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

Can you talk about Charter's long-term plan, wireless plans and what forms your strategy?

It's multi-pronged. The first was thinking about, as I mentioned, the people's definition of connectivity has changed. It continues to change. If you think about your own experience maybe 15 years ago, your broadband connection was defined on an ethernet cable coming into the back of your computer, and then it was how much WiFi you get inside the kitchen in the family environment. Now if you're like me, you get annoyed by if not reaching fully out into the yard the way that you think it should. And you want your Internet connectivity to go with you wherever you go, and you want it to work well, and you want it to work, frankly, the way that it does inside your household with that kind of throughput. And so our first thought around the mobile product was getting into an MVNO relationship that allowed us to naturally extend the connectivity where most of the bits were going over our WiFi anyway. So that was number one. Number two was that we have an attractive MVNO with Verizon. We have an attractive MVNO that allowed us to have profitability on a stand-alone basis, even though that's not how we manage that business. The third is the benefits to cable and whether it's a broadband point-of-sale or whether it's a broadband retention, the ability to bring significant benefits to cable was a big driver. And then finally, the option value that we've often talked about that's inside of our inside-out strategy that allows us to extend that connectivity maybe gives us the opportunity to provide something that's unique in the marketplace and categorize that more as option value than anything else in this.

For a number of years, Charter's discussed building its own small cells to offload traffic in certain areas of the LTE usage. Can you give us an update on your trials and your plans?

So I'm in a difficult spot there. I'm going to sound like a broken record. We're also in a quiet period as it relates to CBRS. However, we've talked at length about all the different trials that we've done, about what we'd like, what would make it work, didn't take work. And I guess, technically, I'm not even allowed to update on that, so I won't. I'll just reference people back to what we've said historically. And as soon as we're out of the quiet period, we'll have the opportunity to speak more.

It's been about 2 years since you launched wireless. What were the biggest surprises in like the past 2 years? When do you think you'll ultimately drive wireless penetration?

Look, I don't -- as I said back, I don't think there's been a major surprise. Frankly, we have Comcast to thank for a fair number of that. We have a productive JV with Comcast around wireless. And we're both regional operators in this, so we're competing against national operators. And they were extremely helpful to us in helping us launch in a way that there weren't a lot of unexpected surprises. And you can -- you could quibble around being in the retail handset distribution model. It's a little different than set-top boxes. They're highly valuable. It's not often they have people trying to steal set-top boxes. But you do have that as it relates to phones. So there's been things that we've needed to learn there, but there haven't been any big surprises. And our success in the marketplace is what we expected. And -- but it's getting better, too. I wouldn't say that we're at full operating capacity. You asked about the potential. We're getting better every day about the way that we go to market, the way that we transact. We're trying to transact at every customer interaction that we have, the yield that we're getting out of that distribution channel. And so I'd say it's still early days, and I think our ability to continue to accelerate growth is there. And I struggled to understand -- similar to broadband. You'd say broadband, why are you only at 50% penetration? Well, it takes a while and there's inertia. Same thing exists in the mobile marketplace. But when you look at it and think about -- we have the ability to give customers the fastest all-in connectivity on their mobile device because of the combination with our broadband and do it at some of the very best prices inside of the market. That's a pretty attractive proposition. And I think it has more runway to be able to market that way to drive continued penetration gains. So I don't see us tapping out for a long time.

And one last question on this subject, then I'll move on. But where do you think -- what kind of margin and cash flow do you expect with the wireless business when you finally reach scale? What do you expect?

We publish a -- maybe to our detriment, but we publish a stand-alone P&L as it relates to mobile today. We've done that really for the capital markets. That's not how we think about the business. It's not how we manage it. We've really done it as a defensive communication strategy with investors to illustrate to them, a, transparency; and b, that even on a stand-alone basis, without any benefits to cable, it has a path to profitability and it will get there. And that's really to demonstrate good stewardship to the capital markets. The way we think about it really internally is the combined product that we offer. We don't have a fixed line voice P&L. We don't have a fixed line broadband Internet P&L, and we don't have a video P&L that we look at and study. We think about the entire -- the totality of the products in the household in our consolidated cash flow that we're driving into the business and the potential for growth over time. And so we'll continue to publish that to the point where -- I think we've demonstrated that it could be stand-alone or is or could be profitable on a stand-alone basis. But then beyond that, I think it's just going to look like another one of the products that we have today.

