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

All right. Good morning. Please note important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com. And if you have any questions, reach out to your sales representative. Really excited to welcome back to the conference. It's been a few years. Great to have Chris Winfrey back, CEO of Charter.

Between being in the COO seat and COVID, it's been a while. So it's good to see you.

And I got to start by, of course, congratulating you on elevating -- being elevated to the CEO role.

Look, it's exciting. It's a unique time in the industry, and I'm really excited about it.

So maybe, Chris, you guys had an Investor Day, investor event back in December. We're going to talk about a lot of the debates that the market has around Charter stock in our conversation today. Maybe start off by talking about the investment priorities for you and the team at Charter, and how you see those investments delivering growth and returns over time.

Yes. So I started to say it, just a minute ago, but it's a really unique time in the industry. And I'm pretty excited about it. I think it's the most interesting time that we've been in since we deployed broadband. So Charter, really what that means is rolling out different initiatives that we talked about in December, the 3 Es, as Jessica calls them. But they're evolution, expansion and execution. So an evolution, what that is, is really the opportunity to drive at a very low cost in a faster pace than our competitors, to have symmetrical speeds and multi-gig capabilities. And at the same time, to be able to deliver convergence with the product set that our competitors can't replicate. When you think about expansion, the second E, it is the opportunity to deliver on rural network passings at a really attractive return. I think people are starting to get their heads around that a little bit. But at the same time, it's a unique opportunity to cooperate with federal, state and local governments and to receive subsidies. This is a onetime opportunity, not something that we've seen before. And then the third E is really execution, which is the continued digitization of our service. The move to proactive maintenance as opposed to reactive and investing in our employees so that we have higher quality service, better yield, better productivity, but it takes upfront investment. And when you sit back and you think about it and you say, "Well, what do I want as a customer?" I know you're a customer. So I'll ask you, "What do you want?" Well, you want to know that you've got the fastest Internet, you got the fastest WiFi, you got the fastest mobile, but you want to know that we're not just going to milk it. You want to know that we're going to continue to get faster, we're going to continue to invest in the network and that we're going to provide ways for you to save money along the way. So the best product and be able to save money, and that's what we do. And then you want to know that we're going to couple it with great service. So if I went through a lightning round, which I won't do. And I said, do you want that service to be provided offshore versus onshore? You'd say onshore. If I said, outsourced versus in-sourced, you'd say in-sourced. When you call in, do you want to get somebody who's a rookie because you have high turnover inside the business? Or do you want to get somebody who's tenured and actually knows what they're doing? And those are all pretty obvious answers. And what's good for the customer is good for growth and what's good for growth is good for shareholders. And that really mirrors our investment plans. You also want to know that we're taking advantage of new opportunities to build out new plan and have attractive returns on extension. So that's our investment philosophy. That's what we're putting into place. And it takes patience and it takes consistent investment and none of this stuff happens overnight. But I'm pretty excited about it. I'm excited for the industry, and we want to show the way.

It was interesting, we were chatting at dinner last night, you talked about this being the biggest cable construction since the '80s, which I had not -- but when you talk about your rural plans, which is really interesting and also the upgrades around comparing it to the '90s, I wanted to ask, though, Chris, as we all try to think about Charter's stock and sort of looking out over a multiyear period to sort of the clear payoff of all these investments, is there a comparison that you would make to the Time Warner Cable Bright House acquisition? Because I think that's a recent example, and a lot of people in this room have been involved in your stock and made money in your stock in that period of time.

Yes. I mean it's an interesting comparison. It's a little different, but it was equally transformational. In 2016, just as a reminder, we combined Charter, Time Warner Cable, Bright House. It's the world's largest-ever, I think, cable integration, and it was successful. And now we have the opportunity, with this very large platform, 55 million passings, to be able to do what I think is probably the largest physical upgrade of the cable network since the 1990s. We're doing that at a really low cost at $100 per passing and we can do it fast. And at the same time, to build more network passings than probably have been built in a single period of time, since, as you mentioned, the '80s. And you get to do convergence to really see if we can make a go of this with full convergence and create a completely different category. Now for a cable person, you'd say, any one of these would be a great thing to participate in from a career standpoint, but the ability to do it all at the same time is exciting for employees, it's great for customers and I think it's going to be great for shareholders, too.

