Charter Communications - Earnings Call - Q1 2020
May 1, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to Charter's First Quarter twenty twenty Investor Call. At this time, all participants are in a listen only mode. And after the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Stefan Anninger.
Please go ahead.
Speaker 1
Good morning, and welcome to Charter's First Quarter twenty twenty 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 10 ks and also our 10 Q filed this morning. 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. On today's call, we have Tom Rutledge, Chairman and CEO and Chris Winfrey, our CFO. With that, let's turn the call over to Tom.
Speaker 2
Thank you, Stefan. First, on behalf of all of us at Charter, let me express our concerns for those who've been impacted by the COVID-nineteen crisis in the local communities we serve as we endure together an extremely serious health, social, and economic crisis. The hard work and dedication of Charter's 95,000 employees has been remarkable. We're all proud of how we're serving our customers at this time. Charter's employees are in trucks, in the field, call centers, dispatch network operation centers, their homes, and retail stores, where we provide customer equipment and numerous support functions that enable our company to service our customers.
We've remained focused on our customers and communities, and we've been able to deliver our connectivity services without interruption to our customers across the country. You know our role as a provider of communication services and the importance of keeping connectivity services fully functioning for both new and existing households and businesses, which enables social distancing, including remote working, distance learning, telehealth services, and family communications. In mid March, as part of our effort to keep America connected during this crisis, we pledged to do a number of things. We committed to offer Spectrum Internet for free for sixty days to households with students or educators who do not already have a Spectrum Internet subscription. We recently announced that we were extending the availability of this offer through June 30.
As of March 31, we added approximately 120,000 customers connected under this offer, with many more installed in April. By the end of the school year, we expect that this offer will have helped approximately 400,000 students and teachers and their families continue schooling through remote learning. For sixty days, we also committed to suspend collection activities, not terminate service for residential or small or medium business customers who are experiencing COVID-nineteen related economic challenges. We also extended the availability of this offer to June 30. Additionally, we've opened our Wi Fi hotspots across our footprint for public use, and we prioritized over 1,000 requests from government, healthcare, and educational institutions for new fiber connections, bandwidth upgrades, and new services.
That includes major hospital groups and the two U. S. Naval Hospitals in New York and Los Angeles. And Spectrum News has opened its websites to ensure people have access to high quality local news and information. We've also donated significant airtime to run public service announcements to our full footprint of 16,000,000 video subscribers.
Charter provides essential service, and we've been working to keep America connected, working and learning, while at the same time protecting our employees. We've instituted guidelines in our call centers that enhance social distancing between employees, including enabling a significant percentage of those employees for remote work. We've also altered our field operations protocol by aggressively moving to customer self installation. So while we continue to operate at nearly full capability, we're taking the necessary precautions to promote the safety of our employees. We're also providing our employees with outstanding benefits.
We've implemented an additional two weeks of paid sick time for COVID related illnesses or when we ask an employee to self quarantine. We've given every employee an additional fifteen days of COVID-nineteen related flex time to address other COVID related issues, including caring for children and dependents. In early April, we increased our wage for all hourly field operations and customer service call center employees by 1.5 per hour back to February. We also committed to raising our minimum wage for hourly workers to at least $20 an hour over the next two years. We're paying employees in parts of our business like residential and SMB's direct sales whose work has been put on hold.
And to reinforce our commitment to employees, we announced that for sixty days, no employee will be laid off or furloughed. We have a great business with employees committed to our mission, and that will ensure that we're able to excel through the eventual economic recovery. We continue to perform well operationally, both through the end of the Q1 and now. In first quarter, we added 580,000 residential and SMB Internet customers. We had a good quarter driven by demand for our higher quality products.
We also saw an increase in the number of residential and business customers upgrading their speeds. Our ability to provision the outsized demand we saw in the quarter has been a result of the investments that we have made over the last several years in our insourced and onshore high quality workforce, significant systems integration and automation, our online and digital sales and self-service platforms, and our self installation program. In fact, we accelerated the expansion of our customer self installation from 55% of sales at the beginning of the quarter to nearly 70% at the end of the quarter to over 90% today. Data usage and traffic on our network also grew significantly during the quarter. In March, residential data usage for Internet only customers was over 600 gigabytes per month, up over 20% since the fourth quarter.
Our customers are benefiting from a continually decreasing price per gigabit. Peak traffic levels remain well below maximum capability. Our network, as well as those of other cable operators in The US, have performed better than networks in other countries because of the significant investments we've made and continue to make in our plant, like the recent rollout of one gig everywhere. The pro investment regulatory climate has made this possible. Over the coming years, we'll invest in our network as we build the lower density in rural communities and pursue our 10 gs plan, which provides a cost efficient pathway for us to offer multi gigabit speeds, lower latency, high compute services to consumers and businesses customers.
With our inside out strategy, we will continue to use and develop small wireless cells powered by our network together with our MVNO to connect customers in and beyond the home, delivering our throughput and economics for customers in fixed, nomadic and mobile environments. Our strategy will be enhanced by the FCC recently freeing up 1,200 megahertz of six gigahertz spectrum for WiFi. The FCC's action is a transformational step toward broadband in America. It was a bold move, and we look forward to making significant use of the spectrum. Moving back to Q1 results, we also performed well from a financial perspective during the quarter.
We grew adjusted EBITDA by 8.4%. And combined with our lower cable capital expenditures, our first quarter free cash flow grew by over 100% year over year. As we look forward, we would expect that demand for our residential broadband product will remain strong as people work and learn from home and need to stay connected. Broadly speaking, the health of our residential business will be impacted by what happens to unemployment and income and how long, and the impact that such factors will have on customers' ability to pay for service in the coming months, including government support to consumers. Slowing household formation may also play a role in our ability to drive new customer growth by slowing activity for both new sales and also churn.
