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

Hi. I'm Jessica Reif Ehrlich, the media and cable analyst for Bank of America Securities. And it is my pleasure to welcome back Chris Winfrey, CFO of Charter Communications. Chris, it's a pleasure to see you. Sorry, it's virtual again. But...

So am I.

Thank you for joining.

It's a pleasure to be here.

Charter's performed extremely well since the start of the COVID crisis. I mean, you had incredible momentum through the first half of this year. And broadband net adds outpaced the first half of 2019 this year. As you look at the remainder of the year, can you talk about what your primary goals are, to the balance of the year, not a lot left, and then into 2022?

Sure. Look, the opportunity at Charter is the same as it's always been in that we're highly underpenetrated with a largely superior product and packaged in a way with multiple products that is very difficult for others to replicate, particularly at the price that we offer. So if you think about us today, we have 54 million passings, and we have 30 million Internet customers. So there's 24 million customers inside of our footprint that we think should have our Internet service. And then on top of that, you have -- of those 30 million Internet customers, you've got 2 million of those that are taking multiple mobile lines from us. So the opportunity at Charter really is to grow to 30, somewhere up there, continuing towards 54. And to grow the percentage of customers from where we are today of 2 million out of 30 million taking mobile, over time, to grow that significantly. And as those products converge and the connectivity service that you have really becomes less distinguished between multiple products. Our goal here really is about continuing to have higher and higher penetration, as you mentioned. And that means continuing to execute very well on the plan that we have, which is keep our products in a state of superiority and invest in those and package those in a way that others can't replicate. Keep our prices low and attractive for customers so that we're competitive, and to do it all with our own in-house service and to win customers every day. Now it takes time, and not every quarter looks the same as the last. But our overall trajectory remains the same, and our goals remain the same today, and probably for the next 5 or 10 years.

So I mean, it's an interesting way to look at it. There are 24 million homes passed that don't have broadband from you, from Charter, but what do you think will be the biggest driver for broadband subs moving forward? Do you think it's just driving penetration in footprint? Do you think it's footprint expansion into overall markets. Can you just talk about how you expect to gain share within your plans, within your footprint?

I think it's all those things, right? You have the fact that we continue to build out our network and continue to invest both in rural areas as well as fill in the homes passed. Our growth inside of our existing passings continues to be high. That's one that we control less of because it's more tied to the marketplace. But we've been able to grow in markets where the home construction rate is lower and higher, and so we'll continue to grow either way. And then as you mentioned, the last one is to continue to penetrate the homes that take broadband from somebody else, or in the past, relied on wireless only, which we've seen a reconversion of those customers into wireline households. So all of those opportunities exist for us. And by doing the things that I mentioned about product and pricing and packaging and service and investment, by doing all of those, we're able to go attack the marketplace on all those fronts and really sustain broadband growth for many years to come.

You just said that not every quarter is the same. Can you talk a little bit about what you're seeing in the third quarter and maybe into this fourth or your second. How price is going to be in the second half '21. And has market activity returned to normalized levels yet?

We'll let's start there. Market activity's not back to normalized levels. It comes a little bit in fits and starts. And how much of that's tied to COVID, I'm not really sure. But certainly, when you think about the churn environment, the mover environment, it's not back to where it would be. Now some of that, we get an expense benefit, and on the hand, as a share taker, we want to see some movement in the marketplace combines with the lower churn that we have in order to have higher net adds. I'm not going to talk inter quarter. We never do. Other than to really reiterate what we said on our last call, which is if you think back to 2019, which is really the better comparable year, our second quarter 2019 was a favorable quarter to compare to relative to the third quarter 2019, which was good, I said that on the last call. And we remain confident in our goal of being able to match or exceed the amount of Internet net additions that we had in 2019 for the full year of this year, so nothing's really changed. We don't manage the business per quarter, and we generally don't provide guidance, but we thought given the -- coming out of COVID, that it was helpful to provide some parameters so people can think about that, and our view of the world hasn't changed.

Charter has been through various cycles of broadband competition, including both competitor fiber build-outs and competition from fixed wireless. How do you view this current cycle of emerging competition from fixed wireless relative to prior periods, given that 5G is a significantly more robust offer?

