Charter Communications, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Charter's Third Quarter Investor Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I'll now turn the call over to Stefan Anninger. You may begin your conference.

[Stefan Anninger:]

Good morning and welcome to Charter's third quarter 2015 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 statements 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. 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, President and CEO; and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom.

[Thomas M. Rutledge:]

Thank you, Stefan. Our core strategy to deliver superior products at highly competitive prices combined with outstanding service continues to drive Charter's firm operating and financial momentum. That momentum continues to improve as we use our high-capacity infrastructure to grow each of our product lines. Looking forward, we intend to apply that same customer focus operating strategy on Time Warner Cable and Bright House assets as soon as we close our transactions. We had a very strong third quarter both in terms of our customer growth, which accelerated year-over-year and our financial performance. We grew our residential customers by 97,000 versus 68,000 during the same period last year. And over the last 12 months, we've grown our residential customer base by a full 5%. Our commercial customer growth driven by a small business activity also is accelerating with 14% growth year-over-year. In residential, we had 180,000 residential primary service units, about 60% more than we had last year. Commercial PSUs also improved to 31,000 net adds versus 5,000 last year. We drove improved unit growth in each product in both residential and commercial. We added 12,000 residential video customers versus the loss of 9,000 last year. And we continue to grow expanded basic video relationship penetration now at 97%. And our commercial video customers grew by 4,000 customers. That performance reflects the significant improvements we've made to our video product following the all digital transition including quality digital pictures, more high-definition satellite and video-on-demand and interactive guide functionality on every television outlet in the home. Our goal remains to grow video customers for the full-year 2015. Residential broadband also continues to improve, we gained 131,000 customers versus 94,000 during the third quarter of 2014. The service we also improved by going all-digital, by dedicating more network capacity to broadband. And we also add 37,000 residential voice customers. We grew total revenue by 7.2% versus 8% in the same period last year. Excluding advertising, however, we grew revenue by 7.9% versus 7.7% last year. An 8.5% EBITDA growth, was higher than our revenue growth. Excluding transition-related costs, our EBITDA grew by 9.7% year-over-year. And our operating strategy, which remains focused on high-quality customer transactions using our skilled U.S.-based labor force, is causing our EBITDA to grow faster than our revenue. A brief update on our proposed transactions with Time Warner Cable and Bright House Networks. In September, both Charter and Time Warner Cable received overwhelming approval from our respective shareholders for our proposed transactions. The FCC comment cycle will close mid-November, and we're working closely with the FCC and the Department of Justice to make sure that they have all the information they need to evaluate the merits of the transactions. We've already received approval or authorization from most states. Most have obtained approvals approaching the threshold closing conditions for franchise authorities proving transactions. And we've raised nearly all the acquisition financing, and we will be operationally ready to close and we would like to close by year-end. But realistically, we think we're looking at a first quarter close. We are establishing our leadership teams for New Charter; earlier this month, we announced that Phil Meeks who is currently at Time Warner Cable, Executive Vice President and Chief Operating Officer for Business Services has joined New Charter as Executive Vice President and President of our Business Enterprise Services Group upon completion of our transaction with TWC. David Kline, formerly of Visible World has joined Charter as Executive Vice President, President of Media Sales, and will oversee all aspects of Charter's advertising business. Given that New Charter will have a workforce of approximately 110,000 employees after we hire 20,000 more U.S. based people, Paul Marchand, formerly of PepsiCo has joined Charter as our new EVP of human resources. We're also making decisions about how departments, groups, and our employee structure will be organized in determining the location of management functions. From an operational perspective, we're developing plans for people, processes and system integration, continue all-digital, new pricing and packaging, Spectrum Guide and World Box roll-out, at both TWC and Bright House closing. Integration planning and investments we made in 2014 and earlier this year provide a good start, should accelerate the integration of the new transactions. We're looking forward to close and to pursuing the many opportunities, great value that the New Charter will offer. Now, I'll turn the call over to Chris Winfrey.

