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

Welcome back. I'm Brett Feldman, Goldman's U.S. telecom, cable and media analyst. It is my great pleasure to welcome back to Communacopia in our 30th year, Tom Rutledge, the Chairman and CEO of Charter Communications. Tom, thanks for being with us today.

Thank you for having me, Brett.

So Charter's second quarter results featured solid growth and operating leverage across the board, and you really haven't missed a beat throughout the entire pandemic. What are your key priorities for the remainder of 2021?

Well, really, it's -- our biggest priority is executing our operating strategy and continuing to sell more broadband and cable and mobile to the new customers. And we've been doing that quite well. We've done it all through the pandemic. And the pandemic has created a very unusual operating environment for us. We had a hard time forecasting what 2021 would be in terms of what the opportunity in the marketplace would be. We really assumed that the pandemic would have been over in our planning. And it's interesting because it's been an unusual year. Our churn levels are extremely low. We have the lowest disconnect rate we've ever had. And -- And yet we've had -- we're going to grow about the same as we grew in 2019. That's been our expectation. We actually thought we were going to get there a lot differently than we did, or are. But it's been an unusual environment in that the activity levels are very low. So we have lower activity levels, which means lower selling opportunities for things like mobile and add-on products that come out of new customer creation. But at the same time, our cost structures have gone down dramatically. So we have really good financial outcomes as a result of less activity coming out of the business. And so it's an interesting operating environment, and hard to forecast when the transition is going to change and activity levels will pick up again. And customers will start moving again and selling opportunities will avail themselves to us, a share taker. But we're executing against the market opportunity that we have. We're doing well, and we are meeting our expectations in terms of growth, but it isn't the way we thought it would work out in terms of activity. And what it does, in terms of activity, we think that we'll be able to continue to take share in the marketplace and to grow our business at the kind of rates we've been growing for the last -- I wouldn't count 2020 in there, but the years prior to 2020. And so '18, '19 and '21, going forward.

Why is that? What gives you confidence that as we get back into a more normalized world, you'll be able to sustain your historical growth rates in broadband, particularly as we're seeing some emerging competition?

Well, we think that we can do well against the competition that's emerging, and we have done well against similar infrastructure placements in the past. We do well where there is fiber against us. We do well where there's wireless against us and satellite against us. And we grow our business in all of those competitive environments because of the total packaging and the quality of the products that we have. We've got superior broadband really in almost everywhere we operate. We've got better WiFi services than our competitors. We've got better mobile integrated with our WiFi and soon-to-be CBRS network. And so -- and even our television products compared to virtual MVPDs and others is a superior product. So when you put it all together with the right pricing and packaging, and -- we do pretty well in the marketplace.

You mentioned that your churn is at the lowest levels you've ever seen, and it does seem like the pandemic has caused at least some of that, whether it's because people aren't moving as much. We've also seen some government stimulus programs that have been helpful. What are your strategies for keeping churn contained as we come out of this?

Well, look, I think there will be moving churn, which I think is an opportunity for us. It raises our cost structure to be in the marketplace and having to sell moving churn, but we do well in the sales prospect of someone who's about to select the new broadband provider. And so a higher churn, in some ways, allows us to grow share faster, even though it costs more from an operating perspective to deal with that. So we actually look forward to a higher churn environment that's caused by move activity. If you look at our -- when we look at our fundamentals and we look at our attach rates of the sales we get in a lower churn, lower sales environment, our actual yield, meaning the number of units at mobile we're getting for sale is going up, continuing to go up. So our selling machine continues to improve. Our value proposition continues to improve. And so we're convinced that as churn naturally goes up, as people move more, that, that's an opportunity for us. Now I do think that nonpay churn may stay lower than it's ever been historically because of the emergency broadband product that the federal government gives to people who are low income. And I think that the churn may go down in general because the value proposition of broadband continues to go up. But there's money for low-income people who tend to be the people who go nonpay and come back into the marketplace when they have money again. And so that may smooth out a bit and lower operating costs in the long run. And in the new stimulus or in the new Infrastructure bill, there's a significant amount of money for a permanent program to provide subsidies to low-income broadband users. So that could have a positive impact should that pass on long-run churn.

You made a point just a few moments ago that you do compete against fiber, you do compete against wireless, that's not new. And you've historically competed very well. You've, of course, made very significant investments in your network, which is probably performing better than it ever has. But if your competitors do what they say they're planning on doing, that the pace of the additional fiber availability and maybe even 5G availability could pick up over the next few years, how do you think about the need or whether you should be engaging in some type of competitive response? And how nimble do you think you can be if the competitive landscape does change on you?

