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

Good afternoon, everyone. I'm John Hodulik, Media and Telecom Analyst here at UBS, and welcome back to UBS' Global TMT Conference. Very pleased to announce our lunch keynote speaker is Tom Rutledge, the Chairman and CEO of Charter Communications. Tom, thanks for being here today.

Good to be here, John, today. Thank you.

Exactly. Thanks for the flexibility from you, Tom and from the audience. I think we put those technical difficulties behind at least for now, we'll see.

Yes. Sorry about the decor. I'm in a little cubicle in Los Angeles at the moment, calling in. I wasn't expecting to be here at the moment.

Right, right. Exactly. Well, we'll make it work. As I always do, late in 2021, starting to get our heads around 2022. Could you lay out the priorities for Charter Communications as you start to think about 2022?

Well, I think '22 is sort of a return to normalcy kind of year for us. I mean, we've gone through a very disruptive last couple of years from an execution point of view. And we've done really quite well. If you think about what happened, we added like 3.5 million customers in that time frame and it was an enormous amount of work and we changed a lot of our processes, and the marketplace changed as a result of what has happened. And so we're getting back on plan in '22 in terms of growing the business and growing the kinds of product sets that we want to deploy. And the biggest single opportunity we have and the biggest growth driver going forward, starting in '22 is mobile. We've been -- we've just redone our billing system that mobile rides on and the initial billing system that we launched with didn't really scale as well as we wanted it to. And so we actually had to hold back marketing and efforts to grow that business because of the scale issues that we had before we could switch out systems. And so those are done and so we have an ability to accelerate growth in the mobile platform and do that in a logical way that fits our integration of those products with the traditional core cable products of broadband, video and wireline voice and the enterprise and small business services. And so mobile is really holding all of those businesses in a -- giving all of those businesses an opportunity to enhance the product that they're presenting in the marketplace both from a price perspective and from a quality of service perspective. So we've got a bunch of technology platforms we want to roll out to make the mobile experience better. Meaning, better than what you can get from a traditional mobile carrier using our broadband network and our WiFi network and to begin to use the CBRS spectrum that we have. And so those are all major projects. But more interestingly, WiFi and the continued enhancement of WiFi 6, which we've deployed and the advanced router systems that we've deployed, cloud-based managed router systems, we're able to actually give people a better experience on their mobile devices than they can get otherwise. And it's unique to us. And so rolling out those platforms and making the business grow is really what '22 is all about for us.

Great. We'll definitely get to mobile and what you're doing there with the new systems. But maybe let's jump into a high-speed data trends. Obviously, there's a lot of focus on nervousness among investors that broadband is slowing, not just for Charter, but for all of cable. Can you discuss the lower activity level that you saw in the third quarter? And you've noted that you've never seen an environment like this in your career. Are you surprised by it? And do you have any sort of sense in terms of when do you think we can emerge from here?

Well, yes, I guess I'm surprised, but I was just as surprised in the beginning of the pandemic in terms of how much growth we had. And we had a quarter where I think we grew over 800,000 broadband customers in 1 quarter. So you have, as I said, over this period, it's been a very unusual period from an economic perspective and from a consumer behavior perspective, we had an enormous amount of growth pulled forward, so to speak, in the sense that people sheltered in place and they immediately got broadband connections and got themselves set up to begin living if they weren't already, which was -- so there's a bunch of people who were living without broadband, they got broadband because they had kids in school or other issues that -- or they want to live in a different place or they weren't going to go to college, they weren't going to stay there, they're going to stay somewhere else. So that kind of infrastructure deployment in a very quick way is what happened at the beginning of the pandemic and now you have sort of the opposite of that, which is you have the unwinding of all those people that just put themselves in place and kind of who are going back out into their normal behavior patterns. And so I think the overall broadband growth opportunity for the company is really more of an average kind of growth if you look back over the last 4 or 5 years, and you look at this quarter, last quarter, you have to think about it in terms of the changes of behavior that were so dynamic in the beginning of the pandemic and how they have to come unwound before the growth rate looks the way it did previously. But I do think that the opportunity to grow the business is pretty much unchanged. And if you look at it on a 4- or 5-year growth rate trend, it's pretty solid and pretty straightforward and pretty consistent. And I think that, that -- the future will look more like the trend than it will look like the third or fourth quarter.