[Christopher L. Winfrey:]

Thanks, Tom, and starting with slide 6 of today's presentation, during the third quarter, we grew residential PSUs by 180,000. Then in video, we added 12,000 residential customers. Excluding both video customers, we added 11,000 compared to a loss of 29,000 last year. So, a strong improvement year-over-year and, as Tom mentioned, we continue to expect video customer net adds for the full year. Residential Internet, we added 131,000 customers and we grew residential voice customers by 37,000 customers. Over the last year, our residential customer base has grown by 290,000 or by 5%. Over the same period, residential ARPU was up by 2.3%, driven by a larger triple play base and step-ups partially offset by continued single play Internet growth. Slide 8 shows our customer growth combined with our ARPU growth resulted in year-over-year residential revenue growth of 7.3% compared to 6.7% last year. In commercial, we added 31,000 PSUs versus 5,000 in the prior year. The improvement was driven by the launch of Spectrum pricing and packaging to the small and medium business segment the first quarter of this year. Commercial revenue grew by approximately 13%, a bit less than last quarter, which reflects the same short-term ARPU trends we saw in residential when we initially launched our new pricing and packaging for residential in the middle of 2012. Our advertising revenue was down about 12% year-over-year, given $8 million of political advertising last year. And, as a reminder, in the fourth quarter of 2014, we had about $18 million of political revenue. In total, our third quarter revenue was up by 7.2% year-over-year, with a lower level of annual rate increases and most of the revenue increase coming from customer growth. Turning to operating expenses and adjusted EBITDA on slide 9, the total OpEx grew by $96 million or 6.5% year-over-year, of which, transition OpEx related to our M&A transactions accounted for about $12 million this quarter. Excluding those transition costs, total expenses grew by 5.8% year-over-year and programming expense grew by $46 million, accounting for about half of the year-over-year increase in total operating expense. The 7.4% increase in programming was driven by contractual rate increases, growth in our expanded video customer base over the last year, higher penetration of our tiers and broader carriage (9

[Operator:]

Your first question is from Ben Swinburne with Morgan Stanley.

[Benjamin Daniel Swinburne:]

Thank you. Good morning. I have two questions. Tom, last quarter you talked about an evolution of your thinking on video bundling. And I wondered if you could update us on how you're thinking about that today? There's been some press coverage that you guys are looking at a streaming package. I wonder if you could maybe address that and just any update on that front would be helpful. And then just for Chris, I'll ask my second question. If you look at the other expense growth which has been in the teens this year, is there a way for us to think about maybe residential versus commercial? Because you would seemingly be showing even more operating leverage than you already are, if that business was maybe more reflecting the residential trend. Any color you can give us there would be helpful.

[Thomas M. Rutledge:]

Well, Ben. In terms of what we're actually selling in the marketplace, we have a very rich video package that includes a two-way interactive platform on every outlet. And the vast majority of our customers, 97%, are taking a complete full basic – expanded basic product, and we're packaging that with high-speed data and with voice in a compelling price point. And we're doing it with a quality service organization that drives the customer relationship in a positive direction and extends the life of the average customer. So, that's our basic marketing strategy. There is an issue in video obviously if you look at the total quantity of video growth in the whole marketplace, it's down slightly, and the reason is the cost of the product relative to what people incomes have done, is creating a mismatch – I mean it's an elasticity of demand problem essentially. The curve has shifted because income growth is down for the vast majority of the population. The population is poor essentially. More people are – have left the workforce. More people are on disability and on food stamps and that affects what people are willing to pay for it. For content, we try to make the content valuable in the way we make the product work and the fully featured service implications of the product. So, there's also effective service issue essentially in that a lot of the TV Everywhere product and other product available online is not secured well. You have people joking about sharing passwords on authentication on Emmy award shows. That's a real issue and so, that expects elasticity to demand as does the overall income level of the population. We're finding success though with the price we're selling and driving to the market. We test occasionally new products, and we test price points. And some of the stories you've read about what we're doing are – those are a result of tests. We don't have any of those kind of numbers in these results. And we do that from time to time. In terms of streaming, we sell cable television services using IP technology and MPEG technology. And people call over the top streaming and they call IP streaming, and what we're selling is cable television in applications. And we have 1.4 million customers who have downloaded our apps and used those apps to receive cable television on their iOS platforms, their Android platforms and now on their Roku platform. So, we continue to expand the platforms that the app system is available, but it's cable television.

