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

All right. Well, welcome, everyone, back to our next session here. It is my pleasure to welcome back to Communacopia Tom Rutledge, who is the Chairman and CEO of Charter. Tom, thanks for being here with us today.

Thanks, Brett. Thanks for having me. Good to see you again. Unfortunately, we're not together, but it's good to see you, hopefully, in this meeting.

Hopefully, it's the only time we have to do it this way.

Let's jump right into it. Your second quarter results featured industry best subscriber trends across broadband, video and even in wireless, yet we are in the midst of a pandemic and a recession. And so how do you think about Charter's key priorities and your ability to sustain this growth momentum as you continue to manage through the risks associated with COVID?

Well, you're right. It's -- I mean it's obviously a difficult operating environment and we didn't anticipate it. But we did anticipate in 2020 that we'd have accelerating growth. And that even in the first quarter, before the pandemic, we were growing and accelerating our growth, which was already good. And so our big challenge has been to execute the growth strategy during a very difficult time. And so far, so good. I mean we've really done well. And obviously, we had tremendous growth in the second quarter. Part of that is a result of the pandemic, and part of it is the difficulty of the pandemic and our ability to execute through it. Our strategic goals for the company have not changed as a result of the conditions that we're in. We want to drive penetration and get the favorable economics that increased penetration gets on a fixed infrastructure. So as our penetration goes up, our average cost to serve each customer goes down and every customer becomes more valuable on the increment. And so we're all about creating customers. And we continue to invest in the network. Fortunately, for us, we just came off a big infrastructure investment to take us to 1 gig everywhere, and so we have lots of capacity in the network. And we're also in a very fortuitous circumstance with our other strategic initiative, which is frictionless customer service experience, which is both cheaper and better from a consumer experience perspective in the sense that you have less transactions, but you also have the digital interface that allows consumers to connect to us without having to call us or without us having to do a truck trip. So we had gone to a self-serve model. We were fairly far down the road with that. At the start of the pandemic, we were about 60%. And at the height of the lockdowns around the country, we were over 95% self-installation. And our ability to go from 60% to 95% was a good -- we were in a good position to do that, but it was a real execution issue and we've successfully done that. So I would say that the pandemic has created operational and changes in the marketplace to some extent, but more marked operational challenges. Our performance in the market is consistent with our overall objective, which is accelerating growth, but it's higher than we would have forecast because of reduction in churn, people not moving. The stimulus checks have been helpful in the sense that people have incomes. But the reality is the product is really valuable. The product's valuable from a price perspective relative to all of the things you can spend money on. And particularly, you have nothing else to do. And so it's a very attractive product. It's a given good, so to speak, as an economic notion. It's worth a lot of money even in a down market. And so our demand is up, and our churn is down and our ability to execute is pretty good. And so we've had very good growth.

So how do you think about the durability of some of those trends, the higher demand, the lower churn? To what extent do you think that it's unique to this environment, and as things recover, you're going to likely see some of those numbers move back to their old run rates? Or do you think that this pandemic has really kind of structurally increased the demand and the stickiness of your product?

Look, I think we're only about 50% penetrated from a broadband perspective. So we've got lots of upside. And the continued decline of satellite video actually helps us in the marketplace in the sense that a lot of video customers who downgrade or kept DIRECTV, for instance, or DISH, didn't subscribe to our broadband. And as they come loose from their satellite relationships, they're reevaluating their broadband connections as well. So that's affecting us in a positive way. But look, I think it's still a very competitive environment. When the pandemic is over, I think you'll get more move activity and there'll be more friction in the marketplace, meaning customers in transition and that means that you'll have higher churn rates, which will affect penetrations. But the net of all of that is, I think that where we started 2020 with an accelerating growth rate is still the basic trend that will continue after the pandemic.

