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

Good morning, everybody, or good afternoon over -- for those over in Europe. I'm Ben Swinburne, Morgan Stanley's media and cable analyst. Please note that important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures, appear as a handout available -- there is a registration area, but certainly on the Morgan Stanley public website. I need to amend that for the virtual conference. We're excited to welcome back virtually this year, Charter Communications. Chris Winfrey is the CFO, a role he has held since all the way back in 2010. Chris, it's great to see you again. Thanks for being with us this morning.

Thanks for having this again, and I look forward to be able to do this in person once again.

Yes. This is the one conference everyone really wishes wasn't virtual, so...

Yes.

So it's been quite a year, Chris, I'm sure you'd agree. You and I have talked through the year about how the business has been impacted and how your company has operated. I'm wondering if you could step back and as you look back at the last 7, 8, 9 months, what have you learned about the business, how your customers reacted, how your employees reacted? And what adjustments have you guys had to make to sort of navigate all this? What could you tell us that maybe we don't know already about COVID and Charter?

Well, I mean, stating the obvious, I think like everybody, from a business and from a managerial capacity, we were -- none of us had ever been through anything like this and all of us were trying to figure out what the impact was going to be to the business. Pretty quickly, though, almost immediately, we realized we had a unique role in that we needed to not only maintain the broadband and video services and communication services that we provided, but we needed to significantly expand them, both for capacity as well as higher customers. And so we pretty quickly moved to take care of our employees, make sure that they were in a good position, both physically as well as even from a compensation standpoint for our frontline workers. And the Charter employees, we embraced our role in this pandemic, and we take a lot of pride in what we've accomplished, and it's gone very well. From a customer and business perspective, we had an operating model that was designed to work in all different types of climates, economic climates, regulatory climates. The reality is, I don't think we had ever anticipated that it would deal with the pandemic, but it did. And all the things that work to make our operating model work inside of those other climates have worked in this environment as well. So as I sit back and think about our customer and our business, our employees have reacted well. We've grown at a much faster rate than we even anticipated to grow. Nobody could have seen how this year was going to develop. But I think net-net, in the end, we're going to be better off surprisingly as we come out the back end, hopefully, as a country and larger.

So when you think about how you operated in 2020 and continue to operate, whether it's across how you position your products, your marketing strategy, billing, customer segmentation, everything, what do you take into the future that is going to help the business operate better that isn't sort of unique to the COVID environment?

Yes. All the attributes -- I talked about our operating strategy, but all the attributes of our operating strategy, really it's been an affirmation of what we're doing. And I think it really gives us confidence and validation that we need to continue to do that, and if anything, do more of it. But if you think through some of the key tenets of that operating strategy, whether it's from continually investing inside of our network and our products, not just for the current generation of usage and products, but for the future, that's paid off well, obviously, with the capacity -- unexpected capacity increases. Or whether it's the employee base making sure that we pay particular attention to having in-house, onshore, high-quality work, well-paid employees who have a career path at Charter, and as a result, pay more attention to the service transactions and result in better customer service. Or the way that we price and package and do that in a way that's attractive and value-driven in the marketplace with products that nobody can replicate. And I don't know that there's a big fundamental change in terms of how we operate going forward other than to instill confidence in us as management. But in the employee, if you think about the employee base, the ability to get behind your operating strategy and what you're doing. And employees see how we operate, the culture that we create, the way we behave inside the community, so do our regulators, and we hope that our shareholders do as well, the consistency with which we go to market. And year in, year out, despite some push from others at different times for us to do more short-term-type activities, we've always resisted that. And I think that's paid off in our operating strategy results now and put us in a position to really grow faster, frankly, over time.

Yes. 2 areas I wanted to focus in on this topic, Chris, one is bad debt. And just I would have thought that would have been a real source of margin pressure this year and it's the opposite. You guys actually flagged it in the other way on the last quarter. I'm curious how you think about that over time? And then also, you really have probably had some customer reluctance to let people into their homes for installation purposes. So as that opens up, what does that mean for the business?