We also recognize that the recent strength in video and wireline voice trends may be temporary due to lockdowns and reverse in an economic downturn. So our SMB business is more difficult. We serve approximately 2,000,000 SMB customers, and many of those customers are currently closed, at least temporarily. As a result, SMB customer growth and revenue growth will be lower than our previous expectations. It will likely take time for this part of our business to recover, but it will, and maybe with a faster growth rate than before the crisis.
I expect our enterprise business to remain more stable than SMB. Enterprise customers are larger and most but not all will be able to stand the recession more than smaller businesses that have less liquidity. But our expectations for enterprise customers and revenue growth have also been tempered. As enterprise customers with complex products are less likely to switch and grant installation access in this environment. Our advertising business is inherently local and primarily supported by small and medium businesses, which have been hurt in the crisis.
But we still expect political advertising to be meaningful, which will help us particularly in the back half of the year. So clearly our revenue growth rate will be less than what we anticipated, but as service transactions and sales slow for the market as a whole and customer adoption of self-service accelerates, there are a number of operating cost improvements and capital expenditure delays that will help cash flow growth now and in the future. We also believe that on a relative basis, we're in a far better position than most companies as the value and demand for our service is significant, and we're operating efficiently and serving our communities well as we always have in a crisis. Chris will cover the potential impacts to our 2020 financials and reporting in more detail, but I wanna be clear that while we don't know the depth and duration of the economic impacts of social distancing, we pressure tested our business model, our liquidity and balance sheet through various scenarios. Our analysis confirms what we have always believed, that we remain well positioned.
Overall, we fully expect to be in good shape over the long term, and we believe our business will continue to do very well given the assets and products we have and the continued investment in those assets, our customers and our employees. Before turning the call over to Chris, I'd like to thank Charter's employees for their hard work and dedication and diligence through this crisis. They've been asked to go well above and beyond their regular duties, and they've delivered, easing the strain from millions of families. The positive feedback we've received from our customers is very gratifying. And we continue to treat our customers with respect, compassion, and support, and continue to deliver great products and services.
We'll come out stronger on the other side of this crisis. We still have a lot of work in front of us, but I'm heartened by how we've risen to the challenge and know that we'll continue to deliver for our customers and for America regardless of what comes our way. I'd also like to send my regards and best wishes to all of those listening to this call. May you and your families remain safe and healthy. Now I'll turn the call over to Chris.
Speaker 3
Thanks, Tom. Our first quarter results were strong and reflect where we were heading as a company before the COVID-nineteen crisis started here in The US. Our residential customer relationship net additions increased versus the prior year in each month of the first quarter, and we were driving increasingly efficient operations given our customer friendly operating strategy and growing our free cash flow quickly. Residential revenue grew by 4.2% in the quarter, primarily driven by accelerating relationship growth and similar PSU bundled and video mix trends we've been seeing over several quarters. SMB revenue grew by 5.4%.
Enterprise revenue declined by 3.2% year over year, driven by the sale of Navisite and by continued pressure from the wholesale side of the business. Excluding both cell tower backhaul and Navisite, Enterprise grew by 6.9%. First quarter advertising revenue grew by 5.7% driven by political. In the month of March, nonpolitical advertising revenue declined by 18.7% year over year, primarily due to COVID nineteen related softness, including the abrupt postponement of sporting events. Mobile revenue totaled $258,000,000 with $131,000,000 of that being device revenue.
In total, consolidated first quarter revenue was up 4.8% year over year. Moving to operating expenses. In the first quarter, total operating expenses grew by $191,000,000 or 2.7% year over year. Cable operating expenses, excluding mobile, grew by 1.1% year over year or 1.7% excluding Navisite. That's despite faster relationship and revenue growth.
Programming increased 0.9% year over year, reflecting the same rate, volume, and mix considerations that we've seen and talked about in prior quarters. And we also had over $20,000,000 in nonrecurring programming benefits this quarter. Regulatory connectivity and produced content expenses decreased by 1.7% year over year, driven by lower regulatory fees and a $20,000,000 benefit from the timing of sports rights payments. Cost to service customers increased by 1.4% year over year compared to four and a half percent customer relationship growth. That expense includes roughly $30,000,000 for recently accelerated hourly wage increases and COVID nineteen benefits as well as $25,000,000 of incremental estimated bad debt for COVID impacts as of March 31.
Excluding bad debt expense in both years, q one cost to service customers declined by 0.7%. We continue to meaningfully lower our per relationship service cost. Cable marketing expenses increased by 4.2% year over year driven by higher labor costs and commissions. And mobile expenses totaled $374,000,000, and they were comprised of mobile device costs tied to device revenue, customer acquisition and MVNO usage costs and operating expenses. In total, we grew adjusted EBITDA by 8.4% in the quarter when including our mobile EBITDA loss of $116,000,000 Cable adjusted EBITDA grew by 8.1%.
We generated $396,000,000 in net income attributable to Charter shareholders in the first quarter, and capital expenditures totaled $1,500,000,000 We generated $1,400,000,000 of consolidated free cash flow. And excluding our investment in mobile, we generated $1,600,000,000 of cable free cash, up about $700,000,000 versus last year's first quarter. During the quarter, we repurchased 5,200,000.0 Charter shares and Charter holding common units totaling about $2,600,000,000 at an average price of $490 per share. Let me briefly turn to our customer results before addressing our business outlook in more detail. Including the impact of COVID nineteen related customer offers and programs, we grew total residential and SMB customer relationships by close to 1,300,000 over the last twelve months or by four and a half percent and by 486,000 relationships in the first quarter.
Including residential and SMB, we grew our Internet customers by 582,000 in the quarter and by close to 1600000.06.1% over the last twelve months. Video declined by 70,000 in the quarter, better than last year's first quarter decline of a 145,000. And wireline voice declined by 65,000. It was also better than last year's first quarter decline of 99,000. Through February, total customer relationships, Internet, and video net additions were all better year over year, and mobile net additions had continued to accelerate.