Right. So let's go on to video. In the second quarter, you gained video subscribers for the first time since the fourth quarter of 2017. The industry as a whole lost more than 1 million subscribers, and that was the eighth consecutive quarter. Could you just -- like, what do you think the main drivers of outperformance were versus the industry, but versus even your cable peers?

Yes. Look, I don't want to slight our marketing and sales team because I think they've done a great job. I do think that the way that we go to market, I think the products that we have and that we've continued to develop as ways to segment the marketplace, the fact that we still have flexibility in some of our programming contracts may not last for much longer. But today, we have that flexibility, and it's worked out well for us and it's worked out well for the programmers actually, too. But at the end of the day, in Q1 and Q2, the biggest driver, I think, to our video performance relative to the marketplace is we sold a boatload of broadband. And when you sell that many broadband connections, there's a lot of video attached that goes along with that, both for the regular expanded basic as well as the streaming packages that we have. And so there's a sell-in that takes place as a result of just more sales transactions for connectivity. And so I've often talked about how having a very competitive video product is actually really important to broadband. But in this case, because there were so many broadband sales coming through, it had a real pull-through effect on video as well. I'm not here to tell you that that's going to exist forever. I think that because we're confident in ourselves, I think we have the ability to outperform the market. But I think the market continues to decline. And whether we have net adds or net losses, and I think it's probably more the latter over time, really what matters most to us is having a competitive video product that is very supportive of the broadband sales and retention. And we think about it, as I mentioned before, really about a package of services.

What do you think the floor is for traditional pay-TV subscribers? And what are the determinants of that?

Well, it's a little bit different than broadband. Broadband, I have a lot of confidence ability to predict where the market goes and where I think we are inside of that. The video space, because there are a lot of external factors out there, you have programmers that are, in many cases, falling apart. You have competitors who are often selling at a loss. And you have the same programmers now become -- trying to become distributors without an understanding or capability as it relates to security. All of which means that you're competing against either loss leaders or you're competing against free, which makes it difficult to predict, where does the market go and where is your place in that and does it get rational over time. And so far, that hasn't been the outcome. But it doesn't -- because there's very little profitability left in the video business for us, it doesn't really matter if we're in a net loss situation on video. What really matters is that we have a competitive video product that supports the other connectivity services to create broadband but also mobile. When you think about video's place in the mobile industry and mobile's impact on broadband and how those all work together, I think that's why video still remains important to us despite all those pretty ugly trends that I mentioned before.

Right. Well, some of the professional sports leagues have returned. The questions remain around college football and NFL. Would you be open if programs were willing to sell sports as a separate package?

I'm not the head of product, and I'm not the head of marketing, but I think we would be thrilled with the opportunity to have more flexibility in packaging our services, our video services to customers. And I think we could -- and pockets of the market really grow as a result of having rightsized video packages for consumers. I don't see that happening anytime soon because so much other content is really tied to it and piggybacks off the sports content, which is what makes the entire package as expensive as it is. But yes, if we had more flexibility, we'd sell more video. And we could, I think, collectively, as an industry, I think the traditional MVPD space can return to growth if we were allowed the flexibility to go package and use the information that we have about our consumers to actually grow the video space. But I don't see that happening anytime soon.

Right. Do you just try to need a more advanced user interface with voice remote, similar to what Comcast already has, Altice has?

So park the voice remote. And some of this comes about because of the legacy user interfaces, but we have a very modern user interface, and it's available for new connects on spectrum guide, which has been for a few years now. So it's a pretty populated base, and it's across all of our devices. So whether that's iOS or whether it's Android, Apple TV, iPhones, laptop computers, PlayStation, all the Samsung TVs, and it's the same spectrum guide across and we think it's actually very modern. And I think it's as good as anybody else's guide. I would admit, we don't have a voice remote right now. And because we were so focused on the integration, that wasn't our #1 priority and it's probably a piece that's lacking. But the guide itself is well liked and it's ubiquitous across our footprint, and it's available on all of our devices. And I think it's quite good. Beauty is in the eye of the beholder and we like ours.

