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

Okay. Good afternoon. It's John Hodulik, the media, telecom and communications infrastructure analyst here at UBS. And I'm pleased to announce our keynote speaker. Today, it's Tom Rutledge, the Chairman and CEO of Charter Communications. Tom, thanks for being here today.

Good to be here, John. Looking forward to talking with you.

Great. And thank you all for tuning in as well, and thanks for bearing with us with the technical issues that we've been having. Hopefully, everyone can hear us, if not see us. And we hope to have a productive session here today and for the rest of the afternoon.

So Tom, obviously, it's been a very unique year to say the least. And I think just to give us a lay of land, can you discuss how Charter has responded to the pandemic and all the challenges it's created and how you've been able to successfully navigate those challenges in the era of the COVID-19 pandemic?

Sure, John. Obviously, it was a totally unanticipated year in every respect. As we came into 2020, we were expecting an accelerating growth prospect for Charter, and I had said so. We put the company together 4 years previously and invested a lot of capital and time and energy in putting the operations in a position where we could really begin to accelerate growth in things like employee or a direct customer connection. Customer self-installation was becoming a major part of our effort, and the whole process of serving customers had improved to the point where we were expecting an acceleration. So when COVID came on the scene, obviously, we had to reconsider all of our activities. And at the same time, we had to fulfill our obligation as an essential service and keep people connected. And obviously, we and the rest of the industry has done a really terrific job making sure that the networks that we've invested in, in the past were capable of handling the traffic that the conditions have been posed on us in a very short order. So initially, we had to connect lots of locations -- thousands of locations to fiber, hospitals, hospital ships and things of that nature when the first part of the reaction was medical. But we had to do that while getting our employees PPE, and we had to continue operating, obviously, and learn to deal with customers, learn to deal with each other and keep ourselves in a safe and socially distant, protected manner. And we were able to do all that pretty successfully. And we also put forth in cooperation with the FCC a program called Keep America Connected, where we forgave some people's bills, 700,000 bills actually, and repositioned those customers so that they could pay that back over some period of time. We also did a program called -- for students, where we gave students 2 free months of broadband if they connected during this process. And we connected 450,000 people with what we call the Remote Educational Offer. And we went from a direct ship model, where we were shipping about 60% of our customer base at a self-installation to almost 100%. We also took our wage structure up and created a $20 an hour target for 2022 as a minimum wage for all of our employees. And so we've been, through all that, executing with a motivated group of people who have been working under adverse conditions. And obviously, we've connected 2.3 million customers in the last 12 months, which is the most significant growth we've ever had. And that growth has resulted of one, being there and being capable of managing that growth and also as a result of the behavior that consumers have now that they're, in many cases, not being able to go out. And so it's been a difficult environment, but one where we've been successful in meeting our obligations and growing the business at the same time.

And I think -- I agree with you. I mean, I think that 2.3 million new customers over the last 12 months certainly is one of the standout issues we've seen over the last 12 months really for within my entire coverage and really, I think, the big story for cable for 2020. Can you talk about that growth? And do you expect to be able to -- do you believe it was some demand pulled forward? Or is it just increasing demand overall? And do you still expect to be able to continue to grow the business in a meaningful way despite this outsized year we've seen?

Well, I guess the answer is it's a lot of things. It's a reduction in churn. It's a reduction in non-pay. It's -- strangely enough with all the subsidies and because of the value proposition, the -- you've got a bunch of effects going on simultaneously. And plus, as I said at the beginning of the conversation, we were in a position where we were expecting accelerating growth anyway. So I think the -- looking forward, I think that we're still on a good growth trajectory. I think it's going to look a lot more like 2019 than it looks like 2020 going forward in terms of the pace of that growth. But even that, I'm not 100% sure of -- I'm not sure how long we'll be in the position we're in. And we're -- from a forecasting perspective in terms of how we plan to operate, we're thinking that things are going to revert gradually to normal, whatever the new normal, and that we're going to have more activity, more churn and more sales as a result of that and more activity as a result of that going forward like we had in previous years. But we still think that the fundamental attributes of our product that it -- the superior broadband service that we can deliver at reasonable prices and that it's -- and consumers are going to have continuously growing demands for digital capacity that we expect to continue to have a good growth prospect. But 2020 is unusual, and I think it will tend to revert more toward where we were than pre -- prior to COVID.