By mid March, due to increased social distancing practices and shelter in place orders throughout the country, demand increased significantly for our products. But we temporarily yielded less mobile as sales call time focused on self installation instructions, and our mobile retail channel has been partially impacted. Also beginning in mid March, we introduced three COVID nineteen related offers and programs for our customers. In today's materials, we've provided an addendum showing customer counts for each of these. I expect we'll continue to report this addendum for a couple of quarters to provide investors with transparency on the impact of our COVID nineteen related offers and programs.
The first of three offers available for customers is our sixty day free Internet offer for new Internet customers with students or educators in the household. We launched the offer in mid March, and it accounted for a 119,000 of our 582,000 total Internet net additions in the quarter. At the March, we still had a large number of pending connects, and customers on the offer continued to grow at a fast pace in April. Interestingly, and uniquely, about 50% of the customers who participated in the offer in March chose to order additional products with immediate billing. The vast majority of these customers are taking our flagship Internet product at 200 megabits per second or a 100 megabits per second, and a small minority subscribed to our low income offer or our ultra and one gigabit premium offers.
The profile of these customers is very similar to the profile of our typical Internet customer acquisition stream. And while some of these customers will no longer subscribe to some of these services after sixty days, the payment trends for customers who took video and phone at the same time already indicate to us that most of these customers will remain. The second offer or customer category reflects customers under our sixty day Keep Americans Connected pledge to the FCC. These are customers who have indicated inability to pay for the service for COVID nineteen related reasons. As of March 31, a 140,000 residential customers were in this program, many who would have been in circumstances, and only 1,000 of which had passed the point in the collection cycle many where we would have normally disconnected their service at March 31.
To give this some color, approximately 25% of the 140,000 customers today have balances which are fully current, And in total, nearly 50% have made partial referral payments since entering into this protection program. However, approximately 65,000 of those customers now have past due balances beyond the point of normal disconnections, meaning at the April. The number of customers requesting disconnection protection has continued to grow in April, and we expect it to grow further through the rest of q two. We intend to work with these COVID nineteen impacted customers to get them back in a good payment status with the objective of fully continuing their service with us. The final category of customers we've isolated in our addendum are SMB customers who've requested a seasonal suspension of service or temporary downgrade of a line of service while their operations are closed or diminished.
Certain restaurants, bars, and hotels are good examples where we've reduced service to a minimum level and reduced the monthly bill until these customers fully reopen. We also expect this category to grow in q two. So what does all this mean beyond temporary ARPU dislocation and back end subscriber risk? First, even if you exclude the impact of these offers and programs from our first quarter results, residential customer relationships and Internet grew at a faster pace year over year. That remains our long term opportunity.
Second, customers may move in, out, or between these categories over time as the economy contracts and ultimately expands. Our issue is not demand for our products. It'll be our customers' ability to pay and how we help them in that respect over time. So until we have a better sense for the depth and the duration of the COVID nineteen crisis and its economic impact, it's difficult for us to project what the help we offer our customers will look like. However, we think we could end up creating more value over the long term as we continue to treat our customers and our employees well.
With that in mind, I'd like to expand on Tom's remark his remarks as it relates to our business outlook and where we're likely to see pressure and opportunities over the coming months and quarters depending how and when the economy re reaccelerates. For our residential and mobile services, the quality and value of our products are clear, demand is high, with Internet up in March in March significantly even without the COVID nineteen related offers. And video and phone also saw positive net adds in March, at least temporarily. Looking forward, the risks are that household formation and growth will be impacted. The other issue will be customers' ability to pay either via their wages or extended employment benefits under the CARES Act or other stimulus packages.
And if, how, and over what period of time we can get some customers to repay back balances when they're able to make payments again. So there are all kinds of questions here about financial presentation, accounts receivables, revenue recognition, bad debt provision and write offs, which really reflected in q two and will work through in the coming months and quarters. And we intend to provide our investors transparency as we go through a unique reporting exercise. When the economy begins to recover and assuming our customers can pay us, I expect our residential business will be in good shape. SMB represented $3,900,000,000 of revenue for us last year or eight and a half percent of our total revenue.
In the March, we began to see softness in our SMB sales, where essentially our entire direct sales force has been on hold, and that channel is a larger contributor to SMB sales than it is to residential. We estimate that less than 20% of our SMB customers are restaurants, hotels, bars, theaters, and the like, many of which will struggle in this downturn. We're working with all of our SMB customers in this difficult time and believe we can return to growth in an economic recovery. We expect the retail base for enterprise to be more stable. In March and April, we saw significant demand from health care and government segments to upgrade and add new services, which has taken the place of new connects in other areas.
But we expect new sales to taper off and retail services growth in the short term for enterprise will be moderated by customers' willingness to make changes, particularly for physical services in this climate. We'll have an offsetting benefit in churn, but absent higher new sales, it'll be difficult to grow retail enterprise significantly in the short term. For Spectrum Reach, our advertising group, the second quarter will be challenging. March revenue was below our expectations by more than $30,000,000 due to cancellations, and the April variance was more than double that amount. We're proactively working with clients to move their advertising spend from sports events to reach their audiences in different places or to move out their orders generally.
Generally. We believe there's an opportunity to both recover and earn more advertising business once the economy picks back up. We still expect significant political spend in the back half of this year, so the full year impact won't be as dramatic on a year over year basis. If those are the short term revenue challenges and long term opportunities, what are the potential offsets in our cost structure? Churn across all of our subscription services was already declining significantly before the crisis.
Mover churn and voluntary churn is declining even more now, but new sales will also decline, all of which says that we expect a much lower level of service calls, truck rolls, installations, commissions, and labor related activity. That applies to residential, SMB, and enterprise. As Tom mentioned, self installation is now over 90%, up from 55% in the first part of the first quarter. And with utilization of digital self care up over 30%, our integration investments and our self-service platforms and portals are paying off. The current crisis has accelerated customers' adoption curve for digital service, and we don't think it goes back to where it was.