[Benjamin Daniel Swinburne:]

Thank you.

[Christopher L. Winfrey:]

Then on the other expense, the way that I characterized it in the prepared remarks really gives you a sense of the materiality. So, starting from the first and largest corporate administrative labor expense that I mentioned really has been driven by IT advanced engineering and software development as we've in-sourced a lot of those functions. That provides benefit to all parts of the house, in residential, SMB and enterprise. So, it's kind of hard to allocate a portion of those. The second category was the property taxes on previous CapEx and insurance on the larger service employee base. I see that also is tied to the insourcing that we are doing as we have more in-house labor, things like casualty insurance and previous CapEx property tax. You could get into a discussion on how to allocate that and we probably could but for consistency we've left that in other, but you could think about it pro rata relative to the customer base. And then the last one, there is a higher bad debt that comes along with increasing revenue in all three of those areas in residential, SMB and enterprise. So, again you can think about that per revenue (21

[Benjamin Daniel Swinburne:]

That's helpful. Thank you.

[Christopher L. Winfrey:]

Thanks.

[Stefan Anninger:]

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

[Operator:]

The next question is from Jeff Wlodarczak with Pivotal Research Group.

[Jeffrey D. Wlodarczak:]

Good morning, guys. Between you all and Time Warner Cable today, it appears you're seeing a particularly nice share shift from your competition. Can you provide more color on the competitive environment? How they're responding to your success? And any trends you can give us on the fourth quarter would be helpful.

[Thomas M. Rutledge:]

Yes. Time Warner's PSU growth is good and accelerating and we're happy to see that, as is Charter's. We invested heavily in our network to make our products superior to our competitors. We've invested heavily in our service organization to differentiate our service from our competitors. And that is affecting our ability to grow. And our growth is accelerating. And all the capital we put into our plant and all of the hiring we did and the training and the acquisition of test equipment, trucks, tools, all of those things are paying off with better service and better products, which have an effect in the marketplace, which you're seeing.

[Jeffrey D. Wlodarczak:]

And the competitive response to that?

[Thomas M. Rutledge:]

Well, I think that the competitors continue to aggressively promote their products at low price points. And we think that fundamentally, we have better products than they do.

[Jeffrey D. Wlodarczak:]

Fair enough. And one for Chris, can you provide more color on the slowdown in programming expense in the third quarter? Is there anything one-off there and the outlook for the fourth quarter?

[Christopher L. Winfrey:]

Yeah. There was nothing one-off inside the third quarter as it related to programming. As I mentioned on the last call, we did have a large one-off in the second quarter of 2014, which caused the growth rate in Q2 of this year to be elevated, so the percentage growth rate to be elevated in Q2. This one is a normal quarter and also reflects the addition of some more significant content at the beginning of June through last year. So, we don't usually get into the mode of providing forward-looking guidance, but the rate that you saw is at in Q3 is a good run rate from where we are today.

[Jeffrey D. Wlodarczak:]

Thank you.

[Stefan Anninger:]

Thanks. Operator, we'll take our next question, please.

[Operator:]

The next question is from Bryan Kraft with Deutsche Bank.

[Bryan Kraft:]

Hi. Good morning. So, two quick questions, first, we've just gone through the back-to-school season, just wondering if you could comment on what you've seen as far as video take rates this year in your college markets as compared to last year, or the past couple of years. And then separately, I just wanted to ask if you would comment on whether or not you might participate in some way in the upcoming broadcast incentive auctions. Thank you.