Yes. So we spend a lot of time, obviously, thinking about that and preparing ourselves to be capable of responding and responding quickly and inexpensively from a capital perspective. So we've got a bunch of tools in our toolbox that we can use to change our network architecture and increase speeds, upstream and downstream, very rapidly and relatively inexpensively. When -- a couple of years ago, we did DOCSIS 3.1, we were able to -- for $450 million or $9 a home passed, completely change our downstream speeds and put a gig everywhere. And people are using the networks today in a very asymmetric way. Most of the network use is downstream and entertainment-driven, video-driven. Streaming TV is the main data application from a capacity perspective. And that's not true in the upstream. But it may change and new products may be developed that require a lot more capacity to be competitive in the upstream, and we have that ability. And we've got high splits and mid-splits, full duplex DOCSIS capabilities that we can do essentially an electronic upgrade of our network without having to re-architect and reconstruct the physical part of it and do that in a very inexpensive per home passed basis and get to symmetrical gig speeds and multi-gig downstream speeds and do that rapidly. So as the market dictates, whether it's from emerging technological competitive situations or whether it's from actual consumer use of products that require that capacity, I think we're well positioned to have a relatively efficient capital strategy, which means that we can be competitive from a pricing perspective relative to other infrastructures that are being deployed against us.

How else do you think about differentiating your product suite versus an emerging cohort of competitors other than just matching or exceeding their speeds?

Well, I think there's more to license speed, even though people may market that. And so we've invested in a really robust Wi-Fi network that's cloud-based and allows us to control the product set in a very forward consumer-friendly way, and to distribute high-capacity broadband throughout the house very efficiently. We've got our MVNO mobile product, which allows us to have very low-cost mobile products mixed with broadband, and to save the consumer money on their overall communication spend and have that communication spend that's lower cost come to us as new revenue. So it's a very virtuous business model for us to reduce people's mobile bills, which are higher than their broadband bills, and integrate the mobile product with the broadband product. And I think we have opportunities in video, too, to continue -- even though the video business is changing the traditional. That bundle is under a lot of stress because it's high-priced and can't be unbundled easily. Although we do have a pretty good video business and pretty good relative performance compared to everyone else in the industry because we have made some inexpensive video packages available as part of our core video product. And I think in the future, we'll be able to have better video products to use our scale purchasing video to make those video products work in a way that's consumer-friendly and across all the functionality of our network, including the mobile platform, in a way that's very consumer-friendly. So I think we can stay competitive and stay better, not just based on price alone, but on the totality of the value of the product that we provide.

I'd like to follow up on the comments you just made about improving your video products. And I was hoping you can clarify, were you referring to improving your traditional linear products, or were you maybe talking about being more engaged in offering streaming products such as having streaming hardware or maybe aggregating streaming services as we've seen some other cable companies do?

Well, so all of that, yes. We've -- our advertising business, if you compare our 2021 numbers against 2019, so throughout 2020, we're still growing our linear advertising business. And the reason we're growing it is not because of the linear piece of it, but the actual digital piece and the higher CPMs we get by having the targeted advertising that comes from a streaming environment. Charter is actually the largest streamer in the country of video product, because we sell our traditional video products, our cable TV services, on both Roku and Apple devices. And so consumers don't need to necessarily take a box from us, they can take an app from us. And so as an app-based provider, we have the highest rate of video app in the country, and we have the most streams of any operator in the country, including an MVNO out there or a virtual video network operator. And so we have the ability to serve the customer on the devices they have the way they want to be served. And we also have the ability to put our own devices out there that have the same attributes as Roku and as Amazon's streaming devices and Apple and so forth. So -- and all of that can be integrated into the total value proposition that we create for the consumer. I mean, there's still a lot of pressure in the legacy business, and there's still a lot of consumers that want the legacy product, and it's still very expensive. And it's still driven by sports, and so -- and it's not about to fall apart. So we're going to be in the legacy business for a long time. And it's going to be under the same pressures as it's been under for years. On the other hand, these new opportunities to create transactional volume, transactional revenue by selling services on a platform so that consumers can buy the products they want when they want to buy them in an easy way, we can do that and create value there. We can create value from our advertising, both nationally and locally. We have a huge local ad sales force. So to the extent that targeted advertising is sold at the local level, that's an opportunity for higher CPMs coming out of video and encourages us to push low-cost video out to consumers supported by advertising. So I think there's a host of opportunities there, but I'm not saying that video is suddenly going to be a major driver. But over the long term, I think it has an opportunity.