Got it. A number of telcos and other old builders that have announced plans to overbuild cable with fiber and that we have a couple of those kinds of AT&T here on Monday. Does that concern you? Does it -- in your mind, does it sort of change the sort of competitive equation over time?

I think -- we've been facing competitive pressure for a long, long time and the old builders for a long time. Now FiOS started building 15 years ago or more now. And so about 35% of our infrastructure has a fiber or a high-capacity network in front of it of some kind. And it's still growing at a fairly consistent rate. It hasn't really changed dramatically. And that's not the reason why that had nothing to do with the broadband trends that have existed over as a result of the pandemic. But you do -- to say that you don't have competition would be wrong. There is plenty of competition and we've had it for a long time, and it's continuing to grow at the pace it's been growing. So -- that's a reality. But 1 thing about the competitive environment we operate in is that even when somebody builds a similar infrastructure to us, we're still growing market share and still growing our business everywhere we operate. So it's -- we're performing across all of the products that we have in a way that allows us to continue to grow relationships in a positive way, even as the competitive environment gets larger.

Okay. How do you think about pricing over time? You suggested that you're still growing in areas where we're seeing 5 or so from a market share standpoint. Do you expect that to hold up? But does that include sort of the similar pricing trends that we've seen over the past few years, even as competition sort of expands.

Yes, we pretty have a -- pretty much of a national pricing strategy and we're -- I don't see anything changing the trends of the overall trajectory of our business relative to what it's been, as I said earlier in the conversation. In terms of pricing, I do think we've repriced our wireless product, our mobile product recently. And there's lots of price opportunity there for us. When you really think about where we are from a price point of view, we take about -- we make about $60 of revenue per customer relationship in broadband and the average mobile household, which has about 2.2 mobile lines per household is paying $130-ish a month for mobile connectivity. And that connectivity has a lot less capacity than our network does and with our fully deployed converged mobile broadband network does. And so we have the ability to save customers' money from a pricing perspective on their overall household telecom spend and essentially make broadband free is one way of looking at it. And so from a consumer's perspective, they can reduce their mobile prices by connecting with us and having broadband with us. And so we think that that's a pretty attractive play from a product and packaging perspective. And from an operational perspective, using an advanced WiFi network for backhaul and using CBRS potentially for backhaul makes that even more attractive long run. So we think we're pretty good from a pricing perspective and from an opportunity perspective, that price gives us. We can save people money and we can make way doing it.

Right. And I guess related to that, there's been some new administration, new Chairman of the FCC, with Jessica Rosenworcel also being confirmed. Do you think there's any risk from a regulatory side in terms of pricing on broadband?

Well, she said in her testimony that she did not want to do price regulator, but she is still interested in Title II. So I take her word. And I do think that from a public policy perspective, it's clear that the competitive environment that we're in from an infrastructure point of view is really generating positive things for consumers broadband capacity, meaning bits per consumer from a pricing perspective has been going down regularly. And as I just said, the price of mobile connectivity and the price of mobile bits and throughput continue to go down on a regular basis. And that -- so consumers are getting more and saving money when they're connected to our products. And that's a pretty attractive policy outcome seems to me. So I think we're in pretty good shape. And obviously, the federal government wants to expand the broadband footprint that needs a healthy industry to do that. And there's a big $42 billion infrastructure subsidy available going forward to make that happen. And so I think from an overall posture, we're in pretty good shape.

Okay. Another sort of outcome of the pandemic was the dramatic increase in self-install rate, which had to do a lot to help your cost structure. Just talk about that. Is that going to remain high and -- or do you expect something more normalization after the pandemic? And any other sort of costs that you can -- that sort of come back? Or do you think you can -- there's learnings and takeaways that you can...

