Charter Communications, Inc. (CHTR) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Ben Swinburne, Morgan Stanley's media analyst. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. I'm excited to welcome back to the conference Charter Communications and specifically Chris Winfrey, the CFO of Charter, a role he's had since 2010. Chris, thanks for being here.

Thanks for having us back.

Absolutely.

So I know we sort of talk about this every year, but you guys closed the acquisition of -- acquisitions of Time Warner Cable and Bright House now going back to 2016, and the integration work is now, I'm sure, happily -- largely behind you or completely behind you. When you look back at the 3 years of integration and sort of where Charter sits today, how would you describe sort of the opportunity in front of you relative to what you thought when you guys originally put the business plan together?

Look, it's been a long haul, but we are essentially through the integration of what was the world's largest-ever cable acquisition and integration that took place, and it's worked out. We haven't had any major negative surprises. In fact, we're really pleased with the network and the asset that we've created; the ability to deploy product across our entire footprint; the service infrastructure, which continues to improve; and our ability to continue to upgrade the network proactively at a dramatically lower cost than our competitors. So we think we got the asset that we were after and continue to be pleased, and we've had some positive surprises as well along the way.

How has the business changed over the course of that period of time when you think about the product offerings, et cetera?

Yes. I mean if you think back, our customer relationship growth, our Internet relationship growth during -- a lot of what we expected it to do, to sit here and tell you that we knew what was going to happen in the video space, over the past few years, that wouldn't be true. To think there would be that many new entrants, virtual MVPDS, OTTs, people selling at a loss, people selling content, distributing content without security for free essentially, and trying to compete against that, that's been a challenge. On the other hand, we've had some positive surprises. We didn't have mobile inside of our business plan. I think that's a positive. We didn't have the fast upgrade to DOCSIS 3.1 neither with the speed or the cost that we were able to do it. We have that ability going forward. And we certainly didn't put in the move to self-care, which has a cost of service improvement that's going to continue to benefit us for many years to come. So mixed bag that generally pretty positive relative to what we were hoping for.

And probably the highlight for most investors in Charter and also the cable business in general has been the continued strength in the broadband business. We were talking to Brian about that this morning. You have ambition, I think, to accelerate the growth rate of broadband in 2020 relative to what was a very successful 2019. Given a business that's basically 80%-ish penetrated in the United States, what gives you confidence you can continue to deliver those kind of results?

Look, it's a competitive environment. And so we recognize that, and we continue to make our product better. But we do think that we have the best product in the marketplace across our entire footprint. We price it very attractively. We provide great service. We bundle other products around it in ways that we think that most of our competitors cannot. And we're not afraid to continue to invest in that product and continue to make it more competitive and try to get in front of that really before the new competition, when it comes, takes place.

You guys last year talked about churn across the footprint and actually gave us a sense of the different churn levels across Time Warner Cable, Bright House and legacy Charter. Are you seeing those trends converge and converge in the way you'd like them to?

They are. One of the things that makes it difficult to declare victory is that legacy Charter churn just continues to improve. And so the rate of improvement at Time Warner Cable has been better than legacy Charter, but legacy Charter is a moving target. And so they have not converged. I don't think they will this year either. I do think they will over time, but that just means that we have a long runway for continued improvement in our service operation and the financial impacts, the goodness that we get out of that.

You mentioned the competition when it comes. I think -- clearly, you're alluding to, I would assume, 5G.

Our industry has had irrational competition pop up at different points in time. And traditionally, that comes about with overbuilders. So you have municipal fiber overbuild in small areas. You had the FiOS project. When that took place many years ago, it didn't make money. And part of the reason it didn't is because cable continued to reinvent itself but -- and had a deployed network across the footprint. So I don't think you can pretend that it's not going to come. I think you need to prepare and be ready for it and invest in your network and provide a product that there's not an attractive ROI for somebody to come do it to you.

What differentiates your broadband product versus your existing competitors? Is it just speed? Or are you guys doing more than that?