Yes. And if I remember, from the Time Warner Cable deal, we could look at legacy Charter. We used to talk about legacy Charter a lot, and there was some obvious success and KPIs that we could look at and then map them to the bigger footprint. This scenario seems different. And the question is, do we need to just look out further to get a sense for the success?

Yes, I think it's -- is it going to be many years before you can see it? No. But it's not going to be a couple of quarters either. And so that's been pretty consistent with Charter. We've never tried to manage for the short term. We've always said, "Look, it may be bumpy or choppy along the way. We'll pull forward investment if we think we can get a great return off it." But we've also tried to -- and I think we'll always do better, but tried to make sure that we provide transparency to investors and provide some metrics along the way so that they can gain confidence and see that we're actually doing and achieving some of the things that we said.

Yes. One of the things I think about Charter and Tom and his philosophy that you guys have executed for a while is really around product pricing packaging superiority, and you touched on some of those things before. There's a lot of debate in the market today, particularly around fiber, which you've competed against for a while. But also fixed wireless. We've had Verizon and T-Mobile here, talking, obviously, bullish on their opportunity there. Maybe tell us, from a consumer point of view, what you think differentiates Charter's product offering in the market today? And is it fair to say, Chris, that we're not necessarily seeing that product superiority in the KPIs at the moment?

Look, we have some new entrants inside the marketplace. So anytime you have a new entrant, you're going to have some people nibbling away around the edges. The fact that we've been able to maintain our subscriber relationships to actually grow despite of that, I think, speaks to the pricing and packaging that we have today. Now back on, from a consumer perspective, from -- we've had competition. Throughout our -- my cable career, we've always had some form of competition. We now have overbuilders in a portion of our footprint. And to address that and take away the marketing claims, really we'll do this high split, DOCSIS 4.0 upgrade. We'll do it over 3 years. We'll do it at $100 per passing. So faster and cheaper than our competitors, and we're going to do it across our entire footprint. So we're not going to red line, which is what they do. We're not going to pick the economically attractive areas to go to. We're going to do it everywhere we operate. So I think -- feel really good about that. Plus you have convergence. Plus the different investment programs we have in service. So I feel good about that. Fixed wireless access, I can make the argument, I will, it's not anything really new. It's wireless substitution, but somebody has decided to market it in a cheaper way. And it's interesting, but it really is just wireless substitution. And so it will suffer from the exact same thing that's always been the case is a lack of capacity, by definition, an inferior product. And as data usage goes up, I think that's going to be pressured and customers will want to focus on having a quality product. And on top of that, when you combine our broadband product, which is better, and our mobile product, which is the fastest, and you put it together, you still save money, whether that's at promotion or at retail. So yes, there's somebody new inside the marketplace, and they're marketing it in a different way, but it is wireless substitution. It won't ever be as good. It doesn't actually save customers money. And I think over time, they say the truth will prevail.

Okay. So you mentioned back at your Investor Day, I believe, that you expected broadband net adds in '23 to be higher than '22. And then that came up on your earnings call, again, which you reiterated. I know you don't like talking about intra-quarter updates. Jessica, last week, commented about some -- made some comments about Q1 that led to some questions I received about sort of how things are trending. I wanted to give you an opportunity to talk about the outlook for broadband more near term, and whether you still feel confident about that 2023 expectation.

Yes. So we've always -- you've said it, and you and I have talked about it, we've always tried to focus investors and the discussion with investors on the long term because I think that's the better place to be. Personally, I -- there have been a number of times where I've been pulled into talking about short-term results. And you know what, it feels good in the moment. And maybe some analysts like it in the moment, but it's actually not a good thing to do and it's not really our strategy and -- so we'll move back to that. The reason for that is that if you think about gross adds are here, disconnects are here, the difference -- even in a normal market, the difference between net adds being okay net adds and good net adds is razor-thin in a particular quarter. So it doesn't -- it matters, but it's not telling of where the business is going. And if you do that inside of a low transaction volume environment, and you have some new competition or marketed wireless substitution competition nibbling around at the edge at the low income part of the segment, it can create some volatility along the way. So to answer the question, to be clear, do I think that our -- is our goal to have 2023 net adds to be higher than 2022? Yes, it is. It remains that case. But I'm not saying anything about a particular quarter and -- nor should we. And what should matter to investors is the investments that we're making, is it going to result in superior product, pricing and packaging and service? And do you believe it? And is it what you want as a consumer? And if that's the case, let's start focusing on longer term and where we're coming out of the back end of this year in terms of the trajectory. And I think that's a healthier conversation to continue to have with shareholders.

