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

Welcome to our next session at the 26th Annual Credit Suisse Communications Conference. I'm Doug Mitchelson, media and telecommunications analyst. Very pleased to have with us from Charter, Chris Winfrey, Chief Financial Officer. Chris, thanks so much for joining us today.

It's a pleasure to be here.

We're going to have a fireside chat format running around 45 minutes or so, and we've got a lot to get through. So Chris, I'm going to dig right in. I wanted to start with 10 years of Charter, 20 years in cable, I'd like to say you've made a lot of accurate predictions over the years. I feel like there's accelerating technological change. Business has gotten more and more complicated in terms of devices and offers and service tiers, and how COVID hits, pretty dynamic backdrop. So I'm just curious how you and the management team would articulate the growth strategy and outlook for Charter, given this sort of more dynamic backdrop.

Well, look, and starting where you started, it's -- cable is a great business. Has been for several decades. And I think as long as we continue to invest in the networks and to provide great service and keep up our reputation, I think it's going to be a great business and industry for many more decades to come. But you mentioned complexity. I don't know that it's more complex now than it's ever been, and I don't think it's been that complex. If you go back -- I mean you've been around, at least as long, if not longer, around the industry, if you think back to when the network was going from analog to digital, when they were going to go bidirectional, when they were upgraded for providing broadband, video-on-demand, IP telephony, those were pretty radical ideas and concepts at the time, and they were complex. And it resulted in more products and more pricing along the way. And so when you think about where we are now today, it's pretty similar to where we've been. We keep on reinvesting in the network. We keep on reinventing ourselves, in a lot of cases, creating a service that doesn't even have products ready to go over as of yet. And if you think about what we are and what we've always been is really a connectivity service. So we go all the way back. It's really about carrying over-the-air broadcast signals and then that moved into carrying programming channels as a form of transit. And then it moved into providing connectivity and transit of bits through IP, whether it's voice or data, and so we've always been a connectivity service. We continue to be a connectivity service. And it's our job to continue to invest in that network so that it's able to provide the net set of products, even if it's not products that are provided by us. So our operating strategy really centers around that. COVID hasn't really dramatically impacted that, which is how can you get as many people taking your connectivity services on a fixed network? And that means having very good products, attractive pricing, having in-home -- in-house service so that you have quality in your service infrastructure. And doing that, so you lower service transactions, you lower churn, which means that you can use your sales and marketing dollars to get more customers that produce net adds as opposed to replacing what you lost, all of which is a big, long, complicated way of saying we have every incentive to put more customers on the network because every customer that we acquire is financially more attractive than the last, both from an EBITDA standpoint as well as from a free cash flow standpoint. So that's been our operating strategy and continues to be the operating strategy today. And it's designed, including the pricing, the way we go-to-market and pricing, that's designed to work in any regulatory environment and really most economic environments as well. And so far, that's all proven out.

So I feel like what's really defined the company the last few years is the Time Warner Cable merger and integration and a promise of operating free scale. And you're obviously sort of through that I was hoping you reflect back. Did the merger sort of accomplish what you were hoping to accomplish? And for a lot of us who are gauging the growth of the company, we're trying to understand how far along you are in terms of capturing the benefits of that increased scale in that merger?

Yes. So 4 years, some days, it feels like a really long time ago. In other days, it feels like it was just yesterday. But I think we've captured -- not fully captured, but we've put into motion all of the things that we expected to put into motion. And so we got all the transaction synergies pretty quickly right up front. We've put Time Warner Cable and Bright House in a position to grow faster than they were before. Still don't -- they haven't reached quite the same level of service infrastructure and transactions that legacy Charter has, and part of that's because legacy Charter continue to get better, which ties into your question of how much is left, is I think what's not always well understood by the capital markets is some of the operating decisions that we've made, whether it's the way we price, the way that we invest in the network, the way that we've in-sourced our labor, which then increases the training of your employees who are taking calls or doing the truck rolls. And the tenure that increases over time, that takes years and years and years for the benefits to fully sync in. And it actually takes even longer for customers to recognize and to appreciate the brand for what it's become. and so your service reputation takes a long time to be created in the marketplace. So I think, from that perspective and the ability to continue to get better and better, I think we're still very much at the early stages, and you're seeing that come through in the operating metrics that we provide as well as the cost to serve per customer relationship. And I think there's a long runway for that to continue to get better. There are pieces to the transaction that, frankly, were never in our business plan. So if you think about mobile and our inside-out strategy that we've talked about so much, if you think about DOCSIS 3.1 and how quickly we implemented that at a relatively low cost and the next wave of upgrades, which we can do at a very attractive cost to provide the next-generation of products, and the digital self-service platform that we've developed and luckily because we really needed it inside of the COVID environment and how well that's performed and what that can do for the customer in terms of satisfaction and what that can do in terms of our reputation and our cost structure, those are all pretty big items that are very, very early stages. So I think we're on a good trajectory, and I think we'll see that for many years to come.

