Earnings Call Transcript - CHTR Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to Charter’s Third Quarter 2020 Investors Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Anninger. Please go ahead, sir.

Stefan Anninger, Investor Relations

Good morning and welcome to Charter’s third quarter 2020 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-K and 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.

Tom Rutledge, Chairman and CEO

Thank you, Stefan. Despite the significant challenges that COVID-19 has posed, we’ve been able to operate our business throughout the pandemic. Early in the pandemic, we offered our customers a set of programs, including our Remote Education Offer and Keep America Connected Pledge that supported customers’ needs, resulting in a significantly higher number of customers enjoying our services. In addition, we opened our WiFi hotspots across our footprint for public use, opened up our Spectrum News websites to ensure people have access to high-quality local news and information, rapidly connected and upgraded fiber services to healthcare providers, and donated significant airtime to run public service announcements to our full footprint of 16 million video subscribers. Our employees were given additional paid sick time for COVID-related illnesses and a flex time program to address other COVID issues. We also increased our wage for all hourly field operations and customer service call center employees by $1.50 an hour, and we remain on path to a $20 minimum wage by 2022. Our ability to operate for our customers and communities, despite the challenging environment, is a testament to the quality of our in-sourced and onshore workforce, our safety precautions, and, in many cases, our ability to operate remotely. Our sales and care agents have continued to sell our products and provide outstanding service to our customers. Most of our stores have been able to remain open throughout the pandemic, serving customers’ needs. Our field operations personnel have handled professional installations and repairs and have continued their work in the field, servicing customers in their homes and maintaining the quality of our physical plant. Our plant construction has continued, and we’ve actually seen plant miles and passings increase more this year than last. And our product development team has continued to develop and roll out various product improvements, including updates and enhancements to our video, internet, and mobile products. Our ability to continue to operate well under the circumstances is also the result of investments we’ve made in various parts of our business over the last several years, including our investments in systems integrations and automation, our self-installation program, which ran at over 80% of installations during the quarter, our online and digital sales and self-service platforms, and our network including DOCSIS 3.1, which provides ample bandwidth to withstand surge in use with residential data usage for internet-only customers remaining at an elevated 600 gigabytes per month during the third quarter. Our operating and investment strategy has allowed us to sustain and accelerate our customer and financial growth. During the quarter, we added 537,000 residential and small business internet customers versus 380,000 in the prior year quarter. In the past 12 months, we’ve added 2.3 million internet customers and 2 million overall customer relationships. We’re growing well and gaining share against all our competitors in all of our markets, regardless of competitive infrastructure. In the third quarter, we grew our mobile lines by 363,000, 87,000 more than in the third quarter of last year and continued acceleration from last quarter. We recently purchased 210 CBRS priority access licenses in 106 counties across all our key DMAs for just over $460 million. Over a multi-year period, we’ll execute on our inside-out strategy with small cells attached to our existing network, using unlicensed, and now our licensed spectrum, based on the disciplined return-on-investment approach, consistent with our goal of reducing mobile operating costs. Turning to the third quarter financials, we grew consolidated EBITDA by over 13%, and our third quarter free cash flow grew by nearly 40% year-over-year. Looking forward and subject to what happens with the virus and unemployment stimulus, we expect our broadband and mobile products to continue to drive demand and churn and growth to return to pre-pandemic levels. SMB has actually performed better than we expected. Our ability to grow will also be partly tied to the economy. In enterprise, retail sales activity is picking back up, despite limited onsite access, and those new sales getting installed in the coming months, we expect enterprise revenue growth to pick back up. Our advertising business is improving, and our core ad business, excluding political, is about 90% back to normal in part because of the amount of sporting events that are now airing. So, core ad sales are improving, and we still expect political advertising to be a meaningful contributor in the fourth quarter. To maintain that growth, we’ll continue to invest in our networks so that we can continue to offer new and better products than our competitors. In the coming years, we expect data usage per customer to continue to grow, and we’re prepared to deliver more throughput across our network. The growth in demand for data is and will be driven by a number of factors, including the growth of IP video services, including video conferencing and gaming, also the number of growing IP devices connected to our network, which is nearing 400 million devices. New and emerging products and services are being developed as we speak, such as e-learning or telemedicine and 4K, virtual reality or holographic formats, for example. We’re continuously increasing the capacity in our core and hubs, and augmenting the network to improve speeds and performance. In the near term, however, we have a large opportunity to improve throughput and latency by continuing to use already deployed DOCSIS 3.1 technology, which still has a long runway. Additional bandwidth tools available to us today include the conversion of the distribution network to DOCSIS 3.1 delivery for all products including video, broadband, and telephony. By allocating more plant spectrum to DOCSIS 3.1 IP services, we have the ability to offer symmetrical gigabit-plus speeds. We’ll also continue to invest in DOCSIS 4.0 with key vendors in the rest of the industry for even greater capacity and functionality. The DOCSIS 4.0 specification allows for multiple paths through each 10-gig and higher speeds, including Full Duplex DOCSIS and Extended Spectrum DOCSIS. Both 3.1 and 4.0 DOCSIS can be deployed in an economically efficient way as the market dictates. Our network evolution strategy allows us to offer superior connectivity products to meet changing consumer demand and extend our growth strategy and drive free cash flow. Before turning the call over to Chris, I’d once again like to thank Charter’s employees for their hard work, dedication and diligence throughout the pandemic. They’ve been asked to go above and beyond their regular duties, and they have delivered. Now, I’ll turn the call over to Chris.