Yes. There's a lot of interesting things that come out of the things we've learned, but we were already on a trend for increasing cost opportunity in the business. And I said a couple of years ago that I thought 1 of the sort of unknowns that occurred as a result of the transaction we did was that there was considerable upside in the cost to serve going forward in the business that we really didn't anticipate or plan for. So the business is actually more valuable than we thought it was when we did our last transaction. The reason is we were on a track to get to a more digitized customer relationship and self-service is part of that and self-installation is part of that, being able to connect when you want to connect. And we were up to around 40% of our transactions were self-installation before the pandemic. And then we went to 100% or 90% overnight because -- and we weren't really prepared to do that, and we weren't -- we didn't have the operational platform in which to do that the way we would have wanted to, but we had to do it because of the crisis. And so we backed that down to about 80% now, and it works quite well. So we got to an effective 80% rate in a very short period of time. And it really does reduce activity levels. And 60% of all transactions that customers deal with us now are digital transactions, meaning there's no human intervention in that transaction. And that's all kind of digital self-service and connects and billing questions and changes in service and scheduling of appointments and so forth. So the opportunity to digitize the business is actually taking activity out of the business, it's taking physical activity out, it's taking cost out, which makes us even more competitive on the long term. And so there's a couple of factors. There's digitalization, there's also penetration. As we have penetrated deeper into the market, we get certain economies of scale against our own network costs because our broadband penetration now is at 55%. The cost of running that network if we get to 65% will be about the same. So our average cost on a per customer basis comes down if we can keep growing the business. And so we're incented actually from a price and market share opportunity perspective to keep driving that growth.

That makes sense. Just a quick follow-up. That 60% of all transactions being digital. Do you have a target for where that could go?

Well, I think a lot of our customers for the foreseeable future would to deal with us by voice, telephone. But -- so I don't know where the natural sort of order of that all is in terms of what the mix will be through time. But it's -- the pandemic itself accelerated consumer behavior too in terms of what consumers wanted to do digitally and could do digitally because there's a learning curve there, kind of an age-related learning curve. So it's actually been striking in terms of how fast it's grown and been adopted. And I don't know what the ultimate mix will be, but our goal is to serve the customer the way they want to be served. And so we think that we'll continue to serve significant amounts of people by telephone because the products are complex, video products are complex, lots of packages. Broadband is complex and the broadband house now has got multiple components to it with pods and with full coverage throughout the housing and throughout the property. So it's a fairly -- and telephone, mobile and hooking up mobile, they're all complex kinds of tasks for consumers which they can do, but there's a learning curve there and a comfort curve. And so we're trying to push it as fast as we can without creating any dissatisfaction or any friction in the customer base.

Right. So last question on broadband. Just fixed wireless, we heard a lot of Verizon and T-Mobile about their initiatives and their kind of expectations that they'll hit a run rate of net adds some time mid-to-late next year given the network deployment. I mean, do you see this as a growing threat? Or just what are your thoughts on competition from fixed wireless providers over time?

Well, I think it's -- I think for all the reasons I just said previously that we can have a superior product and packaging and pricing mix relative to those competitors. But yes, I think that there will be an expansion of that footprint. I don't know how much it will be in ours and that it will be directly against us or whether it will be on the periphery of the plant. But I expect that competitors will continue to build out infrastructure and try to be successful against us. And our aim will be to not let that happen.

Okay. Maybe turning to video. Obviously, you've been around the industry for a long time. Can you give us a sense of your expectations for the future of the multichannel video. Obviously, we've seen a lot of change in the -- just in the last 5 years. But the majority of households still have a traditional multichannel TV service. How do you see that evolving over time?

Yes. It's interesting. So 32 million customers and a little less than 16 million video customers now. So half of our customers don't buy video from us anymore. And the -- but that said, we've had more success in videos than anybody interestingly in percentage terms. And it's because we sold less expensive packages, the fat basic package is approaching $100 in all-in sort of with sports and broadcast TV. And it's priced a lot of people out of the marketplace. And the pressures on that fat bundle haven't really gone away. Everybody who's selling into that fat bundle as content providers also trying to go direct-to-consumer and at the same time, maintain their relationship with us in the bundle. And people -- a lot of people, that is what television is and it's well worth the price. So I think there's -- we're trying to -- given what we can, given the constraints and our own access to content to create as many packages as we can for customers that meet their needs recognizing though that most people would love to have the fat bundle if it wasn't so expensive and to try to keep those cost pressures as low as possible, but it's still difficult for us to control those costs. So where do I see that going? I see us becoming more transactional and helping these direct-to-consumer businesses work and to help sell those businesses for those direct-to-consumer models because of our inherent relationship with the connected customer. So I think there's a continued opportunity in video for us and a continued responsibility for us as part of our overall customer-facing relationship to have a good robust video product so that the relationship with us is enhanced by having video through us. So I think the rate of the decline in full package services will abate to some extent because there's -- it's still the primary way to get sports, but how it ultimately breaks up and get into sports direct and entertainment direct, I'm not -- that could be a long way. And so we'll continue to play in all of those parts and try to find the opportunities for us given our relationship with our customers that video presents us.

