uniform kind of product for the small business universe. With regard to the transaction, we're going to have a much better regional footprint, and the DMAs that we cover will be extremely efficient from a marketing perspective. We're going from an environment now where we can only mass market to 48% of our marketplace through television, radio and newspaper. And the reason that's so is because our position in the DMAs we operate in is, as a percentage of a DMA, relatively small. After this trade-in swap and acquisition, over 95, actually, very high 90s percent of our marketplace, we'll be able to use mass media. What that means is we have a denser, fuller marketplace in which to operate. And from a commercial perspective, we'll be able to cover the entire area and region. So we think that some of the customers that currently have multisite locations in the midsized part of the commercial marketplace are underserved by us. And in this new operating environment, we think that we'll have an opportunity to put products together that will make our service penetrate against that middle market for business. In addition, by having better brand strategy across multiple DMAs, the whole commercial space ought to accelerate, in my view.

[Operator:]

Your next question will come from the line of Michael McCormack with Jefferies.

[Scott Goldman:]

It's Scott Goldman on for Mike. I just had one quick housekeeping question, and that is, on the $14 million expense benefit, wondering, Chris, if maybe you can give us a little bit more detail about what's behind that and which line items it hits? And I think you said part of it was a benefit on the programming cost side. It looks like programming costs are turning up sort of low double digits for the first half of the year. I think your guide is sort of to be commensurate with where some of the others in the industry are, which is probably more high singles. So just wondering what the outlook is for the back half? And then if I could just squeeze one more quick one in, just wondering as sort of Bring Your Own Devices starts to permeate a bit more, still probably in its infancy, but wondering if you're seeing anything from the BYOD sort of community and the reaction from subscribers as you start to deploy more and more set-top boxes into the home?

[Christopher L. Winfrey:]

So Scott, we did have some onetime benefits inside of the quarter. We didn't provide a breakout. Some of that was programming, but certainly not all of it. And we're not going to do it line by line through [ph] the analysis each quarter, but we think it's important to provide that disclosure in Q1. We also had the acceleration of the rate increase year-over-year, so we've provided that as well. Net-net, we think that EBITDA growth, net of the onetime retabulated [ph] items is increasing from Q1 to Q2, and has been for many quarters. And I think that's the most relevant point. For me, long-term programming outlook, I don't think our views have changed. From a short-term programming outlook, we've consistently said that we expected our programming costs growth to be consistent or similar to other operators in the space. I don't know that I've heard too many people talking about the mid- to high-single digits. But we'd expect ours to be consistent with others as adjusted for expanded basic video growth. So unlike many, we're growing video market share. So not only do we have rate pressure, like everybody else, but we have very positive volume pressure as a result of growing video market share. And that's the kind of programming expense you actually want to see. The third one was the Bring Your Own Device, Tom?

[Thomas M. Rutledge:]

I mean, I do think that Bring Your Own Device potentially has a possibility to reduce CPE through time for us. But we've been working on increasing the capability of our app, which works on Bring Your Own Devices, tablets and mobile phones, and we're getting significant uptick in the use of that device. So we think that we continue to need to put CPE out because people need CPE from us in order to make their televisions operate with the fullness of our product in a 2-way interactive service function. And a lot of the Bring Your Own Devices don't necessarily comport with our entire product. But that said, I see a world in which that's possible and so it may be that over the next few years, that our CPE costs, which are going down because of investments we've made, could even be less if there's a bigger proliferation of fully functional Bring Your Own Device kind of assets out there.

[Operator:]

Your next question will come from the line of Bryan Kraft with Evercore.

[Bryan D. Kraft:]

I'm wondering if you could comment on the programming cost differential per subscriber in the systems coming into Charter versus those going out in the transactions. Are they any different? And then also, as you're engaging with programmers now on new renewals, are you finding you're gaining any leverage at all in the negotiations because of the increased scale? And how are the programmers approaching SpinCo? Can we be assured that SpinCo can use Charter's programming contracts? Or are you seeing any push back from this?

[Christopher L. Winfrey:]

Yes, I don't really want to respond to any of that. Bryan, there's huge sensitivity around everything that you just asked. And I think what we've said today and provided in the slides is about as far as we're prepared to go, for obvious reasons. When you've asked these questions, we're going to hold our cards close to our chest.

[Bryan D. Kraft:]

What about just on the first part, on the programming cost differential, and in -- at -- your rate card and what's coming in versus going out. I'm just curious, is there anything structurally that gives you a lower cost, maybe in some of those mid markets based on the retrans footprint or the RSN footprint or when you look at the numbers, does it end up coming out about the same?