Chris Winfrey, CFO

Thanks, Tom. Turning to customer results on slide five of our presentation. We grew total residential and SMB customer relationships by approximately 2 million over the last 12 months, or by 6.8%, and by 457,000 in the third quarter. Including residential and SMB, we grew our internet customers by 537,000 in the quarter and by 2.3 million, or 8.8% over the last 12 months. Video grew by 67,000 in the quarter, better than last year’s third quarter decline of 75,000 video customers. This positive performance was driven by churn benefits, particularly when bundled with broadband. Similarly, wireline voice declined by only 25,000 compared to a loss of 190,000 in the prior year quarter. Mobile line net adds accelerated again to 363,000 in the quarter. To put what is already a strong third quarter subscriber result into perspective, our Q2 results of 755,000 customer relationship net adds and 850,000 internet net adds already included the benefit of our COVID programs. Our third quarter results reflect any churn out of those programs. Our year-to-date customer growth, shown on slide 6, remains the right metric for industry comparability, given different reporting. In the third quarter, we saw excellent retention rates for our Remote Education Offer. Churn has been similar to regular new customer acquisition churn. We re-launched the program very late in September with minimal impact on our third quarter internet net adds. Going forward, we expect the acquisition volume of this offer to be significantly lower than the original program. Our Keep Americans Connected program completed in late June and we saw good retention of those customers in the third quarter. In the second quarter, we put approximately 200,000 customers that were past normal disconnection back into current status through a write-off of their debt. So far, the vast majority are paying with minimal difference to normal customers. The retention has been much better than our expectations. The development of customers’ ability to pay generally through employment or subsidies remains the key driver for our short-term residential outlook. As I mentioned last quarter, our customer growth performance should be measured by our full-year performance, rather than a particular quarter. As the third quarter progressed, we could already see the market return to more normal churn activity and net add levels, and we expect that to be the case in Q4. Turning to the financials on slide 7. As we expected, there continued to be moving parts due to COVID, and I’ll reference some of those items, which we’ve again laid out on slide 9 of today’s presentation with a full year summary on slide 19. Residential revenue grew by 4% in the quarter, primarily driven by accelerating relationship growth and similar PSU bundle and video mix trends we’ve seen over several quarters. The 6.9% customer relationship growth in residential was partially offset by a $218 million one-time adjustment for estimated sports network rebates that we intend to credit to video customers. Due to accounting treatment, which I’ll cover in a moment, not all of that rebate estimate was offset in the current period expense. SMB revenue grew by 1.5%. While revenue growth was slow this quarter due to the first half volume and SMB customers that remain on our seasonal plan, our customer growth has accelerated despite a still tough economic climate for small and medium business. Spectrum enterprise revenue declined by 4.3% year-over-year, driven by the sale of Navisite in the prior year period and the continued pressure from the wholesale side of the business. While the comparability issue for Navisite goes away after Q3, wholesale, particularly cell tower backhaul, has been challenged and likely will continue that way until late next year, based on current activity. Retail enterprise, which is the vast majority of our enterprise revenue, is growing around 6%, driven more by pre-COVID sales than the last six months’ performance. As Tom mentioned, enterprise sales activity has now picked back up, despite limited onsite access. As those new sales get installed in the subsequent months, we expect enterprise revenue growth can recover and begin to accelerate next year. Spectrum Reach third quarter advertising revenue increased by 17%, primarily driven by political. Excluding political, core ad revenue was down by about 10%, which is reflected on slide 9’s COVID impacts. Our core, very much tied to the economy, is coming back and was significantly better than the second quarter with or without the recent heavy sports burn. Obviously, we expect the fourth quarter to benefit from political as well. Mobile revenue totaled $368 million, with $172 million of that being device revenue. In total, consolidated third quarter revenue was up 5.1% year-over-year. Moving to operating expenses on slide 8. In the third quarter, total operating expense grew by $36 million, or 0.5% year-over-year. Cable operating expenses, excluding mobile, declined by 1.2% year-over-year, or 0.8% excluding Navisite, with a number of COVID-related items outlined on slide 9. Programming decreased by 2.3% year-over-year, reflecting the same rate, volume, and mix considerations that we’ve seen in prior quarters. This quarter includes a $163 million benefit related to sports networks