Got you. One of the things you said was interesting talking about usage on the last call was your average data transfer for cord cutters was, at this point, reached 600 gigabytes.

Yes.

Can you -- talk about the -- is that an acceleration of growth? And are you -- is that continuing now? And what does that mean for your business? It's got to be -- from a competitive standpoint, it's got to really sort of point to the strength in the cable plan versus what competitors are able to offer.

Well, we think so. Yes, it's -- look, in terms of growth, usage went up. It didn't flattened out, and it has been growing at about 20% a year. So you would expect it to continue to grow in the long run with some moderation probably in 2021 because of a reversion to how consumers live and work and what the ratio of people working from home and educating from home is. But the long run trend is continued high usage and continued acceleration in usage. And we think -- when I talked in my call about that, I was talking about the difference between our average customer who's a broadband-only customer and a mobile customer, which -- and the number was 50, 60 to 1 in terms of capacity going through the network. And that was the point I was trying to make. But the broader point is that data usage continues to go up. And COVID's an unusual situation. And like growth, I think, will revert to the mean, but it's still a very fast growth rate.

Okay. So given that growth in data usage and the sort of competitive aspects that go along with it, I mean, there's a number of companies talking about 5G as a substitute for fixed services. Both T-Mobile and Verizon are sort of focused in this area. Do you expect to -- these services to evolve into a sort of competitive offering for cable broadband?

Well, yes, I do think we're in a competitive marketplace, and that 5G is a technology that's capable of increasing speed and capacity with capital investment associated with that. And I think that our investment path toward 10G and symmetrical, very high-capacity 10G, high compute services can be done in a capitally-efficient way. And so I expect a continuous competitive environment like there is now far into the future. But I think we can keep our competitive advantage, and that's our basic investment strategy to keep that competitive advantage. And I do think the use cases will continue to get more and more complex, meaning customers will demand more and more data, and more and more capacity, and more and more compute in order to be satisfied. And I think that over the longer span of time and over a fairly long capital investment cycle, we can stay aggressively competitive.

Got you. Maybe pivoting to the video market. Obviously, you guys have bucked the industry trend in the last 2 quarters and actually showed some new subscriber growth. How much more -- first of all, do you expect this to continue? And how much room do you have under these minimum distribution agreements to continue to drive that growth, which -- yes.

Right. Well, our video growth is a complicated story, too. Part of it is a function of how much broadband growth we've had. We've pulled broadband growth from all sorts of places and shifted share toward us. Some of that share had satellite customers in it. And when they made the conversion to us, they bought video from us. And so you have that phenomena going on. So you have this acceleration in broadband growth, and we pulled some video through with that. I don't think the bigger trend on the big bundle being very expensive and the continued cost pressures in that continuing to make that a shrinking business, but we were able to shift share to us. We also have developed some new products. Some of those are over the top. And some of those are related to skinnier packages of traditional cable, which do have these market cap mechanisms in our programming contracts. And so it's -- through time, we'll have to fix the mixture of those services so that we can maximize our growth potential. But the -- I think the general video circumstance is still decaying because of the price pressures in the business. It's still a highly-desired product though. People want it. And so to the extent that there's less cost pressure, you'll get more demand. And we think that some of the new products we've come up with which are low-priced -- lower-priced, but have traditional kind of margins associated with them or gross margin per customer kind of margins make it a profitable business on the margin, although it's not the main driver of our business anymore.

It definitely seems that a number of cable companies have sort of deemphasized video, but Charter hasn't. And is it because you've got room on these minimum distribution near the end, the streaming products are sort of more attractive than you had expected? And also, is it good to have video in the bundle from a sort of overall customer sort of profitability standpoint?

Well, I think, yes. I -- look, as long as you don't -- we don't make that much money on video because of the gross margin pressures. But every video customer that we create is valuable to us, more valuable than not having them. Now their incremental margins are smaller than broadband. And so when you ask the margin question, which you probably will...

It's coming.

What's happening to margins, it's a function to some extent about what you sell and what the mix of that sale is. And it's not the only way of looking at the business. So we view video as an attractive product that people want in their home. And we're trying to get it to them in the fullest service capability we can with the lowest cost we can so that it's attractive to consumers and part of their overall relationship with us. In many ways, mobile is the same thing. It has a different margin characteristic than video. And the more of it you have, the more overall, it could change the aggregate margin relative to somebody else who didn't have those products. But it doesn't mean that from an overall gross margin per customer basis that you aren't doing the right thing and creating the right value proposition for your customers.

