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

I want to welcome Chris Winfrey, CFO of Charter. Chris, thanks for joining us.

Thanks for having me.

Chris, we can't hear you. [Technical Difficulty] Chris, can you hear me?

I can hear you. [Technical Difficulty]

We can hear you just a little bit, Chris. There it is. [Technical Difficulty]

Phil, can you see or hear me?

I hear you now.

And are you able to -- so you can see me and you can hear me?

I can.

Yes. I'm really sorry about that. I'm not sure -- the disconnect...

No, it's okay.

We're on. And we've done a try run and then it works so anyway...

I'm -- listen, thanks for joining us. Chris Winfrey, CFO of Charter.

With integration efforts sort of fully behind you at this point, talk about Charter's priorities and maybe how things have shifted with the pandemic over the last couple of months.

Look, our priorities fundamentally haven't changed. And our operating strategy has been one of trying to acquire as many customer relationships as we can, and the way that we do that is by having highly competitive products at a very attractive price, having high-quality sales because of that. And then in-sourcing all of our labor and having high-quality service onshore, in-house so that the customers don't have an incentive or need to give you a call frequently, which means that your cost per customer relationship goes down. It also means your satisfaction goes up, which means that your churn goes down, which means that you have longer live customers, which means that you have higher profitability per customer relationship despite the fact that you had lower pricing at the outset to get those relationships embedded. And then -- and as a result of that, you have much higher ROI on the capital that you spend to acquire the customer. And your actual CapEx per customer relationship declines as a result of having higher penetration on a fixed set of network assets, and the same applies to OpEx as well. And so you end up in an environment where you have attractively priced products, and you have very high penetrations over time. And you have good EBITDA and cash flow, and you're protected from competition because of the way that you push the marketplace. That operating strategy works well in all types of economic and market climates. So I think we're well positioned from a COVID-19 standpoint. It doesn't mean that we're not doing things along the way to pivot with offers and whatnot, but I think we're in good shape to continue to deploy the operating strategy that's worked so well so far.

Okay. Your broadband growth in the first quarter was really strong, even excluding the pre-education offer you had in the market. Was that growth driven more by market expansion or share gains? And as you think about the source of gross adds, do those customers look different than your gross adds in terms of demographic or credit in the past?

Right. So the -- from a sourcing gross adds perspective, we had both a higher amount of share shift as well as a higher amount of market expansion that was taking place. And so the relative mix, we can get into that, but the reality is that both increased along the way. What was interesting, and I have to give credit to our marketing department, is that they saw the opportunity to not only do real good inside the community to offer a product that was extremely needed to be able to provide Internet service, high broadband service to households that had students in the house as well as educators in the house, to provide it for free for 60 days. But they also had a view of not just providing a low-bandwidth product at a low price but to provide the type of Internet product that the customer would ultimately want and use that as an opportunity for significant share shift in the marketplace. And so they took advantage of that market opportunity to create relationships. Contrary to popular belief, just because you have a high-speed broadband product at an attractive price, you have to dig out these customers one by one. And so by doing good in the community and, at the same time, having a focus to acquire customers, then I think we're going to end up with a lot more customers than we would have otherwise. These customers, you asked about their profile, and they look a lot like our customers that we typically acquire for Internet acquisition. And sort of the demographic profile, the type of products that they're taking, over 50% of them are actually taking video and phone as well. And those products, when it's attached to the Remote Education Offer starts immediately billing and they're paying. So they look and behave very much like any other type of Internet customer acquisition. It's true, we may end up with some of these that come off on the back end after the free promotional period for Internet, either through bad debt or through disconnect, but I think most of these customers are going to stay with Charter. And I think it was a smart thing to do for our communities as well as for Charter when our marketing grouped them together.

Okay. Does the pickup in gross adds and the increased need for speeds at home, does that change how you think about penetration long term?