Yes. We compete in our entire footprint against somebody. We compete against fixed wireline providers, against wireless providers, against satellite providers. We've competed against MMDS, even the wireless base MMDS, LMDS, 3G. We competed against what people thought would be WiFi. It turns out we are WiFi. It was 4G was going to cannibalize in broadband Internet. Now it's 5G, where we have MVNO with Verizon, and we're selling 5G on the mobile side. So I would say that we've always have had competition. We continue to have competition. And really the key for us is to stay ahead of it by continuing to invest in our network. What's served us well in the past is that we've been able to have higher speeds, higher throughput, certainly much higher reliability. And when you think about a wireless network and the value and the pricing of what they sell, the broadband network that we provide tends to have, maybe, call it, 50x lower pricing per gigabit than what you would find in wireless services today, which means that we're really well set up to be able to compete in that space given the throughput that we have, the way that we can price the product. We're not turning a blind eye, so we're staying ahead of it. And we just need to continue to do things that I mentioned before about investing in our network and staying ahead of that to stay competitive. The best wireless networks, as commonly said, are the ones that have a bunch of wires. Our network has, I think, the most wires. And therefore, we have probably 30 million cell towers in the form of WiFi routers that are attached to our network. So we're well situated to compete, not just in the fixed line space, but really in the mobility and portability of that connectivity service that we provide today, particularly when you combine that with our 5G MVNO service that we have as well.

How would the [ rural build ] portion of the infrastructure bill impact charter?

It highlights 2 areas where we think we've been a leader in the industry. One is on serviceability. So access. And the other one is on affordability. So if you take a step back and think about those 2 elements, Charter had been a leader at rural build for many years. So we're experienced at it. Prior to any of this legislation, we were the largest participant in the rural digital opportunity fund and aggressively played in that space. We think it's important that we're there even prior to this legislation. And then on the affordability side, we have a spectrum Internet assist, which is an industry-leading program of having high-speed broadband available for low-income households. So this federal legislation really piggybacks on an area where we have a lot of experience, and we expect to cooperate with the government and be able to provide additional availability through rural bill using federal subsidies to enhance or accelerate programs that we already have today, as well as be a meaningful participant in the emergency broadband benefit. I think it's going to be labeled separately in the future. But we've already been doing that today, and this will enhance our capability to go continue to do that in the future. So we're committed to both the service availability as well as the affordability, and continue to focus on it.

And then just honing in on like the rural opportunity, can you talk about your RDOF plans, including overall strategies, spending plans, timing for that spending as well as penetration and return expectations?

Well, there's a lot there. But yes, the -- we had gained a lot of confidence -- because the amount of rural build that we had been doing, we've gained a lot of confidence in our ability to build it, to get penetration on it, and therefore, did return on investment that we were able to achieve in these environments. And that's what allowed us to be as aggressive as we were in the RDOF program. Now that won't be the only rural spend that we have. We have existing rural spend. We'll have RDOF. We'll participate in these additional federal programs, state programs, RDOF, and then there will be additional construction opportunities that exist for us in what we call the white space, with passings that exist between what we're building anyway. And so we're going to continue our rural footprint build out through RDOF and other means. If you think about it, not only is it going to -- it's one of those opportunities that cable doesn't always get us to look really good inside of the communities that we serve. And so we think we should take up on that. We have good returns. And in some sense, in an environment where attractive or available M&A hasn't existed, this rural cable build out is just another form of M&A with pretty reliable returns based on the penetrations that we see already that we can go get. So in terms of the amount of spend, I think we publicly said that it would be, for RDOF specifically, not some of this other rural spend, for RDOF specifically, we estimate about $5 billion, of which we'll get $1 billion in subsidy to go build out these passings. The returns tend to be very long paybacks, but with pretty reliable returns and IRRs, double-digit teens IRRs, based on our experience of what we can deploy into these markets. So we're excited about it. And like I said, it looks a lot like cable M&A, an environment where cable M&A hasn't existed. We'll continue to look for other ways to be good in the communities we serve.