Yes. A question we've gotten as investors look at the really phenomenal second quarter results that you had and they think about some of the factors. You had a really popular 60-day free broadband promo targeting a particular demographic. You also gave some payment flexibility to some of your customers, as you alluded to, that helped you on the churn side of things. And so as we sort of begin to move into the back half, we're almost through the third quarter here, can you give us an update in terms of the success you've had at retaining some of those Remote Education customers as they've rolled off to 60-day promo? And are there any other significant swing factors in the back half of the year, whether it's to change in the stimulus environment or something else that are relevant in terms of how we think about what are right said about expectations are for your business?

Well, as you know, we did a special offer for Remote Education. We hooked up over 450,000 customers as a result of that particular offer. Those customers, many of them subscribe to video and the full range of products that we had. And those additional products were not part of the free 2-month offer. So those customers actually ended up looking like our customer base, and they're behaving pretty much like our customer base. And so they're good, solid customers. And they count as customers. And their churn rates are similar to our overall underlying churn rate. So we created a -- I think we share shifted as a result of that strategy. And as a result of that, we picked up video customers and we picked up broadband customers that we wouldn't have had otherwise, and they're good customers. So that's good to see in our numbers. We took a revenue write-down in the second quarter associated with Keep America Connected. And we restructured all those accounts. And all those accounts are behaving as we would expect as well. So really, going forward from a write-off or bad debt perspective, we think our growth will be clean and good and that the customers that we have created here to date have been good customers and normal customers in terms of their behavior. And so how will stimulus affect us? What will -- we have -- we could see the stimulus in the way people paid their bills. They look very much like the way income tax refunds look to us, but we can see when income tax refunds hit and how people pay off their bills. And so there was a better payment record during some of the stimulus payouts. And the question is, ultimately, how will people incomes be maintained? What the economy will look like going forward? What will the unemployment rate be? And how will that impact us? It's hard to say that whether we'll have a -- how significant that economic drag will be. But as I said earlier, our products are pretty valuable. And even in a high unemployment environment, people want our products and they have a lot of value to them. And so from a priority perspective, the demand actually increased and may affect people's ability to pay, obviously, so you get shaving and all of that kind of behavior. But I actually don't think our subscriber base is at risk.

All right. Well, thank you for that update. You mentioned the Remote Education promotion that you ran, which was obviously very successful. It expired at the end of the quarter. It seems like what was great about that promo was that it allowed you to quickly accelerate penetration into a demographic where you clearly had been somewhat underpenetrated, and we can talk about your overall penetration opportunity in a minute. Are there other demos that you think similar offers or targeted promos could also help pull forward that demand opportunity?

Well, yes, when we look at the whole marketplace out there, there are opportunities and there are places where we don't do as well as other places based on demographics, for instance. And we have a very sophisticated targeted marketing strategy to try to pull through all of the opportunities that we can find on a very targeted basis. And so we really are marketing down at the household level and I think successfully. So the Remote Education offer was successful from a sales perspective. But we have lots of other sales offers and strategies that are also successful that are contributing to the overall growth. Multicultural marketing is one of those, which we've done really quite well in, and we've overperformed in the multicultural marketplace relative to the traditional marketplace.

So I told you I wanted to come back and talk more about just your penetration opportunity in general. And you alluded to it earlier, only about half of the customer locations in your footprint are your customer, which is interesting because you do typically provide the highest quality products and services in your region. And most of the people who live in your region want the types of products and services that you have. And so what are some of the steps you've taken or additional steps other than just demographic targeting that you think can help show the customers who don't have your service that your services are maybe more relevant to them than they previously thought?