Well, I don't know -- let's talk about bad debt first. Given the economic crisis that's come along with the pandemic and the fact that the subsidies really had stopped, their stimulus had stopped as of July, who would have thought that we would end up with the best payment history for customers that we've ever had despite the economic trends. And so I think what that has demonstrated is now more than ever the important nature and the value of the products and services that we provide. So it wasn't just that the rate of unit growth accelerated, but people's willingness to pay and pay early and pay on time. We've never collected the way that we're collecting right now, and that's starting to return to normal, as you would expect. But I think that was -- you could call it a validation, but honestly, it was a surprise that -- how that behaved. I do think that returns to normal. The other piece you mentioned is digital self-care, and whether that's the self-installation rate. We went from -- at the end of last year, we'd been -- around 35% of our installs were self-install. We were already moving up pretty rapidly inside of Q1 to 50%, but overnight, it essentially went to over 90%, and that's backed off to just over 80%. But I don't know that, that's really going to dramatically change from there. So it caused a pretty fast acceleration to where we ultimately would have targeted to be. And given how well that works and customers' desire to be able to do an installation on their own time and our ability to scale that and to do it well, I don't think that goes backwards. I think we'll continue to get better at it, meaning that you won't have to do a rescue terminal call or whatnot. But I think our digital self-care has permanently been increased along the way. So there are unexpected impacts or accelerations that have come out of this, some of which is going to revert back to normal, bad debt being a good example. And some of that, I don't think it will, digital self-care, being the other.

Okay. Yes, the increase in self-install actually made the Liberty investor slide yesterday. So obviously...

Good. Somebody had a good installation.

You and Tom on the last earnings call talked about your network strategy, and that was something that I noticed just because you typically aren't -- it's not an emphasis per se in the prepared remarks. I'm wondering if you could talk about DOCSIS versus fiber, not that it's a mutually exclusive conversation. But there's been a lot of talk about fiber builds from your competitors, in fact, AT&T was speaking just before you. We talked to Dexter at Altice yesterday about their fiber plans. Why did you feel a need to emphasize it? And why are you confident that a DOCSIS strategy has long term -- still has a long runway for Charter to stay ahead of the competition when it comes to bandwidth capacity, throughput, et cetera?

Sure. Well, look, one of the points that we wanted to get across in the last earnings call was that we are growing against all competitors in all markets, irrespective of the competitive infrastructure, despite what somebody else may have said otherwise, and our results really demonstrate that when you compare that to the competition. And I guess another point that we wanted to make is that DOCSIS 3.1, which is fully deployed across all of our network at a really low cost of $9 per passing, it has a very long runway with mini tools that continue to expand the capacity that we have within the existing DOCSIS 3.1 platform. We can get to multi-gigabit speeds at 1-gig symmetrical just using DOCSIS 3.1. So it has a long runway for growth. There isn't a looming need for an upgrade to the plant. We are investing in DOCSIS 4.0 separately. So that when the time comes, when there's unique customer demand, when there's products and services and incremental revenue attached to it then at a relatively low cost, we can upgrade the network to DOCSIS 4.0. But there's another pressure to go do that today because of the significant capacity that we already have in DOCSIS 3.1. And to the extent you have 1-gigabit symmetrical multi-gig downstream speeds available, we're fully competitive today. And importantly, that network, it's fully deployed across 52 million homes today. And our path to upgrade is dramatically lower cost than it would be for somebody else to go try to replicate what we have. So fiber or DOCSIS 3.1 or fiber or DOCSIS 4.0, we're technology agnostic. But for the fact that we have planned already today that it works now, works in the future, much of the extension that we do on new build is fiber-to-the-home, but a lot of it's still traditional HFC because of how well it works as well. So it just depends on the circumstance. But there's, I guess, to go back through it, we're competing very well. We're winning at pretty similar growth rates across every single competitor that we have across all types of competitive infrastructure. There's no major looming upgrade that we need to do, and we have a path to upgrade at a lower cost than our competition to the extent that there's a customer demand or new products or new revenue streams that command it.