rebates. The difference between the $218 million estimated credit to video customers, which lowered revenue, and the $163 million programming benefit relates to an expected reduction in sports rights content cost, which is recognized in the produced content line over the remaining life of the contract, similar to the delayed expense recognition in Q2, when games were canceled. From a cash perspective, however, we will provide our customers a bill credit for the rebates received from the sports program networks when those details are finalized. Regulatory, connectivity, and produced content expenses were essentially flat year-over-year and were comprised of lower regulatory and franchise fees, offset by higher video CPE sold to customers and higher sports rights costs. Costs to service customers increased by 0.4% year-over-year with meaningful productivity improvement, lower bad debt, and higher wages and benefits as drivers. Bad debt expense was down year-over-year, given surprisingly, probably our best ever payment and collection trends. Excluding bad debt from both years, costs to service customers was up 7.5% year-over-year in the third quarter, primarily driven by 6.8% customer relationship growth, the hourly wage increase we instituted earlier in the year, COVID flex time, and the timing of medical benefits costs. On slide 9 of today’s presentation, we’ve isolated the temporary bad debt benefit as customers paid better than usual and the labor costs increase from an acceleration in frontline wage increases and benefits timing. I expect continued non-recurring puts and takes on this line item for a few more quarters. Over time, costs to service customers should grow at a slower rate than customer relationship growth due to lower transaction volume and higher self-service trends, despite the step-up in minimum wages. General marketing and sales expenses declined by 0.7% year-over-year as our unit growth did benefit significantly from lower churn. Other expenses declined by 2.5% year-over-year, primarily due to Navisite costs in the prior year period. Mobile expenses totaled $456 million and they were comprised of mobile device costs tied to device revenue, customer acquisition, MVNO usage costs, and operating expenses. Mobile EBITDA is still negative because of customer growth costs but by much less, despite the higher growth. Another way of describing that trend is that we have now crossed 2 million lines, and our mobile service revenue now exceeds all regular operating costs, excluding acquisition and growth-related mobile costs. In total, we grew adjusted EBITDA by 13.6% in the quarter when including our mobile EBITDA loss of $88 million. Cable adjusted EBITDA grew by 11.7%. We generated $814 million in net income attributable to Charter shareholders in the third quarter and capital expenditures totaled $2 billion in the third quarter. Our third quarter capital expenditure shows we’ve continued to invest to support current and future growth. We invested significantly in continued capacity upgrades at the national and local levels to stay ahead of higher data usage. We have not slowed down on new build, including construction in rural areas. We continue to purchase significant DOCSIS 3.1 modems for new connects and swaps, as well as the high attach rate for advanced in-home WiFi service. We also continue to invest in facility improvements, back office systems, and mobile store build-outs. For the full year 2020, we still expect cable capital expenditures as a percentage of revenue to decline year-over-year, but maybe only slightly due to the significant customer growth and related CPE and capacity investment. We generated $1.8 billion of consolidated free cash flow in the third quarter and excluding our investment in mobile, we generated $2 billion of cable free cash flow, up about $500 million versus last year’s third quarter. Currently, we don’t expect to be a meaningful federal taxpayer until 2022. We finished the quarter with $1.3 billion of cash and $4.7 billion of availability under our revolver. As of the end of the third quarter, our net debt to last 12-month adjusted EBITDA was 4.3 times or 4.2 times if you look at cable only. Earlier this month, we issued $1.5 billion of 12-year high-yield notes at a yield of roughly 4%. Pro forma for our recent financing activities, our current run rate annualized cash interest is $3.8 billion, and we remain comfortable in the middle to high end of our target leverage range of 4 to 4.5 times. During the quarter, we repurchased 6.1 million Charter shares in Charter Holdings common units, totaling about $3.6 billion at an average price of $592 per share. We will always evaluate the best use of our capital to generate long-term returns for shareholders, be it organic investments, such as our launch of mobile or network edge-outs, accretive M&A, or purchasing of our own shares and probably in that order. The prioritization of organic investments is because there is high demand for our products across every part of our footprint, 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. As the environment continues to evolve, our goal is to stay focused on what we do well and execute a proven operating strategy that works for customers and employees to create shareholder value. Operator, we’re now ready for questions.