Right. And in terms of next steps for enhancing your plans, when should investors expect to see Charter begin implementing additional bandwidth manufacturing or DOCSIS 4.0 technology. What type of capital will be required to make that transition?

I'll kind of take you through and continue. But investors are seeing that already today. So first, we took the DOCSIS [ 3.0 ] network to 3.1. That was at an average cost of $9 per passing. Today, we're doing a significant amount of physical and virtual node splits, and so we're investing more into the DOCSIS 3.1 technology. We have significant runway for capacity there. We will be converting and continuing to convert it into an MPEG-4 environment. So we reclaim bandwidth from the video network and put it into broadband and allocate additional channels for broadband, all within the context of traditional DOCSIS 3.1. And we're spending significant capital doing that. We will invest in high split as well in markets where we think it's attractive to do so, and maybe as a bridge to us transitioning to DOCSIS 4.0. So how far do we get with high split before we flip the switch and move into DOCSIS 4.0. Not 100% clear. But then moving into DOCSIS 4.0, there will be parts of our network where we're building in a rural context today. Most of that is fiber to the home. And there may be cases of the existing network, where if you take a look and say, which is the opportunity here, is we can do a fiber overlay in a similarly attractive way as we can do DOCSIS 4.0. So we're going to have a variety of different technologies and tools available to us, and the cadence of that really will be dictated based on competition and product needs. Right now, we're servicing all of those extremely well. When you think about high split, which is the more up-and-coming expenditure in parallel to developing DOCSIS 4.0, that's really going to be a timing consideration. What you're really doing is pulling forward the node split capital that we're spending today already, and pulling it forward for future years. So there may be some timing where we have an accelerated amount of spend which we would disclose to the market. But over a 5-year period, I think the cost to go do that high split is really very small amounts of incremental dollars. It's not the same as what we would have spent anyway. So it's pretty attractive, and we like our position to have a really capital-efficient approach to upgrading the network.

Have COVID-driven changes impacted your network management strategy at all? For instance, do you believe that you needs symmetrical speed to compete or for marketing purposes?

I don't -- from a pure consumer and product perspective today, I mean all of us have made it through the pandemic; some of us in the office and some of us from home. And with the ability to usher and with the ability to not have any constraints on upstream or downstream, we provide a very viable and competitive product across our entire footprint. So I don't think that COVID has taught us anything other than by staying ahead of bandwidth contention, by investing in the network for a year or 2 in advance, which we have always done, we were able to accommodate that significant amount of increase in both downstream and upstream traffic. Now having said that, we do believe in the power of marketing and competitive claims. So to the extent that either the product needs or the competitive marketplace evolves, we won't be shy. We're not afraid to invest. And I just told you about all the different tools, capital-efficient tools that we have been able -- in front of us to make sure that we can deploy a network that is ubiquitous in its ability over the next 5, 10 years to be 10 gigabit symmetrical at a pretty attractive rate. So we're excited about what's ahead of us and the path that we have to be able to do it, not just in a particular segment of your market, but to do it across our entire 54 million passes.

And then I guess like just overall, how should we think about the capital -- cable capital intensity of the business, excluding RDOF and mobile?

So if you take rural capital expenditure, and includes RDOF, which we'll disclose separately, and think about that as almost cable acquisition. And if you think about mobile capital expenditure, which is the deployment of our wireless radio access network to offload traffic, which is an ROI investment, our core cable capital intensity will continue to decline over the medium to long term. In the meantime, will there be quarters or a year where you have a little bit of pull forward for things like high split? Yes, it's very possible, and we'll disclose that. But the long-term trend remains the same, which is that our capital efficiency is going to continue to get better and better as a percentage of revenue. That's driven based on the network converting much more to an IP space, the need for lower amounts of CPE. But also as you gain penetration on your fixed number of passings and you put additional revenue in place for the same amount of capital expenditure, the fantastic secret is that the more success you have on the revenue side and on the customer growth side, the more efficient you can be for both capital and from OpEx as well.

So one more CapEx question that just came in from an investor. A very specific question. With fiber expanding rapidly through various geographies for competitive prices, how you'll try to respond?

