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

Okay. Thanks, everyone, for joining us for our closing keynote for the day. Pleased to introduce Jessica Fischer, who is the Chief Financial Officer of Charter Communications and making her first public appearance. So welcome, Jessica, and thanks for joining us this afternoon.

Thank you very much. It's great to be here. It's so nice to see people live. So it's great to see all of you.

Before we get into Q&A, just a reminder to people that after this keynote, we do have a reception in the Mediterranean Court, which is make a right out of this room and down on the right-hand side is the Mediterranean Court. So join us for some drinks and hors d'oeuvres, please.

Okay. Jessica, maybe just start out with discussion of management's priorities and key areas that you guys are focused on in 2022.

Sure. So 3 things that I think are sort of worth talking about. The first one is RDOF and our rural construction initiative. We've committed to building out, serving the unserved. We think there are good financial returns there. And we're really getting started with the real construction in that project this year. So we're excited to be rolling it out. The second one is thinking about product and network. So on the product side, we're working on our fixed-mobile convergence, thinking about how it is that you bring the mobile product and make it better with the fixed business and vice versa, doing that with mobile speed boost and then thinking about sort of other ideas for how we pull through that. And on the network side, we have some exciting opportunities to bring more faster connectivity to our customers. So the CBRS build-out and deploying additional WiFi hotspots to help our mobile customers get better connectivity. And then high splits, where we have the opportunity to bring multi-gigabit speeds in the download and gigabit speeds in the upload and really starting to deploy those in some markets and work with that technology. And then the last one is something that we're always thinking about. How do you do more with digital self-service and customer self-care. When we think about that, it's a win-win. We get reduced costs and we're better able to serve our customers in the long term. And on the other side of it, the customers get better service and appreciate their interactions with us more. When you bring all 3 of those things together, what it's really about is growth and penetration, right? So growing our overall count of customers, growing our cash flows and our financials. We have a real opportunity to continue to do that, and we're excited about doing it in those ways.

Okay. Great. During the last 2 years, Charter has experienced exceptional EBITDA growth at 10% to 11%. That was up from the 5% to 6% range in the preceding 2 years. And that was partially due to the pandemic. But how should we think about the company's growth profile from here in relation to recent history and what are the key points to consider?

Yes. So what I think, if you look at the long-term growth of the company, the rate of growth over time has been really good. And there was from a customer growth perspective maybe some pull-forward in the pandemic, but we continue to grow the business really nicely even coming out of that. And ultimately, we're still underpenetrated. So when you think about it, we get about 27% of the overall communication spend in our footprint, which means we have a long way to go. We can save customers money by doing things like selling them Spectrum Mobile, where they can save potentially hundreds of dollars by switching to our service, and grow our business that way. And the broadband business as well continues to grow at a nice pace. And so I think we have the opportunity to continue to grow EBITDA nicely. I'll acknowledge, so you said we had this outsized growth in the pandemic itself. We've had really low transaction volume related to the low churn in that time period. And because of that, you can see it took a lot of transaction costs out of the business. The transaction costs coming out of the business on one hand show sort of the silver lining, which is that if at some point the business were to stop growing, there's substantial financial gains to be pulled out. But we do expect that as those transactions sort of come back into the business, you'll have a little bit of pressure on the P&L. I don't think that, that changes the long-term growth trajectory. I think there's still lots of space for us to go financially and in terms of customer growth, but there is that impact sitting out there.

Yes. The deceleration in broadband net adds over the past 2 quarters has been a major focus for investors just given broadband's contribution to growth in recent years. Can you discuss the drivers of the slowdown?