Any updates related to COVID impact on the business? And you sort of already mentioned it's not really impacting strategy per se, but there might be some long-term effects from COVID that you do try to integrate into your strategy. Anything on the either side you want to share?

Yes. So maybe I'll mention on the short term, and I'm not going to front run our Q2 results. It's not our style. But I think it's pretty well understood that Q2 was -- it probably will always be the highest level of transaction volume that we've ever had. And that applies to acquisitions, upgrades, billing calls, service calls. Our product was in more demand by more people, both current subscribers and people who wanted to be subscribers, as well as people who had a lot of time on their hand to tinker with their packages or their products and, given they had a lot of time on their hands, had a desire to call and make changes along the way. And the billing, you can imagine in this environment, was also a heavy Q. And so we've never had that amount of transaction volume. So on one hand, we had a lot of positive activity, what we would call in the system in Q2, but it's going to drive a tremendous higher cost to serve -- I wouldn't say tremendous, but a larger cost to serve and change in trajectory where we've been as a result of that. It's onetime in nature. I think as we come out the back end and provided that local economies can continue to reopen, you'll see all that activity settle down. In fact, it may actually go even further below where it would have normally otherwise been as people really settle into our products and what they have and less desire to make a move or change their service. We won't begin to see that really, though, into Q3. Longer term, I think their -- the amount of self-installation that was ready to go and the customers' willingness to move into that environment, the digital self-care portals that we've taken, over 30 different portals that existed amongst the 3 companies and combine that down to 1 and had that ready to go so that customers could use that, whether it was chat or bots or all that type of activity was really in place and got put to full use, it was scaled and it tested well and it worked, and the adoption rate was very high across all those platforms. I don't think a lot of that goes backwards. I think we got, whether it's 1.5 years or 2 years of adoption curve in advance that was pulled forward. Now it may slide back a little bit as people move back into a normal environment, but I think there was a lot of forced training that was going to involve because people didn't want to be making a phone call. It's hard to get through phone lines at times because the demand was so high. And they didn't want somebody doing an installation inside their household or a truck roll for a service change inside their household, and so this platform existed. It was in front of them. They made use of it, and I don't think that adoption really goes materially backwards, but we'll see. If that's true, it has a big impact on the customer's perception of Charter, our reputation in the marketplace, and it also has a big impact on our service cost infrastructure as well as the return on investment for -- when we're deploying plant, as an example.

One of the questions we get about this environment relates to the remote education promotion that you have. We have the pledge with the FCC and people are trying to understand how that's going to impact subscriber counts and bad debt accounting and the quality of those customers that are coming in on the remote education. Anything notable as you're a little bit farther along than you were at the time of earnings when you updated?

Yes. So let's separate the 2. You mentioned the revenue and bad debt impact. That's really tied to keep Americans connected, for the most part. The other one is the remote education offer. We approach this -- the remote education offer was something that the industry did voluntarily, and we approached it a little bit different. We made all of our suite of Internet products available to any customer who is a new customer who had a student or a teacher inside of the household, and what we saw were a few things. One is the mix of customer mix coming in between our Spectrum Internet assist between our 200 megabit program, 400 megabit or 1 GB. The mix of customer acquisition was almost identical to what you would have seen in a normal way Internet acquisition. So that gives you a little comfort of what's coming in. Two, the demographics were nearly identical as well of the customers coming in. And third, we also allowed these customers, even though they were going to get their remote educational offer, Internet for free for 60 days, we allowed them to take and pay for videophone or mobile services along the way, and they did. Over 50% of them were taking one of these other services -- one or more of these other services and they were paying for them. so we started that program mid-March. We talked at the time at the end of March, we had 120,000 on our Q1 call. We said that we would get over 400,000. And so now you can think about that quantum of volume beginning to roll off after 60 days. I haven't seen anything that tells us differently that this wasn't a very good way of doing good inside of the community and acquiring long-term customers. And really, more than anything, what we saw at acquisition was what gave us the most insight as to what was going to happen to those subscribers. Now the second question you asked was on keep Americans connected, which we did together with the industry, also at the FCC request, where we suspended collection and disconnect activity for customers who had COVID-19-related economic difficulties through June 30. So that program is still ongoing, and the impact that you'll see there is really less about bad debt and it's going to get more to a onetime revenue write-off, which I'll circle back to. You have to think about what our goal is with those customers. You have customers that they called us proactively. Many of them continue to pay even after they called us and said they were having COVID-19-related economic difficulties. And there were other where they call us first to ask for help. We provided the help, but their bill on the way became pretty large. And if you insist on the collection of the full amount, the likelihood that they can pay is pretty low. And so our view is that these are good customers. We're going to put them back in a position where they can pay their bill. And so we're going to, in essence, write off the billings that occurred inside of Q2 so that we can put them back in a position where they can pay. Our goal here wasn't about the Q2 financial results, which I said on the Q1 call was going to be messy. Our goal was, how do you make at the end of this year, how do we have the most subscribers and the best cost platform for generating free cash flow in the future. And by treating customers right, that's actually the way to get there, and that's what we've done. So I think the -- it will be material. There will be a onetime revenue write-off inside of Q2 where you have billed revenue that were -- we knew at the time we weren't going to collect, and therefore, we didn't recognize as revenue. But I think starting in Q3, we'll be much better off for having done that. And I think when you get to these 2 programs combined, whether it's the remote education offer, and some of it in the course of Q3 may melt off, or it's to keep Americans connected, where some of it may ultimately still turn into bad debt, the true litmus test isn't going to be our Q2 subscriber or financial results. It's really going to be at the end of Q3, year-to-date versus last year's year-to-date Q3, where do we stand in terms of net additions. And I think we're going to be more than pleased with where we stand and what we've done, particularly in this environment. So that's our strategy around it.