So outside of bad debt and some accelerated wage increases to our frontline, our cost of service will decrease with less activity. Employee turnover will decline and hiring activity is likely to slow across the business, which has direct cost and ten year benefits. And we think any remaining EBITDA shortfall relative to our plans would likely be offset by CapEx that would be lower than previously expected due to higher self installation, lower churn, the timing of scalable infrastructure spend, and potential construction delays. So that's how we believe the model will flex. What we don't know is the depth and duration of a recession, but we like our business model, how we manage the business across various climates, and we believe we can grow long term.
It's probably a good transition to the balance sheet and our liquidity profile. As Tom mentioned, we have done a lot of modeling to stress test our balance sheet under various economic scenarios. We finished the quarter with $2,900,000,000 of cash and $4,700,000,000 of availability under our revolver. In early March, at the beginning of the COVID nineteen crisis, we priced a long dated high yield financing at an all time low coupon. And on April 17, we issued $3,000,000,000 of our tightest coupons ever for ten and thirty year investment grade tranches.
Pro form a for those investment grade bonds and recently called debt, at March 31, we had $8,400,000,000 of total available liquidity. As of the end of the first quarter, our net debt to last twelve month adjusted EBITDA was 4.4x or 4.3x if you look at Cable only. In that respect, we've already been deleveraging slightly. Pro form a for our recent financing activities, our weighted average cost of debt is only 4.9%, and the weighted average life of our debt is twelve point two years, with more than 90% of our debt maturing beyond 2022. We have a schedule on Slide 13 of today's presentation, which puts our maturity profile in perspective relative to last year's cable EBITDA.
Together with our significant liquidity and positive free cash flow, we remain in a very good position to finance our operations organically as well as through the capital markets, which remain open to Charter. As it relates to our stock repurchases, we've been under a 10 b five one plan, which was entered into right before the COVID nineteen crisis began here in The US. Due to lower share prices in March, we purchased more of the targeted volume in March than April. We have never provided guidance on buybacks because we think it can encourage bad decision making relative to better alternative uses of cash over time. So we're gonna be thoughtful and response responsive to where we think the economy is going, our stock price, our liquidity, and any organic or organic opportunities, inorganic opportunities which may arise.
While the current environment does suggest caution in the short term, we're not modifying our four to four and a half times leverage target range today, and we'll continue to monitor the economic climate and the interest rate market in regularly evaluating our leverage target. We know that we have a high quality, resilient asset with dedicated employees across our local communities, and we've invested significantly in our network and people over the years. And there's high demand for our product across every part of our footprint in both homes and businesses in good times and bad, which is why we continue to aggressively build out more broadband passings and ensure that our network is well invested, ready, and working for future opportunities. Our goal is to stay focused on what we do well and execute a proven operating strategy that works for customers and employees across various economic and regulatory climates to create shareholder value over the long term. Operator, we're now ready for questions.
Speaker 0
And our first question comes from the line of Craig Moffett with MoffettNathanson. Go ahead please. Your line is open.
Speaker 4
Hi. Thank you. I wanna sort of take a take a bigger picture question for a moment. Just given the strength of your results and the enviable position that you find yourself in of having a business that is relatively resilient in this kind of a market. What are the things that you can do that that sort of take advantage of the dislocation, whether it's more edge outs, potentially acquisitions, a faster move in acquiring spectrum and and trying to take some share in wireless.
How do you think about using this dislocation as a way to make your business stronger when we come out the other side of this disruption?
Speaker 2
Craig, obviously, think about that every day. And we have some cash on hand to be opportunistic if there is an opportunity that would require investment. But the biggest opportunity we see is to continue doing what we're doing and just doing it better and well and being able to execute better and well and continue to succeed in the marketplace. Our biggest opportunity as a company is to connect continue to create customer relationships. And we think that we have a great set of assets that we've put together and invested in properly, and therefore we have advantages in terms of the products that we can sell relative to others at the moment, and we have a high quality, high skilled workforce that's capable of generating and operating activity.
And that's our biggest direct upside. And we think we can continue to operate well and execute well going forward. And to the extent that we're better at that than others, we create more value more quickly.
Speaker 4
Thank you. That that that's helpful. If if I could just ask another maybe slightly more prosaic question. Just given given all the the attention being paid to sports right now, can you just talk about the way you'd like to see the the issue of sports payments to RSNs and national sports networks work out and and the the pressure to rebate to customers and that sort of thing?
Speaker 2
Yeah, well, look, I mean, we've talked for years about the reality of programming costs and how sports drives the bulk of the programming cost. If you look at our average cost of programming per customer in the high $60 range on average, that's the wholesale cost that we're paying per customer. My guess is that if sports was not involved in the negotiations for the creation of that cost, that it would be less than half of what it is. Sports is the major driver in the cost of content, and obviously it makes the whole product difficult to sell because of the cost that consumers have to pay and the effect that yeah. I mean, just simply, it's a very expensive product and people have a hard time paying for it.
The reality is that we would love to pass through the sports programming cost back to the customer it isn't paid or if the events don't occur. You know, there's still a big question about whether the games are gonna be played, and if they are played, most likely the costs will not be rebated to the customer. Don't At this point in time, we have a structure in the industry in how we pay for content. It's all bundled together and tied together contractually, and we have very little control over it directly. So we'd love to see our customers relieved if if they can be.
Ultimately, it's the athletes who are getting the money. And if, you know, at some point, somebody has to give up their money and give it back to the customer, and that hasn't happened yet.
Speaker 5
Thanks, Tom. Thanks,
Speaker 1
Craig. James, we'll take our next question, please.
Speaker 0
Our next question comes from the line of Vijay Jayant with Evercore. Go ahead please. Your line is open. Thanks.
