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

All right. Thanks for joining us. My name is Phil Cusick. I follow the comm services and infrastructure space here at JPMorgan as well as media, and I'm joined today by Jessica Fischer, CFO of Charter. Jessica, thanks for joining us.

Happy to be here. Thanks.

Nice to see you. Can you start off by just discussing what you're focused on for the balance of the year? What are the big things you're focused on?

Yes. So first and foremost, we're always focused on executing on our operating strategy, right, continuing to grow the business in broadband. I think Tom commented last week and some of you may have heard that activity levels have come up a little bit. That's off of what were very, very low levels, really record low levels of churn in Q1. And so we're out there trying to figure out how do you stimulate the market? How do you continue to grow from a financial perspective, make the business more efficient in this market, which is different from the markets that we've been in often. While we're doing that, we have a lot of exciting projects going on. So I would really be remiss not to talk about them. The first one on the network evolution side, we're working on Spectrum splits, working on our -- then moving that through thinking about the technology that comes after distributed access architecture and DOCSIS 4.0 and how our network evolution works over time. We've started on our rural construction initiative. We're doing construction across all of the states where we bid RDOF today, and we're bidding on the additional subsidized builds, so trying to keep that going and continuing both to do what's right for rural America and do what's right for the business and building out to unserved customers. And then on the product side, we think a lot about this fixed mobile convergence concept. And so we're continuing to drive on that front part of that is through our hybrid mobile network operation, which we're trialing over the second half of the year. That's the deployment of our CBRS Spectrum. But in addition to that, really thinking about the ways that we use our existing network to either improve the customer experience on the mobile side or on the broadband side using the fact that we have both a fixed and wireless network available to us. So lots of exciting stuff. I think it's a great year for Charter, and we're excited about what we have to do.

Okay. So let's follow up on your first comment, about Tom saying activity came up a little bit in May. And you said that's from very low levels of churn. So does that mean sort of moves and like migration within the market or just incoming inbounds and interest?

Net adds are always sort of the tip of the iceberg in terms of what happens with a lot...

A lot going on underneath.

There's a lot going on underneath. And so what we're seeing, I think, is just a touch of upward movement in sort of across all of those things. How that plays out in terms of what happens with net adds and given how low we've been in that activity level, sort of how it grows out, we'll have to have a few more months to kind of see. And given the broader economic environment, I think you can see a little bit and it's not really anything until it fully materializes. But there -- I don't know, they're green shoots. So we're excited about the possibility of it coming back, we're certainly ready for there to be additional movement in the market. But absent that movement, as I said, we've got lots of other things going on to try to make sure that we continue to grow overall.

It's interesting. Last year, we didn't really see a lot of seasonality in 2Q. Customers didn't leave and then, of course, they didn't come back in the third quarter either. But do you see seasonality starting to become a driver again?

I think traditionally, this has been a seasonal business. And certainly, people's movements are starting to look a bit more like we did before. And so I think there's seasonality in the business. I think you've heard that from some of our peers. I don't know whether or not to expect it to be as pronounced as it's been previously, but I think it is, by its nature, a seasonal business.

Yes. Now Chris, I think on the conference call, gave probably the most forceful rebuttal of the competitive, like, problems argument out there. How do you see competition whether it's fiber or wireless or everything else?

I think if you look at what's happening with net additions, which is really the question, right? Like why is it that broadband net additions have come back down right from where they were? The first thing that Chris said continues to be true. We had a record low churn in the quarter. And when you look across the footprint, so if I look at my areas where I have another gig product available versus areas where there's not another gig product available, gross additions in churn were down on both sides of that and by the same percentage as where they were in 2019. So when I when I look at it and I say, well, is this a competition problem? The fundamental problem that we had is that movement in our markets. Because we tend to be a share taker, movement in our markets is what generates net adds for us. And there was just extraordinarily low movement in our markets. And really, there continues to be extraordinarily low movements, even if it's sort of moved up from there. The second thing that's happening is low houseable growth rates. I think people saw the new home sales numbers come out yesterday that slow household growth rate is, to some extent, impacted, I think, by stuff that's happening in supply chain for housing and sort of the broader housing market.