In the same way that we've always responded. So we have a product that's able to deliver all the services that customers need. We have promotional capabilities available to us. We have retail pricing that's nationwide and consistent, but we respond locally as well based on the competition that we're seeing. And then you combine that with the different network tactics that I talked about to the extent that the competitive claims become a concern, we'll be able to get ahead of that sufficiently in advance. I'd just remind everybody that it's not new. We've had fiber overbuild taking place, frankly, at higher rates than we see today in the past, and we've been able to grow in that marketplace. The other element that we have available to us is the way that we can utilize the mobile product offering and save customers money. So I think we have the right network and the ability to upgrade at a capital-efficient pace. But we also have the ability to combine our services with mobile in a way that's either not available to competitors or it's difficult for them to follow. So I think we have a lot of tools in front of us to be able to address that investors' concern.

And on mobile, where do you think Charter will ultimately drive penetration? And do you think mobile could actually be larger than the video business over the long term?

Yes. Tom Rutledge has often used and said, "Is mobile really a product?" And if you think about your connectivity and how you use your devices today, you don't really know when you're on our WiFi, or when you're on the mobile operators, or whether you're on Spectrum Mobile that's using our WiFi, or whether Spectrum Mobile that's using our MVNO. And I think the next 5 years will more and more blend those lines as to what connectivity really means. So if you think about what I'm about to describe in that context, we have 30 million Internet relationships. I told you we're going to grow that more towards the 54 million passes that we have. But only 2 million of our customers have our mobile service despite the fact that it's now the fastest mobile operator in the country because of its -- the way it utilizes our WiFi network. And so I think our penetration potential on the growing 30 million Internet customer relationships is very, very high because of the ability to save customers' money, because the way that the product performs in a better way than any other mobile operator that you could have. So I think there's a real upside opportunity. I've talked publicly before about using voice as -- fixed line voice as the comparison. At the height of voice utilization and our path into that market. It was over 50% of Internet customers. So I think is that a reasonable way to think about it? Sure. But I think the other way to think about it is in 5 years or 10 years from now, is it really a separate product? Are we selling a connectivity service? And I would argue if that's the environment we're heading into, we have the best set of cards available.

How much of a cost advantage do you gain by offloading traffic onto your own network versus moving down the pricing curve through higher volume activity as part of your MVNO agreement?

Sure. You're rightfully highlighting they conflict with each other and we'll do what's economically most efficient and what provides the best service for our customers. If we can offload our customers onto a CBRS network or WiFi network that's performing better in the LTE or 5G network that we're renting as part of our MVNO, those will be considerations that we run in. But it's -- the bigger piece isn't so much about how much cost we can save and how much margin we produce into global, but really, what can we do to drive faster growth in the marketplace, both for mobile and for Internet. So if that mobile product, by saving customers hundreds of thousands of dollars every year on their mobile bill, allows us to sell more Internet or allows us to retain more internet, that's where the money is. The money isn't so much in the standalone product margin, because as you know, we're not selling standalone mobile, we're selling a converged connectivity product that will begin to look more and more converged over time.

Can you give us any update on your small cell build out plans to deploy CBRS, including timing and overall spending?

So we're not in a rush. We have this CBRS spectrum, both in the licensed spectrum that we purchased as well as the unlicensed that's available to us in a pretty unique way because we have power, we have right of way, and we have fiber in all these markets. So our ability to deploy and deploy quickly is unique relative to others. We are building 1 network at the back half of this year, 1 market. We'll put our employees in that market on the network, make sure that the design is achieving what we expected, that the offload gets what we have planned. And that the operational deployment is in a way that allows us to scale across broader parts of our footprint. But as I mentioned, there's not a rush. So this is an ROI-based deployment. So we're going to make sure that we get it right. And we'll go where the economics dictate that we go and how far we go, meaning how low of a density does it make sense to go really will be determined over time based on the amount of traffic that we have going over the network. And therefore, the amount of ROI that we can achieve by deploying it. But the return on it is fairly quick in dense environments. So we'll pick up the pace, but we're not in a rush. And it's a multiyear build, so we're not looking to just go as fast as we can. It's a multiyear build and the economics will dictate how fast we go.