Look, I think it should change the way the market thinks about penetration long term. Our view has always been if you look back for years and years, we've said that you can have a very attractively priced broadband product that has high speed, that has high quality, that has good service attached to it. It's very difficult for us to sit back and say, what customer in the U.S. wouldn't want to have that broadband product over time? And so we've always thought that the long-term broadband penetration is going to be very high. And then when you couple it together with the mobile product that we pulled out that enables people to have -- for the same price they pay for the mobile product today, have both the broadband Internet connection into the home and to have high-quality but lower-priced mobile lines. Package that all together in a way that they can afford a broadband plus mobile combination for the same price they currently pay for mobile today, we think it's pretty attractive, and it should be a market expansion alternative for Charter and for cable as an industry overall.

We've seen -- heard from a couple of guys the last couple of days who look at the fixed wireless 5G broadband product as an opportunity. And help me think about what -- where you see that product versus the current competition, whether you have fiber or DSL as your main competitor.

I think the -- in order to make 5G work, we've always said that what you need is effectively a cable network with a wireless draw. The time and the cost and the complexity you're going to make that happen is significant and I don't think our views on that have really changed. And I think the current market climate require having not just an okay broadband connection but having a stellar broadband connection. And the best way to get that really continues to be through cable and/or fiber, and that takes time and cost. And so I think the 5G rut, I think, has subsided. I do think there will be applications for 5G, whether that's in the enterprise space. We'd like to take part of that. Obviously, 5G mobile, we're selling that today through our MVNO, Verizon. So we believe in 5G for certain use applications. But I think as a standard or replacement to a quality fixed wireline product with WiFi attached to it is difficult to match.

Okay. So you've mentioned wireless a couple of times, and net adds accelerated in the first quarter. What drove that strong performance? Are you pushing it harder in the sale process? Or is that sort of a natural event as customers seek out a better price?

Our Q1 net additions for mobile lines would have actually been higher had it not been for COVID-19. I mean we were accelerating significantly through mid-March. And I don't want anybody to get over their skis. Maybe we would have ended the quarter with 25,000, 30,000 more mobile lines and -- at the pace we were going. But we pivoted in the back half of March to broadband self-installations as well as retail, as you can imagine, was impaired as a sales channel. But -- and that's continued through April, and it's picked back up and reaccelerating in May. But I think the key takeaway there is that we're getting better at selling and attaching the product to our connectivity sales. And our messaging in the marketplace in terms of the quality of the product, our reputation in the space and the pricing structure is resonating. And it's getting easier to sell, and we're selling more of it.

Okay. So it doesn't seem like it's tied so much to the retail stores being open, which is something we've heard from other distributors.

From a -- when you compare us to a typical MNO, our go-to-market strategy is different. Retail represents a minority of our sales. It's an important channel. It's an important channel for people to touch and feel different devices, and that's impaired for all of us right now. But the vast majority of our sales still take place through inbound sales through our traditional sales channel. We've already having millions of sales conversations with customers every year as it relates to our broadband, our video and our fixed line phone services. So it's a natural part of that conversation. And so we have a distribution setup that's very different than the traditional mobile operator because we have all these sales conversations taking place anyway. So whether it's online or inbound, that's much higher -- those 2 channels are much higher, both stand-alone and together, than the retail space. So I'll also say, Phil, we'd like to have it up at full capacity. It's not 100% today, although, because we are an essential service provider, we've continued to keep as much retail open as we could for all of our products.

You talked in the past about getting to a sort of, I would say, call it, an ex-growth EBITDA breakeven in wireless. Does the acceleration in growth haul that forward a little bit? How are you thinking about that time frame now?

Two things. One, the economics of the -- maybe 3 things. The economics of the mobile product haven't changed as a result of COVID. Two, our expectations for growth were always really high, they were accelerating. And so I don't think there's any surprise to us. If anything, the back half of Q1 should have been a little better than it was. And three, when we talked about the breakeven, it really was excluding subscriber acquisition costs, and that's really where a higher growth rate puts pressure on the EBITDA profitability. So when I talked about the breakeven timing of mobile, it really was tied to excluding sales and marketing costs to drive additional growth. The faster you grow, the more pressure you're going to put on EBITDA, and we don't want to take away the incentive to get growth fast. So that's the right way to think about it. But no, the simple answer is no. Our thoughts on breakeven on an exact basis, if you will, has not changed.