Operator, Operator

And our first question comes from the line of John Hodulik from UBS.

John Hodulik, Analyst

Okay. Thanks, guys. A couple of questions about broadband. I can’t help but notice that you guys talked about the fact that you’re competing well, really regardless of the infrastructure that you’re going against. Obviously, strong numbers across the board for the industry in terms of broadband net adds. Can you talk about how you’re competing against fiber competitors and sort of market flow share, if you could cite some numbers there? And then, the other number that stuck out to me was the 600 gigabytes of usage and the continued growth there. It looks like maybe we’re a couple of years away from a terabyte on average for broadband-only customers. Tom, how does that affect competition, as you look out over the next few years, I think, specifically against fixed wireless access? Does it make it more difficult for fixed wireless to be a true competitor to sort of wire and cable service? Thanks.

Tom Rutledge, Chairman and CEO

Well, John, how do we compete? It's not just about the products, but the products are important. We're discussing aspects like capacity, speed, throughput, and reliability, as well as how well we service those products and our efficiency in delivering them. Our infrastructure is competitive against various types of networks, including fiber, fixed wireless, satellite, and copper-based high-capacity networks. Our network is very capable, it allows for easy and efficient capital investment augmentation. We strive to have better product and service offerings compared to our competitors, and we succeed in nearly all the areas where we operate. Looking ahead with fixed wireless, I believe our competitors will need to make substantial capital investments to compete. From a capital investment standpoint, our network is well-positioned to offer more capacity and capability at lower costs than our competitors. The competition is fierce, with multiple strategies to succeed, but I am confident that our network has the superior capabilities to manage this landscape effectively.

Chris Winfrey, CFO

John, I’d just add. I kind of went out of my way in my prepared remarks to say if you want to compare against some of that competition, you really need to take a look because of the moving parts throughout the different quarters. You need to look at the year-to-date results and compare that in terms of what’s Charter doing in front of competition. Tom mentioned we have competition essentially everywhere we operate, and we’ve had that. It’s not new. But, we’re performing very well. If you take a look at our Q3 year-to-date results, I think that’s probably the most indicative way to really look at it and think about the performance.

Operator, Operator

Our next question comes from the line of Ben Swinburne from Morgan Stanley.