[Thomas M. Rutledge:]

Yeah, we continue to see opportunity in the college market, and we have improved our ability to sell there. And so, our year-over-year performance has improved. There's continued purchasing of data only in that marketplace, and we've approached the market with a variety of tactics. But fundamentally, a lot of college kids are using their authentication from their parents in getting cable TV services for free, and that was the issue I was talking about previously. The lack of control over the content by content companies and authentication processes has reduced the demand for video because you don't have to pay for it. And that's going on in the college market. But because of our sales techniques, we're actually growing. But there is a trend there that is negative associated with lack of authentication processes. With regard to the auction, we're studying the auction. We're interested in it. And I talked extensively in the past about the opportunities in being a mobile business, and there are a variety of ways to go into it. We're in a very awkward situation given the pendency of our deal to be able to participate in that, but we are exploring it.

[Bryan Kraft:]

Okay. Great. Thanks, Tom.

[Stefan Anninger:]

Thanks, Bryan. Operator, we'll take our next question please.

[Operator:]

The next question is from Craig Moffett from MoffettNathanson.

[Craig Eder Moffett:]

Hi. Thank you. Two quick questions, one, Chris, can you talk some more about your expectations for longer-term capital intensity and what you've learned, and particularly as we think about the rollout of the active video platform and the user interface? And then if you could just update one quick clarification on what you just said about the auction, would you consider participating in the auction with Comcast if that were an opportunity or would your participation necessarily be entirely independent?

[Christopher L. Winfrey:]

On the longer-term capital intensity, unfortunately, we haven't left much to guess for people in terms of what we think because we're required to disclose our internal forecast as part of the shareholder vote proxy process. Our opinion of what happens to the financial development of the company has not changed, and we think that the business becomes a lot less capital-intensive over time, particularly once you get behind all-digital in the Time Warner Cable and Bright House properties. A little bit tied into the second part of that question that you asked me was that one of the other major benefits that comes out of this is not only getting all-digital behind you and having your capital be applied to net additions as opposed to gross adds, but it also means that you can take all of the cloud-based infrastructure development that Charter is doing today and that Time Warner Cable is doing today and that Bright House is doing today, and do it once and be in a position to, on the increment, be able to grow more efficiently from a fixed overhead capital development and infrastructure perspective. And that is one of the benefits that scale brings. And that ties into your question about Spectrum Guide and World Box lessons. We're, as Tom mentioned, rolling out into St. Louis and into Reno imminently. And it requires some up front development, which we've already spent, and it requires some up front expenditure at the local level which you're seeing inside of our capital expenditure today. But once you get beyond that market-by-market, your unit cost is dramatically lower on the CPE. And the functionality of the box is dramatically higher for World Box when that's deployed, which means that you have longer life to assets on longer-lived customers which significantly improves the ROI over time. And that's what you, in essence, see in front of the forecast that we needed to disclose as part of the proxy statement.

[Thomas M. Rutledge:]

And with regard, Craig, to the auction, we're not working with anyone -- at the moment. We're considering – but we have – for us to participate, we have big questions about how to – how to finance it and what are actual footprint would be if we were to bid in. So, we don't know the answers to those questions, but we are thinking about that auction and what to do about it.

[Craig Eder Moffett:]

All right. Thank you.

[Stefan Anninger:]

Thanks, Craig. Operator, we will take our next question, please.

[Operator:]

The next question is from Vijay Jayant with Evercore ISI.

[Vijay Jayant:]

Thanks. Tom, you mentioned about deploying your pricing promotion strategies across Time Warner Cable's footprint on the closing of the transaction. They seem to be following your pricing in some ways already, but in terms of the hardware strategy, I don't think you guys talked about modems and also charge much less for set-top box rentals. Is that something that you are going to move to the Charter pricing scheme for that? And second, if there could be any color on the path of rolling out Spectrum Guide. How many homes can we expect in the next year and so forth, and is there scaling on your trials? Thanks so much.