And without spending the rest of this interview on network terminology and et cetera, can you tell us how you do upstream at 1 gig under DOCSIS? Because I think in this Zoom world we're living in, there's a lot of focus on upstream, particularly when it comes to fiber versus DOCSIS.

Sure. Well, the vast -- the majority of our plant day is still allocated to traditional video, and that takes the form of HD, SD, MPEG-2. And so you can take down SD, you can convert from MPEG-2 to MPEG-4 relatively easily. You can put more of the HD content into switched digital video. And you can shrink the amount of bandwidth allocation to your video and increase the amount of allocation to your broadband DOCSIS 3.1 platform. And you can aggressively convert your 3.0 modems into 3.1 modem so that they make better utilization of the bandwidth. And all of that gives you tremendous runway for bandwidth, not only on the downstream, but also on the upstream. There's a subsequent move that you can make even inside a DOCSIS 3.1, which could be high split, which really enables you to bring the overall capacity of the network up from 850 megahertz today to 1.2 gigahertz at a relatively easy upgrade. We don't need to do that today. If we did it, it might be targeted. But we have a bunch of tools available to us today at a very low cost to be able to go make those types of moves.

And so I guess it makes sense that if someone wants 1 gig up, you can deliver them a new modem and it could be success-based.

Correct. And we've been deploying only DOCSIS 3.1 modems for a really long time. So the population of 3.1 modems is already very, very high.

Got you. You mentioned before, footprint expansion, which something that's become much more of a topic in the cable industry over the last year or so, including some very low-density areas. So I'm wondering if you could talk about why it makes sense for Charter to extend their network or your network into areas where the homes per mile is quite low. And is that -- who are you competing with in these markets? Because whenever you hear about footprint expansion, people start to worry you might start competing with other well-capitalized cable companies.

Yes. Well, look, expanding our footprint, particularly into rural environments, isn't anything new for us. We've been doing it for the past few years. Some of that's been voluntary, and some of it's been as part of the merger conditions that we had, both nationally as well as Upstate New York. And what we've been able to do on the way is we've actually scaled our operations significantly to make this quite the machine. And we've gained a lot of confidence in our ability to go get penetration in what the ultimate penetration curve looks like. So that gives you confidence in your overall ROI. We're investing in areas where the economics and the payback are challenging to begin with for the first operator to come in and there really isn't any ROI for a second operator to come in, which means that you can have a lot of confidence in where your penetration ultimately will land, and we've seen that already. Now, to be fair, the cash-on-cash payback for these projects, it's much longer than what we typically go do. And the IRRs, though, because of your ability to have confidence in the penetration curve, is actually very high. And it's very simple math of where you get to high IRRs, but the cash-on-cash payback is long. And -- but the riskiness of those cash flows is relatively low for the reasons that I've mentioned. And so we think it's attractive investment to make. We think there's a bunch of other tangible and intangible benefits that we're not even baking into our analysis. And so it's an area of focus that we've had for the past couple of years, and we've been hoping and are accelerating those efforts.

Yes. Maybe one more on sort of network and competition. I asked Dexter the same question about 5G. I'm wondering -- I don't think there's much of an argument out in the market that 5G is a better mousetrap than either DOCSIS or fiber, but there is some concern about going after the more price-sensitive customer. My expectation is T-Mobile will announce something loudly around 5G Home in 2021. So I guess my question to you is, do you think about how you price your product and how you segment with an eye towards competitive threats? Or are you so dismissive of the technology and the business case that you think it's something we don't need to worry about?

