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

Good morning, everybody. Thank you for joining us for day 3 of the tenth -- or I started to say the tenth annual MoffettNathanson conference. It's the first annual SVB full TMT conference. And thank you to those in the room, and thank you to those who are joining us via the web. I'm really delighted to have Charter here. Chris and the team at Charter have joined us every year for 10 years. So this is a great opportunity to welcome you back, Chris.

And I want to start with the topic of convergence. In October of last year, you launched Spectrum One, and I'll quote, you called it "the nation's first fully converged connectivity experience to power today's wireless world."

I didn't remember the quote.

And you probably didn't write it, but it's true. But now, by coincidence, you also changed your reporting structure to integrate mobile more fully into your financial results as well.

Yes.

Do you think 5 years from now or maybe 10 years from now, the distinction between mobility and fixed is going to be gone and there's just connectivity? Is that the way customers are going to start to think about this category?

I think it will still exist as 2 separate categories. And why? Because our competitors really have no choice. They don't have the ability similar to us to have both wireline Internet and mobile in the exact same spot all the time. So Charter already today has seamless connectivity across our entire footprint. We have gigabit wireless. The speeds are going to get quicker. It's a better product. It's a faster product, and it actually saves customers lots of money. And so our goal is really to use that seamless connectivity and turn mobile less of a product and turn it more into an attribute of the connectivity service. But at the end of the day, whether it's 5 years or 10 years, that's a long ways out, but our competitors are going to continue to have to sell them as a silo, as a separate product.

And we saw that with Verizon, where their new plans are purely mobile and don't include a fixed component.

Except that you can save money when you take the fixed, when you have mobile. So there's some convergence that they're trying to go after there. But it's a fraction of their footprint. At AT&T, maybe 20% of their footprint will ever be upgraded or 20% of the [indiscernible] that they'll have access to. And so they're not going to be able to have a converged connectivity play with Verizon. It's even less in FiOS -- Frontier FiOS. It's even less than that, and they don't have a mobile product today. So by definition, we have a structural advantage across our entire market. And we can compete with the seamless connectivity product, but we can also compete with stand-alone products as well, and we'll continue to do that because there will be a portion of the market that they still want to do that. But for us, like I said, the opportunity is to use that seamless connectivity to turn mobile into an attribute, an extension of our existing connectivity service.

So is that footprint story that just we can offer it everywhere, they can't, so we win, full stop? I mean, is that core to the way you think about winning? Or how do you think about winning for Charter?

No. It's multifaceted. We have -- today, we have the fastest Internet across our footprint. We had the fastest WiFi. And as a result, we have the fastest mobile, and those speeds are going to continue to increase as we do our network evolution plans. You then couple that with the ability to save customers significant amounts of money and investing in our service infrastructure, which has been always a key tenet of Charter, and I think that puts us on a path to not only save customers money, but introduce additional functionalities on the road at faster speeds. And I think we're set up to compete really well.

So we're going to come back to convergence and wireless in a minute, but I want to drill down a little bit on the broadband market. And maybe starting at a market level, no argument that growth has really slowed dramatically toward the cable industry, but there is still a lot of debate about why. Is that because the market is saturated or is it because cable is losing market share? What's your take on the causation for the deceleration?

Yes. Well, look. Don't forget we had a tremendous amount of pull-forward that took place during the pandemic. We had -- over a year period, we had 2.2 million Internet net adds. And so what you have today is the effect of that pull-forward and some lower market activity that's taken place today as a result, combined with some reversion of the wireless substitution going back to where it was. And so you have a low transaction market and you add to that some incremental new competition, and you get the impact on net adds is actually outsized as a result of that. But longer term, if you think about what we're really doing, I think the pace of overbuilds will begin to slow. I think fixed wireless access is having a moment, but the quality of the product is low and their capacity is constrained. I think market activity starts to pick up. You add in our network evolution, including convergence and even our network expansion, and I think the goal and the opportunity for us is to return to a more normalized rate of Internet growth.