[Thomas M. Rutledge:]

Well, with regard to our box price strategy and our modem price strategy are where our pricing strategy is. As we think through how the price Time Warner, Bright House assets in the future, we would tend to go toward our pricing model. How we transition that is going to be an art, but we think it can be done, and that we can ultimately grow up the business by changing the pricing model toward ours and changing the number of boxes that are actually deployed. One of the functions – one of the things that occurs in the Time Warner assets as a result of the box prices is that there's a lot more one-way boxes out there because of disparity in price between the boxes, interactive boxes and the one-way boxes. And we believe that every outlet should have two-way interactive box on it, because it utilizes the full capacity of the network, and therefore, the product is improved on every TV that's in the house. In order to do that, you got to drive boxes deeper into the marketplace, and so you can't overprice them in our view. And so, we're going to do that. With regard to the Guide rollout, we're a few weeks, six weeks probably behind our schedule than – in rollout as we work through all the software issues, but we are rolling out the product. We have said we thought we could do as many as 1.6 million this year. I don't think that's probably realistic or desirable at this point given where we're starting. Initially, we're going to roll out in Reno and in St. Louis. How we roll that out going forward, we haven't yet budgeted. But our plan is to roll it out as rapidly as we can operationalize it and get the benefit of it. We have some things to learn yet about operationalizing it. And so, I don't – we'll do it as quickly as we can but we don't have a budgeted schedule yet for 2016.

[Vijay Jayant:]

Great. Thank you.

[Stefan Anninger:]

Operator, we'll take on our next question please.

[Operator:]

The next question is from Amy Yong from Macquarie. Amy Yong - Macquarie Capital (USA), Inc. Thank you. There's been a lot of focus and attention on LTs and their synergy and margin targets for Cablevision which would obviously imply there's a long way for improvement for Charter and Time Warner Cable. I just want to know if there are any thoughts on kind of what the margin potential would be and some of the operational efficiencies that you can talk through? Thanks.

[Thomas M. Rutledge:]

Hey, Amy. In regard our thoughts around the U.S. cable business and what we're able to do in a growth model, which we think drives the most value for shareholders. Again, it's reflected in a lot of these internal forecasts. If Charter was – had a higher penetration, which we intend to be our margin would be higher. And we intend for that to take place and you can see that inside of the forecast. Our synergy numbers were designed to be conservative primarily because we were focused on getting the revenue engine going and then not disrupting the workforce in fact to in-source more labor back to the U.S., so that we can provide a higher quality service and grow faster. If we wanted to take an alternative strategy into one time increase our margin percent at the expense of revenue growth, I certainly think there's huge opportunities go do that, it's just not our view of how we want to create value. And we're focused on dollars of EBITDA growth and cash flow growth as opposed to just focusing laterally on the percentage margin. It doesn't mean that you can't have both, it means you can. And that's what the operating model and the growth strategy that we're doing is designed to do it and that's why it works well in acquisitions when you can deploy that operating strategy on a larger set of assets to go create the same set of value.

[Christopher L. Winfrey:]

Something I'll add to that is fundamentally our strategy is to improve our return on investment. And that means that we're looking at the capital we're spending and the kind of operating income that we're creating over time, but ultimately, the free cash flow that we're creating, and that's how we drive the business. So, when we look at opportunity in front of us we try to create as much value over time as we can, without regard to the short term marginal opportunities that might exist.

[Thomas M. Rutledge:]

The only final thing I'd add on to that is there's something interesting to learn along the way. I'm not going to be pig headed or certainly take a look and we'll try to mirror the same – something coming out of Europe. I spent 10 years in European Cable so I have an appreciation for some of the margins that were feasible in another marketplace. But there's something that could be applied I used to do when I was running at above 50% margin that can be applied here, then we would certainly piggyback on that. It would represent upside for all of them.

[Christopher L. Winfrey:]

Of course.

[Thomas M. Rutledge:]

If we can learn how to do this, we certainly will. Amy Yong - Macquarie Capital (USA), Inc. Great. Thank you.

[Stefan Anninger:]

Operator, we'll take our next question please.

[Operator:]

The next question is from Jonathan Chaplin from New Street Research.