Okay. You've been more aggressive than some of your peers in talking about building out some of your own cellular nodes in addition to your Verizon partnership. So can you help us think about what the economics like that look like there? Anything shifting in terms of your costs that might make them more or less attractive?

Look, we have an attractive MVNO with Verizon today, which gives us umbrella and ubiquitous coverage across the country, paired together with our WiFi, which carries about 80% of the traffic today. But there are areas inside the footprint where you see a significant amount of LTE usage, and we have visibility to where that's taking place, where you could deploy -- with our existing cable network, you could deploy a small cell at a very low cost at a very rapid pace. You can deploy small cells to offload that LTE traffic. And you're into a really simple build versus lease equation. Most of that is really just a financial equation as to having a better ROI of that investment tied to a better offload rate versus -- all-in offload rate versus your lease rate. And so we're going to be very disciplined around how we build out any small cell infrastructure, similar to what we would do with WiFi inside or outside the home. And so really no different when you think about it that way.

How should we think about trials maybe ramping up over the next year or 2?

We've had CBRS trials and C-band and millimeter wave trials across the entire country for a couple of years now. And so we've been testing it both from a fixed application, a mobile application. We've had it in North Carolina, Orlando, Tampa, L.A. and New York, the entire of St. Louis. We've had it across the entire country. And so when we've talked about what works and what doesn't work from a 5G perspective on millimeter wave, it wasn't just based on academia. It really was based on our own test. When we've talked about what we think we can do with CBRS from a fixed and from a pneumatic perspective, it's really based on the test that we've run through a lot of different geographies and topologies and with our wireless folks, not to sound like an engineer, morphologies. And so we're pretty confident that as we start to deploy CBRS for licensed or unlicensed spectrum, that it will work the way that we think it does because we've done it already. We've used it in fixed, wireless market trials as well as with wirelines, and it's worked well in that space, too.

Is there an external event that has to happen to make that attractive and viable? Do you need a particular handset or technology to come along to make that work?

No, most of the handsets now are enabled with -- the new handsets are now enabled with Dual SIM Dual Standby, DSDS; as well as having the CBRS frequencies inside the phone. So there will be a period over time where your ROI gets enhanced by the embedded base having more of those capabilities that you need. So with the passage of time, the more phones are enabled -- the more phones that are enabled, the better the ROI that you can get from the build. But I think you can already see how these phone life cycles, while they've been extended a little bit, are still pretty short. And so you get a recapitalization -- customers' recapitalization of their handset device base in a pretty short order of time that enables you to go deliver the services and get the ROI in that period of time.

Okay. Let's shift to video a little bit. You and Tom have always talked about a penetration-based strategy. And video, a few years ago, was discussed as something that could continue to grow over time. Even as the industry has come off, you've shown better video trends than many of your peers. Does the volume-based strategy in videos still apply? How do you think about balancing volume with making sure that you're at least protecting your sort of gross margin from your video base?

Yes, I mean, look, the video acquisition, we're not acquiring much in the way of single-play video and that's not a target for us. What we're trying to do is volume-based strategy to acquire connectivity services. The vast, vast majority of our video PSUs are really a product of Internet sales force attached as well. And so to the extent that you have an Internet customer who would like to have our video product at the same time, it both enhances our ability to acquire because we offer an attractive product and an attractive bundle, but it also enhances our ability to retain that customer over time. And I think that's the continued utility of video. We still make profit from it. It still has positive cash flow. It's declining, it has been for a decade, and yet we've been able to grow because we really don't sell any of our products as a single product service. We really sell a bundle or package of services to customers. And so our strategy for volume-based is really about connectivity services and tacking on whatever products around that, that the customer finds attractive both at the time of sale and retention of the line.

Okay. One of your peers recently talked about maybe changes with the programmers in terms of discussions, over time moving the sports and especially RSNs to more of an over-the-top product than being bundled with your service. How do you think about that? And what the discussions with programmers look like today?