Great. Tom, let me get your thoughts on the virtual MVPD market just in general. Is this -- do you think that over time, you're going to see a significant amount of share shift from sort of traditional multichannel video to virtual? Or do you think it's sort of a stop gap as we see continued declines within that base?

Well, a lot of the virtual products are really just me-too products in a sense that they're the same service as the bundle, and the bundles held together contractually. And you see that the -- most of them have raised their prices, and they have to because their cost structures are imposed by the content companies. And so I don't know that, that is a very easy business to be successful in from a churn perspective and a cost of marketing perspective. So my sense is that the bundle will continue to be sold for some significant period of time until it finally breaks and that we have as good a chance of selling it as anyone else. And we have certain advantages in selling it in that we can sell it with other products.

Recently at the Liberty Analyst Day, John Malone talked about the positioning of Apple and Amazon and Roku as sort of aggregators of IP-based video service. And obviously, Comcast is trying to do the same with its Flex product. Just what are your thoughts on these efforts you've seen in the market? And do you think Flex or services created by -- service ISPs can compete in that playing field?

Well, I -- yes, I do. I think that you can make it easy for customers to order products through your relationship with the customer if you're us, and that we -- and we're doing that today. And really aggregating content is something we've done for many years. If you think about what we did for HBO or Showtime or STARZ or any of those products, we sold those on a consignment basis, essentially, as part of our video package. And we can do that with over-the-top services, and we are doing that with over-the-top services. And we have used an app-based approach to selling our content. It's actually gone quite well. We have more than 10 million app-based users who buy video from us through apps. And so we think that the aggregation and our relationship with the customer is an opportunity for us. It doesn't mean that everybody won't be playing in this field, but we have a unique relationship with the customer. And I think we can bring value-add from that relationship in aggregating video and selling video.

Great. Now the -- one of the sort of big themes we've already heard and what we'll hear for the rest of the conference here is the content companies moving from traditional multichannel TV bundle to their own D2C apps as the wave of the future, given how consumption patterns are changing. How does the fact that you're now competing sort of head-to-head with your suppliers, the content companies in terms of selling of video service, how does that change your conversations with them as it relates to affiliate agreements and programming costs? I mean, programming costs for you guys have moderated. And what's driving that? And does this new paradigm that we're moving into, does it -- what does it mean for that programming cost growth?

Right. So the programming cost has moderated more from a mix of customer base than it has from price of viewing -- viewable content, meaning, if I -- if I'm paying for content and customers are getting that content, the rate for that viewed content is not really going down much from a price perspective. What's happening is the mix of viewers are changing because of the packages we're selling, and that's been the reason that content prices have, in aggregate, have moderated for us. But they haven't moderated on a price-per-viewer basis. And that's an important thought because it means -- it tells you what -- how much money is flowing from the customer to the content companies and through us. But in terms of how a linear bundle works in an environment where the same companies that provide content to the linear bundle also sell a premium direct-to-consumer product or even if it isn't premium, it's a direct-to-consumer product, it's a question of do you cannibalize one? Do you put us in a position where we'd be willing to drop your bundled package because the consumer could get those products directly, and there's no need for us to pay for that as part of the bundle? Or do you have a dual content strategy, where you have good content in your linear products, but different content in your direct-to-consumer products. And we -- it's yet to be determined whether the owners of content are going to try to support both worlds or not.

All right. I think it's early days here. In the past, you've discussed an interest in building into more rural areas. Can you talk a little bit about the interest there and sort of the attractiveness of rural opportunity?

Yes. There's -- I still can't talk about RDOF because there's a quiet period, even though the FCC put out a release today, which explains what happened in the auction. But we think it's good for us, financially, to extend our network, our broadband network and all of our network capabilities to as many people as possible. And we think working with the federal, local and state authorities to improve access to poles and rights of way, along with proper subsidies, can get it done and that we can have a bigger customer base and the communities that we serve can be expanded. And so we think it's smart for our company to do that. We think it can be done in an economically efficient way and that they're -- by working with authorities, regulatory authorities, state and federal authorities that we can expand our network and have a bigger footprint. And so we've embraced that. And we're participating in various programs around the country to expand the amount of serviceable footprint that we can reach. And we think that if we do that, we'll end up with more customers and a happier customer and a better relationship with the total community.