Fair enough. What's going on with fiber competition at this point? We've seen a dramatic change in the interest rate environment, which I would think would have an impact on some of the competition there. And also talk to us about how Charter performs in gigabit markets where you have that competition?

Sure. So 45% roughly of our footprint has gig overbuild. And we are on this path to upgrade the network, to take away the marketing speed claim, which actually is -- it's a marketing speed claim. So we want to make sure that we tell our competitors, we're going to be faster, we're going to be there faster, we're going to be ubiquitous and we're going to have a marketing claim everywhere we operate, not just for fixed-line Internet, but we're going to have a converged product that you can't replicate. In terms of how we've done over time, if you think back to a normal market environment with transaction volume where, in a normalized environment, we were growing across both our gig overlap and our non-gig overlap and growing at pretty healthy rates. Then you get entered into a market with lower transaction volume and what you saw is in those gig overlap markets, because there was new amounts of build taking place, kind of flattened out, maybe even slightly dipped before recovering and flattening out. I mentioned on the Q4 call that, that trend still continues. It's ever so slight so I don't want to overexaggerate. But in our gig overlap areas, despite new build coming in, we're actually slightly gaining, despite new competition coming in, in the gig overbuild footprint. So that's promising. And it's before convergence really takes full effect and it's before we've gone with high split in DOCSIS 4.0. So I feel -- we need to be patient, but I feel pretty confident of where that can go. Where we've had, and I mentioned it on the Q4 call, is relatively new. As you've seen at the lower end of the market, I mentioned fixed wireless access, and I've said it a couple of times now, it's kind of chipping away at the lower end of the market. And I don't think that's going to go away anytime soon until they run out of capacity, and they will, and customers realize, "Hey, this doesn't work the same way as full-blown broadband. And I'm not actually saving any money relative to what I could have."

Yes. Shouldn't some of the fiber competitors who do not offer a converged product have a significant product disadvantage versus Charter? I would think, over time, that's a big opportunity to actually gain share despite the fiber competition?

That's the promise when I said it in December. But if I ask you, when you're pulling out of the driveway, whose service are you on? You would say, "I don't care. It just has to be fast and it has to work." And if that's your definition of seamless connectivity, that's your definition of broadband, nobody can put those two things together across their entire marketing footprint. And we can do it and we can save customers money. So I think we have a killer app. Rutledge used to say it all the time that mobile isn't a product, it's really just an application of broadband. This kind of ties into that a little bit. So yes, I think we have something powerful.

What is the opportunity for multi-gig offers? I mean you talked about a marketing advantage, but it feels like that matters and client customer needs, I'm sure are growing?

Yes. Two things matter. One is marketing claims, they matter. People pay for higher speeds they need all the time because they want an insurance policy or they can or they just want to brag. So marketing claims matter. But it also matters for us in terms of doing the upgrade now and why over 3 years, not longer, is we want to make sure everybody is clear that you're not going to have marketing claims inside of our footprint. If you're going to waste your money, go waste it somewhere else. We have a better product set. We have convergence. We have marketing claims. But I do think that different from the overbuilders -- the overbuilders have done it in splotchy areas or red lining. And so it's difficult for people to develop products and services that utilize that capacity when it's splotchy or sporadic. And for us, when we do a ubiquitous network upgrade, it actually provides the platform for people to develop those products and services. I remember when I was in Switzerland, we snickered a little bit when we rolled out a 10 megabit per second product. We said, "What would somebody ever need that for? And what's the point?" And sure enough, I said the same thing when we did 25, 30, 60, 100, 200, 300, 600. And when you build it, people -- like in places like San Francisco, they'll build products and services that make full use of it.

Yes. Now your network evolution plan, doesn't seem to be as prioritized multi -- symmetric speeds.

It can be.

Yes. But obviously, you've made a conscious decision. Maybe you can tell us why you decided to?