Well, I appreciate all that and...

You probably got more than you asked for but...

We'll take everything you can give. So look, I think the -- you talked about it from a macro standpoint. I'm curious if you're noticing anything notable in sort of early return-to-work markets versus later return-to-work markets.

There are parts of the country that never fully shut down, and we saw similar amounts of network traffic, similar amounts of customer acquisition. It was scaled. In the markets that were more impacted, it was a little more dramatic. The same thing applies to reopening, but the reopening is actually pretty early on. Even in economies that have reopened, it's still pretty slow in terms of people moving back into a normal work and play environment. And so I think the offset to the activity level I described in Q2, you're not going to see it all inside of Q2. That's really more hopefully inside of Q3. Our network traffic levels remain high. So it started to come down a little bit inside of those markets that have opened up more. But again, how much of that is going to be a pull-forward and permanent pull-forward of activity as people rely more on video conferencing as an example. And so I think some of that's set to continue, but you'll see some of that start to subside. You'll see the transaction volume come down. I think churn has already come down significantly: a, because of everything that we were doing prior to the pandemic; b, because people are not moving right now; c, because people are choosing us as the better provider and higher speeds as opposed to leaving us for a promotional offer of dollars of savings, and so competitive churn is down. And I think a lot of that -- those benefits probably are going to continue through the back half of this year as well. I don't have a crystal ball, but that would be my guess.

Yes. So I guess, sort of zooming back out, I'm curious, you've got a lot of confidence in accelerating customer growth, both you and Tom have talked about that fairly consistently for a while, and it's not a static marketplace. So I'm curious, sort of what engenders the confidence that can sustain for a long period of time, sort of COVID disruptions aside, and aren't your competitors reacting? Competitors are losing share to you. Aren't they reacting to what you're doing?

Yes. No. You're absolutely right. I think there's this misconception that we don't have competition. We have competition essentially everywhere we operate. We have people who are doing upgrades. We have overbuilds. Our job is to stay in front of all that by providing really good and high-quality products better than our competitors can provide or at least matching it at a minimum and package it with other products and, importantly, service. Service is a product which Tom often talks about, service is a product. And I think we can do better, and we do, do better than our competitors on that front. Making it easy to do business with, that means the way we price our products, the way we bill our products, the way we service our customers over the phone and in-house or through digital portals and platforms, the way we combine different products and pricing and packaging. So all of that comes together in a way that allows you to compete more effectively in the marketplace. And what we see and what enables us to give -- get that much confidence is the quality of sale that comes in, the amount of billing calls, the amount of retention calls, the amount of service-related phone calls that we get from customers. And if all of that is coming down, and it has been pretty dramatically pre-COVID, what that tells you is that whether they know it or not, your customers are more satisfied with your product, and they're having to call you less. It's working more. There aren't outages or anything like that. And so that means as your churn comes down, and even if your sales only stay flat, then your net adds are going to increase. And when that happens, your marketing and sales dollars, as I mentioned before, instead of using your marketing and sales dollars to replace the customers you lost, you're actually doing it to grow share. And so it's a virtuous cycle of how you get accelerating growth. It's not just about higher sales. It's about driving down your churn, extending the life of customers and getting a better ROI off the customers as a result. So we see all the early indicators that suggest that's the path things are going. And for somebody to compete with us, it's not like it happens overnight. These are big, capital-intensive, long, slow programs. And to the extent that somebody's overbuilding on us, the ROI is not good. It's bad. And it behooves us to have high penetration. And even where there's not an overbuilder or there isn't planned to be one, it behooves us to act as if a FiOS is in that footprint because by acting that way, you prevent the economics looking good to somebody else to come in and build that other network.