Well, that's always been our challenge. There's nothing new about that challenge. It's -- people are inert and driving yourself deeper into the marketplace and having a market-facing strategy that's driven -- market-share-driven strategy, which we do, requires a lot of effort to convince people to go through the aggravation of switching providers. And we've had an accelerating result as a result of the products and service that we have. And so I feel very good about our execution capabilities and the tactics that we use to move the market. But it's a very competitive world out there. And that in the video world, you've got over-the-top providers, you've got satellite providers. Broadband world, you've got cellular companies, you've got traditional telephone companies. So I don't want to understate how competitive it is and aggressive the competitors are. We do have facilities-based competition. It's actually done really well for the country, in my opinion, because we have a great broadband network as a result of it. But we continually try to improve the quality of our products. We try to make our video better. Our whole app-based video system is really attractive to consumers. Our broadband speeds, we took up our minimum broadband speeds to 200 megabits in most of the markets -- in the majority of markets we operate in. As I said previously, we invested a lot of money in increasing our capacity and increasing our minimum capacities, so that we have better products. But we also have built this customer service model, which we think is a differentiator. And our ability to do self-service and our ability to provide high-quality service affects our ability to move in the marketplace. But -- and we're getting better at it every day, and our rate of growth is accelerating as a result of it, but it is not -- it's not a cake walk. It's a challenge out there. And I think we're executing. Our people are doing well. I think we -- our people worked through the pandemic as an essential service. And as a result of that, our customers' perceptions of our service have gone way up as the way they rate us. We were able to provide excellent service throughout the whole shutdown. And obviously, it was challenged, but it was excellent, relatively speaking. And so we've performed well as a group, and it's really about execution, but more than it is about differentiation.

I do want to spend a little more time talking about competition, though, because as you noted, you've always faced facilities-based competition. And because of the significant investments you've made in your network, which ended up being very well timed without being able to know we'd have a pandemic, the quality that you offer right now is very high versus your peer competitors in most instances. But when we look at what's happening, AT&T has completed a major fiber expansion. They said yesterday that they could continue to expand that fiber footprint. There's a few telcos going through restructurings that have talked about a desire to deploy more fiber when they've fixed their balance sheets. And then you have a range of 5G projects, whether it's Verizon 5G Home or some of the regulatory requirements T-Mobile has to meet as a residential 5G broadband provider. So it seems like there could be more options emerging over time. How do you think about those new services as threats? And what can you do to ensure that you're staying a step ahead of them?

Well, that's -- I think you've described the marketplace pretty well that the -- there are emerging threats. And when we think about competition, we think about it years down the road and we think about where our infrastructure is and how it -- what is capabilities will be in the future, what demand might be in the future and try to put ourselves in front of that so that we end up at this point in the future with a better mousetrap, a better product set and a better service set. And so we continue to invest in the network to make sure that's true. And the great thing about our network, and I think the great thing about the 3.1 upgrade that took us from 200 megabits or 300 megabits to a megabit -- or a gigabit, excuse me, of capability everywhere. The thing about that upgrade that is really significant is that on a relative basis, it was pretty inexpensive. The cost per passing in that case for us was less than $10 per home pass to get that kind of capacity out of our network. And we have a strategy of moving forward with what we call 10G that will take us up to 10-gig symmetrical. And so we've built specs to do that. We built those specs with inside the existing infrastructure. And it doesn't mean there's -- that it's cost-free by any means, but capital investment will not need to be made at the same relative level that we think competitors will have to make. So we think we have -- we'll have equal or better products at a lower cost of investment going forward. So that's the beauty of our infrastructure and its long-term health. And we're trying to invest in that for the future so that we stay ahead of the pack and we keep our prices and structure low. And penetration also keeps our pricing lower because the higher you're penetrated, the lower your average cost per customer is against a fixed infrastructure. So go ahead.

Yes. So thank you for that. When we think about your growth potential, it's not just increasing the penetration of the homes that you pass. You continue to expand your footprint, I think you add about 1 million homes a year to the coverage. And you've also signed up for the rural digital opportunity fund. And I think you might be restricted on talking about that. So I think really what I'm just interested in understanding is, how do you think about footprint expansion as an important element of growing the company?