Look, if the programmers would allow the environment that you described, we would be, I think, all in favor of it. And then we'd look to carry that over-the-top product as well and be a good distributor of video content attached to connectivity services, which is the role that we've always played. And I don't think, economically, you'll find many of them looking to -- that to be the way forward. And in terms of the rights cost today, I guess if you were in a renewal today with a big content provider or a programmer who had lots of sports in there, maybe that could increase some of your leverage today. But it'd only be in the context of being in a renewal environment today. Otherwise, I don't think that the value of sports rights has gone up as a result of the current pandemic, and I don't think it's gone down either in May, but I just don't see that any of us are sitting around saying that it's going to be fundamentally different when you come out the back end.

Okay. You also -- you recently announced a deal with HBO to offer HBO Max, and I imagine, as part of that, the Dodgers deal was brought in. Help me understand how -- the sort of win-win opportunity between you and Warner and HBO as well as all the other people -- pieces that might have been wrapped around that deal.

Look, we have a lot of relationships with AT&T. We're a competitor, but on the other hand, we're a programming provider to them now. They're a programming -- big programming provider to us. It's no secret that we've had conversations with AT&T over time, and so we're going to have business relationships with them in a lot of different ways. We distribute their programming. And to the extent that they're going to have HBO Max, particularly the way that we've seen it publicly discussed, being available to all of our customers today, if that's an attractive product that customers want to have, then it behooves us to make sure that we can carry and package as we receive that product as well to our customers and to our connectivity relationships and provide utility at the end of the day to our end-user customers so that we facilitate whatever content that they'd like to watch, that we have the ability to provide that and to package it and to provide search and discovery functionality attached to that as well. And so I think you'll see more of that over time. And does that cause things to look a little different on the traditional video packaging? I don't know. But for now, I think we want to make sure that we continue to have good content available so that we can provide that as a way to drive more connectivity relationships.

Okay. And that last sentence, I think, is key, where you talk about driving more connectivity relationships. Do you think the -- whether or not you sell HBO Max, whether or not customers take video, is that a significant driver of cash flow at Charter? Or is it really the growth in broadband, the growth in broadband revenue that drives most of that cash flow growth?

So I can give you a technical or financial answer. And I'd say no, video doesn't really contribute that much to the cash flow growth over time one way or another. And that's technically true, but that also assumes that you're selling it as a single-play product. And as I mentioned before, that's really not what we do. So it doesn't take a whole lot of connectivity relationship acquisition or retention, it doesn't take a whole lot of change in that to fundamentally change your views on the attractiveness of video and the profitability of video. As an example, if having a high-quality video product just enabled us to have 5% more sales on Internet, if having a high-quality, attractive video product that worked in QAM and IP and across all different devices inside the home and outside the home and had all the content available, which is -- all of which is what we provide, enabled you to have 5% less churn on your connectivity services for broadband, the ROI on that is significant. So I don't think that you can go down a path that it makes sense to look at it for customers where it's not relevant to them. But to the extent that the video package service is relevant to the customer, it has, even those small levels, impact on your broadband or connectivity relationship. And the whole question of profitability of video really isn't on a stand-alone basis. It's really about a package of bundled services that we provide to the customer and how all of that works inside the household and how that feeds into your economic returns in totality.

Speaking of churn there, and that makes a lot of sense, have you found that wireless as a bundled product rather than video has had the same impact or similar impact on bringing down broadband churn?

Well, it has, but I think there's self-selection attached to that as well. And it's still early enough that what you have is customers are happy with Charter, like our brand, have high customer -- higher customer satisfaction by definition because they're willing to take more product from us. So do they churn less? Yes, they churn less. I think you need to get at a bigger level of scale to say does that apply across the entire base. But -- the early returns are promising, but I don't think it's -- we're not here to raise the flag and say that it's there.

Okay. Last one on video. Advertising, on the first quarter call, you called out that the number of cancellations had more than doubled versus March and April. Any update on what you're seeing today in advertising, local versus what little national you have?