Great. Another area that's been boosting growth is wireless. And it's definitely an area that as we look at cable, and there's a lot of value there, and there's -- and we think it's an area where cable might not be getting enough value for what we think those businesses are going to look like in the future. Can you talk a little bit -- first of all, Charter has been growing meaningful faster than we expected. I think it's certainly the fastest growth among the cable companies. Can you talk about what's driving that growth? And do we -- do you expect it to moderate here as we head into '21?

Well, it's -- we believe that mobile, like -- kind of like what we've just said about video is an integral part of the product capabilities that we can serve our customers with. We can do it in an efficient way and create value, both for the consumer and for us, save the consumer money and enhance the customer relationship by serving the customer with a fuller suite of products at good pricing. And so it's an integral part of our connectivity strategy. And so we're executing against it and creating wireless relationships. We've won spectrum in the CBRS auction, so we can begin to move some of our traffic to that CBRS spectrum. We moved a significant part of the mobile traffic already to WiFi. And we've recently, through FCC rulemaking, received expansive amounts of WiFi spectrum available to us. So our capacity as a wireless provider continues to improve. And remember, most -- all of our connections are wireless already. We have 400 million wireless devices connected to the Charter network today, and mobility is part of that. So it's an integrated value proposition for consumers, and we think that we can continue to make that a valuable part of the relationship. It's -- going forward, it's going to -- the growth will be somewhat of a function of activity levels and what the underlying broadband growth will be, too. And so to the extent that broadband growth moderates as a result of the more normalization of demand going forward post-COVID, mobile will have it, and video will tend to follow that.

So is wireless having a tangible impact on your ability to sell high-speed data today?

Well, that's our premise is that the overall value of our relationship is improved by wireless. Now as a stand-alone business, it's still a good business. And we had actually crossed the threshold where we -- every incremental customer becomes profitable to us in mobile. We've covered our fixed costs with the customer base that we've already created. So it's incrementally wind at our back from -- financially. But it's also a positive driver of our overall ability to have a good relationship with customers to create -- improve the whole value proposition of a customer's telecom bill in the home and to make that an attribute of our relationship with the customer and hopefully extend the average life of each customer, which, all other things being equal, means you have more customers.

Right. So one thing I want to touch on is the -- you've secured some spectrum in the CBRS auction. Obviously, C-band auction starting up here shortly. I know you can't talk about, but can you give us just maybe the broad outlines of either the CBRS buildout or just how you see Charter's wireless infrastructure rollout? And touch on what you said about WiFi. Obviously, you have extensive WiFi that works in your footprint. Is that infrastructure that you've deployed for WiFi, can you utilize that as you roll out license spectrum? Does it give you economies or even help speed the rollout of that licensed spectrum?

So the answer to all of that is yes, but it's complicated. So yes, we have a lot of WiFi connectivity today. Most of the bits on wireless devices, mobile phones, actually travel through WiFi, not through the cellular network. And most people that use bandwidth-intensive mobile applications like video will watch that video in a sedentary environment, which is generally where WiFi is available. It's not a mobile environment. And so there's already a significant offload, so to speak, from mobile to WiFi. CBRS has the same capabilities in that you can offload traffic from the mobile platform to CBRS and then on to the cable network, the broadband network. And you can use CBRS in outdoor geographies, but we also use WiFi in outdoor geographies. We use WiFi in stadiums and in plazas and in restaurants and places where people work and play and gather, where there's some density. And CBRS has similar attributes but a bigger coverage footprint. It can also be used in the home, along with WiFi, for certain kinds of applications. We have -- we think -- we don't think we need to use it in the home, but you could mix it in the home with WiFi to extend the coverage. And if you think of large properties, farms and other kinds of properties where WiFi probably couldn't cover the whole property, you could use CBRS to do that. So it's a tool, like WiFi, with a little more power and a fixed license so that you can manage that spectrum in an efficient way. And so we think we can use it to reduce our costs and improve the customer service experience and integrate that into the overall strategy of having a reasonably-priced high-capacity mobile product, integrated with a great broadband product, integrated with great television products that create a customer relationship that's more valuable than by having those things independently sold.

Lastly, in terms of the growth drivers, is the enterprise market. And obviously, 2020 was a challenged year for that segment. But clearly, you're still optimistic that there's an attractive long-term opportunity in that area. I don't know if -- is there a chance you could sort of size the opportunity for us? Or talk about why you still remain optimistic on that segment?