Yes. So when the pandemic happened, I think we came into what has been an unusual market, and that market is still unusual. In the fourth quarter, we had record-low churn across all types, voluntary and nonpay and mover churn. And the activity that you need to grow the cable business, the best time to sell to a customer is when they're new to a residence, so when you have sort of this turnover in the market. And moves are still more than 10% lower than they were pre-pandemic. And I think you continue to see with that lower move rate that there are somewhat lower selling opportunities. We started to see some of it come back in fourth quarter of last year. And some of that activity picked back up and then Omicron hit and kind of put a wrinkle on things. But ultimately, I think we see a return to that level of activity. So we're excited to see the company start growing at a more rapid pace again. Though ultimately, we've still grown through all of it, albeit at a lower rate.

Yes. When we look at industry broadband net adds, we see that fixed wireless has become a large component of industry net adds. And it's really happened over the past few quarters and it's growing. Can you discuss your view of fixed wireless access as a competitor?

Yes. So if you look at our customers who are nonvideo customers, more than 25% of them are using more than a terabyte a month of data. And that number has been growing. And as video moves more and more into the IP space, we expect that, that amount will continue to grow. And in that context, you have Verizon and T-Mobile who, as I understood, are out there offering products that are 200 to 300 megabit per second products. That's at the lower end of the speed tiers we offer. We can offer up to gigabit essentially all across our footprint. And as customers continue to consume more data, we very much expect that some of those technologies, DSL and VDSL and even fixed wireless, won't be able to compete with really serving customers' needs. So while you might have fixed wireless sort of take some customers in the shorter term, we think that in the long run, ultimately, that wired connections will be necessary to serve customer needs.

Okay. Can you talk about the investments that you're making into the network this year? You mentioned them a bit at the beginning, like high splits, in order to maintain your lead ahead of an expansion in telco fiber-to-the-home footprints.

Yes. So we have a few different opportunities to upgrade the network. So if you think about first the short to medium term, you have things like high splits. A high split is really just an electronic drop-in. It's a low capital intensity upgrade. We think that once we sort of get started, if we were to decide to go really fast, that we could go really fast because of how easy it is in terms of doing the upgrade itself. And ultimately, it allows us to serve sort of multi-gigabit speeds in the downstream and up to gigabit speeds in the upstream. So a low capital intensity process that I think provides a lot of additional connectivity for customers. You have additional opportunities after that, right? So we can go to DOCSIS 4.0 following that, which is part of our sort of overall path to 10G. And through those, I think, really, there's a lot of optionality. So you always have sort of that next decision to make in terms of how you deploy capital to be able to upgrade your network in the most capital-efficient way at any given point in time. So I think we have a lot of opportunity when it comes to network upgrades and things like high splits, and I think that we will work through the process of deploying those at the speed that's necessary given market conditions.

Okay. How should we think about capital intensity longer term in terms of the core cable business and rural expansion opportunities in mobile, if you think about it in those kind of 3 areas?

Yes. So the good thing about the network upgrade path that I described is that we think that capital intensity can stay at a pretty steady rate, even incorporating the investments that we'll have to make relative to our investment in the network. We've always said after that, that we would think about ways to deploy capital in the business in a way that generates ROI. And I think when you think about our opportunity to go build in the rural space, that's very much what that is, right? So we think that in rural that we can generate really strong ROI while deploying capital there. We think about it really like an acquisition of an accretive M&A asset. So not so much as though it's a capital investment, but like you're acquiring a new cable company. If you can't buy one, build one. On the other side in mobile, I think we can be really targeted. So the nice thing about deploying WiFi, deploying CBRS is that the amount of investment that you have to make to generate return is relatively small, and we can find the spaces where that investment will be best served for the company. So I also sort of think about those as an overall ROI investment. You can make these investments of relatively small assets and get strong ROIs out of them. And we'll target spaces across the footprint that we think makes sense to do that.

Okay. What else can you tell us, I guess, on the progress of the RDOF build-outs and also other opportunities to expand Charter's rural footprint?