Ben Swinburne, Analyst

Thanks. Good morning. Picking up a little bit on the same themes that John asked about, I wanted to ask, Tom, about the network evolution you discussed going to IP video. Just so I understand, are you taking down MPEG across the system? And is that something that requires a swapping out of boxes? Just what are the capital business implications of moving video over to IP on 3.1? Obviously, that seems like a big transition from a historical approach. And then, again, just going back to the broadband results this year across the industry, it seems like we’ve pulled forward penetration in broadband in the United States. If we just look at the year-to-date growth, it’s an unbelievably strong year across the industry. So, I’m just wondering, I don’t know, Chris, if you want to take this one, but just thinking about lapping this year, next year, and thinking about the quality of the customers you brought on. I know you’ve seen good churn stats so far. But, should we be thinking about this pull forward having maybe lapping this next year and next year is going to be a below-average year? I don’t know if you have any thoughts on sort of where we go from here as we come out of COVID, which has obviously just pulled all this growth into 2020. Thank you, both.

Tom Rutledge, Chairman and CEO

Currently, we operate more than three major networks within a single physical infrastructure. We utilize DOCSIS 3.1 to provide IP-based services to specific modems, households, and customers. Additionally, we have a DOCSIS 3.0 infrastructure and a QAM-based video infrastructure. The majority of our network is still allocated to QAM-based video, which is the traditional cable TV service provided to consumers. We have various ways to deliver video and other services to our customers, including 10 million app-based streaming devices connected to our network that allow customers to download apps. We offer a full bundle of video packages with those apps, enabling users to bring their own devices. We also distribute traditional cable TV services significantly. Our plan is to integrate both services into the same device. For example, we offer Netflix on our set-top boxes, but it’s delivered through a different path. The device will access video from both the traditional cable TV path and the new IP paths, creating a seamless experience for the customer. We can effectively manage customer premises equipment and customers over time, allowing us to use our network efficiently to provide a wide range of services.

Ben Swinburne, Analyst

Yes. But you don’t need to replace boxes in order to move that network?

Chris Winfrey, CFO

No, no.

Tom Rutledge, Chairman and CEO

Okay. That’s the key point. Yes, got it.

Chris Winfrey, CFO

Regarding your question about broadband, I'll address it and Tom may want to add to it. The industry has been expanding rapidly. We have gained a larger share across all areas of our network and infrastructure, as mentioned by Tom. This growth is coming from broadband newcomers and the rise of mobile-only users, along with a significant share shift we are observing in the cable sector. I can't say if this was a pull forward or not, but it won't reverse. The demand for the product is evident and it is not going away. I believe it represents a lasting trend of decreasing mobile-only use and an increased need for broadband in homes. What we're already noticing, as I pointed out in my prepared remarks, is that late in Q3, the market began to shift towards more typical transaction activity, which includes both churn and sales. We think this is indicative of how Q4 will likely unfold. Next year, we expect higher levels of mover churn and market churn, resulting in increased sales as this process continues. Overall, next year should resemble a more typical year compared to 2020.

Tom Rutledge, Chairman and CEO

The other thing I would add just in terms of longer run trends is, yes, COVID had some impact on broadband adoption, but so does the change in the video business that’s happening rapidly. As more and more people are using IP-connected devices to bring video services that traditionally would have been delivered either over the air or by cable, that increases overall demand for broadband in the home. I think that also is simultaneously going on. You have a sort of overall demand change as a result of what’s really going on in video. I don’t know that it changes adoption rates so much going forward, but it has shifted the entire amount of people that would be interested in having in-home broadband service, which kind of ties into John’s question about the suitability of wireless access over time when you have that kind of throughput going through. I agree.

Operator, Operator

Our next question comes from the line of Jessica Reif Ehrlich from Bank of America.

Jessica Reif Ehrlich, Analyst

Thank you. So, even with the increase in broadband demand, which is quite evident, you posted video net adds for the second quarter in a row, significantly bucking industry trends. So, first, have trends in fourth quarter indicated that you can continue those trends, or was it COVID-related, the pulse rate that you were talking about? And second, what specifically about your offering do you believe consumers are responding to? Then, just as a second topic, Tom, just to follow-up on your advertising comments. You said that the core underlying advertising is 90% back to normal. What do you think the drivers are there? Because it still seems that local businesses are struggling. So, what are you doing differently, or what metrics are you using that’s different?