Okay. Earlier this year, possibly on the back of the renegotiated MVNO agreement with Verizon that you share, Comcast introduced multiline pricing and packaging with really surprising, very attractive for consumer. How are you thinking about multiline pricing going forward?

So we like what Comcast did. I'm not sure what we do will be exactly the same, but we like what they did, and we think it's more -- we're in the process of finalizing some system changes that will allow us to make multi-line pricing as well as future pricing change in a more nimble way. So I'm not here to announce exactly what that -- those new packages will look like. But I think our customers will be very happy. And I think our employees who interface with customers and sell to customers would be very happy. I think our stakeholders would be happy, too. So more to come, but not necessarily today.

Right. Moving on. Small businesses -- small business revenue recovered in the second quarter and actually grew versus the second quarter of 2019. Can you talk a little bit about current trends in the small and medium-sized business?

Sure. The SMB market overall is coming back. Similar to what I said at the outset, it's a little bit of fits and starts. So there'll be 1 month where you say we're back, and next month, we say we're slowing down. Is that tied to COVID? I don't know. But the overall trend is clear, it's going to be back. And given that you have businesses coming back online, small businesses coming back online as well as new business is sprouting, that generally bodes well for us. It's not all the way back, and you can think about certain markets where it's back more or less than others. But we're on the right trend, and we should be in an environment where we can continue to grow in SMB for the long-term very well.

And your pricing strategy has been -- on that area has been focused on driving unit growth. When do you think we'll see a convergence of revenue growth to customer growth?

For the most part, I think we had a benefit in Q2 that won't be replicated in Q3. We took some credits in 2020 and then had the impact of positively impacting our year-over-year growth rate in revenue as well as ARPU. We won't have the exact same one in Q3. But our unit growth and our ARPU growths have largely converged. The only piece that's still outstanding is some legacy voice revenue when we convert customers because our voice revenue, our voice pricing is so low. But for the most part, the SMB compression, price compression is largely behind us.

The enterprise market has been one of the more difficult markets due to the changes brought on by COVID. However, you did see some signs of recovery in the second quarter and particularly compared to the second quarter of '19. Could you talk about trends there overall and address some of your specific markets like the New York City and L.A.?

Sure. Well, look, I'm impressed and pleased that it held up -- and enterprise held up as well as it did through the pandemic, an environment where employees, for the most part, weren't reporting to these corporate offices and working out of there. And yet, we were able to hold the revenue line, hold the subscribers. In the case of retail, actually grow it in a slightly slower pace than before. And then by the time you got to the second quarter, as you mentioned, we were selling more in the second quarter of this year than we were selling in the same period 2019 despite the fact that New York City and L.A.still aren't back. So those are 2 very large markets for us. There's a lot of corporates that are in those markets. So I think that bodes well for us. We have been selling a deeper set of products, more multi-product selling. We've been moving upmarket as it relates to logos and product and what we're selling. And the fact that we're selling more than we were before despite not having New York City and L.A. fully back, I think bodes well. Now when I say selling, just to be clear, the install time and conversion of that to revenue takes, on average, about 6 months. So what you do today, you won't see for another 6 months in terms of its full effect into the revenue line. But the leading indicators there are very good. And I think as the market continues to emerge from the pandemic, I think enterprise is pretty well positioned for Charter.

Now let's move on over to video. Largely due to your focus on slimmer, lower price packages, your video results, specifically in terms of retaining subscribers, have absolutely outperformed the industry. What do you think the floor for traditional Pay TV subscribers will sell? And what are the determinants of that floor?