Right. I'm waiting for your voice remote, but anyway. Can you talk about Spectrum's pricing and packaging strategy and how you believe it differentiates you from competition?

Yes. So our view on pricing is to keep it simple. We don't -- our products don't come with contracts. We generally don't charge taxes and fees. We like to have low prices per product with very clear roll-offs of where it goes and ends up in a rack rate. And the idea behind that is you incentivize customers to take more products in the household from you, which means that you can actually have low prices but increase your revenue per household relative to what you would have done otherwise. When you do that, you -- and not have a great mixture of different tiers and try to price differentiate along the way, try to put the best value product that you can enhance to all customers, they all want high speeds and they want it at a fair price. They may be leaving something on the table when you do that, but your operating infrastructure ends up being much more simple, clear-cut, it's easier to train, you get better quality. All of our employees are effectively in-sourced, and so they have a training and progression path with us. It makes it easier for them and it makes the quality of our service better, which means that we have less calls, which means our operating cost per customer goes down. And it means that we have lower churn, which means our ROI per customer relationship goes up despite the fact that we had lower pricing. And all of that's actually somewhat easy to understand. It's difficult to have the discipline to consistently go implement and resist the temptation to take rate just because you think you can. When you do that, you impact your volume, and our strategy has been much more about growing the marketplace, putting our product in the hands of more people and, by doing that, getting better ROI and customer acquisition. You're getting a better ROI on the network investments that we make with higher penetration capacity and a higher penetration per household of products, which means that despite having low pricing, you can -- and having high investments, you can have actually better EBITDA margins and you have better free cash flow over time. And that's been our operating strategy and it's worked well, and I don't see it changing.

So on that topic of margins, volume margins have been growing quickly. You're still relatively at the low end compared to other public cable operators.

I would jump in, we're the highest growth and that has an impact on the margins, too. And so you can't look at margin without taking a look at growth, but yes.

You are the highest growth, but where do you think -- where do you think you'll drive margins over time? And what will you do to achieve that? Do you need to change?

I don't -- yes. I think growth -- kidding aside, I think growth has an impact on your short-term margins. But when you're growing high, it means your effective margin is actually much higher than what you're showing from a financial statement perspective because you're driving so much growth and investment in that activity. At some point, you'll see that continue to -- and we've been continuing to increase year-over-year in a pretty steady way. I don't expect that to change, but it isn't actually how we manage the business. We don't look at margin when we do our budgets. It's not even a point of consideration for how we look at the financial performance. We think about it in a multiyear view of what's the free cash flow generation in total for the company and what's the free cash flow per share generation over time and what's the growth rate on that look like. And importantly, not just over a 1-, 2-, 3- or even 5-year time period, but what's the sustainability of the free cash flow per share growth rate that you have and the things that you're doing today. And so we would happily give up free cash flow today or margin today for the opportunity to have higher free cash flow per share in a reliable way in the future, and that's the way that we've really managed the business. That doesn't mean -- I'm not sitting here saying that I don't think EBITDA margins will continue to increase. They have, and those factors that exist inside the business are lowering cost to serve or customer relationship. The product shift mix -- mix shift that's going on in the business, all of that argues for continued margin expansion growth. But I don't feel that -- it's not the litmus test for us, how we compare to others. There's nothing structurally different about us than others other than the growth rate and the way that I think we think about the business for a longer-term growth profile.

Right. So you just said your pricing strategy has been focused on driving unit growth. So talk about the commercial business, but so many small businesses are struggling to survive due to the current pandemic. Has that caused you to adjust your pricing plans at all? And when do you think you'll see a convergence of revenue growth to customer growth in the SMB side, small mediums?