Tom Rutledge, Chairman and CEO

Charter is experiencing higher and faster overall connectivity growth compared to the industry. This growth is helping to drive our video service. If we consider video penetration as a percentage of households and think about converting households to our network, we will naturally see an increase in video subscriptions. As long as we continue to grow rapidly, video demand will also increase. We mentioned this in our last call regarding our positive outlook on video growth. We believe that the overall video marketplace remains unchanged; traditional cable bundles are still expensive and under pressure, which will likely lead to continued declines in that segment. However, we are growing at a rate that exceeds this decline. Regarding ad sales, I’ll have Chris address that. I do want to highlight that local businesses are facing challenges. Our small and medium-sized business growth rate in the third quarter is higher than it was last year. Despite the damage in the market, there is also significant reinvention and new business formation among smaller businesses, and we are leveraging that opportunity.

Chris Winfrey, CFO

Jessica, the Spectrum Reach advertising group is back to 90% of last year's performance in non-political advertising, except in local markets. From what I've observed, most of our competitors are seeing similar recovery in their core advertising. Therefore, we're not particularly unique in this respect. The industry benefited from a decline in advertising in Q2, which triggered a desire to re-engage in the market. Additionally, the small and medium-sized business segment is performing well for us, as Tom mentioned. The timing of sports events in the third quarter, with a significant increase in activity due to postponed seasons, also contributed positively during this period. However, from a Charter perspective, New York City and L.A. have experienced stricter lockdowns compared to other markets, resulting in a slight delay in economic recovery there. Yet, when considering the broader market trends, despite negative video trends and the challenges facing traditional advertising, we have substantial growth potential. This is largely due to our ability to monetize previously unprofitable inventory using innovative tools for impression-based viewing measurement and advertising sales. Traditional channels are now being monetized and packaged differently, allowing for varied pricing, along with enhanced addressability and new interactive advertising features that we have integrated into our offerings. Even in a slightly declining video environment, we believe we can grow our core advertising business, both politically and non-politically, and our overall business remains strong outside of the pandemic impact.

Operator, Operator

Our next question comes from the line of Jonathan Chaplin with New Street.

Jonathan Chaplin, Analyst

Thanks, guys. Two quick ones. So, Chris, you mentioned that next year would be a more normal broadband year. But you’ve been accelerating broadband subs ever since the Time Warner Cable acquisition. What do you think of as a normal broadband subscriber growth here? Is that sort of 6% year-over-year growth? And then on EBITDA growth, the contribution from wireless this quarter was awesome. I assume that just continues and that will be a propellant for EBITDA next year as well. Do you have a sense of what that could contribute to year-over-year growth for EBITDA next year?

Chris Winfrey, CFO

So, on both of those, kind of bit of guidance questions, which isn’t what we do. The honest answer to your first question is we don’t know. We see trends reverting back to normal, which would mean more normalized growth. Does that mean more like 2019? Does that mean continued acceleration somewhere? Yes, I guess, is the answer to both of those questions, I don’t know. But I think it’s going to be good, either way. We’re really positive on the outlook for broadband. Obviously, as we look further out to the extent that we’re doing rural build and expanding our footprint to the extent that mobile really has a significant impact both at acquisition as well as churn, to the extent that there’s additional mobile substitution that declines for all the reasons that we talked about before, all of those things would be positive relative to our normal growth rate. We need to see how all that develops. On the wireless side, to your point, you can look at it a few different ways. You can take a look at our losses per mobile line, which is doing very well. You can think about it in terms of what I said before is that once we got to 2 million lines, which we crossed over inside this quarter, that it’s now an incrementally positive business, but for the subscriber acquisition cost. So, it’s already EBITDA positive if we decided to stop growing, which of course, we won’t do. Yes, it’s going to continue to get better. But, the amount that it continues to get better in terms of its contribution to our EBITDA performance really depends on the growth rate of wireless and that subscriber acquisition cost. The faster you grow, the more you’re going to spend. We’re going to try to grow as fast as we can.

Tom Rutledge, Chairman and CEO

One way to look at mobile is that it is already generating positive EBITDA moving forward at its current pricing. However, as we continue to grow mobile rapidly, it will also drive significant growth in our broadband services.

Operator, Operator

Our next question comes from the line of Kannan Venkateshwar from Barclays.