Yes. So I think our outsized performance really means that we've been essentially flat while everybody else has been losing significant amount of subscribers. We just need to keep that perspective. But it's not just been because we've been selling skinny packages. We've been able to find ways to sell whether it's new plan, Latino, whether it's an essentials pack, whether it's a full expanded basic package for those customers who can still afford it, given what the programmers have done. So having that product available on all kinds of different devices, whether it's Apple TV, Roku, Samsung TVs, inside the home, outside the home with all these different packages, IP/QAM, traditional box or not, really gives us the broadest set of video capabilities, I think, that exists in the marketplace. Now the issue is that the programmers have made this product unaffordable for a large part of the population, despite the fact that we try to find ways to get valuable product that customers can afford and set their hands. And so when you ask, what's the floor for video relationships, I think a lot of that depends on the affordability question, and that's not in our hands. We're simply passing through rate increases that are coming through for programmers. And we're not actually able to pass through everything that's coming through to us. So to the extent that the programmers continue to increase their rates in a way that is higher than CPI, is higher than customers can afford, I think you're going to see continued losses and maybe even accelerating losses in the marketplace. And to be fair, for us, because we have the ability to offer SVOD, DTC, skinny packages, IP packages, QAM packages, and because we're not as sensitive to the profitability anymore because there's not much left, the real value for us is just putting video products that customers value and combine that with the connectivity products that we offer. And we have the ability to go do that as much, if not more, than any of our competitors.

So I mean, given that backdrop, how are carriage agreements evolving? How do you expect, over the next couple of years, like how will they change? What are the -- it's just complicated. There's so many different things to go into this now.

I don't know. If you'd ask me 5 years ago, I'd say that those negotiations in carriage agreements should look a lot different. And they look a lot more like they did 5 years ago than anything else. The programmers have not been able to get out of the prisoner's dilemma of taking additional rate increases and insisting on carriage, and forcing multiple channels and cross-bundling requirements that increase the price of the product in a way that the customers can't handle. And so it is a prisoner's dilemma. They haven't stopped doing it. To the extent you wanted to increase the health of the overall ecosystem, you'd have to either have lower prices and/or you'd have to increase the flexibility for MVPDs like ourselves to be able to package these products in a way that could actually drive penetration, and hold those customers as opposed to having them either be unable to afford the product or forcing them to come in and out of the market when their wallet could afford a particular piece of content. So it's not healthy today.

I'm going to switch gears a little bit because we've got a couple of investor questions. So one of them is, 2020 was a record year of net adds. How do we know the lower market is not just reflective of pull-forward?

I think our results inside 2021 reflect that it wasn't just a pull-forward. Clearly, there were some. And so if you think about absence of pull-forward with our results this year would be even better; maybe, probably. But the fact that we're able to project that our 2019 Internet net additions will be the same or better than they were -- sorry, this year will be as good, if not better than 2019, means that despite any pull-forward benefit that we had in 2020, that the curve still looks very good for us.

And then another investor question. Can you give us an update on how you see regulatory risk evolving in the Biden administration?

Clearly, regulatory environment is something that we spend a lot of time thinking about. It's one of either a top topics that Tom Rutledge is very focused on. I think our opportunity there is to be a very good service operator. And the more that we can build into a rural environment and bring connectivity to those who didn't have it; the more that we can do to increase the affordability of the product by participating and cooperating and partnering with the government for our own existing programs like Spectrum Internet Assist or through the EBB program; the more that we can continue to invest in our networks and maintain our speed advantage and have that fully deployed across the 54 million passings; the more that we can save customers hundreds, even thousands of dollars on their mobile bill by selling them a superior mobile product, a faster mobile product and saving them money; and by trying to do our best to keep our prices low despite some of the programming increases that we face, I think that's how we address regulatory risk: by being a good operator, by having -- taking pride in our service operations, by in-sourcing all of our labor, which we've done. So we took all of our outsourced labor that we encountered when we acquired Time Warner Cable and Bright House, but 100% of that labor onshore and we're on our path to in-sourcing, essentially, 100% of our labor force as well. By having good wages in the marketplace. We've increased our minimum wage to $20. I think we try to be a very good service operator, not just because it looks good in front of the regulators, but it's a good way to have better service, have better products, gain penetration and increase our cash flow per passing over time by taking those really long-term strategies of how to grow in the marketplace.

Great. And then just moving on to margins. There -- lot of puts and takes. You just talked about video programming costs still increasing, but then you've done a great job managing non-programming expenses. So can you talk about how you drive better performance at the network? You've lowered customer interaction. So is there any upside in margins from here? Where do you think margins kind of level out longer term?