No, I think it's -- I started to mention a little bit of that before. It's certainly speed where we have a tremendous advantage. You can debate, as we have over 20 years of Internet over broadband, what are they going to use that much speed for. And I remember saying that when the speeds were going to 10 megabits per second. And so today, you sit here and say you offer a 1 gigabit per second product across your entire footprint. What are people going to use it for other than bragging rights? Well, a, bragging right matters; and b, that -- those products get developed when you put that network in front of your customers. But -- so it's more than speed. It's throughput. It's the ability to have multiple devices attached. It's low latency, which is something that we're uniquely positioned to deliver as a service of the DOCSIS footprint because of the decentralized nature of the cloud and compute where we have our network and then bundling that together with advanced WiFi services and then having an attractive video product to bundle together with it as well and now mobile where we can save customers significant amounts of money as a way to drive Internet relationships, both at acquisition as well as churn, and provide a more holistic Internet connectivity product along the way.

You sort of alluded to it. I don't want to put words in your mouth. Are you -- when you think about the 5G threat, is that something you just think it's an irrational or unsustainable or undefendable business case, but it may happen anyway? Or are you maybe more open to...

People could go spend a lot of money and not get a return. And that doesn't mean that it won't happen. So I think you need to be prepared for that, and you need to make sure that your product is superior in every way. I don't think that there's an economic case to do it, and I don't think that it will be comparable as a service. I think if 5G -- I mean we have to really break it apart. 5G mobile, we're going to be launching in the next few months. We have Verizon as an MVNO partner, and we'll be launching 5G mobile. So to the extent that 5G mobile is a success, we'll be part of it. 5G fixed, nobody has a better position from a network architecture standpoint to deploy 5G fixed as an edge case, whether in an enterprise setting, whether it's to access a really difficult place to get to or whether it's a rural buildout, and we've done those projects already. And so we know our network can do that in a way that most others can't because our network is already there. So I think there will be some edge cases for 5G fixed. I just don't think it's going to be a ubiquitous deployment at scale. If it were, I don't think it'll make money. I don't think it'll provide ubiquitous coverage inside the footprint. And I don't think that it'll have quality even where it can be delivered. But that doesn't mean that we won't stay way ahead in terms of upgrading the network and keeping our speeds high and keeping our rates attractive so that you're not inviting somebody to compete with an inferior product just with a lower price.

And without having an engineering discussion on 5G onstage here, is the challenge in that business, from your perspective, just the amount of capacity the network's going to need?

Well, I'm glad you raised it. That's the other point, is that a fixed wireless network, if you're deploying spectrum in an area where there's any type of usage, then the spectrum is valuable, and you don't want to be using it the way that you would need to use it for a fixed broadband product. What do I mean by that? Our nonvideo customer, which is what we'd be talking about here, uses 450 gigs per month. And the average LTE or 4G or a future 5G customer, if you were to try to provide that without the benefit of our broadband or our WiFi, would have to do 450 gigs versus about 8 or 9 gigs today. So the capacity difference is tremendous, and we're just in a much more efficient way to go deliver that type of product.

And presumably, the 450 is growing.

It is, so it's not going to be static. It continues to go up. It goes up for our total Internet customers, it goes up for our nonvideo customers, and it's dramatic.

Lastly, on broadband, is there anything we should be thinking about from a seasonality or year-over-year comparison perspective about broadband either this quarter or this year?

There was -- if I think back, there were -- always in every quarter last year, there were things that were unique that was happening inside of a quarter. This year, there'll be things that are unique. The difference between gross adds and gross disconnects is what we call net adds, but not to be rudimentary but most people -- that's the only thing that people see, and it's because it's the only thing that we show. But that's razor thin, that difference, net adds. And so a small change in your gross adds or a small change in your gross disconnects doesn't mean a fundamental difference in the performance of your business. It just means that something small happened in the quarter to 1 of those 2 buckets. So if you think back to the past 2 years in terms of seasonality, the past 2 years, I think we said each year, we expect to grow our customer relationships at a faster rate, and we did. But that doesn't mean that every single quarter was a dramatic improvement. It meant that some were dramatic, some were on par, some were slightly better. But net-net, that was the case. So if I had one wish coming out of the integration, it was that we stopped focusing so much on a particular quarter and saying that forever defines the destiny and the growth rate of Charter, and we just don't manage the business that way. We don't think about the business in terms of a quarter. We don't think about it in terms of a month. We think about doing things that are going to drive long-term growth for many years to come. And the quarter will fall where the quarter will fall. And that applies to what you're doing on churn and gross adds. That applies to what we're doing on the financials as well.

Okay. I will grant you that wish. We'll not talk about it for the rest of the time we have.