Kannan Venkateshwar, Analyst

Thank you. Chris, I guess, a couple for you. The first is on the gross addition front, I mean, obviously, the gross adds have been really strong this year, and many of them have come in at a lower price. And in general, gross additions come in at a lower price. So, when you look at ARPU next year, it should be stronger than normal because of the cohort shift this year and the bigger volume of growth additions. So, I just wanted to understand if that’s the right way to think about it, or if there are other things that offset that benefit? And then, secondly, in terms of home passing, you guys have been, I think, growing at more than 2% this year, which is higher than household formation and higher than most others in the industry. If you could give us some sense of the attach rates for these newer homes passed versus your existing base to give us a sense of what the mix of these newer homes looks like, that would be useful. Thanks.

Chris Winfrey, CFO

I think the answer to your first question about gross additions is that it's going to be somewhat mixed. The second quarter of this year had higher gross additions for various reasons we discussed. However, the third quarter did not see the same trend. We experienced a significant drop in activity levels, particularly related to churn, which in turn reduced sales across the entire market due to decreased flow. One of the reasons our marketing and sales costs were so low in the third quarter, despite our significant growth, was tied to this fact. Looking ahead to next year, you'll see a mixed picture regarding ARPU impacts from the rollout of promotional pricing. Additionally, I believe the main factor driving our ARPU development relates more to the volume of single-play sell-in rather than just the pricing at rollout. The success we've had with selling spectrum stream, choice, and essentials products has a greater impact than the mix you mentioned. Regarding homes passed, whether it's new construction or renovations, we see fairly consistent penetration curves over different projects. This consistency gives us the confidence to pursue further investments, as we can observe a high level of consistency in achieving very high terminal penetration rates when we enter new markets. This gives us assurance in our ability to expand on this investment strategy.

Operator, Operator

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

Craig Moffett, Analyst

Thank you. I have two questions. First, regarding the adoption curves in new markets, could you provide insight into how much of this quarter’s growth was driven by newly passed homes or homes passed in the last 24 months? I would like to understand the penetration in newly opened markets compared to the increases in mature markets. Secondly, considering how competitive the wireless market has become recently, especially following the iPhone launch, how does this influence your promotional strategy for customer acquisition in wireless? Additionally, what should we anticipate regarding the costs for the fourth quarter?

Chris Winfrey, CFO

Craig, why don’t I take the first one and Tom could grab the second. I don’t have the number in front of me, but it’s not the material driver for our net additions, the new passings construction. It’s been relatively small when you consider that compared to our 52 million passings overall. It’s helpful, but it’s not the material driver of our growth. A simple way to think about it is, if you think about greenfield new construction, it’s traditionally been 500,000 to 600,000 homes. That gives you what you would need to go model and say apply an adoption curve to that number of passings and you can get to a number. What you’d see is it’s meaningful but not material to our overall internet net additions growth rate.

Tom Rutledge, Chairman and CEO

Yes. I’d say, it’s meaningful, but not material. Yes. I agree with that. Promotional, our basic proposition when you think about wireless is that we can save consumers a lot of money. If you look at the average wireless bill most households are paying, they can connect to us and buy the right package from us and save a significant amount of household spend, telecom spend, and reallocate that to us. That’s our primary objective. We have the ability to switch customers over who already have a wireless account to our product. We’re not driven by new hardware for the consumer to drive our business. The consumer can bring their hardware with them and connect to us and save money. Yes, we’re oriented toward making our price successful in the marketplace and we’ll have to compete with that price. We already have a significant price discount to what most people are paying for their wireless service. As a result of that, we’ve had accelerating growth in wireless connections. We’re offering real value to consumers and real overall savings by having them connect to us, both for their broadband and their wireless products.

Operator, Operator

Our next question comes from the line of Bryan Kraft with Deutsche Bank.

Bryan Kraft, Analyst

Hi. Good morning. I wanted to follow up, I guess, on a couple of topics. So, one for Tom and then one for Chris. Tom, I wanted to follow up on your earlier comments on the HFC network. I think there’s been more talk recently in the industry about operators overbuilding with fiber-to-the-home. The advantage is obviously being upstream and latency. How are you thinking about the trade-offs now between deploying more fiber-to-the-home versus continuing with HFC, particularly given some of the changes in upstream traffic patterns during COVID? And can you just help us to understand how that upstream bandwidth and latency improve as the DOCSIS infrastructure evolves? Then, Chris, I wanted to follow up on the build-out or the inside-out strategy that Tom mentioned in his prepared remarks. Can you give us any color on the magnitude or the significance of the capital investment that we could expect there? Maybe just some timing comments broadly speaking. Is that a long time to reach positive ROI, or is it a fairly short duration?