So you and I've had this conversation a couple of times. We don't manage the business for margins. We, in some sense, refuse to look at the percentage margin until the very end of whether it's a quarter or a budget process. We don't manage the business for margin. What we do is manage the business for how much long-term cash flow can you generate by doing all those things. And if your -- those 2 notions are inconsistent. Sometimes if you want to maximize the long-term cash flow that you're producing from the cable business, you have to be willing to invest significant amounts of OpEx to in-source your labor. You have to be willing to invest significant amounts of CapEx to upgrade your network and go as fast as you can. You have to be willing to go construct new networks and take a double-digit year payback to get a double-digit IRR. And all of those go against this notion of whether it's EBITDA margin or cash flow margin in the short term, but they increased your ability to grow in the long term. So now that's how we manage the business. But wait, it's not that we don't think about efficiency. If the question -- if the heart of your question is how much room do we have or runway do we have for efficiency over time, I think it's significant. By having our own in-sourced labor, we get a lower turnover of our employees. We get a higher amount of trading by our employees knowing that they have a career path here, they're more committed to the service transaction they provide. There's less repeat transactions, whether it's service calls or truck rolls, which means our customers are happier and they're less likely to churn. They have longer customer lives, which means our ROIs go up. So there's a lot of goodness and a lot of benefit that will take years to fully manifest there. And on top of that, you have really the digitization of our service infrastructure that's taking place. You can use self-insulation as the first example. But more and more of our transactions are taking place on My Spectrum ad -- My Spectrum app, taking place through chat, the use of machine learning and artificial intelligence to flag to customers when there is an issue, so they don't call, so they know when the repair is going to be done. Service and context. When a customer calls, that an agent already knows what the problem is, what the previous conversations have been, all of which we talked about really on our last earnings call. That digital road map is really at its beginning stages. And what's happening already that you can see is the amount of digital transactions, the customers digitally interacting with us is taking off significantly, and the number of physical service transactions that they have with us is going down significantly. And it's not because we're shoving things down the customers throat. It's because they're interacting with us in the way that they want to interact. It means that their customer satisfaction is increasing, and our cost structure stands to benefit from that over time in a really meaningful way. So I think we have more runway for efficiency improvements that can offset the programming cost increases in a way that we've already shown an ability to go to.

And then we only a few minutes left. This my favorite topic. It's actually a high-margin revenue source; it's advertising. And you guys have done an amazing job on that side of the business. How much of your advertising revenue growth is coming from addressable sales? And then how much is being driven by the Spectrum TV app on devices outside of the set-top box?

Yes. So I wouldn't give a revenue breakdown. What I would say is those capabilities, through addressability and through the ability to show even traditional TV demonetization of long-tail inventory, is enabling us to sell a much broader package of advertising services. So that when we go to a customer, we're not selling them just one product, we're selling to have a package of services, which is traditional, linear, video on-demand, IPTV, impressions, which is the same thing as the traditional QAM delivery, which I'll come back to, as well as digital. QAM digital as well as third-party digital and sell a bundled package of advertising services. And when we're doing that, we're able to uniquely demonstrate at a local level, at a household level, anonymized, of course, the impressions that are taking place over both the traditional QAM network as well as the IP network and sell that as a package of services, have it be hyper local, have it be addressable, tell a customer how many impressions they're going to be able to get across all those traditional and IP platforms, be able to validate it at the back end and ultimately get to the holy grail of attribution, which is unique in terms of our capabilities on the advertising space. So I agree with you. I think we're early on. And it's happened. We've been able to grow our core revenue in advertising despite having a challenged video environment, as you've already highlighted. Despite COVID as -- so I'm pretty pleased with where that business is going as well.

Is there any way that you can talk a little bit more about what's going on in the local market? Have you seen local advertising recover at this point?

Not sure if local advertising has recovered. I would tell you that local auto has not. In fact, it's gone maybe backwards from where it had been because of supply chain issues. Offsetting some of that has been the health category. Local auto is a big -- has been traditionally a big part of our business. And it's not fully back yet really because of supply chain issues coming out of COVID. So despite that, we're performing well.

And we know that will recover. I mean, demand is there, for sure.

The demand is there.

So with that, we're out of time, Chris. But thank you so much for coming back. And for everybody listening, we will be back at 12:30 with Discovery. Thank you.

Thank you very much. Take care.