So there's a lot to unpack there, and I'm going to touch on all those things. So fixed, overbuilds and rural. But let's start with fixed. You've said that you don't see fixed wireless very often as a source of broadband churn. Can you expand on that a little bit? Is that -- that's based on your call center conversations with customers as...

It's based on machine learning that we use to identify where certain things are being said that gives you an idea of where churn is coming from. But right now, take a step back, we have historically low churn. We've had historically low churn for a while now. So almost by definition, that tells you something. And then a small percentage of that is actually we can hear in there it's fixed wireless access. So they've had some success picking off the lower end of the market. I do think that if you were to normalize market activity, you wouldn't see that as much. And over time, as market activity picks up and we do the things that I just mentioned, I think we have a path back to a more normalized growth rate.

So you said the product itself is not as good. Are you seeing that in win-back rates? I mean we -- I know all of us in the room spend time looking at Reddit boards and anywhere we can to just try to find out are there signs of...

Well, I mean, you must see it, right? I mean, if you're doing the work, then you see the same things that we see, yes. So we see some flowback that's coming. Some of it is genuinely because somebody is looking at the -- targeting the low end of the market. It may be good enough for today. And over time, what will end up happening is the data usage will increase, the capacity, the supply inside of the network, will go down. And the quality of the product will continue to go down so that even for a lower user, it becomes untenable. And then if you combine that together with the fact that you're not really saving money, if you put our mobile and our broadband together, we have the cheapest and the fastest product in the entire marketplace. So right now, you can think about fixed wireless access as if it was a standalone, but really, when you put it together with mobile, for us, you get a much higher-quality product, a much more reliable product, a faster product, and you actually save hundreds or even thousands of dollars a year.

And you said that -- you talked about the exhaustion of capacity for wireless networks. Your engineers obviously have real views on that, but it stands in contrast to what Verizon, especially, has said where they see a long runway. Are you seeing places where cell sectors are being shut down and -- that give you signs that their capacity is being exhausted?

Sure. We do. And yes, you asked. Our engineers feel the same way. The product is capacity-constrained today, and it's always going to be capacity-constrained. When we go take a look at market availability, it changes from month to month. We'll go take a look at a big market of L.A. and say, for example, what's available today open for market for the fixed wireless access. You go back a couple of months later, and it's a completely different set of houses that are open for marketing. And the reason for that is capacity that sits inside the network. Now to be fair, an MNO, the macro cell tower providers, could go out and purchase additional spectrum. They could spend a lot of money to densify their network. But I would make the case that it's not a really great use of the asset that they have today, and it certainly wouldn't be a great investment case to go densify or buy a new spectrum. In fact, if spectrum is an asset and if it's valuable and traffic is going up, I would argue that the way to use that precious resource would be towards your own retail customers, where the dollars per gig is dramatically higher. And admittedly talking out of our own book, but even our MVNO rate per gig, dramatically higher if you do simple math of what they're getting out of fixed wireless access. So I don't think there's an economic rationale either to increase the capacity for it in the future, and even I could make the case that it's actually not a great use of the existing asset that they have today.

But you would expect that capacity conversation inside the providers to be quite different in rural and urban and suburban?

Yes. I think you can pick your places, which is going to change over time, which we talked about. And so as a competitor to DSL, for example, the example you just gave, there may be a place and time for that. As RDOF takes place and BEAD takes place, there's going to be less of that market that's available. But I think it's a perfectly fine product for that environment where no other alternative other than maybe satellite exists, and I think it has a place.

So you also mentioned in your previous answer about fiber overbuilds. We started to see some pullback. First, some of it was just missing targets, but some of it was actually pulling back some targets last year. Have you seen that in your footprint? Is it your sense that we're going to see a little bit less than what people expected?