Got it. Okay. You mentioned being part of sort of D2C or streaming aggregation and distribution. Anything you can tell us about the sort of economics of doing that? I mean, is that attractive? And obviously, it's probably sort of all the margin, right, anytime someone downloads an average size for a service from you guys, but is that an ongoing and could that be a pretty meaningful contributor versus [indiscernible] video?

No, I think it could be. Yes, I think it could be -- it's certainly, it could be worth doing. Will it be as large as the traditional video business? No, I don't think so. I think ultimately, video is a smaller business than it is today, which is unfortunate. But there's no model that would produce as much as the model we had. So -- but that doesn't mean that it's not a good opportunity for the long run.

Right. Lastly on video, just how do you expect -- given all these changing dynamics and the big 1 you said a lot of these contents -- a lot of these networks pushing content onto their own D2C platforms at the expense of the linear feed. How do you see that impacting or just the overall evolution of sort of your programming costs as these networks renew and core cutting does what it's done?

Yes. There's a lot of pressure in the system. And we don't want to raise cost because it's just -- we're passing it through to the customers. We don't want to pay those costs in the back packages because the customers get them and they -- and the subscriber numbers go down and so nobody realizes the revenue anyway, which is -- so we'd like to find a way to stabilize those costs, and include having the cost go up and help support the direct-to-consumer models at the same time so that the companies that rely on the big bundle for their current EBITDA growth -- or EBITDA, their current cash flow can transition some of that into the direct-to-consumer models. But I think we're going to continue to try to not pay higher programming costs. People are going to continue to want those costs to be given to -- they're going to try to realize those. So there will be continued conflict. But I do think there's a point where it's obvious where things are going, and yet you kind of need to make it smart and rationalize how you serve video. And I think we could work with content companies to help make that work.

Yes. Let's pivot back to the couple of the growth drivers for this business. You've seen some acceleration in SMB growth. Can you talk about the drivers there? And do you think you can sustain mid-single-digit growth in that segment?

Again, it's interesting, I was looking at the data just the -- I guess, it was yesterday before we were supposed to talk that -- small businesses that are closing because of shutdown or bankruptcy, numbers are down below they were pre-pandemic for the first time, which is kind of interesting. But we're doing well in that area. We've managed to put mobile with our packaging as well, as well as good video packages that actually work in the SMB space. And so we -- and our share there is less than it is in the residential market. So we think there's lots of continued long-run upside in the SMB space although that share gap is closing because we're doing quite well. But there's more to get than there has been gotten.

Makes sense. You started out earlier in talking about mobility. So let's dig a little deeper in there and talked about the new billing system and how that could drive faster growth, which I assume it just means higher net adds as those plans come together and got to '22. I mean, what exactly does it allow you to do that you weren't doing before? Are we -- should we expect to see more sort of advertising and marketing around sort of wireless broadband bundle and sort of unified sales and service and that kind of product?

Yes. Yes. I mean, we're really -- back to the penetration model I started talking about in the revenue takeout per household earlier in the conversation, if you look at our penetration on a household spend rate, we're 26% penetrated just in pure dollars sense, take out per home passed. And so that means that there's a lot -- 3x as much upside as there is what we've already achieved at the current prices now and now if we lower those prices, there's still a significant upside there. So yes, we're going to be marketing mobile significantly and we're making headway. As I said, we actually had to hold back most of the last half of last year on where we wanted to go -- the last half of this year, excuse me and where we wanted to go with mobile in terms of trying to drive that business. We've gotten to over 3 million customers. We know what we're doing and how to do it at this point. So we're ready to go faster, and we had to switch out billing systems in order to do that. So we're now in a position where we're taking advantage of that. You may see our mass media advertising as a result of that. And we're getting response. And so our mobile business is accelerating. And that's good. And it's accelerating both out of our existing customer base and it's accelerating, we think it'll have a pull through ultimately on broadband. And what the natural pull-through is at this moment in time is hard to say because of all the COVID-related issues that we talked about earlier. But yes, I do think it's a 2-edged opportunity. It's the opportunity to just create more ARPU per customer and more satisfaction per customer on the existing base. So we just make our cable system more valuable and we make our revenues go up, but our customer costs go down on a household basis and our cash flow goes up and our average customer life goes up. And so our customers are worth more just by having this product. But we can also grow our customer base because it's an attractive overall relationship that a customer -- that doesn't have a relationship with us can take advantage of it. So it can grow both ways and so it's pretty exciting. And it's more upside in broadband alone.

