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

Welcome back, everybody. Good morning. I'm Ben Swinburne, Morgan Stanley's media analyst. Quick disclosure statement. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Really excited to welcome back to our conference this morning, Tom Rutledge. Tom is the Chairman and CEO of Charter Communications. I'm sure everyone's aware, but just in case, Charter is a leading broadband communications company, the second-largest cable operator in the United States that services over 30 million residential and commercial customers in the U.S. Tom, thanks so much for joining us this morning. It's good to see you.

Good to be here, Ben. What can I do for you?

Well, maybe we could start. We've been sort of tracking your progress for a long time as you implement the sort of Charter operating strategy. When you look back at the pandemic, I guess, we're still in it, but the last kind of 12 months and early parts of '21, how would you assess how that operating model has been executed and performed, given these unusual circumstances? Anything you would change or going to change as you move forward coming out of this?

Well, I think that the one thing we learned is that our execution strategy, which is the core of the strategy that we put together when we put the company together 5 years ago, and then we just closed the company. It will be 5 years this spring. And our view was that we could grow penetration, we could grow market share if we had great packages and prices and good products with good service, that there was plenty of penetration to gain in the marketplace. And the pandemic changed the world in a lot of ways. In one way, it made the use of broadband more definitely attractive. But it also reduced churn and put people in their houses and knocked down activity levels in ways that were very unusual. And there are other parts of our business, like, advertising and commercial services, business services, that were directly negatively impacted by business issues associated with shutdowns. But all said, the pandemic really, for us, was about executing the strategy that we had. We changed, obviously, and modified our offers and packages and behavior, including our social responsibility behavior and things we did for the community through the pandemic. But fundamentally, we executed. And we had good products. We went to a self-service model, which we are already moving towards. So it wasn't like it transformed our strategy, but it accelerated our strategy. And so I would say that acceleration will continue as a result of coming out of it. And we managed to execute during the pandemic quite effectively, and it was very difficult. We have a very large workforce. We're very spread out. We have direct customer contact. And so we had to make a safe work environment. We had to have a healthy workforce. We had to have customers who would be willing to interact with us. And we managed to overcome all of those issues and grow rapidly. And so I think we're in great shape, relatively speaking, in that we can execute. And hopefully, the environment -- the execution environment gets better going forward.

Yes. No, that makes sense. You mentioned it's the almost 5-year anniversary. And I can think back to '16, '17, '18, the amount of activity and investment that you guys were putting into the company. And in many ways, we were really starting to see the benefits of all the activity as -- then the pandemic hits. This might be a bit of a silly question, but are there more -- is there more value to capture, more we can see from the business from the merger process that has been masked effectively by the pandemic that will be coming over the next couple of years? Or are you done?

No, we're not done. We're not done. There's still tremendous opportunity in front of us in terms of penetration opportunity. And you have a category that's growing. As a long time cable operator, I've seen cable systems with penetrations up in the 80s. Our broadband penetration now just crossed over 50% in the residential area. Our total customer relationships is around 58%. And the category of broadband continues to expand. And in fact, one of the most interesting things that happened during the pandemic was that mobile-only share went down, meaning, people were living on just mobile devices. And in many cases, they are immigrant communities, but a lot of those potential customers became our customers, Hispanic customers, during the pandemic, and they have now a full service of broadband. And if you think about where broadband is going and where television is going, television is becoming a broadband product, clearly, although it doesn't mean that we won't continue to have a cable TV business for years to come. But as a result of that process, it makes broadband and its capacity even more valuable, and it increases the share of the potential universe of people who will buy broadband, both at the entry level and at the sort of age out level of who subscribes to broadband. So you have an underpenetrated business, as I look at it, still underpenetrated, and a growing category. So I think we've got lots of growth in front of us. We have lots of growth in front of the company for the last 5 years as a result of the merger. I don't see that changing. What I do -- the one sort of serendipitous thing that has come out of the merger that wasn't really in the thinking, one, we've got a whole mobile business now. Now you could argue that's a replacement of wireline voice, and it's basically the same concept. But -- and to some extent, it is. But the other thing that's come out of it is our ability to self-provision in an all-digital world and, meaning, customers can be direct-shipped devices. We've got wires into most homes already fully installed. And those opportunities to make transactions easier and less costly are benefiting us from a future EBITDA growth perspective. It allows us to be more competitive from an installation and -- perspective and, therefore, we can have lower prices, we can grow faster and we can produce more EBITDA than we might have otherwise. So that's the one thing that's come out of this process that we've accelerated that is really a positive benefit to us long haul.