Speaker 6
You know, so Tom, given that you obviously have exposure across the country, can you just talk about, you know, how the markets are different for areas like New York and California where lockdown started early and and compared to the other markets, are you sort of seeing any sort of green shoots as some of these states start opening up and any sort of change in direction of business? And then just a simple question on the network. Obviously, it's highly resilient right now, but I'm assuming that from the work from home sort of orders right now that the data transfer is becoming more symmetrical and your upstream on your network is not conducive for that kind of thing, I think. Can you sort of help us think about is there any stress on the network from that side and what needs to be done, if any? Thanks.
Speaker 2
Sure. Well, in terms of variation by various parts of the country, obviously there are reopenings occurring and we're preparing to operate differently in different parts of the country depending on what the local regulatory climate is with regard to what's allowed from a business practice perspective. As an essential business, we've been operating the whole time, and obviously we have to keep our business running, so we've been running it under the tightest conditions that exist in terms of what we can do and how we have to take care of our employees and how we have to take care of our customers. So as we begin to see places opening up, we're preparing to respond to the local markets individually and to project our capability locally. I can't tell you that I can see at this moment any differences from one location to another in terms of mean, New York City's a unique place, but it's unique in every way, always is.
But broadly speaking, we've been locked down everywhere up till now. We're growing market share everywhere. We are growing consistently everywhere. Now in terms of the future of the network and the load on it, we've been able to handle the very quick change in demand. One interesting thing about the demand has gone up a lot in terms of network utilization, but it's also spread out.
You build your network to maximum peak utilization and not total utilization. So it's the Mother's Day call effect from a network build perspective. You build for the one day a year when you need every bit of your network. And the network has been built, and it's absorbed what we think of as a year's worth of augmentation in a few weeks. But the general trend that we now see in a few weeks has been going on for quite a long time, and we expect it to continue.
And so we have a pathway in terms of our assets to developing what we think the future communications is, including an upstream capability as upstream utilization continues to grow. So that's what we call 10 gs. It's also called DOCSIS four point zero in terms of the way we describe it from a specifications perspective. But we are you know, we're still rapidly moving down the path of augmenting our networks in smart ways, in capitally efficient ways, to continue to allow capacity to grow, and to create new products that are hard to even envision. And we think that we're very well positioned to do that over the long term.
It's gonna require continued investment, but a proportional investment that's significantly less than any sort of brand new build. So we think we're in a great position to make those investments and to realize the benefits of them, and to create the new products that are gonna come from them. But we don't have an immediate upstream problem, and we don't have a downstream problem. We have opportunities in both places in the long run.
Speaker 6
Thanks so much.
Speaker 1
Thanks, Vijay. James, we'll take our next question, please.
Speaker 0
Our next question comes from the line of Mike McCormack from Guggenheim Partners. Go ahead, please. Your line is open.
Speaker 2
Hey, guys. Thanks. Tom, maybe just a a quick question on Spectrum. I know you mentioned the the FCC's move recently. Does that change your appetite in any way for the CBRS spectrum auction later this year?
And then thinking about sports rights, I know you touched on it briefly, but what are your thoughts just more generally on the value of sports rights coming out of all this? Thanks. Well, in terms of the you mean good if you if I understand your question, are you saying did the FCC's six gigahertz WiFi spectrum affect our valuation of CBRS? The answer is no. They're really separate notions.
I look at the six gigahertz spectrum as inside house type spectrum, you know, all of our products are delivered wirelessly. So the the real issue is mobility versus stationary or sedentary behavior. And the six gigahertz spectrum is really for in house, high capacity use for a whole new set of products that will come along. The CBRS spectrum really allows for more efficient use of the mobile platform, at least the way we
Speaker 6
look at it. Although it could
Speaker 2
be used indoors as well, and it can be used indoors both for mobile service in enterprise environments and externally. And so we see them as separate notions and separate values, and it hasn't affected One hasn't affected the other in our view. Regarding sports rights, know, everybody misses sports, and it it really you know, it it obviously is an extremely valuable product, and it is the glue that holds the bundle together. And, you know, assuming that sports come back and leagues generally play, the secular trends that are going on shouldn't change in my view. The same forces will exist going forward that existed before the crisis.
So absent a complete collapse of the sports business, I don't see a major change. Got it. Thanks, Mike.
Speaker 1
We'll take our next question, James, please.
Speaker 0
Our next question comes from the line of Michael Rollins with Citi. Go ahead please. Your line is open.
Speaker 4
Thanks and good morning. I was curious if you could frame some of the scenarios that you were running for your SMB customers in trying to think through the exposure and how you frame the bad debt reserves in the quarter? Thanks.
Speaker 3
Sure. Yeah. Go ahead. Mike, on the on the SMB, I mean, I just put it a little bit in perspective. It's eight and a half percent of our revenue, and so you can get to some pretty wicked scenarios, and and, it still doesn't have that material of an impact to the company, certainly when you're talking about liquidity or balance sheet perspective.
It has an impact on the revenue growth rate for the entire company. And and so I think, you know, given some of the stats that I was providing inside the prepared remarks, the idea was that people could take their own view of how how bad in particular that segment of bars, restaurants, and theaters could be hit and for how long, and that would give you some sensitivity of what the trough looks like. We don't know any more than anybody else in terms of the depth and duration of a recession, but that's why we wanted to give some of those stats to give a framework for people to think about it. The second question was the first one was s and d. The second was,
Speaker 4
was the the bad debt?
Speaker 3
Oh, well, look. You know, every every company's had to modify to a new GAAP standard, which, requires you to estimate your bad debt reserves for the receivables that you have at a period of time as opposed to when they age. And so you've heard everybody talk about that this quarter. We're no different. We had, in total between cable and mobile, about $30,000,000 of, additional bad debt as an estimate for what might not be payable on on the, the accounts of receivables that existed at the time of close.