Because I think the downstream is where you get the marketing claim over time. So we likely will go to 10x1. But we could provision the DOCSIS 4.0 modems in a way that you could go to 5x5, maybe even 6x6. And by the way, I don't think DOCSIS 4.0 -- DOCSIS is not done at 4.0. So I think there will be potential for that to expand both for downstream and upstream in the future. We also have -- if you remember, in the December presentation, we talked about having remote OLTs that have fiber drop inside of them. So we kind of call that fiber on demand. So inside of every node, we'll have the capability to market 25, 50, 100-gig symmetrical service and have fiber on the increment. So that also provides marketing claims, probably at a premium price, not so different than what we do with enterprise today. But the ability to have those marketing claims and footprint and protect it for a long time, whether that's DOCSIS 4.0 or whether it's DOCSIS 5.0 or whether it's fiber on demand, we're going to maintain our marketing claims and we're going to maintain our product pricing and service superiority.

So Charter has effectively asked shareholders to help invest significant amount of capital in a rural network extension strategy. You're quite bullish on that opportunity. We're talking about over $3,000 of passing, probably on average when all is said and done. What do you see as the biggest benefits to returns and sort of the company overall from this significant project?

Let me start by saying, you need a long-term capital structure to actually have the visibility to allow you to do that. And we think we have that, and that's what we want to keep. But if you think about specifically the returns, this isn't new for us. We know the penetrations that we're getting. Jessica has talked about the penetrations that we get within 6 months, but we did a lot of rural build up in New York State. And so we have a tremendous amount of experience. There's 145,000 required passings. And I think the number we actually did, because we had more opportunity, it was probably closer to 180,000. So we have a lot of success in that. We know what we're going to get. It's pretty mechanical in terms of the penetration. We see that as well with RDOF off and state grants. And so we get to mid- to high-teen IRRs, which is great. But I think one of the things that maybe we haven't done the best job or I haven't done the best job is articulating it. If you think about cable math, think about EBITDA valuation perspective. If you think about from an EBITDA valuation perspective, the payback is more akin to around 4 years. And what's not inside that return is a bunch of different other opportunities, which includes now you have the opportunity to -- you have the option to extend your footprint even further with new passings, serviceability [ pathways ], to have this machine of continuous return. The other piece, and I think there's been more understanding and better modeling of what we're doing, but a lot of that modeling is focused on a terminal value, which is a multiple of EBITDA. And it's a current multiple of EBITDA, but these are faster-growing systems by definition, with lower operating costs, higher penetration. And so at a minimum, I would say you have to have a much higher multiple on that terminal. But from the company perspective, you now have a higher perpetuity growth rate. And so I don't think anybody has really thought about the fact that you have a higher perpetuity growth rate and what that means from an overall valuation perspective of the company. And when you think to the history of cable, it's always had cycles where there's been investment opportunities that drive spikes in capital, but it's always delivered way more perpetuity growth rate than everybody put into their models for decades. So there's intangibles as well, what we're doing inside of the footprint together with our government partners. And that is a rare opportunity for cable to look good. And we're doing all the right things. And we're a good operator, we're good to consumers and we're good in our communities. But the real returns are the ones that I mentioned.

Yes, makes sense. Let's go back to convergence and wireless. You guys had a really strong fourth quarter, over 600,000 lines, got Spectrum One in the marketplace. Talk about scaling wireless and sort of the investments you're making in things like sales and marketing and your workforce to really continue to accelerate that business ahead.

So today, the opportunity -- well, the growth that we're having really is coming from the existing 30 million Internet customers that we have today. The vast majority of our growth is coming from existing Internet customers upgrading, saving money and having a faster mobile product in a way that works better together. So the opportunity to drive new relationship connects is relatively untapped. So that's the real opportunity. So I think we can continue to grow at an accelerated pace. Our distribution channels are fully established. Our selling machine is working both for new customers as well as for upgrades. If anything, we have a chance to get more efficient over time because we've had a little bit of a victim of our own success of having so much growth in trying to onboard and activate that. But we're scaled. We're ready to go. And I think as the word of mouth gets around that Spectrum Mobile is actually faster and it does really save you money and there's no gimmicks, the promotional free line for a year, but then after that it's $30, which is retail rate, it's a dramatic savings. It's meaningful at the household level.