No, that's okay. I don't -- just because I asked for the wish doesn't mean it would happen. So...

Right. You mentioned before, Chris, that the changes in the video business have been massive and maybe were hard to predict. Where does -- how do you guys think about video now as you go to market? And what's your product road map here over the next several years in this business?

Well, there are some who would suggest we should just walk away from video. I don't think that's the case at all. I think video is a really important piece to our overall product strategy. It's a really important piece to our connectivity strategy. And then if you think about today, maybe 5% of our video sales actually take video stand-alone. So what does that mean? That means we don't sell video as a stand-alone product. We sell video as an application or a service that accompanies our Internet service. And so 95% of the time that somebody is taking our video product, they're taking it together with the Internet service, which means it's important to our customers to have a product. Now what is that product today and in the future? It can be traditional big, fat, expanded basic with premium channels on a set-top box, and we do that with a really good guide. But it's also on an Apple TV. It's on a Roku. It's on everybody's iPad or Android, iOS device. It includes big, fat, expanded package across all those platforms in IP and QAM. And it includes skinnier packages: Stream, Choice, Essentials, Lifestyle, all kinds of genre-type programming that we have available to satisfy that itch for our broadband connectivity customers by providing them that. When you look at all of our wireline competitors, they all have -- in one form or another, they have a video product. And when you look at our mobile competitors, and the only reason we're in mobile is to get more connectivity relationships through Internet, they all either have or they're trying to get a video platform. Despite all the horrible things that we say about video and its economics, everybody wants to have it because it's a sticky service for selling your connectivity products. And I think it will be for a long time, and we'll continue to invest. It doesn't mean invest a lot in CPE. It just means keeping the application, the software stack, both for traditional set-top boxes as well as nontraditional delivery mechanisms fresh and competitive in the marketplace. And we have that. When you think about any other video operator that has the ability to have bidirectional video services over IP, QAM, the packaging ability, the relationship with the programmers, we have a strategic asset in our digital infrastructure to use that towards connectivity services. So I think it matters irrespective of the profitability of video. And we recognize that it has pressure, but that's on a stand-alone basis. In essence, what I'm telling you is that's not what we sell. And it only matters to the extent that it's driving your Internet service.

Yes. So I'm a Spectrum customer. I have a regular old set-top.

Yes.

I feel very old-fashioned.

We can fix that for you, Ben.

And I have some third-party devices like an Apple TV. Is there a role for sort of an IP-only, streaming-only product in the Charter?

Yes, I think so. I mean first, on your legacy set-top box, all new connects are going in with Spectrum Guide. And so you have a legacy box because you were a legacy TWC customer. And so we've not gone through as of yet the disruptive effort to go with a software push to convert people's boxes. Some of them actually like the ease of use in finding where The Price Is Right and Wheel of Fortune exist inside the guide. And so you don't want to disrupt that. It can be very disruptive. And so we've only been doing it on the incremental. We may come back around and deal with that. But to your point, you've got an Apple TV. Did you load the Spectrum TV on it?

Yes. We talked about it, yes.

It works extremely well.

It does. But actually, there are little blips, loading things once in a while, which made that so...

That's a problem. That has not -- we have to fix that problem. So anyway, the -- I went around your question for a second. What was it?

Well, basically, is there a role for a Charter use and sold IP-only aggregator?

Yes. And we've publicly said we think that the strategy that Comcast is going as one of the strategies we have around video with the Flex product, I think that feels right. And putting yourselves in a position to be an aggregator of content, it's the job that we always performed for the customer. It's getting a little unruly out there in terms of customers of where is the show, where can I find it, how can I search, how can I do this, do I have to change the input either physically or with a button. And that was the service that cable always provided, was the ability to pull all that content together, give you an ability to search it and find it and to watch it. So could we reconstitute that in a way that has us essentially reselling D2C services, SVOD services, upselling to our own video services and having it inside of a consolidated package for the customer inside of an IP delivered box? Yes, I think so. And Tom's spoken about it publicly. We think that would make sense for the entire industry.

Great. Why don't we shift to mobile, which is another part of the model that wasn't part of the original business plan but now is a big part of the business plan. You guys added, I think, almost 1 million lines last year. How do you think about the benefits of this business to Charter both in terms of broadband growth and share and then actually making money in wireless?