On the RDOF side, I can tell you that we're definitely underway. So one of the things about building additional cable passings, I'm sure you all know, is you have to put all of the money in upfront before you actually get the passing in service. There's a big component of that build that's concentrated around planning, design, making the poles ready and then going out and actually building the network. Where we've had really cooperative pole owners, we actually have already sort of been able to place that or been able to start building and even have placed some RDOF passings into service. I think we'll continue to do that through the year. But there in the background, there's a lot of planning and design going on for areas that will ultimately be rolled out until next year, potentially the year after. In addition to that RDOF build that we've been working on, we're also actively bidding on additional subsidized builds, and we're excited about a lot of those. I think any opportunity that we have to connect the unserved and to do that in a way that we think brings returns to the company, we're excited about doing it. And so we continue to be really active in that space as well.

Might we hear more on that front in coming months as far as additional opportunities with these government subsidies as I'm encouraged by it?

I think we could. I think right now a lot of that bidding is in process. There's also $42 billion related to the infrastructure bill that they haven't sort of started deploying yet. There are a lot of passings out there that will be expensive to build. And so I think that there will be sort of space for all of that subsidy to come in. But the process that's really happening right now on it is the bidding process. To the extent we do win bids and we think that it's material, we'll certainly disclose them. But right now we're out there sort of aggressively trying to bid on that work and bring our service where we can.

Okay. Maybe shift to mobile. So fourth quarter mobile net adds achieved a new high-water mark. How sustainable do you think that kind of growth is given that 4Q is a seasonally strong quarter for the industry and it was also the first full quarter for Charter's unlimited plans?

Yes. I absolutely think that mobile growth is sustainable. Part of what you talked about, that seasonality that you see in mobile, is really related to mobile phone sales. And mobile phone sales ultimately have not been the primary way that we've grown our mobile business. So the pricing and packaging that we rolled out late last year has been really effective in drawing consumers without having to do phones and subsidies. And we think that it will continue to be effective, and we're excited about the opportunity to keep saving customers money on their mobile service.

Do you think there might be room for that pace to accelerate in coming quarters?

Sure. There's always space for it to accelerate. I'm not prepared to sort of give guidance on mobile net adds here, but we're excited about the business. We think we bring a strong value, and we think we have the opportunity for it to grow really well for a long time to come.

Okay. Charter has exercised restraint in offering device subsidies, as you alluded to, ever since launching Spectrum Mobile. Is that simply because you haven't needed to offer them in order to grow subs or is it that you just don't find the economics of subsidies attractive relative to CLV? How should we think about that?

I mean, I think it's both, right? So on one hand, I think we've been growing the mobile business really well. And we've been happy with the growth that we're able to generate given the pricing and packaging that we have in the market. On the other hand, device subsidies are a real detriment to cash flow, and I'm happy that we've been able to grow the way that we have without offering them. That doesn't take them off the table. I think, ultimately, we'll do what we need to do to grow the business. But right now given that we're able to grow at a good pace without having to offer device subsidies, I think we'll continue to try to do that as long as we can.

Given that there's a wide range of outcomes here, how should we think about the reasonable base case for mobile margins as the product matures and the percentage of profit reinvested into CAC, sorry, as the reinvestment in the CAC becomes smaller, how should we think about the overall economics of mobile and margins?

Sure. So customers today, mobile customers today generate positive margin before customer acquisition costs. And I think that we'll reach a point in the relatively near future where that also translates to positive EBITDA margins as that sort of ongoing subscriber base margin exceeds the customer acquisition costs that we have. But on the other side of that, we don't think about mobile as a stand-alone business. And so I honestly don't think a lot about the margin that the mobile business itself generates. Our goal is always to look at our 54 million passings and say, how do you generate the most cash flow out of these passings? And there's 2 ways to generate cash flow. You can either have more customers or you can have more cash flow per customer. And the nice thing about the mobile business is that it does both of those things for us. So we think the mobile business both allows us to be stickier to customers. It allows us to bring them additional value, which we think will bring us additional subscribers or additional customers on our network. And then in addition to that, as long as we're generating some additional margin in that business or the broadband business, you're generating additional cash flow per customer. So ultimately, the business is more accretive to the broader business than whatever you see in that sort of mobile profitability line. And so that's the way we think about it. Ultimately, we're trying to drive the most value to consumers and the network. The great thing about mobile is we can do it, driving value both to Charter and to the customer. So we take more of the wallet, but we actually shrink the total customer spend at the same time. So it's a virtuous cycle of a transaction. Like it helps us, it helps them. And ultimately, we think it's good for the business, sort of separate from that line.