Yes. You guys had been talking pre-pandemic about sort of the differences between TWC, Bright House Networks assets and the legacy Charter. I think one particular, you talked about churn differences. If we were to look at those portfolios, will we still see an operating gap? In other words, is there still runway for those acquired assets to kind of get where you want them to be? Or is the whole company now sort of performing at a similar level?

Well, at the moment, it is because churn is down so significantly. And what's really down is move churn, which impacts nonpaid churn. And nonpaid churn is down, too, because of subsidies going on in the economy. But it's more particularly down because move churn is down. A lot of nonpaid churn comes out of moving activity. People just don't pay their bills when they leave, and they're going somewhere else anyway and reinventing themselves somehow. So that process has slowed down a bit and so it's hard to say. But generally, the companies were converging and there were gaps, yes, when we closed. Time Warner had a particularly higher churn rate, and that was closing and it has closed now. Slightly different demographics between the assets that has a minimal impact on churn, but I would say it's mostly closed.

Okay...

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Yes. Understood. One of the things that came up on your earnings call in your prepared remarks that I've gotten questions to investors about is you talked about 2022, and you guys typically don't give us more than a 1-year view. But you mentioned that '22 should be particularly strong from a financial perspective. What was behind that comment? And what are the things that are in place that make next year something that we should be looking at as sort of a measuring point for Charter?

Yes. I guess I don't even know why we did 2022 other than to try to say that there were a lot of anomalies in '21. And some of those anomalies are going to be also in '22 from a comparative perspective. And we said -- if you really want to think about '21, we think it's going to look a lot more like 2019 than it is like 2020. And then we got into 2022. And really, I guess, we have expected and have consistently delivered a continuous growth rate in penetration and customer relationships. And we expect that to continue. And we expect that '22 will be a year where there's no year-over-year anomalies from an accounting perspective. And the benefits that I just talked about in terms of cost structure to serve the customer, which were always included in our plan, will be fully -- more fully realized. And so you'll have accelerating economic performance and continued good growth.

Makes sense.

And that was the basic notion.

Yes. Another area of questions from investors is around your footprint expansion. That's a bigger part of the growth strategy for cable today than we've seen in the past. Could you talk a little bit about why it's attractive to build out in these low-density markets, some of which you might actually be competing with other cable companies? There's a phrase in your 10-K of, call it -- I think it was poles per home instead of homes per pole, which I've not heard before, but that speaks to the potential inefficiency of those areas. But why is that an attractive use of capital?

It's attractive because of something I said earlier, which is, the market share of broadband, in general, continues to go up. So the amount of customers you can get out of a mile of physical infrastructure, all other things being equal, if market -- total market adoption of broadband goes up, there's more customer potential. So the penetration potential of these areas is very high. And yes, the cost to construct on a per-home-passed basis in historic terms is high, but so is the customer relationship opportunity on a per-home-passed basis. So when you do all the math, you can pay a lot to build these low-density areas. Now we're getting subsidies, too, as part of the rural broadband subsidy plan, RDOF. And when you put the subsidy together with the amount of capital we're committing, we can make a return. Yes, it's going to be complicated. Yes, it's expensive. Yes, there's lots of miles, but there's high penetration, there's low churn, and it works.