It is important. We've been growing -- when we did the Time Warner, Bright House merger with Charter, which is now -- it will be 5 years in April that we actually implemented the merger, it seems like my whole life, I have been working on that merger, but the commitment there was to build a couple of million additional pass as part of the consent decree that we signed, which we did. And so we've been expanding the network and household formation is up interestingly. So there's lots of construction going on, and there's still lots of areas that are unserved. And interestingly, as your penetration comes up, the -- if you have confidence that your penetration is going to be higher both today and in the future, then your ability to expand in a lower density area gets easier from an economic return perspective. So as our penetrations go up, our footprint can expand at a faster rate. And so we look at that as an opportunity. And on the increment, it's a nice growth, but there's -- the big opportunity is increased penetration, but there's a nice opportunity to continue to build out new home growth. There's a nice opportunity to build our contiguous low penetrated or low density contiguous facilities to existing facilities in contiguous areas to existing facilities. And there's a -- and that opportunity to build into low density gets better as your penetration goes up. So -- and it's also -- the public wants it. The public wants broadband in low-density areas. And so I think it's in our interest to make sure that we're part of the solution for that.

In the past, you've always favored subscriber growth over ARPU growth as the principal mechanism for growing your broadband revenues, but it certainly seems like there are a number of potential tailwinds to broadband ARPU. I mean you're increasing your speeds and demand for higher speeds is going up. That's typically driven people into higher tiers. The perceived quality of -- and importance of high-quality broadband continues to go up. And cord cutting is sort of eliminating a degree of intrinsic discounting that had always been embedded in broadband pricing and, of course, it opens a wallet. And so a question we always get is, is there a way to have a little more balance? Or how do you think about the right balance between driving growth through ARPU and driving growth through subscribers? And what's the trade off?

Well, we think that there is upside to future revenue based on higher capacities and higher levels of service, including lower latencies and other kinds of capacity enhancements that might make new products work. And speed itself is a value driver, and we have more and more customers taking higher levels of speed, which is all positive from an ARPU perspective. We also have, at the same time, an accelerating growth rate, which is -- and we use promotional pricing to drive that accelerated growth rate, which then steps up in the future to the nominal rate to the published rate. And so the more people you have in a promotional window, it actually pressures ARPU the other way. But it's a good thing because you're creating value, you're creating customers. And so you have all those forces that work. But the net of that is that you have a product that continues to be valued, and you have a fairly easy relatively low-cost capital infrastructure environment where you can create additional capacity and create new products to meet that demand and drive future revenue. So I think we're in pretty good shape, all in all.

We started off by mentioning that it wasn't just your broadband trends that were industry-leading in the second quarter, it was actually a lot of different product categories. And one of them, surprising to me, was in wireless. You added 325,000 mobile lines in the second quarter despite distributing to less than half of the households in the country. If I was to proportionalize that, that's the equivalent of a national operator having over 800,000 net adds in the quarter, which would have just been record setting, particularly in this environment. So a question we keep getting is, what drove such strong performance in the second quarter? Who are you taking share from? And how sustainable do you think this is?

Well, I think it will accelerate. I think we're just getting going in mobile. And I would expect it to accelerate throughout this year and going forward. It's -- again, it's a valuable product that we're offering as part of an overall connectivity relationship with the customer. And when people buy mobile from us, they get a low-cost, high-quality mobile product, but they also actually get a better product than they had previously. Because mobile customers who use their mobile devices in our WiFi environment get faster speeds than they get off their mobile network. So our customers who subscribe to our mobile service are getting faster, better quality products than they were previously and they're getting them at lower price. That's a really good situation for us. If you look at people's average mobile bills, they're really large, they're much bigger than the broadband bill. And so we're able to reduce people's overall spend. They add -- they're accretive to us on the increment. And they actually end up with a better product and a better service than they had previously. And so we think we can continue to drive mobile growth as the new triple plan. We are a bigger wireline provider than the traditional wireline telephone companies and wireline voice. I don't see any reason why we can't continue to make mobile grow like we make wireline voice to grow.