Okay. Your video subscriber trends have significantly outperformed the industry over the past few years and even in the most recent quarter. Can you talk about why you've been more successful there than your competitors and peers? And how would you suggest thinking about the potential for subscriber outperformance to continue?

Yes. We started in a different place on overall video penetration than some of our peers did. And so some of that difference, I think, is probably just the difference in starting point. But from a strategic perspective, there's a couple of things that we're doing. I think on one hand, we've helped our customer base find packages that provide value to them. So for a large component of customers, that's making sure that they are able to purchase sort of a fully loaded video package instead of ending up in a basic cable package. And we've done that by pricing sort of as well as we can in video products. So trying to capture the most customers that we can in that high-value video product that works well for them. On the other side of that, so you have customers in that group. And then on the other side, for customers who really want a skinnier bundle, we've done a lot to try to manage into being able to offer those skinnier bundles to the customers that want them. And so I think in pulling those couple of things together that we've been pretty successful in deploying a set of products that customers really like and doing it in a way that provides them with value. But ultimately, in the video business, the problem is that you're always at the mercy of the programmers. I mean, we're really just a pass-through of that expense. And our ability to continue to limit costs to consumers is limited by the programmers who continue to drive up pricing on an ever-shrinking base. And until that changes, I don't know that there's a way to sort of be confident in what the long-term trends in video are because that component of the business is hard for us to control. So I think we will do what we can for as long as we can. And we think it does provide value to our customers to do that. But it's hard to say exactly where it goes.

Yes. How is Charter evolving the video business from the traditional pay-TV bundle to an app-based product strategy? And where are you in the process of putting all the pieces in place for that new product concept for video?

We fully understand. I think all of us as consumers probably understand how difficult the app-based environment can be. It's expensive. There are a lot of them. There is definitely a space in that market for there to be an aggregation product. Cable has the history and the relationships, I think, to drive that aggregation. But I think getting there from a market perspective is going to be tough. When you pull them all together initially, it's going to be extremely expensive. And that portion of the market just has challenges that I think they need to work their way through. We certainly are thinking about aggregation and about from a product perspective how we can play a role in pulling it together. But I think right now is maybe just not quite time yet given the number of products out there and sort of the difficulty of pulling it all in.

Okay. Maybe switch to business services. So your enterprise and SMB segments returned to mid-single-digit growth in 2021. Can you talk about the outlook in '22? What are the factors we should be considering as we think about the growth potential for enterprise and SMB in '22? And what are some of the key growth initiatives you have in these parts of the business?

Yes. The first piece that I would say is those businesses both continue to be underpenetrated. They're the space historically of the telcos. And we, I think, have been pushing into those markets, but there's a lot more share for us to go get. And I think on the SMB side, obviously, some of that is dependent on whether small and medium businesses are sort of growing well in the market. And as the economy sort of rolls through the pandemic and then the challenges that we're seeing now, I think that we'll have to see sort of where that space overall goes. But even in a market with challenged economics, we price and package our products really well for those small and medium-sized businesses. So we think that if they're squeezed by inflation or rising labor costs, we think that there's space for them to come, get products with us and use that to save money and therefore, switch to our products. On the enterprise side, once again, lots of opportunity for additional penetration there. The wholesale business has been a drag for a period of time. It continues to be a bit of a drag, but I think, at some point, that has to kind of flatten out and we'll see less of that. The retail side of the enterprise business has been growing extremely well. And we're excited to continue that growth in the retail space. We have a lot of fiber-connected buildings, a lot of opportunities to go sell customers. And I think as the enterprise space overall, people coming back to work is picking up, we certainly see the opportunity to do that.