Hard for us to know all the drivers for sure, and I think it varies by company, so I'll let them do their own IR. But what I can say is that over the years, we've always said that there isn't a great financial return. There's no real ROI for an overbuild. Certainly, that's what we see in our footprint. We don't see the type of requisite penetrations that people talk about that they need to get. We don't see that taking place in our footprint, and that's not new. So overbuilding isn't a new phenomenon. People every 10 years come out and think about it and say, oh, I've got this great idea. We've got to go overbuild. That's going to cost me X, and I can get this penetration. It doesn't work, it stops, it fails. And then 10 years later, people say, oh, I got this great idea. And it comes back and [ find yourself ]. We can't stop that, other than try to point it out to capital markets so that they understand that's not a great ROI on your investment, whether that's debt funding or equity funding. But we don't control it. What we can do, and you and I have talked about this for years, is we operate -- at Charter, we operate as if there was a wireline overbuilder in every single one of our passings. Why? Because we want to make sure that we're attractive to our customers today and that we're unattractive for somebody to go waste their capital. And so we keep our prices low. We try to drive as many products into the household so we can create as much value as we have now with mobile, that's even more attractive. And we invest in great service and we think being a good member of the community, so to speak, and good in front of our competitors is actually good for the financial returns of Charter over time as well.

A big part of the overbuild story is obviously the cost of overbuilding, right? And you -- I think, as you've said, you're the largest rural builder now in the country. That gives you a really interesting perch to see things like labor availability and equipment cost and supply chain issues. Can you tell us what you're seeing? I would imagine this is a very inflationary environment.

Yes. So look, we had our hands full last year in terms of getting supply across the entire business, whether it was chips, whether it was glass, whether it was labor. It was a fight. I mean we always had a good seat because of the volume that we do and the fact that we're not back and forth in terms of our commitments. So that has weight. But we were able to get through it. But by the end of the year, we had secured all the labor we needed. We'd secured all the supply. And we knew what it was going to cost. And when we talked about our network evolution and network expansion plans in December, all of that was really reflected in that. Now since then, we've seen a significant amount of supply, in particular, really free up. Some of that's the supply chain. Some of that may be the fact that people are slowing down, which you referenced before. But we have a clear line of sight to purchases for the supply chain, and we have a clear line of sight to the labor that we need and the pricing associated with that. So I think we're in pretty good shape. There's an opportunity that as supply does free up that maybe our cost per passing can ultimately be lower.

I'm going to come back to the issues of capacity when we talk about your rural build, but I wanted -- one last important part of the broadband story is the pricing environment. You raised your prices last year on the -- or this year, I guess, which I guess you can see that 1 of 2 ways. You can see lowering the price in the context of the converged offer and raising it standalone gives a greater incentive to take the converged offer, but it also sort of speaks to the pricing environment of the stand-alone products. So I wonder if you could just talk about those 2 and where you think the market is going on that.

Well, I mean, you know our strategy. Our strategy has been to try to limit the amount of price increases that we have because we want to be competitive inside of our footprint where we have wireline overbuild and where we don't. We've managed to do that, keep it lower than I think our -- generally, the increases that our competitors or even our peers have put through. But we're not immune to inflation either, and we're not incapable of passing that through, and we've needed to. So we try to minimize how much of it we've done. I think the interesting takeaway was less about broadband. A lot of the rate increases that we've had to push through were really because of the programming cost coming through, and so more of that's come through on video. The learnings, and I think you can see it in certain quarters last year and certain quarters this year, is that the downgrade impact to video and to phone is higher than it's been in the past as customers try to save money. So there's a learning lesson there, which is you may think it comes for free, but we still like to have video and we still like to have phone. One other learning lesson is, over the past few years, what we've gotten really good at is the customers try to save money and call in and want to either downsize their package or downgrade a PSU or that type of product. We have the ability to actually say, "How much are you looking to save?" And if somebody says, "Well, I'm looking to save $30 per month or $20 per month." We say, "Well, have you thought about our mobile product?" And so we actually have a pretty large selling channel that's going on saving customers money, saving the PSUs and saving customers more money than they were looking to save by putting one or multiple lines on $30 a mobile line. So it's been an attractive retention tool for us as well.