In q two, let me start maybe back with the first objective. Our goal through all of this is is a, to do well by the customer by providing good offers for remote education as well as for, in this case, Keep American Connected pledge. But our goal is also not gonna be to quickly get into a collection environment and cut them off. Our goal is gonna be to keep these customers. And in the second quarter, to the extent that we work with a customer to right size their receivable, some of that could impact their revenue recognition inside of q two, and some of that for a financed portion that they may need to pay back over time could impact our estimate for bad debt reserve.
That'll apply for residential and SMB. And so when I mentioned in the prepared remarks that, you know, we're gonna have a lot of technical accounting and reporting issues to deal deal with in q two, it's true. But we're gonna be focused on not the accounting income outcome or how q two is gonna look. We're gonna be focused on what's the right long term outcome for the customers and for the company, and and we'll make sure that the accounting does what's appropriate on the back end. But I think there'll be a little bit of noise, and and we'll we'll make sure that we disclose any revenue impacts and any bad debt impacts in our q two reporting.
Speaker 2
So that's kind of an accounting explanation. The way I look at bad debt is, you know, have you created customers and do you keep them, and do they pay you? And, you know, if you create customers and they pay you, that's that's good. And if you don't, have a lot of bad debt. It's and and when I look at the customers that we're creating, you know, we have they're taking our high quality products and in in the residential space.
And they from a profile perspective, they look like the customers we've always created. And so, you know, they're gonna be affected by the macro climate, obviously, but we have products that we can sell to those customers that have value regardless of what where they fall in the income range. We sell to very poor people and we sell to very rich people, and we have a product mix that can work across the entire marketplace. So I'm confident that we can create valuable customer relationships through time. Even in the small business arena, we're still creating customers today.
And even in, if you think about the restaurant business, which is closed, the vast majority of those customer relationships are still intact. They still want websites, and they may have takeout businesses or whatever. But even if a business is closed, it doesn't mean that they don't wanna have a relationship with us.
Speaker 4
Thank you.
Speaker 2
Thanks, Mike.
Speaker 1
James, we'll take our next question.
Speaker 0
And our next question comes from the line of Peter Sapino with Bernstein. Go ahead, please. Your line is open.
Speaker 7
Hey, thank you. When you all analyze the improvements in churn, what are the drivers of that other than the all digital upgrade that we've talked about at length and the insourcing of customer service? I wonder if your performance in the legacy charter territories continues to provide any helpful data to answer this question.
Speaker 2
So what what what's good for churn wait. Look. Churn was before the impacts of COVID, our churn was coming down steadily.
Speaker 7
Yep.
Speaker 2
And and we've all you know, everything we've done post COVID has been consistent with the strategies that we had before in terms of having high quality service, high quality products, high quality workers insourced in The United States who are trained and capable of providing excellent service. If you do that, you have less activity. And the ultimate value proposition that drives the cost to serve is is activity. And if you can if your service is better and your products have longer lives, inherently, you have less activity per dollar of revenue generated, which means that you have a higher a higher margin or a lower cost to serve. And churn is is a is one of the measurements of customer satisfaction.
It's also a measure of of, you know, mobility in the economy and other things of that nature. But the all of those things being held constant, if your churn rate is going down, it means your customer satisfaction is going up because your products are better. And that's been our objective in terms of managing the company and still is. So the Legacy Charter platform churn was coming down, and Legacy Time Warner platform and Legacy Righthouse platform Churn was coming down across all of those businesses. And cost to serve was coming down too because of the self installation models and all digital models in terms of digital buy flows that we created
Speaker 4
allow for ease
Speaker 2
from a consumer perspective of dealing with us and less friction in the actual transaction because an appointment is necessary to keep for that process to occur. And all of that creates less activity and higher satisfaction, which is a very virtuous cycle in the sense that if you have less activity and you have less failure in your activities, meaning you have less service calls, you'll have less missed appointments, you actually create more satisfaction, which even extends subscriber life even longer, which by itself reduces activity. So that that was the path we were on, and it's still, I believe, the path we're on. It's a little bit confused by the volume that we're currently under. We've had enormous uptick in activity in the last two months.
Due to sales. And, you know, interestingly, you know, we've created, in the last sixty days, 10,000 new broadband customers a day. So 600,000 customers in sixty days. That's a lot of work, and we've done that, pretty seamlessly.
Speaker 0
Thank you.
Speaker 1
Thanks, Peter. Operator, we'll take our next question, please.
Speaker 0
Our next question comes from the line of Jonathan Chaplin with New Street Research. Go ahead, please. Your line is open.
Speaker 5
Thanks. Two quick ones if I may. Tom, for you, you mentioned that, the importance of the sort of the secular trends in sports haven't changed. I'm wondering if you can touch on some of the secular trends in the business that you think have changed, how the business is gonna look different when we come out of the current environment. And then, Chris, I think you said that non programming costs were down year over year when you exclude the COVID impacts on from wages and bad debt.
Is that a trend that you would have expected to continue throughout the year but for the impact of the pandemic? And then should we annualize that $30,000,000 and $25,000,000 of COVID related impact? Or is it does it sort of flow differently as we go through the year? Thank you.
Speaker 2
Jonathan, on secular change, you know, I I would say it this way. I I don't know that they're permanently changed, but they're permanently advanced. Meaning, you know, we took years of of secular change and compressed it into a very short period of time, and we're not gonna go back to the original trend line. We may have just moved way up the trend line. And, and I think network utilization is one of those.
And and I think customer self serve is the other, and the cost to serve as a result of that. You know, we were already fairly down far down the road in the customer self-service model, And and and we were fortunate when when we got hit with what we did and and with the marketing tactics that we employed that we were able to actually deal with it. Because, you know, we had started the quarter in the fifth 55% range, I think, of self installation. And and we were about at 70% when everything changed, and we're over 90% now of self installation. So the fact that we were already at 70% allowed us to get to 90% with a fair degree of operational efficiency.