Just one more follow-up on video since you offered so much color there. And you've talked about this a lot in the past, your ability to be flexible with your video offers has historically been constrained by the agreements that you had with the media companies. I think you've noted as you've rolled through some renewals recently that you've modernized some of those agreements. And I know you can't talk about any specific agreement. Could you maybe just talk holistically, what does it mean to have modernized agreements with media companies? And broadly speaking, how is that giving you more flexibility across your suite of video offers? I know you sort of touched on some of that.

Yes. Well, modernizing -- I use that term to describe that. It was a difference than historic agreements without saying much really. But -- and I don't want to go into the specifics of any agreement that we've done. But we are doing things like, as I said, creating app-based products and app-based platforms where we sell content in an app, and we also help other providers who have a direct-to-consumer relationship sell their product as part of our relationship with the customer and take a transaction fee -- a sales fee, essentially, a commission for doing that. So it's a consignment kind of model. And we have -- so we're developing those kind of models. And we're also developing fully featured hardware systems. And so for instance, we've recently started deploying apps on our Worldbox. So HBO is now an app-based product, direct-to-consumer on our Worldbox in an app environment. YouTube is on there. Others are on there. Netflix. So we -- obviously, our programming deals with those companies, to the extent you'd call them programming deals, our direct-to-consumer models, and they're not -- they've not been traditionally part of our programming negotiation infrastructure, so to speak. So we're bringing television back together again -- all television, where we want to have every kind of television model possible altogether available to our customers so that our customers have the best video experience that they can get. And ultimately, that's an attribute of our relationship with the customer, just like mobile is an attribute of our relationship with the customer. That interconnected broadband product that we have, the high-capacity 2-way connection is really just enhanced by all of these attributes in our product. And I think we can look at those businesses as stand-alone businesses, but we can also look at them as just integral features of our connections.

Great. Well,let's bring it back to broadband for a little bit. And I'd like to talk about ARPU, where you've seen really strong growth. How should we think about the primary drivers of ARPU growth going forward, whether it's speed up tiering or rate adjustments or just a shift in the mix? And are there other factors that could feature in how you think about pricing your broadband over time? For example, latency or uplink speeds.

Yes. I mean you don't want to make broadband too complicated from a pricing perspective. So there's -- there's always a tendency to want to have a pricing mechanism associated with every capital dollar you deploy historically in our business. But in the way consumers really buy things, it's better to have all you can eat and as much functionality in that all you can eat as possible. So there's a tension between those 2 views. And we tend to come out to the all-you-can-eat side of that and drive value to the consumer. So I don't envision a short-term change in the way we price broadband, going forward.

So then how do we think about the trajectory of your broadband ARPU?

Well, I think for one thing, ARPU is going up because churn is going down. And that's not commonly looked at as a cause of it, and it is somewhat temporary. When you have less promotional offers as part of your mix, ARPU naturally rises. So some of our ARPU growth this year is because of the odd operating environment. So we have this strange year where we have less activity and great financials and they're directly connected. So this year, we're going to have good growth like we had in 2019, but it's growth that in a strange operating environment with a lot less cost in it, so ARPUs are going up because of less promotional pricing, and EBITDA is going up because of less operating cost. So we have a very strong financial outcome coming this year. But it's sort of masking the longer-run trend, which is positive in subscriber growth, and I think we can continue to take market share at the rates we've been taking it because of all the things I said about our product and the capability of our network. But we're going to have to go back to an environment where we have a higher cost because we're selling more. And so it's -- people will have to understand that from a short-term perspective and how it impacts the long-run perspective.

I think you actually had expected that this year, right, that this was going to be the back to normal, and then we were going to see the inflection in next year as probably all been pushed a year, is that fair? Best guess.

And I don't know when the last variant goes through and people say, okay, life's normal again. But I'd expect it sooner than it has happened. But at some point, it's going to happen and life will return to a more normal kind of environment, and we're going to have to return to a more normal plan. But -- so it's a challenging environment from a sales perspective because there's less activity, but it's a great financial environment.

We're talking about subscriber growth. And one of the things that factors into your rate of subscriber growth is footprint expansion. Last year, you had expanded your territory by about 1 million, I think, over 1 million passings. And you were recently a winner of $1.2 billion of subsidies under the RDOF program, which is really part of a bigger $5 billion initiative that you have around expanding your footprint into rural areas. And so really, the question is, why does it make sense right now to lean into rural broadband, particularly when it seems like some of these emerging competitors have actually identified those markets as attractive as well?