You have been a big evangelizer of DOCSIS, especially lately as fiber has been a bigger focus area. AT&T announced additional fiber builds for this year. You remain confident in DOCSIS as a go-to-market technology, even in the face of rising fiber competition and even given the upstream surge we've seen from COVID around things like Zoom.

Right. Well, it's working. That's an interesting thing about network itself. So I don't know about AT&T's build strategy or what they'll actually build. But we have competed -- like, in 2020, we grew market share in every competitive environment we operate in. And we expect to continue to be able to do that. And we think that we've just scratched the surface in terms of the capabilities of the plan that we've got deployed. Now it doesn't mean that we won't have -- put more capital into it. We will and we do every year. And we've got a regular node-splitting, augmentation process. DOCSIS 3.1 has got tremendous capacity downstream and upstream yet to be realized. And if you look at the nature of broadband utilization with streaming video and so forth, it's still primarily a downstream model. And we are fully capable of doing Zoom, and we are fully capable of doing through interactive television, security monitoring and all of the kinds of things that people are doing on an upstream basis. So we've got a great product, and it's -- but it's also got a lot of capacity left in it. We can start doing node splits going forward with more fiber, which we've been doing on a regular basis as penetration increases. But we're also doing DOCSIS high splits, where you can change the amount of broadband coming back. And so I think with relatively modest capital investment as an alternative to replacement cost, new or building a whole new fiber network over the top of you, that we can get tremendous capability out of DOCSIS 3.1 going forward, stay competitive, continue to grow market share against our competitors and be a technological leader. So -- and to be ubiquitous in our deployment of that capability, which I think is a great capability in terms of developing new products and developing opportunity from a market share perspective. Having that ubiquitous footprint of high-capacity plant is a great competitive advantage to us, I hope.

Should we be worried about 5G fixed wireless taking at least some kind of pound of flesh from the incumbents if it gets rolled out, which -- it seems like something will get rolled out. I'm not saying it's a better mousetrap, but you were at Cablevision when Verizon overbuilt the Optimum footprint. That Optimum did fantastic. However, FiOS still took some shares as sort of the nature of the game. What do you think we should be thinking about with 5G fixed as it comes in the market this year and next?

Well, I think if you spend enough capital, you can end up with a competitive product. And 5G, to be a full replacement product for what we serve, is -- would take an enormous amount of capital. And so I think that, that is not likely to be deployed rapidly. So -- but anywhere it is deployed or anywhere that capital is spent, obviously, people will have a competitive product and will have to deal with that competitively, which I think we can. The one -- the interesting data point between mobile networks and what we do is the capacity that each customer uses. Our customers are using over 700 gigs a month, our Internet-only customers. And wireless customers are using around 10 -- 10 to 12. So there's a magnitude of order in terms of capacity and total utilization of our kind of network versus what the mobile network is designed for. So I don't think it's -- I think it's a competitor and, obviously, a potential replacement or a substitution. But without a massive infusion of capital, it's not a full replacement for where we're going from an architectural perspective.

Yes. So even if you have spectrum and you've got a wireless infrastructure, you're not really there without additional substantial capital, presumably around fiber, I would imagine.

That's correct. And lots of small radios, which is what a WiFi network is, by the way.

Right. Right. Got it. Okay. Let's talk a little bit about the video business. I think I actually asked you this on the last earnings call about whether video is still a strategic priority for the company. Clearly, that industry and that market is evolving rapidly. What is your product pipeline and strategy in video, given just the dynamism in the marketplace as you look out over the next 5 years?