Yes. So our pricing was already very attractive relative to the competition with higher speeds, generally better product offerings. What we have had to do, particularly in the SMB space, but also the enterprise spaces as businesses were shut down, particularly early on in the pandemic, and we disclosed the amount of this activity, but we had a fair amount of customers who went on a seasonal program. They were shut down either fully and so we suspended their services and their billing or certain lines of their business. For example, a bar-restaurant that was still open for takeout, maybe we suspended their video but kept their internet and turned up and running. And so we worked with those customers to actually modify their plans that way. Most of that, if not all of that, has now ceased as the economies have broken back up, and there's less need for that. It doesn't mean that these businesses are all doing well or that all of them have survived, but they have a very attractive product from us today, and it's not going to be our product pricing that dictates whether they survive or not. If they do, they have the best product, the best pricing they want in place. And if they don't, the businesses that come behind you replace them, we'll look like a natural place for them to start as opposed to what would have been the incumbent. So that's why I think our opportunity to grow at the back end, once we're through all of this, may actually be enhanced.

Right. Well, of course, another area that's been challenged due to COVID has been advertising. Can you talk about your expectations for the advertising market for the back half of 2020 and into '21?

Yes. As you know, advertising is very near and dear to me. And David Kline, who you know, and the team there, they've done a really fantastic job through the most challenged part of any of these businesses during this crisis. I mean what we saw really in the trough inside of April was pretty impressive in terms of an advertising collapse. And our team stayed fully engaged working with all of our customers, even though they weren't buying additional spots at that point in time. But we've done ways to work with them to provide them free video, spot production, bonus campaigns, different type of activity along the way. And as I mentioned on our Q2 call, from April to May to June, and I think I might have even -- I don't remember, I might have given a little indication how July was going as well, we've seen a steady progression coming out on our core advertising. So that core isn't totally repaired, and it -- maybe it will be by the end of the year, but that depends a lot more on the economy and stimulus. Political advertising in the back half of this year is going to be a godsend, and it's going to cause us to feel a lot better about the back half than maybe we would have otherwise. But the key points, our core is recovering long term. There's nothing that's impaired there. And political is going to cover up in all likelihood for Q3 and Q4 some of the ongoing difficulties that we may still have. But it's improving, and I feel pretty good about it.

Two quick topics. I don't really have time, but I just have to cover 2 more things. On CapEx, you said that capital intensity will decline. How should we think about that in 2021 and beyond? Where do you think it will go?

So some of that depends on growth, and we don't want to be pinned down. If we had -- if we saw -- if I saw the opportunity to grow faster and we had to go against what I'm about to tell you, we would happily do it, and we would explain ourselves as to why. But I expect our cable capital intensity to continue to decline for the next couple of years absent any big opportunity to really grow. And so if something changes on that front, we'd certainly articulate that, isolate it and tell people why, but that's not what I see today. That's really the outlook we have. I don't want to give a dollar forecast. We're not going to provide guidance, but I think the trends that you see in the business today are set up to continue for a decent period of time.

And then finally, of course, the obligatory, how do you prioritize capital in terms of either reinvesting new business, share repurchases, M&A?

Yes. I think since I got to Charter in 2010, and Tom was announced in late 2011, it hasn't changed. Our view is if you have an opportunity to invest in higher ROI projects inside the business, that's the first quarter call. Why? Because it enhances all the other capital structure activities that you do and it gives it longevity. So investing in high-quality internal ROI projects. Accretive M&A, by that, you have really the litmus test, is can you buy somebody else's shares at a more attractive ROI than your own? I mean, for example, cable operators. And there was some confusion around that on our last call, but cable M&A in particular, can you buy somebody else's shares at a more accretive rate than buying your own because of synergies or accelerated growth rate? And then finally, if those don't exist or if you have additional excess free cash flow, we do share buybacks. But those share buybacks, they work best when you have a fantastic ROI in the core business and you continue to invest in the core business, and it's a virtuous circle in terms of how attractive those become over time based on how else you're deploying capital. And that's why investing in the business is first quarter call for free cash flow.

Okay. With that, Chris, we're over time. But thank you again for joining us this year. It's great to see you.

Thanks for having us. It's good to see you at least on video. All right. Take care.