I can't get a refrigerator, you can't get a [ CO ].

Right. You can't outfit your kitchen, you can't finish your house. And so there's some of that impact that we're seeing. Then in addition to that, you have what happened during COVID, which is that very early on in COVID, we converted a whole lot of customers who were VDSL customers, DSL customers, mobile-only customers who I think in a different environment, you would have seen those customers convert sort of gradually over a number of years. And so there was really some sort of COVID pull forward in the adoption of higher-speed broadband to homes that were on the other side of. And then there is always this change in mix in your footprint, right? So we're -- 38% of our footprint is overlapped by gig services. That has always grown at a sort of small percentage per year clip. And as it grows, there is sort of a different mix between markets where they're competing with gig and markets where you're not competing with gig. And that does have some impact, but the growth of gig overlap in our footprint in spite of what we've seen in terms of total build from the fiber providers across the country, and our footprint has not changed significantly over the last 8, 10 quarters. And so the impact that, that additional sort of competitive footprint inside of our broader footprint has, I would say, is sort of the lowest on the list of those things that I think about in terms of what impacts net adds. The last one that you can't not talk about, I guess, is fixed wireless and what's the impact of that fixed wireless is having on the business. I think we've heard more from them since we've talked about it at the end of Q1, and Chris talked about it as to what fixed wireless is doing to expand the overall market for broadband. So the number of those connections that are going to rural or that are going to commercial, which makes it easier to understand why it is really hard for us to actually see in our numbers the impact of fixed wireless on the footprint. Once again, if you talk about the iceberg concept and think about how many gross adds we have across the board, it's hard to say if they might be taking a sort of a shaving off of the top of that total gross adds number. And -- but I think any time you get a new competitor in the market, you have some switchers who'd like to switch. And so there's the initial of that piece that we see. Might they take some customers over time? They might. But ultimately, when you look at the technology that they're providing, I think it becomes more like a situation was with VDSL or DSL where it's a set of customers who ultimately will be our customers in the long run. And we'll have to go in and compete and win them back. And we'll do that.

So you haven't seen, and Chris has answered this question, but that value customer who wants to switch or is angry, you're not seeing that sort of low-end move off to wireless or anything like that?

No. I mean as we said about churn in the first quarter, churn across the footprint, across all types of churn, we track it thinking about moves and voluntary and nonpay. And all of them are sort of at -- in the first quarter, were at or near record lows. So there's not a space where you would say, "Oh, well, clearly, we're losing something that we otherwise would have kept here if you can see it."

I was speaking to one of your peers, and they had a very granular view of what the mobile-only customer base was in 2019 and how that was sort of pulled into fixed broadband in 2020.

Yes, absolutely.

And it's creeping back out.

I think that we've seen it -- I do think that it's possible that you have some customers who had to go to fixed connections and that there might be a little bit of movement back in that mobile-only space. We brought so many of those customers in early on, that, that's possible. We haven't seen a lot of evidence of it in our footprint, but certainly, you can see in the broader environment how that could happen.

Yes. I think you said something like 38%, 40% of your homes are competitive in 1 gig. You talk about cable. We think of cable as a share taker. So when there's more movement, that cable takes share. Do you think that continues when the competitive number is 50%, 60%, 70% of your footprint?

I think it does. And I think it's because what we can offer, in addition to offering a competitive product on the broadband side, we can offer things that many of the fiber providers can't in that where many of these overbuilding ILECs have a mobile product and a broadband product, they don't have it ubiquitously across their footprint in a DMA, which makes it really hard to market. And what we have via our sort of fully-deployed broadband network combined with our mobile product, which is available in all of our passings is a fixed broadband product, a fixed and mobile product that can be deployed ubiquitously across the footprint in a way that I think will be differentiated to consumers because of the advantages that we'll create will actually deliver better mobile experience to the customers by being a part of our network and having our broadband network. And when you combine that with our video product and with our differentiated service experience, because of all of that we invest in having high-quality customer service, I think even in those markets, we'll continue to offer a differentiated product versus what a fiber provider can offer.