Well, as you know, we're the only company that I'm aware of that grew video customers last year. So we haven't given up. And look, I think live TV will continue to be sold in a linear package for a significant period of time. And there's a lot of customers and users who enjoy that experience. But it is being priced out of the market in many ways. And the new streaming products, on-demand products, which really haven't been successful on a linear perspective yet, obviously, are gaining some traction in the marketplace. I think we can manage our video relationships with customers going forward, and we can sell streaming packages and be a storefront and an aggregator. And I think we can continue to sell our existing products, our streaming products. And we can sell subsets of those. We've been very successful in selling over-the-top video products that aren't full packages that are priced for price-sensitive customers, foreign language products the same way. So I think that the industry will segment into much narrower niches and people still spend a lot of time on the big screen, and there's an opportunity there for us to be the best provider of those products and -- because of our customer relationships, to have a higher-quality product and a more valuable product for customers. So I'm not sure how it all evolves and how fast it evolves, but I think it's important that we be a video connectivity company as well as a broadband company and a mobile company. I think we need to satisfy a customer's full range of connectivity issues to keep our relationship positive.

Yes. Yes, it's interesting. I mean we are starting to see live linear populate in the streaming world. I was talking to Bob Bakish this morning about Pluto. I got linear -- over 100 linear channels. So it would seem to me that the cable operators as aggregators, which has been your traditional role, would be quite logical in the streaming world, particularly because the market is not going to sustain thousands of direct-to-consumer apps economically, I would think. I don't know if you agree.

I do agree. I don't think -- if you add them all up, they get expensive really quickly, and which is a problem with TV. And actually, when you think about -- if you think about what's the fat bundle and how expensive it is, if you wanted to resell it all in an app -- in a linear app environment with 20 different companies doing it, you can end up with a bigger bill and smaller distribution. So it's -- and that's the reality of it. So there's still a lot of value in that aggregation, that broadcast product, meaning, widely distributed, relatively inexpensive, high-value content.

Yes. Is there anything to say about your relationship with programmers from a cost point of view as you go through renewals in the future and navigate the fact that a lot of them have streaming services? I mean, you did a Disney deal, so you've already sort of been through it once or twice. But it's becoming a bigger and bigger question, I think, in the market.

Yes. No, I think we'll do both kinds of deals. We do both kinds of deals. We've done NBC. We've done Disney. And I'm sure -- we've done other deals, too. And we've put the content in -- content that's in Pluto, for instance, is also in products that we sell. And so we have our own linear over-the-top product that we sell. So how those relationships work in the long run, how -- which ones customers will gravitate to, I'm not sure. But there's opportunity for us there with the content companies to make it good for them and make it good for us.

Great. Let's shift to your B2B business, which was one that, I think, was sort of last to go through the Charter reinvention, so to speak, and really hadn't fully come out of the repricing when we hit COVID. This was a business. It's a $6.5 billion business now. It was a double-digit grower if we go back to 2016. I'm just wondering what the right expectation is for this business over the next kind of 3 to 5 years, given what we've been through and where we are in the cycle.

Well, actually, it's continuing to grow very nicely. Our small business piece has grown nicely economically and from a penetration perspective. Our large-scale business, our enterprise business, it's also growing nicely on the increment in terms of new customer relationships. We have a -- we were very successful early on with that business, actually premerger, in creating a cellular backhaul infrastructure. And that business is not growing. It's built. But -- it had a great return on investment, but it pulls -- it's -- and because we were a significant market share grabber there, its lack of growth has pulled down our growth rate. But that actually will fall out of the numbers as the scale of the business continues to get bigger. But on the increment, new enterprise relationships are growing, and we have double-digit expectations for those. And our small business universe continues to grow rapidly and is -- actually, at one point in the middle of the COVID experience, I thought it was going to be a lot worse than it was. Then there was a period where we had 1 million hotel rooms which are on our network, which we essentially were getting 20% on a dollar for those deals. And there was a period where we had to give amnesty to small business. But we didn't lose customers, and we're actually growing those again. So I'm actually quite bullish on our -- on both parts of that business, the small business and the enterprise segment.