[Jonathan Chaplin:]

Thanks. Two quick questions, if I may. As you sort of look at the wireless opportunity, how do you weigh going with an asset-light model like some of the Liberty Global properties have in Europe versus needing to put assets underneath the model, buying spectrum, and other assets like that? And then separately on the enterprise side, it seems like growth has slowed more for you guys than it has for some of the other cable companies. Is it because you're more penetrated in enterprise than others or is the opportunity in your footprint less than it is in others or do you think that you should be able to accelerate that growth rate from here?

[Thomas M. Rutledge:]

Yeah. Well, with regard to wireless, I think I talked in the past about all of the opportunities that exist there and as you approach that business, I think there are different time frames in terms of what your model might be over time, I should say. So it's a complex question, and I don't have an answer for it yet because we haven't gone into the business. But as we do, I think there are a multiple ways of coming at it. But in the long run, you want to do the thing that produces the highest return on investment, which is what we were talking about a moment ago. With regard to enterprise, if you look at our unit growth in the small business section, it's going, it's accelerating. So, why is the revenue growth decelerating from a growth rate perspective? Part of that is because we've repositioned the business to grow faster, just like we did the residential business four years ago. And as a result of doing that, we're actually pricing down some product so that we can grow faster. And as we do that, there is a lag in growth that will be covered up with the growth rate of units in the future. And our view is that we will have a higher outcome than we would if we continued on the current pricing model. So, that's essentially what's going on there. With regard to the large segment, some of the segments have slowed like cell tower growth, but the opportunity there is tremendous. Our penetration at the enterprise level is less than 10%. And so, there is tremendous upside, and there is a tremendous upside to expand our footprint there, which is not fully expanded. We've committed, as part of this acquisition, to extend the footprint of our serviceable enterprise area as a result of that. And we think that we can grow the business and improve the products and create new products that don't exist today. So, we're very bullish on the future of enterprise, and we think that what's going on today short term is just a repositioning in the marketplace.

[Jonathan Chaplin:]

Thank you.

[Stefan Anninger:]

Thanks, Jonathan. Operator, next question please.

[Operator:]

The next question is from Will Milner with Arete Research.

[Will Milner:]

Thanks a lot. I just had one question. I just want to ask a question in relation to the $2 billion TWC break fee. I mean, presumably the right way to think about this is that you'd be willing to contemplate concessions up to that value. And in that light, I just wonder, are there any particular concessions around TWC that you deem to be deal breakers? And specifically, I'm thinking about wholesale access to your broadband network, if you could give some thoughts on that, that'd be helpful.

[Thomas M. Rutledge:]

Yeah. I don't really think it's a good thing to be discussing the break fee. Our opportunity with this deal is to grow the total business and to improve the total business and to create a more competitive business across all of the assets. And so, we haven't had any discussions with the FCC regarding any conditions. And so, I don't really want to discuss them in this place.

[Stefan Anninger:]

Thanks, Will.

[Will Milner:]

Fair enough. Thanks.

[Stefan Anninger:]

We'll take the next question, please.

[Operator:]

The next question is from Marci Ryvicker with Wells Fargo.

[Marci L. Ryvicker:]

Thanks. I have two. The first is on usage-based pricing. I know you don't implement this today, but how are you comfortable that you're not going to need or want usage-based pricing as the ecosystem evolves over the next couple of years? And then the second question is with regards to your conversations with the regulators, is Bright House included in these? Is it Time Warner Cable only? Does Bright House come in separate?

[Thomas M. Rutledge:]

It's one transaction from a regulatory point of view. So, Bright House and Time Warner and Charter are all included. With regard to usage-based pricing, we don't do it. We don't do it because we want to sell more services, and that's our business model.

[Marci L. Ryvicker:]

And you don't see for that to change at any point?

[Thomas M. Rutledge:]

We don't have any plans to change it.

[Marci L. Ryvicker:]

Okay. Thank you.

[Stefan Anninger:]

Thanks, Marci. We'll take our next question, please.