That's interesting. It sort of leads me to one of my questions about edging out. And should we look at the growth in homes pass as just organic within footprint, household formation? Are you see edging out opportunities? People shouldn't be overbuilding you because the economics aren't good. But can you edge out and go up against others?

Look, it's something that we've been giving a lot of thought to. And most of the edge-out that we've been thinking about isn't so much about overbuilding on somebody else. The opportunity really is to build into rural broadband where true broadband options don't exist today. So that's something that, Tom, in particular, but all of us have been thinking about for some time now. And why would we do that? Well, the cost per passing is naturally higher because you're in a more rural environment. But as our penetration gets higher in markets that are largely competitive, as that penetration gets very high, it gives you a lot more confidence in terms of the ROI that you can achieve. The cost to build the network is very, very well known. And we have a regime right now from a regulatory standpoint and from a tax standpoint that actually incentivizes the investments that we would be making. And so when you step back, if you have pretty good clarity around what type of terminal penetrations you think you can get, you have a good visibility to the project cost. It's pretty much classic infrastructure style investing. And you marry that with a higher growth rate for the overall company, you marry that with tax shield, which is going to become increasingly important to us, and a low-cost interest rate environment and it starts to look pretty attractive. So there's nothing that we're here to announce today other than to say we're seriously evaluating it, taking a look at it. I think it could prove a pretty attractive alternative to cable M&A, to the extent it doesn't exist, as well as an additional use of cash flow along the way in parallel to the buyback activity that we've done well in the past.

So I wanted to -- appreciate that, and I wanted to shift to broadband and video and wireless. And for broadband, I think you -- it'll probably overlap some of what you've already said, but I'm going to push forward anyways, which is -- and the reason is the most asked question I get on cable and on Charter is about sustainability of broadband growth because broadband growth has been pretty healthy for all of the public cable companies. And so what's your confidence level in sort of the longevity of broadband growth as you exit 2020? And what are the drivers of any confidence that you have?

The -- I talked before about the metrics that we watch and how we get that confidence. So I won't repeat all of that. But I would say that if you step back and look at our product and the service we provide and the fact that we're just over 50% penetrated, who doesn't want the product, right? And who doesn't want the better product? And most of the people that are on this video call today have needed their home or business video -- Internet product more than ever before. And chances are that you were also desperate to go get Charter's broadband product if you didn't have it already. Now that may be a little bold, but I think the reality is because of the way we've invested and the way that we provide service and pricing package in the marketplace, I think we're the natural preferred choice for people to take and for them to stay with, meaning lower churn. And I think that's a model that's going to work for a really long time. And as I mentioned before, it's not that you don't have competition, we do. But you can see it coming a long ways away. And if you get in front of it and do the right thing is treat the customers well and invest proactively, I think you can stay ahead of it and continue to have very good, healthy growth rates for some time.

One of those potential competitors, we just had Verizon on, and they remain pretty confident in 5G Home, and you are always testing a lot of wireless technologies. And I'm aware that this is sort of an asked and answered question, but I think we'll probably continue to ask it for some time as these various technologies you continue to invest in, any thoughts on 5G and 5G coming your way as a competitive threat?

Yes. I'm glad you made that distinction because I think there's a lot of confusion around when somebody says 5G, you have to start back and say, what are you -- what are we talking about, what spectrum is being used and what's the purpose of the product. So if it's 5G mobility over low-band or mid-band, it's going to work and it's going to be the next generation of mobility, just the way that LTE was. We have an MVNO with Verizon. We have a 5G product with Verizon. And to the extent it works, we're going to have it, and we'll be right there in the mix competing with a converged product that's able to deliver probably the fastest -- continue to offer the fastest speeds, both from a landline as wireless pneumatic and mobility standpoint, I think we'll have the best product out there. If the question, and I think that's where you're going, if you then say, well, what about 5G millimeter wave as a fixed wireless replacement to wireline broadband, then I would say, yes. Does it work? In some cases, it does. I think of that as just another overbuild. And I already mentioned what I thought about the returns on overbuilds. I think about it as another overbuild but it has a wireless drop, which is going to make it less reliable than the network that we have. Does that mean that we shouldn't be concerned about it? No. Verizon has a big balance sheet. It will take a long time and they will spend a lot of money doing it, but all else equal, you need to be careful with it. And so that's why we have -- we're not having to build another cable network. We have a fully deployed network in front of us. It's high capacity, low latency already. We have a clear path to upgrade beyond the 1 gigabit national speeds that we provide already today, and it's really incumbent upon us to stay way ahead of any other competitive products. And I think as long as we do that, and I go back and I sound like a broken record, but provide great service and pricing and packaging and able to do it in a ubiquitous market format across the DNA and really get the benefits of that marketing and service infrastructure, I think we're going to be okay.