Well, let's take a step back. If you had had 20 years ago said how you're going to value your Internet service, you would have gone to the PC inside of your office or inside of your kitchen and you would have measured the speed. And if 10, 15 years ago, you would have said in the kitchen, on the phone or with a tablet, how is it performing? And 5 years ago, you would have said it better work inside every single bedroom inside the house. And now you get frustrated when you're deep into the yard and you're not able to get the same type of WiFi signal and you're relying on LTE coverage, which is inferior to the WiFi service that we provide. So our -- the Internet connectivity, the definition for consumers of Internet connectivity is changing, and it's moving from the inside of the house or the inside of the business out. And so we've often talked about our strategy as an inside-out strategy. It allows us to have the power of the broadband network that we have with millions and millions and millions of deployed small cells across our footprint through WiFi and future other spectrum later on and then use a macro cell tower coverage, the MVNO that we have with Verizon to pick up the ancillary traffic, the minority traffic that becomes increasingly important for people to have that ubiquitous Internet connectivity. And so the strategy really started from there, which is we're going to provide a really good Internet connectivity product. And having an MVNO and having a mobile product attached to it and having it integrated with our Internet service, which it does, makes a lot of sense. It is also our goal to make money on a stand-alone basis for mobile, and we'll do that. But that's not why we got into the business. We got into the business because of the benefits to our overall Internet connectivity business, and that for sure, I think, will have big benefits.

Is there an opportunity to get a better MVNO and improve your unit economics? Is that something you guys think is a real thing?

Are you asking, do we do our fiduciary duty? Yes. Yes, we do. Look, we have a good relationship with Verizon. It's worked very well. It's a great product. They have a great network, and I think we're good for them. I think cable, the wholesale relationship we have with Verizon, I think, is very much good for Verizon as well. And it doesn't mean that there won't be opportunities for us and for them to improve that relationship over time.

Yes. I mean I guess part of the question is, we've never really had scaled MVNOs in the U.S. from companies that have real sustainable business models and cash flow and therefore represent real opportunity.

I think it's not to be argued. I think it's more than just sustainability and cash flow because anybody can go raise a bunch of capital and go do that. I think it's the distribution power that we have. The number of sales and service interactions, upgrade opportunities that we have with our customers on an annual basis through all these sales channels, it's tremendous. I don't think it's something that anybody else has. So I think that's the power that we bring. This is really as a distribution network to utilize network capacity in an accretive way for them and clearly in an accretive way for us.

You touched on this a little bit, Chris, on the earnings call, which is the appetite for maybe acquiring some spectrum. Can you just give us an update on how you think about owning versus renting? And when you look at the options in front of you, what's sort of interesting?

Yes. I mean there are -- I'll leave the product benefits to the -- because I don't want to make this overly financial. Having a superior product in the marketplace is what drives us most. But we take a look at things through a financial lens, and we've done that through the mobile launch as well, which is lease, which is the MVNO build, which is the deployment of small cells, including starting from WiFi, which we do today inside the home and business outside the home, doing it with mid-band spectrum, unlicensed or licensed. All that fits into the build category. And then buy would be to acquire a macro cell tower network. The buy piece, the vast majority of the traffic that we deliver for consumers is not taking place over the macro cell tower network, it's taking place over small cells. And so I don't think it makes a whole lot of sense for us to buy a macro cell tower network or to build a macro cell tower network when it exists already and we can lease it at an attractive rate. So we've really been focused on the lease versus the build, which is where you're going. And so on the build, we'll take a look at where does the traffic most occur. We know exactly where that is based on our existing mobile relationships today. We know where the traffic is taking place. We know where -- when we build a small cell of any kind, what type of offload we can achieve through building that small cell and therefore the ROI that we would have from offloading the traffic off the lease network. And so we'll go down that path. And you can make the case and say, well, if you could do that and not have to have licensed spectrum or pay for licensed spectrum, all the better, except that maybe 5 years down the road, you're not the only one who's decided this is a good place where traffic occurs. They're using the unlicensed spectrum. You get congestion, and you've built a network, and you don't have the capacity that you need to continue to deliver the product that you've done in a pretty unique way. That then argues and says, okay, I should go out and go get licensed spectrum. So we're very interested in the licensed spectrum for all those reasons, particularly around CBRS and likely to be around C-Bands as well. And to the extent we can acquire that at an attractive, reasonable price with a clear ROI, that's the lens that we'll take a look at that process.