Yes. The -- it's not pretty, not for Q2. I think the long-term profile of the business is unimpaired. And I think we're doing a lot of things in the short term that could actually enhance our ability to be a great partner to these advertisers over time. Most of our advertisers are local SMB businesses. And so as you can imagine, they're in a little bit of pain right now and they're not advertising as much. I think I mentioned on the call that we saw a $30 million reduction in March for cancellations. We saw more than double that inside of April. April probably is going to be the trough, but May doesn't look that different. So the trough may be a little flat. And we're hopeful that June starts to recover, but a lot of that is just tied to the economic reopenings on a local level. And I do think that once things start -- really start to fully reopen, that you'll have a lot of pent-up demand for advertising to get customers back in the door, and we stand ready to provide that. But I think at a minimum for Q2, it's going to be a significant impact to revenue and to EBITDA on a relative basis. You do have to keep in mind that this -- that the advertising segment ex political accounts for about 3% of our revenue, maybe a little less than that. And so how dramatic can it really be? But all else equal, I'd rather have it. And -- but I think we're well positioned long term in the future with advertising for that and for all the other reasons I've mentioned on the first quarter call.

And that's a good segue into the SMB side. Can you break down for us your exposure to customers who need more bandwidth and are paying for it versus those that are impacted and closed or maybe just taking less service?

Yes. In fairness, enterprise is a space where you've seen more on the upgrade side. On the SMB side, because our product is so fast and so attractively priced to begin with, I haven't seen any real evidence of significant upgrades in the SMB space, at least none that's moving the needle materially. To the contrary, what we've seen is a decent number of customers who have called in and said, "My restaurant is either shut down," in which case we can put people on a temporary suspension and maintain the relationship and keep the equipment in place and restart when they reopen. So we have that available. There are others who say, "Look, my bar or my restaurant, in particular, is open, but I don't have a need for the video package that I did before because the bar is closed." So we'll do a temporary downgrade of the video product. And then there are customers who call up and say, "Look, I want to keep the service, and -- but I'm having short-term difficulties to pay." And so we have our Keep Americans Connected program available. They're not huge numbers on SMB. If anything, we've been pleasantly surprised by the amount of disconnects so far and the number of customers entering into those programs. But it's going to be sideways at best from a units perspective on Q2, at best, maybe slightly negative revenue. You'll still have growth because you've got a full year of growth behind you, but it's going to be a little bumpy on the SMB side. But again, similar to what I said around advertising, we are going out of our way on the residential, the SMB, the enterprise, the advertising space to not really be too worried about how our financials look in the short term, but to really be focused on the recurring revenue that can sit underneath that we can maintain and that we can actually grow and that we come out on the back side with a really healthy balance sheet and an aggressive marketing strategy and a better product in almost all cases, to be able to come out the back end with a faster growth rate than even we would have had otherwise. So that's really where we're focused today. SMB and advertising, it's going to be choppy in Q2, and I think everybody recognizes that. But the focus is, where do you end up at the end of this year? Where do you end up heading into 2021? I think we -- hard to have a crystal ball, but from what I can tell, I think we look pretty good.

Okay. As you see some areas reopening, have you seen a little bit of a lift in reactivations or...

Anecdotal. If you take a market like New York City or take L.A. right now, that's different than the heartland, so to speak, both in terms of the impact that already we saw as well as the impact that we're seeing on the back end. So yes, it will be localized, and it will be a mixed bag across the country. And we have all kinds of different markets from the Midwest, the upper Midwest, to Hawaii to Maine to Washington to Florida. We have it all. So we've a pretty good diversified set of assets and reopenings, so to speak.

Okay. And in enterprise, you mentioned mostly upgrades at this point. Maybe go back and talk about the trends in enterprise. You brought in spectrum pricing and packaging a couple of years ago there. You really haven't seen revenue rebound that much yet. How should we think about that going forward?