[Christopher L. Winfrey:]

Yes, I don't think that we're going to get into that here. I don't think it behooves us and it's not in the interest of our shareholders to do so.

[Operator:]

Your next question will come from the line of Tom Eagan with Telsey Advisory Group.

[Thomas William Eagan:]

I have a question on the FCC. Now the calendar has gotten a lot more crowded over the past couple of months and will probably get even more crowded if other potential deals are announced. So I guess, for Tom, is there any risk that the FCC has to stop the, what, 180-day clock in an effort to better assess the changing landscape?

[Thomas M. Rutledge:]

Well, it's always a possibility and it's been done in the past, but the FCC has actually said that they wanted to ask for lots of information upfront, which they did, and that they were going to try to go through the process within the normal time frame. So that normal time frame clock of 6 months is ticking, and if they stay true to their objectives, the deal will close by the end of the year, at least for Comcast and Time Warner Cable, and our deal will close 30 to 45 days after that. But it's been stopped in the past.

[Operator:]

Your next question will come from the line of Will Milner with Arete Research.

[Will Milner:]

I just want to focus again on Slide 15, lots of helpful information, but really on the top line growth, of the 3 million TWC assets that will, as you say, be over 50% of the enlarged Charter coming in. I mean, TWC today posted residential revenue growth of less than 1%. And is there any reason to suspect the revenue growth for the 3 million subs coming in will be materially different from that number? And I have one follow-up.

[Christopher L. Winfrey:]

Yes, look, unfortunately, I don't think it's appropriate for us, really, to talk about assets that are not ours as of yet. The methodology that we've used is really for illustrative purposes in terms of determining the purchase price and what a starting EBITDA could be on a consolidated pro forma, when you add in all these different pieces, assuming that the consensus estimates was correct. That's really all it's intended to do. So I don't want to stretch it into more than it is or get into the mode of really commenting on somebody else's assets for the time being and how they might perform. The reality is, we'll know when we close. I'm sorry, the other question you had was?

[Will Milner:]

Yes, and switching back to your business, I guess. Just on the CapEx profile going forward, I mean, the guidance obviously this year is absolutely clear, $2.2 billion, of which, $500 million is one-off. But at the same time, I'm just thinking about the potential on the Fort Worth trial and the cloud-based EPG. I mean, as you look into 2015, if that trial is successful and you have a full commercial deployment, is there a potential to sort of materially change the number of boxes you're going to upgrade in 2015 as a result of that trial? How should we think about that?

[Thomas M. Rutledge:]

I don't think the trial of the user interface is directly related to our box strategy. Now by the end of -- and what I mean is, by end of this year, historic Charter, we will be all-digital, and we'll be buying relatively small number of boxes without this transaction. So as we go into '15, we would want to put the new user interface out in historic Charter, on all the boxes that we've already bought, and it will have no impact on future pricing or future box prices. In the acquired systems, how soon we can get going with an all-digital strategy in 2015, after a transition services agreement is put in place, and how that would roll out in '15, I don't really know. But it wouldn't happen the day you close that you'd suddenly move to a much faster capital spend. You'd have to do some planning and packaging and pricing and branding and prepare the system operationally for new sets of hardware, which takes time. But the user interface, if it is working the way that we hope, it might be able to be deployed even before you go all-digital. And it's a relatively minor capital expenditure compared to a box rollout.

[Operator:]

Our final question will come from the line of James Ratcliffe with Buckingham Research.

[James M. Ratcliffe:]

I just wonder if you have any thoughts on the Windstream transaction announced earlier this week and about whether a REIT architecture could make sense for an MSO in general? And in particular, what the puts and takes would be for a growth- and accretion-oriented MSO, like Charter in particular.

[Christopher L. Winfrey:]

So James, it's not the first time this idea has been shopped around, but we tend to believe the largest value for Charter is in operating its assets well and gaining market share, and control of your network operations is a very key element to our strategy. So we believe the inherent value will be recognized through our performance over time versus trying to isolate the value of that network now at the expense of potential cash flow growth. Another thing to keep in mind is we also have significant tax assets already today, and it's not like we lack complexity with the organic and inorganic strategy we're focused on delivering. And the way we're set up today, I think, is the most valuable way today for Charter shareholders.

[Operator:]

I will now turn the conference back over to Mr. Anninger for any concluding remarks.

[Stefan Anninger:]

Thanks to all of you for joining us today and we will see you all after we complete our third quarter. Bye-bye.

[Christopher L. Winfrey:]

Thanks a lot.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you, all, for joining, and you may now disconnect.