Okay. There's a lot of places to go from there. Let's start with one of the first priorities you talked about was your network evolution. So I get all these questions of, is cable as good as fiber? Help me understand how your confidence in the path of cable getting to those symmetric speeds and if -- well, let's just talk about that path first.

Yes. So from a technological perspective, I think we're very confident in our ability to deploy the path and whether that's sort of a Spectrum split today or sort of our flexibility over time as additional technologies become available to pivot from Spectrum splits to sort of the next technology to DOCSIS 4.0, whatever that is. And even with the Spectrum splits, I mean, I think we're talking about being able to offer symmetric gig products with multiple gigabit speeds in the downstream, which I think enables us to be competitive with where fiber providers are today in terms of having both a marketing claim that's worthwhile and being able to more than fully serve the needs of customers who are in the system. The advantage that we have is that we can do that and we can do it using a whole lot less capital than the people who are building today with fiber have to deploy, and we can do it in a system that's already fully deployed to customers. And as Tom said, no network is actually fully fiber to the device. There's always a sort of stopping point for fiber and then a starting point for the next connection, whether that's WiFi or whether it's through a coaxial network to get to the customer premise or to get to the customer device. And so I think that our expectation to -- you might have situations where fiber moves closer to the customer over time, but the way that you deliver it through that last piece shouldn't be sort of the end all and be all. Because we think the technology is available to drive the same kinds of speeds, but to do it less expensively because we have this sort of capital advantage in the fully deployed network that's there. And by doing that, to be able to provide the connectivity services to customers at a value that is hard for others to replicate. And to do it along with the differentiated service package that we're able to offer, which ultimately we think positions us well.

So you're going to offer 1 gig, I think, across the whole footprint today?

We do.

And what about the symmetric speeds? What's the timing of that?

So I think we are starting to deploy Spectrum splits as we said. And I think that as we deploy those, we'll be able to offer those symmetric speeds across the footprint.

Do you think many people actually need that? Or is this about addressing the marketing message?

I think ultimately, a good portion of it is about addressing the marketing message. Certainly, people who are in their homes, doing a couple of Zoom feeds, having a couple of people watching television, the actual bandwidth that they consume isn't that high. But I do think cable and connectivity has always been sort of an if you build it, they will come kind of business. So one of the things that we do by developing technologies to provide additional connectivity over time,is that we enable the products of the future that will come in and start to consume that bandwidth. And so is there a use case today? I'm not sure that they are particularly good use cases today, but in the long run, I think that the past has shown that we'll see those use cases develop. And so we think that we need to be there with the product to deliver, to be able to serve that future use case.

Okay. I'm curious. We've known Chris for a long time. As you've come into the CFO spot, help me think about how you view the matrix of sort of pricing and penetration and customer base, especially in broadband. It's always been a very penetration-focused company. And how do you look at that today?

I think our operating strategy is the same as it's always been. We price and package our products well in a way that delivers value to the customers because we believe that having more customers connected to the network is valuable in terms of creating the virtuous cycle sort of the best cost profile that you can create, which then allows you to deliver more value to the customer while also creating more value in the system by adding more customers to the network. So I don't think that, that point of view has changed.

The pricing actions from some of your competitors, like AT&T went from a promotion to sort of everyday low price type of organization. You've got a little bit more 1 gig competition in more markets. Does that change how you think about pricing the product?