What are the big differences between CBRS and C-Band when you think about the attractiveness to Charter? Is it really the -- is it the size of the license and how surgical you can be?

Well, look, there's still more details to come around how the C-Band is going to be auctioned. But the CBRS going county by county was a significant impetus for us to be able to be in this auction process and to be aggressive around the CBRS. So we thank the FCC for that. It creates competition in that process. But structurally, the CBRS, because it's lower power than the C-Band, which will be higher power -- again, not to try to play an engineer here, but it means that it's going to require more small cells to have the effective deployment of CBRS, which sounds like a bad thing, except if you already have a network that's fully deployed with fiber, power and right of way, then we have a strong competitive advantage to being able to deploy CBRS in a way that nobody else really does. And I'm speaking about cable generally here, not specific to Charter. C-Band is very attractive. Similar to 2.5 gigahertz, it's attractive in advanced spectrum, but they're higher power. And that means that while it's still going to be very expensive for somebody other than us to deploy, and we could do it better, we could do it faster, we could do it cheaper, the relative difference between a CBRS deployment and C-Band deployment means that CBRS is kind of built for cable.

Anything else you need from a technology evolution perspective to put this stuff into the network?

We've talked about dual SIM, dual standby. We've had that in the lab. We've been doing field trials, and it works. And so that enables you to flip back and forth without a second physical SIM inside the phone between your own wireless network, your own cellular network in this case, and the cellular network of your MVNO. And so we're pretty confident of how everything looks so far on that front.

Okay. And then shifting, maybe the last piece on the revenue side of the equation, to your commercial business, which is, I guess, probably the sort of the last in line of businesses that you've invested and are turning around. How should we think about growth in both the SMB part of business and the enterprise side particularly now that you've shed the NaviSite asset?

Yes. So I'm going to split them apart because they really are pretty different. SMB followed the residential repricing and packaging. As a result of that, very high unit growth, but we had ARPU pressure, which you can see has now subsided, which means that the revenue growth rate and the unit growth rate are pretty much converged. And that's what we had signaled maybe this time last year, that we thought by the end of last year that, that would happen. That's essentially happened. We do think there are ways to continue to accelerate the growth in SMB, but the unit growth is going to really tie to the revenue growth going forward. On the enterprise side, I think you need to split it into 2 pieces, which I've been doing for several quarters now. The retail space in enterprise is growing around 8%. When you think about that, it's fiber Internet access to large enterprise clients. It's all types of different voice services, managed services, managed router services, managed security, Ethernet, SD-WAN, so sophisticated fiber-based services for large enterprises. And that's growing at a very healthy rate despite the fact that we have a repricing that's taking place inside that business as well, growing around 8%. So the unit growth...

With the repricing?

Correct. And the unit growth is much higher on fiber-based services. Working against that is the wholesale piece and for particularly cell tower backhaul. And so cell tower backhaul is flat at best. And so what's happening is, while that's not the largest portion of our revenue inside of enterprise, it's watering down the growth rate. Then we've divested NaviSite, which is about $100 million a year. So going forward, I think we will -- certainly, through the rest of this year, we'll isolate NaviSite, so people would say what's the true growth rate of enterprise. And then on top of that, we'll talk about what's the retail growth rate so that people can focus on the more material piece in the marketplace, which matters most to us, as well as financially what's happening inside that business.

And imagine your market share inside of SMB and enterprise are probably still relatively modest.

Correct. It's extremely modest inside enterprise, and we have a long runway for growth in SMB.

And how should we think about how far along the repricing of enterprise you are today? Is this still early days?

There's still a little ways to go.

Okay.

I think we need to get through this year.

Got you. Okay. Let's talk about expenses and margins. You guys -- I thought one of the real highlights of the fourth quarter results was the margin expansion. I think even you said the cost to serve trends were extraordinary or something...

I think it was exceptional, which means don't expect us to repeat exactly that every single quarter. But it was exceptional.

Right. Maybe you could just talk about the opportunity to continue to capture efficiencies in the business, even though we're 3 year plus since the deals closed.