And and so we were prepared, fortunately, at that moment. But I think that's a big change in the business going forward. And and I and I think people using, you know, Zoom and other kinds of, you know, two way communications in in a work like environment in their homes is probably advanced by a number of years for the for the long term.
Speaker 3
And, Jonathan, you talked about non go ahead.
Speaker 0
Go ahead.
Speaker 8
Was gonna
Speaker 5
say just to follow-up on that, and this is probably directed at you, Chris. Going from 55% to 90%, what does that do for, for margins when we you know, in a in a year or maybe it's two years when we get out of this environment? How much are margins structurally higher because of that?
Speaker 9
Yeah. I don't I don't
Speaker 3
wanna get into a percentage margin discussion, but, you know, the cost of a self installation is about a third of the cost of a professional install, and the benefit of that inures to both OpEx and CapEx depending on, you know, what type of installation it is. So it's it's significant. You know? But keep in mind that we were already at 55%. We would have been at 70% by the end of the quarter absent, you know, the acceleration.
Your second question was on non programming expense. There's a you know, there's marketing. There's, advertising expense. There's enterprise expenses in there. So I prefer to think about cost to service customers, which is really the residential and SMB, cost to provide network operations, field operations, and customer service operations, so call centers and billing, which is the, you know, the bulk of our cost.
That, cost, as I mentioned in the prepared remarks, absent leaving aside just bad debt was down year over year in gross dollars, and it was down as a, you know, as a per relationship basis. And I know I've cautioned in the past that, what we're committed to is that per relationship cost to serve is gonna continue to decline. And, I've been hesitant to say that the dollar cost to serve, excluding bad debt, would also decline on a gross basis. Clearly, it would have inside of q one year over year. And, given that we do expect, you know, once we get beyond April, April's been a high activity month, We think that transactions, sales transactions, and and move churn and and all of, the different service transactions will start to slow down.
And so that could actually accelerate, excluding bad debt, the cost to serve decline year over year, certainly on a per relationship basis. So I think the trends there are good and they continue. There is an increase in the amount of our labor expense because we accelerated the path that Tom was already putting the company on to a $20 minimum wage. That was $30,000,000 in the quarter for really a month and a half of expense. So, you know, yes, that'll get annualized at the appropriate rate.
But I think that's a small dollar amount relative to the amount of transactions that come out of the business, and I think our our operating strategy fully funds that. And the acceleration of the adoption of self-service and self install, you know, are very helpful in in in making that viable for not just our employees, but for all stakeholders.
Speaker 5
Great. Thanks, Chris.
Speaker 2
Thanks, Jonathan. Operator, we'll take our next question, please.
Speaker 0
Our next question comes from the line of Ben Swinburne with Morgan Stanley. Go ahead please. Your line is open.
Speaker 8
Thanks. Good morning. I just want to ask you both about two comments you made in the prepared remarks. Tom, you've been in the business for a long time and you've been through lots of cycles. And I don't think I'm breaking news to say that the cable company historically has not had the best customer reputation and even reputation with sort of regulators and politicians.
And you mentioned sort of the reputational benefits that the company is seeing. I'm just wondering if you have sort of conviction in that being sustainable or any real data behind that because obviously that's not been the lens with which cable operators historically have been looked at. And then Chris, you were talking about capital allocation, the buyback. You mentioned organic or inorganic opportunities. I'm just wondering if you could just take a minute to remind us of kind of your M and A framework and sort of the kinds of things you guys historically have talked about either being interested in or not interested in just so we can flesh out that comment a little bit more if you're willing.
Thanks.
Speaker 2
Well, Ben, I I've always loved the cable industry and what it does. And but and I've always thought that it has done great things consistently. You know, if you think about the upsides of our reputation, we transform telecommunications. And if you think you know, I remember just fifteen years ago, twenty years ago, the average wireline phone bill was $75 in the New York area. You know, today, it's $9.99.
And if you look at, what the cost of broadband was, particularly on a per gigabit basis, think about dial up, AOL dial up in the year 02/2001, they acquired Time Warner. It was $20.20 bucks a month, and you got 56 baud or 56 k.
Speaker 5
You
Speaker 2
know, cost of broadband has gone way down, and the telecommunications outputs of the investments that the cable industry has made have been tremendous in terms of the benefits that it's created for consumers. Nobody likes paying their cable bill, and nobody likes paying for programming costs, And that's always been a difficult aspect of our business. You know, since we've had competition in video, since the rise of satellite, and the the cable industry had to divest itself of of programming essentially because of the the vertical integration rules. The, the programming costs have increased massively because programming is a copyright, which is a legal monopoly, and they've had pricing power over a competitive video business. Consumers don't like that.
But now you have the rise of a la carte direct to consumer programming in Netflix and Warner Home Media and Disney and so forth. So a lot of our customers have the video they wanna buy at prices they wanna pay. And so I think it's The biggest driver of negativity in the cable business I think has been the price of video, and to some extent that's breaking up. So I'm relatively optimistic about our status, and I think that when you really look at it objectively, we have done great things, and I think that the facilities based competition model that we have in the country has done a really great job of producing really high quality communication services for consumers.
Speaker 3
Ben, on the, the m and a framework on the inorganic side, I I think the prospect is probably more actionable on the organic side, some of the things that Tom's talked about in the past. But on the inorganic side would be m and a. Nothing's changed with the way that we think about, opportunities. We as Tom just mentioned, we'd love cable. At the at the right price, we would we would, do cable all day long.
And and and that means tack ons, which we do frequently as we can, as well as bigger acquisitions. That hasn't been the case today. They're mostly family controlled or family owned. And so that'll be not in our hands. That'll be in in the hands of others who decide that.