Let's talk about the packaging part of that because you're seeing wireless companies and some of the broadband competitors start to bundle in more, sort of, call it, content services, whether it's video service or music services. And perhaps as we have more and more cord-cutting, there'll be more and more incentive to give broadband customers some form of video service. Do you have to do -- you look at things that you can add on to broadband as something to make more money from consumers and serve them better? Do you look at it as what -- there might be a marketing cost that we have to incur on this high-margin broadband product as our competitors evolve the way they approach the market?

The -- if you compare today the wireless products that are out there and our broadband product, our cost per bit is fundamentally different than the cost per bit on wireless. And so the throughput -- and we mentioned on our last call that non -- Internet-only customers were consuming IP video, but Internet-only customers were consuming over 600 gigabits per second. The -- or sorry, 600 gigabits per month. And the average wireless customer is consuming on LTE probably 9 gigabits per month, and that's probably lower in the course of the COVID crisis because so much of that has gone back over to Wi-Fi. The traffic has already actually come down. The cost of their product is higher, and yet our throughput is much, much higher at a cheaper price. So I don't think about us needing to subsidize our broadband product anytime soon. Does that mean that video isn't a really good application service to our connectivity service? No, not at all. That's why we have a high-quality video product that works inside the home, outside the home, across all different types of devices, customer devices, our devices. So I think video is a helpful tool to the connectivity service, but I don't think that we're in an environment where we feel the need to subsidize it relative to wireless. The reality to -- I won't go totally down this path, but most of that content is being offered for free, whether they know it or not, because of password sharing. So OTT, SVOD, DTC is not secured. And so our broadband is for sure being used for free content today, and most people know it and want to turn a blind eye, but it's out there. And so I guess my cheeky response would be it's already happening today.

Okay. Understood. Let's stick with communications into our business services. And 2 topics. I'll throw them both out there. SMB, of course, looking for an update. But broadly, I think that we've all become pretty comfortable that business services ex COVID is just going to grow because it's been growing. If you could help us understand what opportunity is left. And particularly, when you look at medium-size or enterprise, do you already have all the capabilities you need in-house to capture that opportunity? And sizing it for us would be great.

So there's a lot in what you just said. And let me bifurcate SMB and enterprise because they're both commercial, but they're a little different. And I'll talk about the current status of each as well as the longer-term market opportunity. So the SMB was we have good penetration, but still, we're a minority player in that market. So we have long-term upside. We have better products. We have better pricing. We don't have the incumbent's dilemma around how we go-to-market and how attractively we price products and the speeds that we can drive in a ubiquitous way. To pair that together with really low-priced phone and an attractive video product, and SMB is a -- it's really a residential product on steroids with very similar ROI payback, standard model, easily replicable in terms of its operations. It also is an environment that, in COVID, we expect it was going to get hurt, maybe not materially, but get hurt. It's done better. I'm not going to get into our Q2 results, but it's done better than we feared. I'm not sitting here telling you that it's at a rapid growth rate or anything like that, but we're seeing green shoots coming back in SMB. It didn't get hurt, at least so far as much as we thought it could. We're not out of the woods. So I don't want anybody to react too strong to that. But the fact that we're seeing a pickup in sales and the slowdown in churn is promising in that environment. And I think our long-term opportunity match would be greater, I think, because as businesses come back online who were disconnected from our competitors, our product is going to look more attractive. And so the inertia that's in the marketplace, this could be a forcing either economically or just because they have got to pick something as a new service, could be a way for us to pick up share in SMB at a faster clip than we would before. That's the optimist approach. On enterprise, we have all the products we need. We need to sell more of those products at the point-of-sale as opposed to just doing our classic fiber Internet acquisition. But we have all the products. We have all the tools. We're even more underpenetrated in the enterprise space. We have increasingly kind of split the retail versus wholesale. Wholesale is traditional wholesale and cell tower backhaul, those are low or even slightly x growth. But the retail side of enterprise, which is the majority, really has a long runway in front of it if we operate it well, and we will.

And any impediments to growth there? I think when you have -- serving enterprises, you have to work with peers to try to get geographies sorted out and have services sold and maintained the same way. Any issues or impediments that you see?