I think we've always offered through the rack rate a consistent pricing methodology across our footprint, which I think is an advantage to our service operation and kind of the way we work more broadly. I think offering that value to competitors even -- or that value to customers even in spaces where you don't have a gig competitor is important to the overall dynamic that we create in the market. But we've offered promotional pricing in various ways across the footprint over time as well. And I think we continue to test what's necessary to generate the revenue that we want as well as to generate the customer base that we want by using various types of promotional pricing across the markets in which we compete. And really, we've been successful in doing that. So I would never preclude and say we're not going to go 1 direction or another in terms of pricing and packaging. I think we'll continue to look at what works in the markets where we're competing and to do what it takes to generate what we're looking for, which is penetration of the asset and offering our products at a value to consumers.

Okay. One of the priorities you mentioned is the network expansion. And so you've been doing edge outs for a long time. You've added this year the rural opportunity and then there's more opportunities that are coming. So how do you think about how much you want to be doing at a time and the balance of that with generating cash, which is what a lot of investors care about?

Yes. I think we've always managed our asset for the long term. And so our goal is always to sort of find projects where we can invest and generate solid return on investment to customers -- or I'm sorry, to investors. And we think that what we're doing with the rural build initiative, the rural construction initiative really does that. So we've said before, we think in the builds that we've committed to thus far, we think that we'll get mid-teens IRRs from that build and continue to think that, that's the case. And we think that from a growth perspective and sort of thinking about the growth of the company going forward that continuing to invest in rural build is the right thing to do from a financial perspective. We also think it's the right thing to do from a sort of corporate citizenship perspective, being part of the solution in connecting rural America. And so I think that you'll see us continue to bid on those subsidized builds that become -- those subsidized funds that become available to go out and complete the project of connecting rural America. And we're excited about it. We think it will generate returns for investors in the long term, which is what we're here to do, and we think it's the right thing to do.

If you -- some people were surprised that as you ramped up your RDOF spending, you didn't ramp down the other spending, I think. Is that right?

Well, yes, we didn't. I mean you still have to invest in the network if it's there, right? And the edge-outs that we do are valuable. I mean, I think that, that's another one of those ways that you continue to capture additional households and in markets where you can have very high penetrations. And so I think it's a both strategy. It's not an either/or. We'll continue to do edge-outs. We'll continue to do the rural construction initiative to expand our footprint and really become more invested. It's like -- we've always said that if there were cable assets out there that came available at reasonable prices that we would buy them, but there hasn't been as much of that as you might have hoped over the last few years. And at some point, if you can't go buy a cable company. We looked at it and said, well, we can build one. And we can build one for pricing that's perhaps better than what we could have gone and bought one for. So that's what we're going to do. We're going to go build it, and we're excited about it.

Since you mentioned that, Tom sort of generated some excitement by saying that you would love to buy cable assets recently. Should we think of anything is different? Or is that just a long-term statement of, yes, we would love to buy cable assets?

No, I don't think anything is different. I think that even -- when I talk about the capital strategy, we've always said that the first thing that we do in the company is we go out and we invest in high ROI projects. And the second thing that we do is we go consider strategic M&A. And certainly, when we consider that, we like the cable business. We know the cable business. We're confident in our ability to grow cable businesses. And that's always been the case. You have to be able to buy them at a price that's appropriate for the asset. And sometimes that's a sticking point. But we like the cable business. We'll do that. And then absent our ability to do those things, we go buy the cable business that we also like a lot, which is our own stock, right? And so I think that, that is consistent with where we've been before. I wouldn't read too much into it. It's just what we do.

I didn't read a lot into it, but some people did. So as you think about the next set of awards that may come, FCC may start pushing some of that money down late this year, early next year. Do you see that being a driver of your own spending in '23? Maybe it's more '24 and '25?

That's interesting. I mean I think some of it is a question of how quickly the states can actually get the money and do the analysis that they need to do, put the capital to work. I guess I would be surprised to see a lot of it get deployed in '23. I think there is subsidized money getting deployed right now at the state level that factors into what you can build in '23. But there's process that's necessary. So I mean, we'll have to see if they manage to sort of pull together processes and push the funds down really quickly and then maybe I'll be surprised. But certainly, I think that there is a lot of money out there to fund additional subsidized build that we expect to see coming in the next couple of years.