Okay. Are you seeing any meaningful incremental cost pressure now from rising fuel costs and other general inflation?

Inflation is real, no doubt about it. On the labor side, I think we got out ahead of it. So we announced our $20 per hour starting wage back early in the pandemic and stepped into it over time. So we just sort of reached that milestone recently. And we did it because we thought we were doing the right thing at the time. It turns out that it was the right thing for more reasons than we knew. But I think that we've been well positioned having sort of gone through that cycle. On the fuel cost, on that side, there's nothing material to talk about in terms of the impact on the overall business. The piece that I think about a lot is what the impact is that inflation has on consumers and their continued buying. We're participants in the EBB and then the ACP program, which I think has done a lot to impact affordability for customers who struggle with that. And we continue to be strong promoters of those programs. But as consumer wallets get squeezed, I actually think it's an opportunity when you think about the mobile business where we can save people money by switching plans. And even in our other products and services where people might want to be spending sort of more time in the home, on products in the home, I think that there's a good opportunity for us to continue to grow even in that more pressured environment with consumers. So I think we're really well positioned to come into an inflationary market if that's where we end up being.

And maybe just to shift to capital allocation and free cash flow. Can you talk about your capital allocation priorities and plans for utilizing excess free cash and leverage capacity?

Absolutely. So we're doing essentially the thing that we've always been doing. So we've always said, first, we're going to take our free cash flow and invest it in high-ROI projects in the business. And so we're doing that with things like RDOF and the subsidized build-outs that we're doing as well as just building additional customers and also reinvesting in the business in the form of things like high split where we can invest. We don't think that we'll increase capital intensity with it, but we think that, that investment is important. The second bucket is always accretive M&A. We'll certainly do accretive M&A to the extent that we come across it. And then the third bucket has always been sort of then looking at where we want to be in terms of our total leverage ratio and either paying back debt or going and buying back shares to the extent that we need to do that to kind of get to that point. We're still targeting, our guidance hasn't changed on our 4 to 4.5x leverage ratio and our target in it. So we'll continue to sort of do what we've been doing along that line, and I think it's been successful for the business.

Okay. And with the interest rate environment that we're in, rising rates, do you think that, that's going to impact free cash flow in a noticeable way over the next few years? Are you pretty locked in based on your maturity schedule?

Our debt portfolio is largely very long term and also largely fixed. And so in terms of the interest rate environment from that perspective, we're not concerned. And I talked about the leverage ratio and where we sit. When we set that leverage ratio, rates were actually higher than they are today. Rates are higher than they've been in the past couple of years. But when you think about where rates are from a historical perspective, they're still quite low. And so right now given where rates are today, I'm not that concerned with the interest impact on our cash flow going forward. I think the balance sheet is in very good shape.

When you set the leverage ratio years ago, cash taxes were also in a different place.

They were.

Now that you're becoming a more significant cash taxpayer, does that change? It sounds like it doesn't change your view on leverage ratio at all but...

It doesn't. I mean, ultimately, what you have to believe is you have to believe that the business is going to continue to grow from a cash flow perspective, right? And cash taxes, while they certainly will have an impact on that cash flow growth in the year between when you don't have them and when you do have them, I think in the long term, we still anticipate that growth. And once again, when we set that plan, like we only had a set amount of net operating losses, so we knew that the cash taxes would come. I mean, they've come, I'll say, around the time that we expected them to when we set that, actually maybe a little later. So I don't think that, that today has an impact either on where we'll go.

Okay. Great. All right. Well, that about does it then. Why don't we wrap up. Thanks, everyone, for joining us. And just a reminder, reception outside, down the hall to the right. I've got refreshments and hors d'oeuvres down there so I hope to see you there.