Good. I want to spend maybe our last 5 minutes, Tom, on the wireless business, which is something that has been sort of a new growth area for the company, one that's been pressuring EBITDA, although those losses have been falling. What's the opportunity in wireless? What should Charter shareholders be thinking about when they look out over the longer term as you guys get bigger in this business?

Yes. Well, we look at mobile as an attribute of broadband. And so we've launched the mobile business like we launched the wireline business for voice a long time ago. We're now the -- Comcast and us are the biggest wireline phone companies in America.

Congratulations.

Well, yes. So -- but so -- but the point of it is, it made wireline kind of a segment of broadband. And we look at mobile in a similar way. It's a -- from a capacity point of view, it's a relatively small piece. And when you think about wireless versus mobile, we have 400 million wireless devices connected to our network right now through WiFi, and we have an MVNO of more than 2.5 million. So just to put that in perspective -- and we think there's an opportunity from a product point of view to continue to grow our mobile relationships, to integrate that mobile relationship into the overall broadband relationship, to use our wireless broadband connectivity, both WiFi and CBRS spectrum, which has some attributes of WiFi. There's some public pieces of it. There's some private pieces of it. But it's a lower power than C-Band. And it fits very nicely onto our strand architecture so it can be outside, it can be inside, it can be in enterprise environments. And we can place it where we have traffic utilization needs, and we can save rental costs for MVNO using CBRS. So we think we can have relatively inexpensive mobility. And we think that we can have very high capacity wireless. And the 2 together can be on the same device in some cases. And so the mobile experience from us can be a better experience. And so we think we can use that to drive share and drive broadband relationships. And it's really just about extending the connectivity relationship in a way that takes advantage of the broadband infrastructure and takes advantage of the customer relationship to create a product set that is better and less expensive than what they already have.

Do you think long term, as we think about network evolution, that there is a convergence of mobile, wireless and wireline, maybe even on a national scale? We've seen that in Europe. We haven't seen that here. Do you think it's a different market and will always be a different market?

And I think we could evolve the way we're going for a long period of time without that happening, but I can't say that it's impossible. The relationship between the customers' overall connectivity and their mobility, I think, is a long-run convergence. And -- but how that gets manifested in M&A and how it gets manifested in investment, I think, is -- in the United States isn't fully clear.

Okay.

Unlike some, I'm not going to say we're going to buy T-Mobile or whatever. Or they're going to buy us.

Right, right. Well, listen, we're out of time. I wanted to end, Tom. You've just signed on for another 5 years at Charter and...

4.

4? What keeps you motivated? You guys have -- you've executed the plan. I was talking to Greg Maffei yesterday about the return on the stock. You've been, as you said, a long time cable executive. What's on the agenda for the next 4 years? And what keeps you motivated coming to work every day?

Yes. I really love this business. And the interesting thing about our business is that we're really -- we live in the future in terms of what we think and do and how we bring technology and markets together for the long run. And people often overlook that, that we're -- how far out we're actually planning. And so as I look at my own life and, I think, yes, I'm not going to live forever, but this business is going to go on and on and on. It's an interesting situation. I think there's tremendous opportunity yet in terms of what we can build as an industry, what we can build as Charter and as a company. I think it's the premier asset in communications, upon which to build. And the product sets that we build are interesting to everybody. Everybody wants them, cares about them. That's always been my experience as a cable operator that I could go -- any time I went to a party, everybody wanted to know about [ what we were ] doing and why. And that's still true about broadband, and it's true about the networks that we have. And so it's extremely interesting. It's extremely exciting. And the products we build, they're successful in the marketplace. And I think they'll continue to be. And it's -- people care about what we do. And so I'm -- that motivates me.

That's a great answer. Terrific. Thanks for your time, Tom. It's great to see you. Appreciate you spending this time with us virtually. And hopefully, we can do it in person next year.

Coming soon, I hope. Thanks. Good to see you, Ben.

Thanks, everybody, for joining us.

All right. Thank you.