I assume you have people at every state house knocking on doors, getting ready for this money to come through.

The piece that I think about more than that piece is that we have to do quite a bit of work to figure out what we think it costs to build those passings that are still unserved across the states. So we've been doing some of that work, trying to figure out what we think it costs. The piece of that, that I've maybe gotten more comfortable with over time is I think that it will take a very large portion, if not all of the funding that's out there, to go connect every consumer in America. So the risk that those funds get used for something else. Over time, we are building networks in places where there are already networks. I'm, over time, getting more comfortable that I don't think that can be the case because based on what we're seeing and what it will take to connect some of these really rural customers. I think they'll end up spending it to make those connections happen.

Yes. If I think of the -- what it's going to cost you to build an RDOF home and then the subsidy on top of that, I imagine that you don't want to spend a whole lot more on an even further afield home than you are on RDOF. So it will take even more subsidy.

So I think what ends up mattering is always just how dense is the build that you're building toward. And -- and then what does that mean about what it takes to operate the system over time as well as what it takes just in build costs to build the customer. We're a private enterprise. We still have to make a return on the customers. I do think we'll be well positioned. We did our New York State build, and we were really happy with how well that went, both in terms of the success of the build itself and in terms of the results that we got with the customer populations that were there related to that. I think through RDOF that we're learning a lot about how to stand up a really efficient construction force. And so I think that we know more now than we did when we built RDOF or when we bid on RDOF, and I think we'll know even more as we're looking at these subsidized builds about how that construction environment is sort of going to materialize. So I think we'll be really well positioned to put in competitive bids across those spaces.

Have you found as you've built those that is this going to be more expensive, less expensive than you expected?

Yes. I think it's too soon to sort of try to make any pronouncements one direction or the other. Like my overall expectation is still consistent with where we were, that we'll spend $5 billion or so over the 5 or 6 years that it takes to build. But as we work our way through, we might get more comfortable. And at that point, we'll talk about it.

Okay. One of the other initiatives you talked about was the CBRS. And I think you have a friends and family trial that's ramping up soon. Can you give us any insight there?

We built out the mobile core in the first half of the year. We've been testing the CBRS technology, and I think we're comfortable with how it works on a small scale. So this market trial's really about sort of figuring out how you deploy and how you work it at scale. We have a lot of confidence that it will work well. And we're excited to see sort of what kind of overall results we get out of it. I don't have a lot more color than that, but...

Is Verizon embedded in this effort to sort of tie their network to your network?

That's an interesting question. I don't know that I can speak to that one. I think we're really happy with our MVNO relationship with Verizon and happy with the service that they're able to provide to our customers. And I think that we work well together across a lot of different types of projects, so...

If this trial goes well, how broad do you envision it becoming?

The good news about CBRS, so -- or about the hybrid mobile network deployment is that individual radios are relatively inexpensive. And so the thing that we can do that I think is really exciting is that we can be really targeted in the way that we deploy those across the network. And so -- and we have a lot of telemetry data on customers, obviously, fully anonymized and appropriately private, but we understand where the data is being used. And so I think that we can be really strategic about where we put the radios, and we can build it over time in a way that might end up being kind of chunky because you would deploy some of it and you watch and you see how it worked and how comfortable you are and then decide if you're going to go to that next set of spaces. But I think we can be really strategic in it. So I think that initially, you'll see us do that. And over time, whether that means it leads to much broader deployment or not I think will be dependent on a whole bunch of variables in terms of how we're able to cover the market in various ways. But where we deploy it, I think that we expect to get really good returns because we can be so strategic and because the asset itself is relatively inexpensive.