Yes. Yes. Our enterprise financials over the last several years haven't looked that great, but we really have, underneath it, a pretty good business. We did sell a business, and so we're measured against the comps on it. But we've also had difficulty in our cellular backhaul business, which Charter and Time Warner developed aggressively and early and created a fully-penetrated marketplace, which is now under a lot of pressure because of those deals being renewed and other players being in the market. So it's had an impact on our overall revenue. But if you look at underneath that, we have a direct fiber connection business and an Ethernet business that is direct to the enterprise, and it's actually growing quite rapidly. And so we continue to invest in enterprise, and we continue to create new customer relationships at a fairly rapid clip that are valuable, financially valuable. And so I think the financials actually are disguising, to some extent, the opportunity in enterprise. And so we're very bullish on our ability to take market share in enterprise and then mix in new products to the direct fiber connections that we're making, including using our wireless spectrum.

Got it. So kind of maybe moving from some of the more operational aspects to -- over to some financial questions. As you expected, the -- I got to ask a margin question. The -- actually margins have been moving up, but I think people look at Comcast's cable margins as sort of a goal for Charter. But given a lot of the -- really the learnings that you had during this difficult year in terms of digital fulfillment, in terms of self-install, can your cable margins continue to expand maybe beyond what Comcast is seeing as the business shifts from more and more in the direction of high-speed data?

So I've danced around this issue a couple of times through the conversation in terms of mix in margin. But fundamentally, in the traditional cable business and broadband business, our margins operationally are improving. Our direct-to-consumer relationship, our direct serve customer relationship, self-serve customer relationship has a higher margin than our traditional business. And our ability to use digital sales and service techniques improve operating margins. And the capital intensity margin, in general, is trending to improve in traditional set-top boxes. As I said earlier, we have 10,000 -- 10 million, excuse me, more than 10 million app-based customers who brought their own equipment. They're using Roku devices. They're using Apple devices and so forth. And we're not providing the capital associated with that. And even if we were, if we decide to produce our own IP devices and ship them direct to customers, they can be done less expensively than traditional capital set-top CPE kinds of capital environments. And so general capital intensity and general margins are improving. Obviously, you can improve them by raising rates and other things of that nature, but that has an impact on growth. And so our strategy is to grow the business as rapidly as we can and create as much value as we can from a free cash flow perspective over the long term. And that doesn't always mean that you have the best operating margin in the short term. That said, so that's our sort of underlying view of margin. But then when you think about video mix and you think about mobile mix, if those businesses have different margins than your underlying broadband business, but you have a different penetration in those businesses than another operator, your aggregate margins might be different, negative or favorable. And -- but so just looking at margins alone isn't a valid way of looking at the business. So that's our view on margin. If we sell more video, margins will be lower, but aggregate cash flow per home passed will go up.

Got it. That was great. I think it sort of encompasses what I was going to ask you on the capital intensity side. So maybe last question, Tom, just, you talked about -- you touched on pricing power. And obviously, we've got a new -- looks like we're going to have a new administration in the White House come January. Can you talk about the -- maybe the regulatory background as you look out into '21? Do you think the change in the administration provides a different backdrop as we look out into the future? And could it impact your -- the pricing power in the market, at least from a regulatory standpoint?

Well, I guess the short answer is that Charter was created and got its approval to be a company with Time Warner and Bright House in the Obama administration and the Tom Wheeler FCC. And yes, we signed a consent decree and worked our way through that. But I think we can work with the Biden administration successfully. We have a great business in terms of what it can do. And we've just proved that through the COVID experience, and people found out that they had the best broadband networks in the world. And I think that's a function of the competitive facilities-based competition that we have as an industry. And I think that ultimately results in great products for consumers at the best prices. And in terms of net neutrality, we support a legislative solution. We are net neutral. We don't like Title II, but -- and we'd rather not live in a Title II world, and there are legislative solutions. And we think we can work with Congress and the new FCC and be effective at doing that. So it's always difficult to change gears in terms of regulatory approach, but we're comfortable with our position.

Got it. Well, Tom, thank you very much for being here. And again, thanks for bearing with us, both Tom and the audience, as we sort of sort through these type of core issues. But I think it's a great session, and that's kind of very important. We appreciate your time.

Thank you, John. My pleasure.

Okay. Thank you all.