Yes. I mean the -- we are reaping the benefits of all the investment that we put into the integration and as well as the operating strategy. And some of that means all the in-sourcing that we took -- we did, those employees become more and more tenured by the quarter, which means their ability to provide good service gets better and better. The systems infrastructure that we have has been integrated, and so the ability for our agents or service personnel to be able to function effectively continues to get better. The model itself is designed to not just take short-term revenue growth but to get additional penetration on a fixed set of assets, which means that the higher penetration you drive on your homes passed, by definition, you're going to get more profitable per passing. And I don't think that's ever been widely understood, that the benefits to the P&L and the benefits to CapEx that's having deep penetration of your products makes everything work a lot more efficiently because you've got that working to your benefit. So all that's taking place. Then on top of that, you have -- all-digital is behind us. You have self-installation, which is growing at a rapid rate. It's now over 50% of our installs are taking place for self-installation. That can continue to go higher. And then the entire -- the customer-driven environment of customers saying that they want to be able to self-serve, whether it's on an online portal, whether it's through chat, we're certainly able and available to take all phone calls to do truck rolls. But customers are becoming much more interested in being able to do that themselves. And that takes -- that not only provides a benefit to customers and bring customer satisfaction, lower churn, lower service calls. But it means we actually have to do less physical work, either picking up the phone or doing a truck roll. And so we're seeing just the very early stages of the benefit of that type of cost of service improvement. So whether it's the type of Q4 improvement that we had year-over-year or not, I think the long-term trend here for several years is going to be our business is getting more efficient, some of which was definitely in our plans of how we were going to put these businesses together. Other pieces, we knew was a possibility, but we didn't try to model and bet on it.

So we should continue to see cost to serve per customer relationship to decline as we look forward. Any other sources of leverage in the model you'd highlight? Marketing has been an area you've gotten so...

Well, similar to -- there are systemic things taking place. Penetration, the more penetration you get, the better capital utilization you get, meaning your capital intensity as a percentage of revenue declines because your fixed CapEx is being spread over a higher number of customers. So that exists in the OpEx side. That exists inside of CapEx. When you bring churn -- when you get churn coming down, that means your sales and marketing dollars get to acquire new customers instead of replacing the ones that you just lost, which then when you think back to that, it means you have higher penetration, which means you have higher margin, which means you have lower capital intensity [ as a pursuit ]. So it's a vicious positive circle that continues to deliver that. And so our -- which is why for years, we've talked about slow and steady, we're going to do the right things. We're not going to try to get a big pop in revenue by taking outsized rate increases. We're not going to get a big pop by slashing costs temporarily. And we're not going to do the same thing by underinvesting on CapEx. Our goal is really to invest in the network, provide the best products, price things attractively, package together, drive penetration, which then has you -- puts you on a very long cycle of momentum to continue to drive revenue growth, EBITDA growth, margin expansion, cash flow expansion and to make you even more competitive along the way, which protects your ability to have that type -- I could go on for hours like this, but...

Makes sense. The largest expense item continues to be programming costs for everybody in the business.

Quickly -- closely followed by labor, right? So yes, programming, and there's a horrible environment in programming, but don't underestimate the size of labor. We're talking about employee costs as well as contractor costs. And we've been able to significantly remove the contractor costs. And while we've invested in our employees and we've hired lots of employees to provide service, the number of transactions coming down means that cost item, which we've talked about, is going down. Programming, I don't think the world is going to change dramatically as it relates to the prisoner's dilemma that programmers face of less subs means that they got to look somewhere to drive revenue. And the temptation to take rate actually has -- when I talked about momentum before in our business, it has the opposite momentum effect in theirs. So I don't think that's going away. But as we lose video subs, that programming cost item is minimized. As we sell packages that are more tailored to specific customer needs, we get a mix benefit as well. But I don't see the programming environment changing all that dramatically.

Really. Because I would say we were -- I think that a lot of people were expecting more programming cost pressure this year given some of the higher-profile renewals that Charter has gone through recently. And to talk about mid-single digit, I guess my question, Chris, are the days of double digit...

Per customer relationship.

Yes. Are the days of double-digit programming cost per customer relationship behind you?

Well, I don't want to tempt anybody to do anything bad to us. So -- but look, there's -- the world has changed. When renewals take place and they're stacked through multiyear periods, there are times where a certain category of programming expense, retrans is a great example, is going to have double digits. And when does that fall apart? I don't know. It's free, it's over the air and yet it's the biggest driver of our programming expense increase every year.

Yes. So have you taken a different tack of passing those on or pricing video as you -- as the business has changed?