Yes. Well, I guess 2 reasons: One, the rural areas weren't getting built, and there is an unserved part of America that's -- in terms of total capacity, it's not huge, but it's -- it's a significant piece, and people want broadband. And we view that as a significant policy issue for the country that has to be solved, and we want to be part of the solution. And so we participated in RDOF and we got subsidy and we got the ability to build out low-density areas. At the same time, our vision of what our potential penetration in broadband can be keeps going up. And so it actually makes expansion into lower-density areas more palatable or profitable, both, because we expect to get more customers for home passed in the low-density areas that we might have 5 years ago. And so with rising expectations of total penetration, it makes things feasible that weren't feasible previously from an economic and capital point of view. So we're building opportunistically based on our vision of what our penetration will be in low-density areas. And we have good experience with that. We've built hundreds of thousands of very low-density passings throughout the country, and we're getting the penetrations we expect to get that justify that construction. So there's 2 things going on. One, we want to serve the country, and we're willing to go down to very long-run, relatively low ROI construction projects to serve low-density areas for purposes of, meaning, the public obligation that we might have as a company. And we're also enthused by our ability to actually grow this business, which takes us and builds -- allows us to build unsubsidized passings at lower and lower penetrations, because our view of what we're going to get out of it ultimately is greater based on our actual performance.

I'd like to pivot and talk a bit about mobile. You earlier made some comments about how the change in sales activity has had an impact on mobile volumes. But in aggregate, your mobile business has had a pretty good run over the 3 years since you've launched it. So the real question is what do you think and hope your mobile strategy can do for the business over the longer term?

Yes. Well, I -- look, I think we can -- if you look at the average mobile bill that a household has, it's significantly higher than the cable bill. It's more like $120 to $140 a month and -- relative to the broadband bill. And it's a lot less capacity actually being sold and used in that footprint. So we think that we can make mobile less expensive for consumers fundamentally, and integrate it into the broadband product in a way that's very efficient and we can save consumers at the household level significant money. And by saving that money, they can buy more video, they can buy more broadband, they can buy or have a lower overall telecom spend and have a higher level of satisfaction than we would have had otherwise. And so that's the fundamental mobile opportunity. And we're getting better and better at selling mobile. There's a lot of learnings that have to occur when you go into a new business like that. We had to deploy 750 stores as part of our sort of planned effort. From a retail perspective, that capital expenditure is coming to an end, and the deployment is fully out there now. And so the capability of that selling machine is now in the marketplace. We've been able to get higher and higher attach rates in mobile on every sale we make. The interesting thing is that sales are lower because of the low churn environment, so we actually had higher mobile expectations than we've achieved because we didn't anticipate the low sales environment that we're in. But my vision, given the yields we get in the sales environment we are in is that should they continue, they're actually higher than our plan. So we should actually have a better trajectory than we might have thought when the marketplace returns to normal from an activity level perspective.

I'd like to talk about your 5G strategy a little bit. You've done very well with the Bring Your Own Device model as consumers were increasingly satisfied with the 4G handsets they had, and in many cases, had already paid off. But the major wireless carriers have become increasingly promotional with their handset offers, particularly as they try to encourage customers to move and upgrade into 5G devices. Do you think you need to match these offers or to make handset promos, generally speaking, a bigger part of how you go to market? And how has that changed the financial dynamics of the business?

Well, everything I just said in terms of what our -- how we're doing and what our opportunity is in an environment where we're not doing those subsidies. But -- it is a very competitive environment and your competitors react and they -- and so I don't know what we're going to have to do ultimately to make -- to take friction out of the selling process, so to speak. But I do think long run, we have a lower cost model and that we can make the -- give more value for less money because of our CBRS and Wi-Fi offload and the good MVNO that we have. And as a result of all of that, create value for the consumer. Now do we -- will we need to do subsidies in order to loosen the market share quicker? Potentially, but we -- so far, we've resisted that and don't have any plans to do it.

Earlier this week, we had Brian Roberts at the conference, and he was talking about some of the partnerships that you guys have around your mobile strategies. And one of the things he pointed to was an evaluation of whether it made sense to do CBRS-based small cells in partnership with you to ensure that they would be offload across the joint footprint. So I was hoping you can maybe just give us an update on how you're thinking about that and how your evaluation of that opportunity kind of factors into your long-term financial objectives for the wireless business?