Well, you've heard me over the past probably 4 quarters or so really start to isolate a couple of things. One is NaviSite. So we sold NaviSite, had about $150 million of revenue, no impact really to EBITDA or free cash flow. So you need to roll that off. It wasn't big enough to do it pro forma, but it does impact our revenue growth rate, and we'll do so until we lap that in Q3. And the second piece is wholesale, where we have traditional wholesale as well as significant cell tower backhaul. That has all been either flat or slightly declining. It's not necessarily our bread and butter. And so the bulk of what we have, what does matter to us most is the retail side of enterprise, and I've been isolating that growth rate, which is around 7%. The unit growth, to your point, has been higher. I think we've been doing a repricing spectrum -- enterprise spectrum pricing and packaging for several years now, particularly on the fiber Internet access product, and we're most of the way through that. Some price pressure that we see now is self-induced, particularly on the Ethernet side, where we've been very successful for the past years and continue to be from a unit perspective. But that whole marketplace is under a little bit of pricing pressure. And so the objective for us is to sell enough fiber Internet access, higher volume of Ethernet units, more on the unified communications side as well as managed router services, managed security services, SD-WAN. We package that around to do a better job of selling on that than we have traditionally, so that we get a higher amount of revenue per connect because we have more PSUs per connect, which means that -- similar to what I said about residential, because you have a higher amount of revenue, PSUs and longer life and better contract with that customer means that physical capital, the capital for physical construction that we're going to put in any way for the fiber Internet access, for the installation, that is spread over a larger base of revenue. And that, I think, is really the opportunity for enterprise space, is to sell more product into baseline relationship.

Okay. And you mentioned selling NaviSite. Are there products or services that make sense to add on to your enterprise or SMB business in terms of acquiring them? Or do you really want to grow organically from here?

The SMB side, I think, has the tools that it needs, and we continue to roll out new products there. But let me focus on enterprise. I think to have success in the marketplace and to accelerate our unit sales growth, we have the products we need. We have -- all the way from fiber Internet access, which is bread and butter to us; Ethernet, where we are one of the top Ethernet providers in the country. But we need to do, frankly, a better job on selling voice and unified communication services, reducing the complexity around some of that SD-WAN, managed router services and higher-ARPU products that have flowed through to EBITDA. And to make sure that when we're in a customer's premise at the point of sale that we're taking all of that business and improving what's already a great ROI for fiber Internet access, but could be even a better ROI and creating longer customer life by getting more products sold in. And there's operational and sales complexity around all that, so it will take time. But we've recently hired a seasoned professional in that space, Bill Archer. And so I'm confident that in the next year or so, we can really get that going, particularly once we come out the backside of this current pandemic. In the meantime, to be clear, all the positive things I said about enterprise is in a normal space. Right now, we've seen -- short term, we've seen a flurry of upgrade activity and a flurry of activity to add additional products and services that hospitals, health care, generally as well as governments needed. And we've been responsive to that, and we've done a great job with that. But in this environment, getting on site to sell new product to consumers is tough, and being on site to install that new product is tough. And so the short-term uplift that we've seen in upgrade has been countered with a reduction in acquisition. I think that's going to -- the upgrades are going to subside. The lower acquisition is going to be with us for a while. On the other side, not a lot of people are looking to disconnect their services currently either. So I think we're going to go a little flattish here in enterprise as businesses settle and focus on other things temporarily. And we'll just be putting ourselves in a position to grow fast on the back side.

Okay. Chris, last question real quick. On the call, you indicated maybe a pause in the buyback in the near term after a strong first quarter of buying. How should we think about that going forward?

I don't know that I said pause. I said we're -- target leverage range hasn't changed. We're 4 to 4.5x. We have more than ample liquidity pro forma for financing transactions and debt cost servicing. We've got over $8 billion of pro forma liquidity at the end of Q1. So we have the capacity. We have the visibility on our subscription services. We know where we're heading. We know our operating strategy works in all kinds of different markets. You could argue that, that means that we should go on the offense and we should be buying back more stock. You could also say that taking a look around, not knowing how long the pandemic will ultimately last and the economic impact means standing back and evaluating what are the defensive alternatives that are available and what are the offensive alternatives that are either available today or might be available that are hard to see around the corner and be in a position where we can take advantage of that. It just means that we should be thoughtful as to how we approach the next few weeks and months. It doesn't mean that our views fundamentally have changed. It just means that we're going to be prudent, and I think, on both sides of the equation that's what people would want to see.

Okay. That's a good place to wrap it up. Chris, thanks very much for joining us. Thanks, everybody, for being on the call. And stay safe, and have a great day.

Thanks, Phil. Take care.

Bye, Chris.

Bye.