We have looked, you know, all around to see if there's anything on the content side. We haven't found anything that really matches up well with our assets and capabilities other than, some of the local news that we've expanded organically, and that makes a lot of sense for us. And particularly, this environment has been a a big asset. We've thought a lot about wireless. But given the assets that we have, the ability to deploy small cells, the attractive MVNO that we have, we we haven't found a scenario that made a whole lot of sense for us or for the industry.
There are pieces that we can take a look at to accelerate growth, whether that's in enterprise, or whether that's in wireless technology, where we've made some minority and some joint investments with Comcast. Same would apply to advertising, but none of those are gonna be particularly material. They'll be great for those segments of business and the ability to accelerate growth, hopefully, but it's not gonna be something that really materially shows up on the balance sheet and impacts our liquidity. All of which leads you back to I think unless Tom's got something else he does, leads you back to you know, we we think the organic opportunities and, if you can't buy somebody else's cable stock, buying more of your stock at some point in the future is probably between organic and that is is where we've ended up in in the meantime.
Speaker 5
Thank you both. Thanks,
Speaker 1
Ben. James, we'll take our next question, please.
Speaker 0
Our next question comes from the line of Jessica Reeferlek from Bank of America. Go ahead, please. Your line is open.
Speaker 10
Oh, thanks. I was just wondering if you could talk about maybe some of the new offers for customers. I think I said something that you're doing with Sirius. And could you talk about any plans you have for Peacock? Do you need to wait for your NBCU renewal at the end of the year?
And then finally, in terms of customer offers, does does the AT and T promo offer for HBO impact the way you would sell or offer HBO?
Speaker 2
I had I had a hard time hearing
Speaker 3
So the first question was any new offers, including, I think, the serious trial that we've run out in the marketplace was the question there. And then the second was Peacock and whether that needs to that could happen now or needs to wait until the future renewal. And the third was the HBO Max to the extent that it impacts the the way that we sell the or package the HBO product.
Speaker 2
In terms of our offer strategy, you know, I I wouldn't disclose those before we do them. We experiment with various offers through time. But, you know, not to to to minimize the our marketing prowess, we you know, ultimately, it's a do you have good products and are they worth what they cost? And that's what affects your ability to sell and take in the marketplace. But we experiment with marketing tactics all the time, and Sirius is one of them.
And so we don't have any announcements about future tactics that we might employ. In terms of Peacock, we have ongoing discussions with NBC, and we haven't concluded anything yet. In terms of HBO Max, we just completed an agreement with AT and T, and we're gonna convert our customers who have HBO, to the new product. And, and then we're gonna market the new product as part of our overall video offering. And we look forward to doing that.
Speaker 1
Thanks, Jessica. Operator, we'll take our last question, please.
Speaker 0
Our last question comes from the line of John Hodulik from UBS. Go ahead please. Your line is open.
Speaker 9
Great. I'll make it quick. First, I guess just two quick ones. The first, Chris, on the comment on March advertising, I guess or April advertising, I guess you said it's twice as variance is twice what you saw in March. Does that mean that we're down sort of 36% so far in April?
And any color you could give on what you think that how the quarter is going to shape up there? And then on the CapEx question, you said given the outbreak, it'll likely come in lighter than you previously expected, which is already lower capital intensity. Is there any magnitude of change there? And if you could give us any color on the buckets would be great too. Thanks.
Speaker 3
So the, the the April comment that I made was really not related to the percentage decline year over year. It was really the variance to our what would have been our expectations. So $30,000,000, we had literally come off the books in March. It was already sold. It came off the books.
It's over twice that that came off the books for April. We think that'll probably, you know, be the trough in April, small if that recovery in May. And maybe depending on how the openings occur, June start to come back. So q two is gonna be, you know, a rough advertising. It's not a big portion part of our business, but it's gonna be a rough advertising quarter.
We do think as things come back online that there'll be some pent up demand for advertising on the core local, which for us has been growing. Our core business has been growing at three to 4% year over year. On top of that, there'll be pent up demand. So whenever the market opens back up, and and that's a lot of that's tied to health of SMBs and and when the recession or when the the distancing starts to open back up. But, q two will be the rougher point.
And then the back half of the year, we'll have political advertising, which takes a little bit of for a full year perspective, takes a little bit of sting out of out of the the collapse that we're seeing inside of q two. And there's nothing about us that's unique there. Right.
Speaker 6
The the
Speaker 3
CapEx side, I think it's way too early. I I think all we're signaling at this point is that we've been focused on a lot of different activities right now, and there's the possibility that some of the programs that we've had might be slightly delayed. Construction could be slightly delayed. Installation CapEx certainly is, on one hand gonna be lower because of a lower unit cost because of self installation. On the other hand, we're doing a lot of installations.
The the volume is very, very high as Tom mentioned. So there's a lot of moving parts there. But if we had to guess, it will probably be slightly off relative to the dollar amount that we intended to spend. That being said, Claire guessed at the very beginning of the q and a, you know, are there are there areas that we could accelerate our spend given the the strength of our balance sheet and the strength of the business? And, you know, we'll we'll be moving from a reactive mode into very much a proactive to thinking about how what are the things that we could do longer term to even take more advantage of of the assets we have.
So I don't wanna prejudice too much other than say right now in the path that we're on, it it probably looks like there'd be a slight minimal, lower dollar amount than we intended to spend.
Speaker 2
Yeah. The the thing I would say about capital spending is we were we talked about it in terms of pressure testing, really.
Speaker 3
Yes.
Speaker 2
And, you know, we haven't changed our commitment to the projects that we're building and the products that we're building. And, you know, we're continuing to take the business forward, but a lot of our capital is success based. And and so it it's it's modulated automatically by customer creation. And so to the extent that the market moves around based on macroeconomic effects, so does capital.
Speaker 5
Got it. Thanks, guys.
Speaker 2
Operator, that concludes our call.
Speaker 3
Thank you all very much.
Speaker 0
And ladies and gentlemen, this does conclude today's call. We do thank you for your participation. You may now disconnect.