Comcast is a national provider of enterprise services, as is Charter, and we piggyback off of them and others for providing circuits outside of our footprint when we need them, no different than in any of the telcos. So we're a national operator, as is Comcast, in the enterprise front. It's a little unique in that you're not -- there are many cases where we have the better network going into the building. There are other cases where we're at parity with another fiber network that's going into the building. We're not always used to that because of where we've been in residential and SMB, but we are aggressive. We don't have the market share, which allows us to be aggressive. We are aggressive more in the way we price and package and bundle our products. And I think for the same reasons I mentioned before, we can provide a better service platform to our customers than our competitors, and that's for us to prove out and earn our reputation in the space, but it's happening. It's not a small business.

So let's switch over to video. One of the things I noticed in your remote education net adds, your first quarter results with sell-in percentage for video was higher than your actual video penetration. So folks are taking video more often. I don't know if that was an artifact of the time with everyone at home. But are you seeing anything noticeable in the video sell-in rate? I'm sort of selfishly asking you to try to get a cage, where pay TV subscriber penetrations are going to ultimately head?

Yes. Well, not get -- I'm going to try not to get into our Q2 results. But people were at home, and I know that may not have been the case that other MVPDs saw, at least we could tell from the Q1 results, but people wanted our video product. Maybe that's because of our local news and the value that, that brought during the pandemic or other reasons. But it wasn't just the remote education offer. Video has been valued throughout this crisis. Will that stick? Probably not. It probably goes back to the same trends that existed prior to the crisis. But I would step back on video and just say, we actually -- as strange as that sounds for a cable company, we don't sell video. We sell a product, a suite of package of services that are tied to connectivity, and video is really the application. If you think about it, video is single play, stand-alone video, this isn't new. Has been at around 5% of our total video sales, our video single play, which means that 95% of the cases, we're actually selling it together with a broadband. And in the majority of those cases, the customer is not coming us to a video and say, "Oh, by the way, let me take broadband." Chances are they're probably taking our broadband and say, "Well, you know what? I'd like to have your video product paired together with that." And so to the extent that video -- having a high-quality video product allows you to sell more broadband or to retain more broadband. I mean we make money still on video, not as much as we used to, but we still do. But the bigger value is that if you can increase your connectivity services, either by higher acquisition or lower churn as a result of having a high-quality video product, then we're going to invest in that product because it: a, makes money; and b, it adds value to the overall connectivity package that we provide. And that's why if you look at us modernizing this user interface, making sure that it's available on Apple TV, Roku, gaming devices, iPads, Android devices, inside the home, outside the home, video-on-demand, live, across the board, you think of -- there aren't many companies that have that full suite of package of video services across that many devices, live, video-on-demand and integrated OTT and DTC products. So we think we have a high-quality video product. It still makes money today. But the real driver of that is to add value to the overall connectivity services. And it's not what we're -- the video product isn't what we're selling at point of acquisition. It's an attractive add-on to the product.

Well, I think that leads to my 2 next questions. I'll restrain myself and ask them 1 at a time this time. But Discovery mentioned yesterday that they're in discussions with pay TV distributors about their future in terms of launching OTT and trying to figure that out as partners. Comcast would love Peacock and maybe flex distribution. You did a deal for HBO Max. And are there deals to be done? And what value needs to accrue to Charter for you to engage on these sort of OTT video services?

Yes. I mean, look, we don't want to be taken advantage of. So put that on the table. But the real value to us has nothing to do with an economic deal between us and the programmer. The real value has to do with what kind of customer value is that creating. So if the customer wants that service, has that service -- or has that service separately already and is looking for somebody to integrate it in a way that's easy to search and find and navigate the content, we're the logical player for doing that. And so if it's adding value to a customer by reducing friction inside the household, think about the way that we have Netflix integrated into our Spectrum user interface, on Spectrum Guide, on set-top boxes, it's seamless and it simplifies their life. That adds value to us because it adds value to the customer. I'll go back to my first point. Does that mean we want to be taken advantage of to get there? No, it's not a must-have, but I think we can add value into the ecosystem by enabling that type of activity.

The second piece was set-top boxes and modems versus customer convenience and experience. Occasionally, I get the question as to whether or not those are going to go away and shift over to the customers paying for those devices and whether that's a sort of material impact on profitability for cable companies.