Great. And I can't think of anyone better to help us think about the MVNO model and why the European MVNO model that people tend to default to and view as a negative from an economic point of view, is the wrong way to think about Charter and Comcast's relationship with Verizon. So maybe you could...

So I may not be the best person anymore. You and I joke all the time about me being in European cable, but it's a long time ago. We're getting old. When I left Europe, there really was only one MVNO out there, and it was successful. It was Telenet. And I think it's probably deferred this as long as it relates to convergence. I think they've probably done a good job of it. When I take a look at the other offers out there in Europe, as much as people talk about convergence, I don't see anybody who's putting together a category of product the way that I'm describing it. So that may be part of the issue. The other piece is that, maybe it's not the case there, but here, 85% of the traffic today already before additional offloading, is on our network. It's on our fastest Internet. So we have the fastest mobile product because it's relying on our WiFi and it works better together with our WiFi and allows us to have the claim of fastest mobile. And at the same time, we have a pretty strategic relationship with Verizon. I think it's good for us, it's good for them, but it's attractive economics for us. Jessica has highlighted that. It's attractive economics now, and I think it can continue to get better over time, both as a standalone, which isn't necessarily how we look at it, but also as an integrated product. So hard for me to say other than we've demonstrated that it does work and that it is profitable on a stand-alone basis and then it's going to generate significant benefits, both for churn as well as for the gross add rate on broadband.

So let me ask you one of the comments from some of your competitors, which is not a surprise, is that, yes, you're adding a lot of wireless customers now and some think you have a very strong 2023, at least that's our estimate for wireless. But you won't really start lapping the Spectrum One promotional roll-off, I guess, until Q4, really. So I know I've asked you and Tom this question probably over the last couple of decades about different promotions, but why are you confident that you can manage promotional roll-off here without having a churn impact?

In order to have meaningful churn on that roll-off, you have to have somewhere better to go. And so if the roll-off is to a single line pricing at $30, and you're going to say I'm going to -- just because the roll-off went -- I got the line for free for a year, it rolled to $30, that's retail price. So now I'm going to go out and pay $70 for an inferior product? It just doesn't make sense. And so I think because the product saves customers money, both at promotion as well as at retail, and it works better and it's faster, I'm pretty confident that we're not going to have that type of issue. It doesn't mean that we're not focused on it and that we won't manage through, but I'm not as worried.

okay. We'll get a chance next year, hopefully, to check back and see how's it all gone.

We will.

You guys talked about a mobile margin, excluding acquisition costs, of 20% last year. As you keep scaling this business, and I know you don't like talking about product-specific margins, so that's the caveat, but...

Yes. So you're going to ask me anyway?

I'll ask you anyway. I assume that has room to expand as you scale the business, I guess that's probably the easiest way.

We have fixed costs inside the business as we sell more and retain more. We get bigger. You'll have more revenue to amortize those costs. So yes, technically, you're right. But you've also highlighted what we always say is we're not focused on percentage margin. You can have really high margins on very low revenue, and you got a bad business. And so you have to avoid falling into that trap. For us, it's even deeper than that, which is we have 55 million passings, and 32 million of those are connected to our network today, which means that there's 23 million passings that the opportunity for us to not just sell one product, but multiple products into. And we're already paying the operating cost and the capital expense to maintain those additional passings. And so every customer that we acquire on the increment is more profitable than the last. And the more product we can put into the household, high margin, low margin, as long as it's margin, it's going to stick better, it's going to have lower churn, it's going to have a better ROI and we'll end up with more cash flow along the way. So the model is virtuous and our views on it hasn't changed.

I want to ask you, we don't really talk much, it's sort of interesting, about video anymore in the cable industry. But Mike Cavanagh was here this morning talking about the Xumo product and JV that you guys have. I don't think anyone expects that necessarily to be a big business for the industry in the long term, but I know you're excited about the product. What is bringing this new aggregation streaming service to market maybe later this year or next year? What can that mean for Charter's business?