Right. In terms of the size of the opportunity, you've got 50% penetration of broadband of sort of homes passed. Do you think you can get to sort of 50% penetration of broadband with wireless? Is that sort of where the...

Yes. Well -- yes, so back, I remember launching voice over IP in 2004 against the wireline telephone companies. And there was virtually no competition on wireline voice at that time and the average home build in the New York area where I was doing it, the metro area was about $72 with taxes and fees for wireline. We're selling that for $13 today, but we have 60 -- more than 60% share of wireline. So the 2 biggest phone companies in America of that product are us in Comcast, it's kind of interesting people don't think of us as though -- -yes, but that's -- we took that business as an industry and we were early leaders in that at Cablevision when I was there. And I -- so what kind of upside is there, I think that kind of upside.

Got you. And then 2 more, I think cable's approach to mobility has been, I think there's a lot of differences versus the traditional carriers. But 1 of the big ones from a customer-facing standpoint is a lack of subsidies and right now the wireless industry is sort of competing head-to-head based on trade-in values and those handset promotions. I mean, do you expect over time the cable industry to sort of follow in that stat or are you going to continue to go your own path?

Well, I don't know, to be honest, but I do think that we'll take customers and we'll do what it takes to take customers. But what's the best way to do that? That's -- we're not doing that today and we have accelerating growth. So I don't see a need to do it today. But then in the end, it's about household spend and what people are actually paying and showing them what they're paying. There's a lot of obfuscation in the way things are priced with subsidies, but in the long run, it's -- what's your total dollars out to have -- to be connected to the service on this device, and we think right now, we can show consumers that our deal is a better deal and it's going to resonate in the marketplace, but we'll do what it takes.

Lastly, on wireless, you have planned. You have some CBR spectrum. You have plans to bid out a market in 2022. I guess what are you hoping to learn? What are the -- what are you're testing out? And what do you hope to come away with from this, I guess, initial build? And then can you give us a sort of vague time frame for when do you think -- we should think of you having all the CBR spectrum built out if things go the way you expect?

Right. What we expect -- what we'd like to learn and what we expect to learn is how to operate a CBRS network in conjunction with an MVNO and in conjunction with our WiFi networks and how to make the integration of all 3 of those relationships a seamless roaming opportunity for us and for our customers in such a way that we bring our average cost to serve down as well as add functionality related to the capacity of each 1 of those networks in terms of speed and throughput that the customer wouldn't otherwise get. So what does that mean? It means faster phones with more data and at less cost. And being able to integrate all of that on a seamless technical platform that allows the customer experience to be a good experience. And we think that, that's what we'll achieve. And we're already achieving it with WiFi in many ways. If you look at the total bits that a mobile customer uses, about 80% of it is coming through the WiFi platform. We think a substantial portion could come through CBRS, and we think WiFi could actually take more of that. So -- and there are ways to help manage that. And so fundamentally, we like our MVNO relationship. We like the product that we are able to use -- deploy on it, and it's a good one. And -- but we think we can actually make it better and make it a little less expensive for us. And as a result of that, better for the consumer.

Maybe we'll skip to the CapEx with -- we got about 7 minutes here. Capital intensity has been coming down. I think a lot of it has to do with CPE spending. And do you think that, that trend can continue, especially as you transition to as we talked about earlier, more and more to IP-based TV services?