Tom Rutledge, Chairman and CEO

So, Bryan, on the HFC plant, we think that there’s a lot of capacity in the HFC plant, both downstream and upstream. We think that given the current marketplace and utilization behaviors of consumers, we have plenty of upstream capacity and we have a pathway using DOCSIS 3.1 technology and later, 4.1 technology to continue to increase that. We have a vision that in the event that there is a transformative product set that needs upstream that would create value for consumers and then for us, we could fairly rapidly upgrade our plant to get a massive change in upstream capability. So, we build with fiber on the increment because it’s cheaper. But we think the HFC plant can be equal to fiber from capability, latency, and capacity perspective, for years to come. With only relatively small capital investments compared to replacement costs, which new fiber is, we can upgrade the network and remain competitive for a very long period.

Chris Winfrey, CFO

As it relates to the CBRS build-out, it’s really a function of a few variables. One is the number of subscribers that you have. The more you have, the more economical the build would be. The usage of those subscribers, the amount of WiFi offload that you can get already, what is your rate on MVNO, and what’s your density in the build cost. As Tom mentioned, we wouldn’t be building just to build a network. We’d be building tied to a guaranteed cost reduction, effectively. The ROI is not only relatively quick, but it’s very clear, and there’s very low risk involved. We’re not building any inside-out strategy just to have a network or for other network type build reasons, other than cost reduction. I don’t think that it’s going to be material in the short term. I think it will occur for a many multiyear period. You could argue that as the mobile retail store build-out declines for mobile, that could be substituted over time with some additional build-out, which has a direct correlation to cost reduction. As we start to do that, we’re not doing that yet, but we’ll probably provide a little more color on what we think the effective payback of that is. The thing you should take comfort in is that we’re not building just to build, and it’s going to be tied to a clear cost reduction in ROI.

Tom Rutledge, Chairman and CEO

Yes. We have the $460 million of cost for CBRS spectrum. But the incremental capital is very specific to the location and the amount of traffic that we would save in an essentially radio by radio kind of investment. It doesn’t require building out a complete footprint. It’s actually opportunistic by location.

Operator, Operator

And our final question comes from the line of Michael Rollins with Citi.

Michael Rollins, Analyst

Thanks. Good morning. So, over time, you’ve given us a lot of insight into broadband consumption trends. I was curious if you can give us an update of how your video customers are now engaging with your platform, especially as you grow in subs year-to-date, with respect to maybe what percent of your customers engage with your VOD platform or the digital applications that you offer for the cable networks offered and need to be authenticated through Charter? And then, if you take all of that in aggregate, how much time they’re spending with you guys? As you roll that up, how does that instruct your video strategy going forward in terms of the way you want to aggregate and distribute content? Thanks.

Tom Rutledge, Chairman and CEO

I don’t know that I can answer that directly, except to say this. We track what our customers do with their video products and also track how they rate our applications and what their customer experience is and what our availability of content is to sell to the consumer. We try to mix and match that in a way that we create overall value and the relationship we have with the customer, but also create a product that makes money. We’ve had some success in managing new ways of delivering video. We have over 10 million users who are getting their service through applications as opposed to traditional hardware. We look at the business evolving. We think that people will continue to buy rich packages for years to come, but we also think there are other opportunities to sell a variety of video services to consumers in different formats and that we can improve the customer experience by being a good place for consumers to interact with us to get those video services. We’re working toward that and we’re making some success, and we’re actually optimistic in the very long term about our video business.

Stefan Anninger, Investor Relations

Thanks, Mike. That concludes the call.

Chris Winfrey, CFO

Thank you, everyone.

Tom Rutledge, Chairman and CEO

Thank you, all.

Operator, Operator

With that, ladies and gentlemen, this concludes today’s Charter’s third quarter 2020 investor call. We thank you for your participation. You may now disconnect.