We have. We pretty clearly pass on retransmission expense to customers. We isolate it on the bill, so they can see where it's coming from. It doesn't mean that we're taking ourselves out of that relationship with the customer. It's a loss that they're going to call. But it's at least trying to provide some transparency and saying, we're not just taking rate increases, take rate increases. It's because of what's happening to us and we're just passing it along.

One last thing I want to ask on margins, which is actually also tied to revenue. This is -- obviously, it's Super Tuesday today. It's a political year. I believe you were the Head of Ad Sales.

Well, we have our President of Ad Sales, David Kline, who does a fantastic job. But I was asked to take oversight responsibility for both Spectrum Enterprise as well as Spectrum Reach, but yes.

Okay. So question is, especially with the virus and the macro and all that stuff, how are you feeling about the advertising business this year? And that should also help margins in almost all environments.

Yes. I mean it's a little early on the advertising side on coronavirus. So I'm going to refrain from commenting there. The advertising business is healthy for us. It's really attractive. It brings strategic advantage to the cable operations side of the house, but it's not the biggest material driver of value for Charter shareholders. But it can provide good healthy growth, and it's doing it. Last year, we were growing our core advertising revenue in the 3% to 4% range in a nonpolitical year, and we were doing it in spite of video losses. And the way that we've gone about doing that is that traditionally, the entire marketplace has relied on Nielsen's, which is -- Nielsen, which is to say a sample, a relatively small sample of survey of where viewership is taking place with Charter and any other cable operator, has anonymized, aggregated set-top box viewership data down to the minute, down to the click. And so we've put in place a platform. Our advertising group has put in a platform that allows us to not only sell the most highly viewed channels but to monetize the long tail of inventory, some really attractive channels and to be able to place that and to get proper CPMs on that and actually do a better job for our clients by getting them in front of the audience that they were actually looking for and freeing up some of the higher-priced traditional inventory that can be sold that way. So we're doing a really good job there. Addressability. You've heard of Ampersand, which is the industry initiative. And so delivering addressability, we have that ability to do it locally or nationally, drive higher CPMs, get our customers, our advertising customers more of what they're looking for. I think there's a lot of positive things going on in the advertising space, which is kind of counterintuitive to everything else that you would hear. But it's because we have a local advertising business, and it's because we have the aggregated, anonymized set-top box data. And we have the ability to put an advertising product in front of customers that's impressions-based on traditional TV, on IP platforms, online. And we can be a one-stop shop for the advertising product to our customers in quite a unique way.

So it will be a big political year, I'd imagine.

And it'll be -- we expect it to be a big political year. I mean already, I think you've heard some others talk about the same. It's very early in the political year, but we're doing better on political than we did in the '16 or '18 cycles.

Right, makes sense. Okay. Last sort of topic now is just to continue to move down the financial statements to free cash flow and capital spending. So the big reveal a year or so ago was the big drop in CapEx. You guys are guiding, I think, to basically flat cable CapEx this year. Just talk about the drivers, putting upward pressure and downward pressure on CapEx, and how we should think about the longer-term intensity picture.

Sure. The scalable infrastructure part of capital expenditure for the cable company has been artificially or temporarily depressed relative to where I think it has been and will be in the future. And that's because of the DOCSIS 3.1 upgrade, which gave us a significant amount of bandwidth headroom. We benefited from that last year. We'll benefit from that this year. I don't think that'll be permanent. I think you'll start to see us evolve and continue to invest in the network in the same ways that I described just ahead of the competition. So that's one element. CPE is coming down. Already, the majority of our CPE is driven by Internet as opposed to video. The CPE comprises not only of the boxes but of the capitalized labor. Because of self-installation and because of less video CPE deployment on a per acquisition basis, you're going to see the CPE line continue to decline. It doesn't mean every single quarter. I'm just talking big bold statements over multiyear periods, particularly this year. And then line extensions is a category that a lot of people don't typically focus on, but we're building. We -- the economics for us to do new construction, whether it's for new homes passed or to do edge-out or building -- when we have the type of penetration rates that we have and have conviction about the type of product and service we can deliver and type of returns that we can get, we're aggressively building not just because of meeting the FCC or the state commitments that we have but because we're proactively doing it and bringing broadband to more rural areas along the way. And so I think you'll see us continue to expand that category. Support capital expenditure, the last one you asked for it. The support, it continues to be elevated because of the integration. It's coming down, but it's elevated relative to its steady state. And so support this year will still be slightly elevated to what I think is kind of a steady-state amount of dollar capital expenditure, all on the cable side. But I think cable capital expenditure as a percentage of revenue is going to decline for many years to come. And a lot of -- how much is going to be your next question. I'm not going to tell you, but...