Right. I think Tom said something like as much as 1/3 of data traffic could go onto your own network. Is that an upward like contracted bound? Or is that sort of him thinking about...

I think he's thinking very broadly about the possibilities. One of the things that we've been able to do that I think is kind of amazing. If you think about a big 3 MNO customer, today, they offload about 80% of the traffic from their mobile device onto a WiFi network already. If you look at one of our customers, they offload about 85% onto a mobile network or onto a WiFi network already, which is because of how we've been able to help the devices connect to our network in a variety of ways. And the good news about that is that it's a win-win, right? From a consumer standpoint, when you're on a WiFi network, you both have better speeds and better connectivity than you have when you're connected to the cellular network. From a Charter perspective, when we're connecting them to our WiFi network, we're not paying for the MVNO network. So I think it creates sort of a dual good. And as we find additional ways to bring customers into connection with our network, whether that's through CBRS or through WiFi, I think that we'll continue to create that double good, both providing better service to customers and creating better financial returns on the mobile product for us.

Do you expect to market this as a better product than an MNO? Or is it more cost? You mentioned the cost side, but can it be a differentiator as well?

I'd like it to be both. And I think it can be, right? I think that certainly people have seen our claims out in the market about the speed of our network when you combine usage across the cellular and WiFi network. And I think that we will continue to drive down sort of the cost of serving customers. So it allows us what really is an incredible opportunity. I mean we have like 54 million overall passings. We have 2.5 million mobile customers. And so the opportunity that we have to connect additional customers on our network and to do it while saving them money as well as while generating financial growth for Charter. It's actually pretty incredible and we're really excited about that.

Okay. You mentioned making a return for investors. So capital return has been a big part of the Charter story over time. The 4.5x leverage has been the level in other interest rate environments and higher and lower than we've been today. How do you think about that as rates start going up and inflation as well?

There are multiple factors that I think you have to sort of go through in thinking about what's happening and where the leverage ratio should sit. One of them is, what kind of confidence do you have in the financial growth of the business? And I think we continue to be extraordinarily confident that we can continue to grow the financials of the business at a very strong rate. One is where interest rates are and fully admittedly, there's more pressure on interest rates today than there has been certainly over the last few years. So I'm going to say even today that if you put the rates in historical context that we're just sort of going back to -- yes, they're not that high. And then there are some other things where our tax rates and you pull those all together and you say, okay, well, what does that mean about how levered the business should be? And I think when we pull those things together today and particularly when I do that and then I look at where our shares are trading, I say, "Oh, well, we should be at the high end of our 4x to 4.5x space that we've set." I think we've been fairly consistently at that target over time. But I think it continues to be the right space to be. And obviously, you have to continue to evaluate it over time. But ultimately -- we'll continue to evaluate. But right now, I'm pretty comfortable where we are.

It's funny to ask you this one. Chris and Tom are clearly still in the building. But the way that Charter returns cash and buying back stock has been very formulaic, right? 4.4 turns is almost exactly where you end up every quarter. But that can lead to buying a lot of stock at high prices and a lot of stock at low prices. Have you thought at all of, as you come into the CFO spot, of evaluating a little bit more of where are the shares trading versus just like this is the method at which we return cash?

It's an interesting question. The problem is always that my crystal ball doesn't work better than anyone else's in terms of where our share prices kind of ultimately go over time. And we do believe in the value of the business. And so I think the shares that we've purchased, I mean, when you look at the longer term of what we've paid for shares, I think we're really comfortable with the price that we've bought out over time and the consistent buying strategy. While it does mean that sometimes you buy into a bit higher market, it also means that you take advantage of those dips in the share price. And so I'm not in a space where I think I'm going to start sort of betting on directionally where the market is going to go. I think we're happy with keeping leverage in a level that we think is appropriate, and we'll continue to do what we've been doing.

That's good. That's a good place to leave it.

Good. All right.

Thanks very much, Jessica.

Thank you very much.

Nice to meet you. Thanks, everybody.