No. Look, I think if we stood still and we didn't invest in our network and we didn't develop it the way that I was describing, I think the fear that 5G fixed wireless could pick us off in certain areas is real even if it was only at the edge. The reality, though, is that we've always invested in our network. And we've always stated this concept of a wireless threat isn't new. It existed with MMDS, LMDS, 3G, WiFi. WiFi was going to eat our lunch. We are WiFi. And it existed with WiMAX and it existed with 4G. And what happened is we always stayed ahead of the investment cycle and made sure that our network not only had faster speeds, but also it could scale better. And we have, as I mentioned, a 2-way network that's in front of 52 million passings today, and we are committed to continue to invest in our network and stay ahead of the competition. Frankly, competition is good. It's what forces us to continue to make sure that we do invest that way. But I think if we continue to maintain the consistency of what we've done historically, we will be fine. But we are competing against very well capitalized, in many cases, much larger companies than us, and we pay attention to competition, and we need to stay ahead of it. so the things that you mentioned don't take place.

Makes sense. I had not heard of WiMAX in a long time, brings back some memories.

And probably scars for some, but yes.

One question I know you've gotten a lot, Chris, but I'll take another swing at it. This year, we've seen, our estimates anyway, the broadband industry growth rate almost double from 3% to nearly 6%, and we all know that COVID has helped that growth rate, if not been entirely responsible. But when you think about '21, '22 and kind of pull forward versus normalization, what would be your advice to us and your investors and sort of expectations for the next couple of years, relative to what we saw in 2020?

Yes. I'll start off with our competitive nature. You mentioned 6%, just for the record Charter is at 8.8% internet growth year-over-year, and we were much higher than the industry even prior to this, and we expect to be in the future. Now that competitive nature aside, 8.8% is a pretty high growth rate. And we did benefit from the need for our products, which I think has a permanent impact on our growth rate over time because it's demonstrated the value and the need for what we provide. That being said, before we get over our skis, I don't think that in 2021, 2020, unit net adds is going to be the right comparison. I think 2019 is probably more of a fair comparable. It doesn't look more like 2019 or does it look like what we would have expected this year of a slow acceleration on that, I don't know. But I think it's -- to set the table right, it's -- 2020 unit adds isn't the right comparison, it really should be 2019. As it relates to the P&L, I mean if you think back to 2020, all of the unique items that are flowing through our P&L this year, and it's not going to be all inclusive, but we had a significant wage increase for all of our hourly workers. At the same time, we had an artificially depressed amount of service transactions because people didn't want service in their home. They didn't want to -- they weren't moving. There were -- none of them were upgrades or downgrades. And so we had stasis in the marketplace, which lowered our cost to serve on that aspect. We had bad debt, as we talked about before, growing just the opposite direction. That's, I think, temporary in nature. We had sports rights cost, which get amortized in many cases based on the number of games, and we had a lot less games this year. And so some of that will bleed into next year, not only you have a normal year, but you have due to the NBA season, some of those games flip into next year. We have medical costs flipping left and right between different quarters. We have political advertising inside this year. So our finance group and financial planning analysis group, we have a lot of work in front of us to go make sure that we clearly lay that out for shareholders, so that they can see all the puts and takes that existed in 2020. And to a lesser extent, some of the puts and takes that will still exist in 2021, so that we can all take a look at it and say, okay, now I understand what the normalized growth rate is. And put it out in a way, which we've started to do through these COVID schedules, that investors can take their own view as to what they think is recurring and what's not and to try to get to a better underlying growth rate. We've always taken the view that we'd rather put everything on the table and be transparent with it, and it's upon us to continue to do that. So we'll work through that during the course of next year. I think next year will still be a fine growth rate. But between the quarters, if you think what happened in Q2 of this year, if you think about political advertising, if you think about sports rights, it's going to be a little wild. But I think we'll still have a good year next year. It's just going to be -- there will be some volatility along the way.

Yes. Yes. That all makes sense. Yes, I can't remember what slide number it is, 19 I'm guessing. I can't remember from the investor deck. It's something like...