Yes. I think that joint venture that we did with Comcast was a very good example of how 2 pretty large companies but both regional players, neither one of us has a national business from a distribution point of view, and yet all of the wireless carrier companies that we compete against are national in scope. And so we used our relationship to create a synthetic national opportunity by creating a CBRS business. And we had a meeting of the minds on how that could work and how we could offload traffic and how both companies could benefit their customer bases by having this offload process and capability, and how that would save consumers money, not just for Charter customers, but for Comcast customers, for all customers of both companies. And so I think it's a good testament to how companies, who are in a certain kind of environment, can work together to create real value, and we did in that case.

Let's spend a few moments talking about your commercial business, which represents about 13% of your revenues. This is obviously a customer segment that was impacted pretty significantly by COVID. What does the bid demand backdrop look like right now in the enterprise group as the economy reopens? And to what extent has the Delta variant sort of disrupted the reopening trajectory?

Our enterprise business is doing pretty well, and we're happy with the results we're getting. Our relationship growth, new customers' growth, is accelerating. And so that's a very positive sign. The country, in most places, is open and businesses are making decisions. And we are getting -- our salespeople are able to talk to enterprise customers. And so there's a significant amount of activity, and it's higher than it's been. We have some drags in our enterprise business with our early deployment of cellular backhaul, which we actually created a fairly large business that is not growing, it's actually shrinking. And so that's -- the last couple of years, pulled down our overall numbers, but we're still very low penetrated in enterprise. And the actual business that we're seeking in enterprise today, creating new customers with new services, is accelerating and growing quite well.

So what do you have to do to be able to move more efficiently up market? And just how do you think about the long-term opportunity in the business space?

Well, to move upmarket, you need more product development and credibility in the marketplace to sell sophisticated products to sophisticated enterprise customers. I think we're pleased with the development that we have, and we are moving upscale in our up segment, you might say, in terms of the customers that we're reaching. And we have a pretty robust product development product line in the pipeline. So I think we'll be able to continue to launch new products into the market, credibly service those products, and continue to grow share, which our percentage of is quite low.

I want turn to your capital program. So you expect your cable CapEx, excluding RDOF and mobile investments, to be relatively consistent as a percentage of cable revenue this year versus 2020. I think you had previously anticipated that your cable capital intensity, so as a percentage of revenue, would be coming down over time. I guess the question would be like what's driving the incremental investment? And what's the right framework for investors to think about your capital program longer term?

Well, I think there are a couple of trends going on. I think over the long haul, we're less capital-intensive. How you measure capital intensity is an issue, too. Some people divide capital into revenue. You have the video business, which is high revenue, low margin shrinking in general in terms of revenues. So I think measuring it that way could create an optical illusion. Capital intensity is going down to serve the business. CPE is going down on a per unit basis. The cost of doing upgrades using like a DOCSIS 3.1 approach or a high split or DOCSIS 4.0 approach on a capital basis is relatively less expensive in terms of the output of capacity you get in historic capital deployments. And our operating costs, which also have a capital component to them like transaction volume and self-service, which we can now do without sending trucks in many cases, continues to go up as a percentage of the overall activity. So the business is becoming less capital-intensive. That said, to the extent that we do RDOF and we deploy $4 billion of private capital or $1 billion of public capital against that, that will get layered in at some point in the future when that activity begins. CBRS, similarly, it isn't going to happen next year in a significant way. But in a couple of years, it -- to the extent it works well, it will get deployed more rapidly. And so you're going to have a lumpy process of capital deployment to some extent. But over the long haul, the trend is lower.

And then so my last question, how do you think about balancing these capital programs against your capital return programs, your buyback programs? And if you're going to see some lumpiness here in your CapEx over the next few years, how might that be reflected in your share repurchase program?

Well we have sort of a hierarchy of opportunities to deploy capital. And one is to do M&A if there's good M&A and we like this business. And if there were more of it to do, we would do it. We also like our own company, and so we've been buying back our stock and -- with our own available cash flow. Look, I do think free cash flow intensity is another way of describing it. That's going up also because EBITDA is going up rapidly. Capital, even notwithstanding the lumpiness of free cash flow, is still growing up. And so that's, to me, a great business. And so to the extent we have free capital or free cash flow available, we've been buying our own stock, and I don't see anything changing that.

All right. Tom, that's a great place to end. Thanks so much for being here with us, and we certainly hope we can do this in person next year.

I hope so, too. Believe me. But thank you for having me.

Thanks for being here.