[Operator:]

The next question is from Mike McCormack with Jefferies.

[Michael L. McCormack:]

Hey, guys. Thanks. Tom, I guess just drilling back into this depth of service issue. I guess having grown up in a cable executive's household that fought pirated set-top boxes and the like back in the day, this seems like it's even worse and particularly more pervasive on the premium content side. Just your thoughts on why the industry is not being more proactive in addressing it? It seems like there's just a lot of complacency out there. And as we move into a limited streaming environment of three to four streams, it seems like that the overall audience still is going to be shrinking over time. Just your thoughts around that? And then, if I may, Chris, the higher bad debt level, is there any connection there with any sort of uptick in involuntary churn? Thanks.

[Thomas M. Rutledge:]

Yeah. I've spoken to a lot of the programming providers. In fact, at a core level, it's – they haven't been in that business before, and they haven't really thought through what they're doing. And so, now they're sending their signal out themselves. And they have – they don't seem to have thought through what the implications of that are. And they've created a problem where they devalued their own product by their inability to secure it. And it's a real issue. And it does affect the overall value. Now, it's a hassle (45

[Christopher L. Winfrey:]

Yeah. I guess the younger generation level in the poll testing that we do, back to your point, there's just a tremendous amount of password churn particularly in those premium apps.

[Thomas M. Rutledge:]

Yeah. And so, there's a complete lack of control and understanding in that space.

[Michael L. McCormack:]

I agree.

[Christopher L. Winfrey:]

On the higher bad debt levels, no we're not seeing an increase in non-pay churn. What we're seeing is a growing customer base. We also made some minor changes to our collection policies in the fourth quarter of 2014 that just technically causes an expansion of that that will be wrapped inside of Q4. So, there is no issue of non-pay. Overall, our total churn is coming down and we're pleased with where we're at.

[Michael L. McCormack:]

Great. Thank you, guys.

[Stefan Anninger:]

Thanks, Mike. Operator, we have time for one last question, please.

[Operator:]

The last question is from James Ratcliffe with Buckingham Research.

[James M. Ratcliffe:]

Thanks for taking the question. Just to dig into commercial a little bit. It sounds like part of the slowdown was just, slower issuing customers and more on intro plans. Is there going to be a need to reprice the back book there at all, and how – what sort of impact should we expect that to have? And secondly, on video and looking at – I know that there are a lot of issues around video ARPU numbers due to bundling, but can you give us an idea of what you think is really happening with video profitability in terms of customer's willingness to pay for services versus the what the content is actually costing and if that delta is actually compressing, how do you think about the trade-off between more video subs potentially lower profitably versus higher profitability but lower subs? Thanks.

[Thomas M. Rutledge:]

Sure. On the commercial side and similar to what we said with residential, we did pricing and packaging, there will be a transition of the base over time, but you've got to do it in a way that it doesn't have a negative pull on the business. We've successfully managed through that on the residential side and we'll take the same approach with the SMB portion of commercial which is where we pulled out the pricing and packaging. So, yes, there are puts and takes along the way, but we're seeing that already and we'll manage it in a similar way that has already been done for residential. And video profitability, we don't – because of what we sell, we sell triple play and our strategy is about growing customer relationships, growing revenue per household. And as a result, actually increasing our margin through, and our ROI, through having a better penetration and revenue-base on what is essentially a fixed set of assets and operating cost. So, we don't try to piece apart and say look at one particular segment or a product of what we're selling because we sell an entire package into the household and it would lead you to bad conclusions. In any event, we think video remains a profitable business. It's a core part of our strategy. It's what we sell together with Internet and phone. And what we're selling is profitable, and that's what really matters versus opposed to trying to divvy it up and decide who gets the certain amount of network operating cost. It's somewhat arbitrary and it's not what we sell. So, we don't look at it that way.

[James M. Ratcliffe:]

Thank you.

[Stefan Anninger:]

Thanks, James. Operator, that is our last question.

[Operator:]

This concludes today's conference call. You may now disconnect.