That wasn't going to be my next question.

Is it?

No.

No, okay. I'm going to answer it anyway. I'd ask you, how much are we growing, right? The capital expenditure, the biggest driver of capital expenditure really is your growth rate.

Actually, my next question was going to be, what is after 3.1? So you've been in a bit of a pause or how you would describe it on that. But is it fiber to the home? Is it some next version of DOCSIS, node splitting, all of the above?

All the above. I mean -- and let me be a little more precise around that. Much of the new build that we do is already fiber to the home, right? We're a big fiber builder not only for the core of the network, but all of our enterprise activity is fiber-based. When we go build out new areas, we typically do that with fiber, and we can do that with the cheaper operating costs going forward. It doesn't make sense to go rip out what we already have. There's no business case for that. But on the increment, we are deploying fiber. We will and have done before node splits, CMTS upgrades, whatnot. We'll do more of that once we eat into some of the 3.1 headroom that I talked about before. But there's also the next phase of development of the network, and that's what we call 10G. And so that's putting the network over time in an ability to go 10 gigabits symmetrical. It doesn't mean that we're in a rush to go do it, but that's the way we're going to evolve the network. And there's a fair amount of debate driven amongst the cable operators through our industry organization, CableLabs, as to the most efficient way to get there. Is it to go to 1.2 gigahertz? Is it to get to 1.8 gigahertz? Is it expanded -- the extended-spectrum DOCSIS spectrum? Is it going to node plus 0? It could be all those buzz in different situations. So we need to collectively find the most efficient way to get to where we're going. The good news is we have many ways to get there, right? And we have a cost structure, we have a path to get there that allows us to do it faster and cheaper than anybody else in the business.

And the one thing I was just going to ask you, CPE is still a sizable dollar amount. Are you benefiting at all from people using Bring Your Own Devices? Are you seeing that as a big...

Sorry, you said CPE?

Well, within CPE, if I choose a Roku or an Apple TV, is that actually counterintuitively helping you from a CapEx perspective?

Yes. No, it is. I mean our video box per sale has declined dramatically in terms of what we deploy. And our video set-top boxes per video relationship, both because of new acquisition as well as people switching over to that inside their home, is also declining. It doesn't mean that it's not important. So there's a good portion of the population who wants to have a traditional set-top box. They're not interested in a Roku or a Fire Stick or an Apple TV or any of these other different -- they just want something that works. And so it's important for us to keep a high-quality set-top box in the environment as well. But there's less of a need for it than ever, and it's having an impact on CPE.

Okay. Maybe in our last couple of minutes, Chris, you guys gave us some additional insight into your cash tax position as you guys start to run through the rest of your NOLs, et cetera. Maybe you could just update us on what's allowed you to extend the runway a bit into '22. And then generally, what do you think you'll be using all this free cash flow for?

So the bonus depreciation has been the biggest help for us to be able to extend. And we came out a couple of years ago with the outlook as it related to when we pay cash tax. We're naturally a little bit conservative. And as we've gotten closer to that time line, we can see that we could be -- start paying some cash tax in the end of '21 and become a material cash income taxpayer in 2022. We'll still have NOLs that allow us to have a lower rate, but we'll be a material cash income taxpayer then unless something else comes up along the way. I've been in cable for over 20 years, and I've never paid cash income tax. So I struggle to have the conversation around it, and I still have hope that something comes and solves that. But we'll see. And right now, that's the base case, and I don't see anything -- any real hope for diverging from that. In terms of where we use the cash, we're -- if there's a good investment opportunity, whether we have cash tax savings or not, we're going to go invest capital. And so I don't want people to think that just because we've got a windfall, so to speak, of additional free cash flow that we're going to go out like drunken sailors and start spending in odd ways. The way we deploy capital is really unimpacted by the short-term outlook on cash tax. Whether that's buybacks or M&A or opportunities preferably to accelerate investment in the business, those would be the things that we take a look at.

Terrific. Well, we're out of time. Chris, thanks so much for being here.

Thanks for having us again.

Thanks, everybody.

Appreciate it. Thank you.