Well, I know -- leaving other cable companies aside, I won't pick on them, but I know a lot of our competitors, that's where they make a lot of their money is on customer premise equipment. If you think about the way that we go to market, we don't charge for cable modems. We want to make sure that, that customer has the very best modem inside their house that's working the way that we want, that it has the software, that if it needs to be replaced or upgraded, we can control that and make sure they're getting the best service, and we don't even charge on modems. On set-top boxes, we probably have the lowest set-top box rate. That sounds strange for a finance person to be bragging about it, but I am. So we're pretty immune to that. And it means that we're somewhat indifferent as to where the customer takes their content onto their own devices or through our device inside the home or outside the home. It really is about trying to make sure that it works for the customer. Even our router service, the most advanced Wi-Fi router, I think, in the country right now, we provide that as a service, a managed service, for about $5 a month. And so it's very attractively priced because we want to drive take-up, and the reason we want to drive take-up is so that we get quality in the home, but that means you can't gouge pricing on it. You have to make it attractive. And the way we make our money actually is not by our customer premise equipment. The way that we make our money is by them taking the core service and keeping the service for a really long period of time so that we get this long customer life and we get a very attractive return on investment.

All right. It makes sense. Why don't we shift over to wireless. So Spectrum Mobile, early days as a share gainer. So the more switching activity that's out there, the better. Probably not a lot of switching activity in 2Q with retail closed. On the other hand, you don't need retail to sell that product. I mean, how are you approaching that product this year in the midst of COVID and the challenges it brings? And then also as you look forward, how should investors think about your wireless strategy?

Yes. We mentioned on our first quarter call that we were accelerating our mobile net acquisition through January and February. And in March, it slowed down as the focus in our sales channels really turned towards activating the broadband subscriptions, and it takes time on a phone call. And so we sold a little bit less of it inside of March than we probably would have otherwise. And our retail channels, because we're an essential services provider, the vast majority were open through the crisis because we had to provide service. That applied for cable services as well as mobile. So we didn't have a real impact on the number of retail outlets. However, the yield and selling that I talked about in Q1, that impacts retail. Arguing against that, to your point, our -- it's much bigger for us. The inbound sales and online as a channel, even in mobile, is a much bigger area for us than retail. Because we're having an ongoing sales conversation with a customer, it opens the door for us to have a mobile conversation that most other companies wouldn't have because we have a separate relationship with the customer operating.

It seems like in an environment where having a cheaper service that's high quality would be a good thing when talking to customers...

And look, I agree. If you go back, and it's been a source of debate with some of our investors, but having a pricing structure and having a service structure that's designed to operate in all economic climates, in all regulatory climates, it was not an accident. And I think we've performed very well as a result of it. I think our employees take pride in having that type of strategy. And I don't think -- despite our moments, I don't think it goes unnoticed by the regulators either, the way that we go to market and try to have integrity in our operating practices.

So last question on wireless. I know you love hypotheticals. So I'm trying to figure out how I can ask you a wireless question in a way that will be productive for everybody. And so the way I'm going to go is can you help investors understand under what circumstances Charter would consider becoming a full-scale facilities-based mobile network operator.

We've looked at it every way and we've not found any economic case that would suggest we need to go down that path. I mean the 2 ways of what you're suggesting would either be to buy a wireless operator, a macro cell tower operator, let me call it that. And with the sole intention of ripping apart the revenue and EBITDA that you just bought by going aggressively in the marketplace to drive a converged connectivity service, that doesn't seem to be very smart if we have the technical capability to go do that ourselves without making that purchase. The second alternative would be to build a macro cell tower network ourself, go out and get -- go build a macro cell tower network. And because we have a very fruitful relationship with Verizon, for them and for us, and we can be a fast-growing operator that's putting traffic and revenue onto their network, it's a much more attractive way to go and to say, "I'm going to take the umbrella coverage for macro cell tower traffic. I'm going to lease that, what we think is an attractive set for Verizon." And then we already offload 75% plus the traffic to our Wi-Fi today and continue to have small cells in an opportunistic way built out that allows us to offload more traffic and improve our economics along the way at our pace. And so that's been our inside-out strategy, and we haven't found a scenario that really has a very positive relevant -- relative payback of going out and trying to own net macro cell tower network where, frankly, most of the traffic doesn't take place.

Okay. That's helpful. So cost and capital. I think, on the cost buckets and the CapEx buckets, you've mentioned some of the items in the call where there might be efficiencies. I'll give you some air cover and that I know you don't give guidance, but is there anything that you see that would distract Charter's trajectory towards, over time, more OpEx efficiency, more CapEx efficiency? And what are the big buckets where you see a potential for those efficiencies?