Yes. Capital intensity is coming down for a lot of reasons. One thing is EBITDA keeps growing and if capital stays the same, intensity comes down and revenue grows because that's the way you're measuring it. But ultimately, it is how much free cash flow you thrown out. And the capital intensity is coming down on the video side. One, we have 11 million customers now who buy video from us who we don't provide the CPE, they're bringing their own CPE. It's through an app-based sale. So you could actually get to a -- you could imagine, I don't think it will actually develop this way, but you can imagine there is no CPE for video from an operator's perspective. But -- so that's -- that in itself brings it down. So does the cost of IP boxes relative to traditional architectures. And then well, there's sort of taking care of the plant, upgrading the plant, augmenting the plant. Those costs aren't changing much, but they're -- relative to the EBITDA being produced, they're staying flat. And as I said earlier, if you penetrate a fixed network deeper, then the fixed cost gets shared by more people and so you have lower average capital.

Right. You guys have been talking more recently about using high splits to add capacity to a network. Can you give us a sense for how much additional capacity that creates from broadband as a technology is deployed?

Yes. Yes. So high split is -- it's a way to get to multi-gig downstream speeds and gig upstream speeds. So if you wanted to have symmetrical gigs products where you wanted to have 3 gig down speeds, you could do that with high split augmentation. And you can also use high split instead of note split. So we have in our normal capital expenditures, which we -- and we've been spending about $7 billion a year, a little less actually without mobile on capital for quite a while. And if we -- in that number is an augmentation capital number, which is what we spend on a yearly basis, we're continuously upgrading our plant infrastructure to handle average increased users and data throughput. So we augment our network so that it has plenty of headroom over it so that if we have rapid growth, it's already deployed. Like we did in the pandemic interestingly, we had a massive change in behavior almost overnight, and the networks held up very well. So that capacity headroom is what we constantly are spending capital against in, what we call, augmentation, making the network capable. If you do high split, in place of the traditional augmentation, you sort of get both things at the same time. And so it's actually quite inexpensive on an ongoing basis over a multiyear period and gives you a lot of capacity now. We don't really have any products that need that capacity right now, and we're doing very well in the marketplace competitively without that capacity. But in terms of today, we'll start augmenting our plant using high split. It's really not an increase in capital today and it may not be over a multiyear period. So it's a relatively inexpensive opportunity. It would cost money, if you did it all in 1 fell swoop. But again, more -- it's more like -- well more like what we did with DOCSIS 3.1, which took about $450 million of capital. We did that in 2 years and took capacity up. It's more than that, but it's a lot, lot less than any kind of alternative infrastructure.

Got it. Just 2 more from me, Tom. So I think they're pretty quick. First, M&A, you've said in the past that you'd like to buy digital cable assets. Is that still the case? Does the regulatory environment make that more difficult now? Or does the changes we've seen in potential sort of slowdown that at least we're seeing in the near term and broadband maybe make that more likely, just your view on this sort of M&A...

Yes. Like I said, I'm not sure there is a slowdown in that sense, but I think that obviously, there's a new DOJ and new FTC. And the FCC, we've seen -- Jessica was there when we did the Time Warner deal. And so that deal was done under a democratic administration. We're still a regional player. We compete against national companies AT&T and Verizon, T-Mobile, Elon Musk and UseNet and DIRECTV and DISH. So there's a lot to be said for even from a policy point of view, getting us to a national footprint kind of capability. But that said, I can't tell you -- I haven't seen anybody go through the deal process and I don't know what it would be like, but I think there are good arguments of why we could continue to do M&A. On the other hand, we don't need it today. And we have our own stock that we've been buying back in significant amounts and that opportunity -- we still think the business is fundamentally a great business.

That was going to be my last question on the capital return strategy. Obviously, it's worked very well for the company. It's sort -- certainly from our perspective, it's very clean. You know what you're getting. Should we expect any of that to change or this level of buybacks to continue?

Yes. Well, we said that if we could do the right M&A, we would do it. And we think that this business is attractive and obviously, there would be synergies and opportunity and scale advantages to having that M&A. But fundamentally, we also think that we're in a great business, and we've been buying our own company when other opportunities weren't available in, that's still our view.

Okay. Awesome. Well, that's all the time we have today. Tom, thanks for being here and thanks for the flexibility.

Thank, John. Thanks.

Thank you very much for joining us.

Take care.

Bye-bye.

Bye.