Well, first, we're an investor in Xumo. And so I think Xumo has the opportunity to look really good. What will it do? What can't it -- what it will probably not do? When I left, I was meeting with the Xumo team at CES, and I walked out with the Charter and the Comcast team. I said, "This product is so great. It's fantastic. It's what I want on every single one of my television sets." And yes, I'm biased, but it was actually true. It's what I want in every TV set at the home. But then I looked at them and said, it's too bad that video can't really make that much money because if it could, it'd be really powerful. But why do we have video? We have video because we still make money on it. And there's still a large number of our customers who can afford to pay what the programmers have done and are willing to pay that price. And it's a very high-quality product. We have the very best video product inside the market today from a live video, DVR, video-on-demand, inside-the-home, outside-the-home, on all devices and different packages to service different needs. But the reality is because the programmers have done what they've done, it's become too expensive for many people. And so yes, we're the best-performing video operator in the market, I think, but we're still losing. And I don't see that changing. What Xumo gives us the ability to do is a fully integrated app and live video experience for customers all in a single place with the very best that Comcast has to offer together with our Spectrum TV app, to the extent somebody wants to take video. And to provide utility to customers whether they want to take traditional live video or not, and we can be more agnostic on that. I think Xumo is really good for consumers. It's what I want. I also think it's really good for programmers. If they've gone down this path with direct-to-consumer or SVOD, this puts it all in the hands of the consumer and gives them the utility in a way that's very customer-friendly. And I think we can benefit because of the relationship with our connectivity services, and I think we can benefit as a shareholder in Xumo as well.

Okay. So this is sort of -- we may in a year or whenever this rolls out, it'll be through Xumo from Spectrum or something along those lines?

It'll be Xumo. Xumo is a standalone independent company and they will be...

But you'll market it and...

Yes, we will. Xumo will be the principal way that we deploy our video product when somebody takes video from us. They can come in and out of those services. They can upgrade, they can downgrade, and Xumo will still have that relationship with the different apps and will still have the ability to service the customer for live video to the extent their wallet permits it, thanks to the programmers.

Okay. I want to make sure in the sort of minute and change we have left to hit on the balance sheet and sort of levered equity, which is obviously core to the Charter investment thesis.

It is, yes.

Just tell us about your capital allocation thought. Imagine M&A in this environment, it's probably tough in general. But also why you believe 4 to 4.5x is the right number?

Yes. So organic investments were always our top priority. We kept saying it. I'm not sure people believed us. I think they probably believe us now. It is the highest return, the best use of our capital. It enhances the value of our buybacks. And to the extent there's cable M&A along the way, we would do that as well. It has to be at the right -- has to be a willing seller and has to be at the right price, which reflects the investment and the growth opportunity that comes out of that acquisition. None of that's really lined up today, which is why we've been a combination of organic investments and buyback. The 4.5x leverage ratio, we're comfortable with it today. It's based on the fact that we expect EBITDA and cash flow growth. And so despite a higher interest rate market, which is a place that we've been before, frankly, and we were at 4.5x. I've been 4.5x across three different cable companies for a really long time, and it's always worked out well. It provides that levered equity return. And if things were to materially change, which isn't in the cards, we would certainly revisit that. It's not -- we're not dogmatic, but it still feels like the right place to be.

Okay. All right. Well, any last comments as we wrap up, Chris?

I'd start with some of the things I said inside of December, which is this is an industry that has the -- has always the proven ability to reinvent itself, despite not being seen always as entrepreneurial. If you think back, it goes back to the 50s, digital TV, Internet, voice over IP telephony where Comcast and us are the top two phone providers in the country. I don't think we ever thought that would be the case, but it is. The introduction of even higher speeds, gigabit everywhere we operate, wireless or mobile and now the converged product. And then if you think about it from an industry perspective and you think about Charter, where else can you get it? As a pure-play cable operator, 55 million passings, already a gigabit speeds everywhere we operate, fastest Internet, fastest WiFi, fastest mobile, fastest-growing mobile. And then you have the ability to save customers lots of money, material amounts of money, thousands of dollars and provide high-quality service, all that exists before today, prior to these investments that we've talked about, which is evolution, expansion and execution. All of which have a positive ROI and has the ability to continue to deliver generational growth, perpetuity growth. This management team is highly incentivized along with shareholders. It's how we think about the business. We don't think about it quarter-to-quarter. But we are incentivized by what happens to the share price, and that's by design. And we believe we're making the right decisions in terms of how we're allocating capital and how we're operating the business for the long term.

Well, that's a great summary, Chris, and I hope you'll come back next year. Thank you so much for your time.

Good. Thank you.

Thanks, everybody.