I think if you look at the business that we have today, all the trends would say that we're going to continue to grow, which means that your profitability per passing increases and that we're going to continue to have less service transactions, which means that your profitability per customer relationship is going to go up, which also then compounds your profitability for passing that I just mentioned and that your fixed amount of OpEx and fixed amount of CapEx is now getting spread over a larger base, which means that your cash flow, your EBITDA and your cash flow per customer continues to go up. So what could knock you off your horse? Well, competition. We talked a little bit about that. Regulatory, for sure, which is all the more reason to make sure that we operate the business the way that we do and make it consumer-friendly, and we do it for growth but we also do it for the pride of our employees so that they do a better job of what they do. And also, I guess the other one would be mobile, when we enter into mobile. What we found is there was an opportunity to go deploy cash organically in a way that was going to create a pretty significant NPV, but it was going to have a classic investment curve up front that people have to wait a multiyear period to get beyond. And so what we did is, in the financial reporting, split it apart and said, look, think of cable as cable. We're going to show you down to the penny what the start-up losses are for mobile, and we're going to tell you how it turns and when it goes profitable. And so you could think about the one as a traditional valuation for the cable, and you could think about the wireless business. If you're a bear, you just think about it as an option, call option that may end up not paying off. And if you're a bull, you look at it and say, it has a huge amount of NPV, and I'm going to value that. Either way, it kind of solves the debate. Can I sit here and tell you that those type of opportunities aren't going to present themselves for cable? No, they always have. And so you take a look at a 5-year or 10-year model for our cable business that we have with the products and services we have today, it's pretty clear what's going to happen to the cash flow per customer, the cash flow per passing, the capital intensity and how that's going to go down, and it's all very attractive until the next big attractive investment opportunity comes along, and that's been the story of cable since the '50s. And it's why a perpetuity growth rate for this business should really be very different from a DCF standpoint than just about any other type of business that I've seen over that time period.

So let's carry that more forward. Dr. Malone had a view, I think he espoused at the last Analyst Day that as companies approach becoming full cash taxpayers, they get more aggressive trying to find growth to invest in. You've mentioned good interest rate environment, decent tax environment. Is there an incentive for Charter to go out and find something to do with its capital other than buy back stock as you approach becoming a full taxpayer?

Yes...

Or for any other reason for that matter...

Yes. It's always been there. If you go back -- since you mentioned since I started with the company in 2010, if you go back and look at everything we've always said about capital allocation, it's always been organic investment first because those are opportunities that don't always come about. Cable M&A is a high priority to the extent that you can make more money off of it than buying your own stock. And if you can't do enough of those 2 options first, then you buy back your stock. And it's been -- not to say that it can't change, but that's been the formula for a really long time and it's worked since 2010. I don't think it's any different today. So the fact that we're going to become, as far as I can tell, a cash taxpayer, which is pretty incredible, that's a first for me, the fact that we're going to become a cash taxpayer doesn't mean that we're going to go out and just flush capital down the toilet to avoid paying taxes. And it's a good way to do it, but that's not really the best ROI. So we're going to stay focused on having a great ROI, having a good IRR. The fact that you can get some tax shield along the way by making capital investments is helpful. And I'm not sure that it will fully dictate the outcome of what we do one way or another.

So I'm required by our investors to end on a question about the pace of capital returns and stock buybacks. Any puts or takes as people should be thinking about the rest of the year? I know spectrum auctions are coming up. We're going through the COVID crisis, which has some impacts, as you mentioned, on 2Q. Anything investors should be thinking about?

Yes. Well, look, we're pretty well-known for not providing guidance, particularly around buybacks because I think you end up -- the management team ends up accidentally shackling themselves from being able to take advantage of opportunities along the way. You set a guidance, it's a bit of a commitment, and then you have to come back and say, "But I found a better opportunity. So now I'm going to change my commitment." And that's an awkward position to be in. And a lot of times, it's artificial pressure that I don't think needs to exist. So we've -- I hope that we've earned investors' trust over the past x number of years in terms of how we deploy capital, how we generate returns, and that means moving quickly on opportunities as they reside -- as they arrive, whether that's organically or inorganically or buying back our stock, all of which has worked out pretty well for shareholders. And we'd like the opportunity to continue to have that optionality and go continue to do the same thing. Providing guidance doesn't really help that. So now I'm off my soapbox. I did tell in our Q1 earnings call that given a fairly unique environment relative to anything that we've seen, we had pretty good conviction around what was going to happen with the business. All that's pretty much panned out, but that we would be -- it would be -- I think the word I used is we needed to be prudent in the course of Q2 in terms of what exactly we didn't buy back, just make sure that we didn't need to pivot one way or another. But I don't think that our long-term framework for capital allocation or what we'd like to do as it relates to buybacks has fundamentally changed as a result of capital markets, tax or the COVID crisis. That can change, but as of today, I don't see a dramatic change.

All right, Chris. Well, I think that's a pretty good place to end. And we've gone a few minutes over. I really appreciate all your time today. Thank you so much for joining us.

It's good to see you. Thanks for everything.

Yes. Thank you, Chris.

Take care.