And on a stand-alone basis, has your pricing gotten relatively higher or relatively lower? It seems like AT&T's fiber ARPU is rising faster, but it's always hard to tell whether that's mix or whether that's pricing.

Our pricing structure is more simple than most. So I think you can look and take a look at where we're at. Both promotional pricing and retail pricing, it's all clearly disclosed to customers. And that's not always the case with all the different operators. But as I take a look, the amount of increases that we've passed through due to inflation have been less than what our competitors or even our peers have done. And I think that's good for us in the long term. It means that we're able to compete better, but it also means that if we do need to pivot and we need to pass through more at some point, Charter has more of that capacity than others. But that's -- for the reasons I mentioned, that's not our goal.

Yes. It certainly doesn't seem like there is evidence of the kind of broadband price war that a lot of investors feared a year or so ago.

I think the mobile space is challenged, but I agree with you on broadband.

Let's talk about your rural strategy. I think for a lot of investors, your rural investment is -- cutting out share repurchases that had once been a really important part of your equity story has been a difficult transition. Can you talk about the trade-off for you, particularly just given how closely associated you were with the buyback strategy?

All of it. Yes. Look, the rural subsidized build-out is a unique opportunity. I can't remember, in my entire cable career, where somebody said, can we give you money to extend and build out your network so you can have permanent passings with -- in an area where you're going to get very high penetration rates and a guaranteed return on investment, effectively, of what you're going to get out of these markets? So yes, the payback is long, but the IRR is very high and the risk is extremely low. And so if you think back to what we've said really for more than a decade, and we used to repeat it on every earnings call, our capital allocation policy is, first and foremost, for organic growth investment. Second is for accretive M&A.; and third is for return of capital, and we always prefer buybacks over dividends in that statement. And for a lot of years, we were doing all of that. And here came this unique moment in time where it was going to utilize a tremendous amount of capital but have fantastic returns. So in essence, we did what we always said we were going to do. Now what that means is that from -- not only are you going to have good IRR, but you're going to have higher revenue, you're going to have higher EBITDA, you're going to have longer free cash flow or higher free cash flow, and you're going to have, along the way, because the ROI is good, the buybacks that we're doing today are going to have a higher return, right? And when you get to the back end, your free cash flow is going to be higher, your free cash flow per share is going to be higher. That means that you can do more capital returns. So we haven't given up on a capital return strategy. We believe in it. In fact, just want to do more of it. But our time line may be different than short-term investors.

And I remember you saying on a call a couple of quarters ago that you actually think of this almost more like the accretive M&A strategy than like organic growth alone.

We do. And Jessica and I go back and forth on which way is the better way. I've always talked about it as accretive M&A because you're acquiring passings. And she looks at it and says, you have to take a look at it as building a brand-new cable company. And that's what took place inside the '80s, which is not dissimilar to what we're doing today, except somebody is helping pay, which is nice. I think both of those analogies are completely correct. And the returns aren't that different. One of the things that -- when she and I were going back and forth, the payback is long. But if you think about it in typical what we would call John Malone math, after 4 years or so, if you think about it in terms of corporate finance valuation payback, your EBITDA multiple and almost any EBITDA multiple is a 4-year payback. So payback is actually pretty fast from a valuation perspective. And your long-term...

That's using your current multiple? Or...

Yes, which I would argue is low, but we -- call it conservative, but yes. Yes, I think obviously, if you have a higher multiple, you get there faster. If you have more growth, which this lends into, then you should have a higher multiple, which is why I mentioned the perpetuity growth rate as well. And that's not factored into any of our paybacks or IRRs. But if you have more growth, you should be valued in a different way.

You said that recently that you could complete the RDOF builds earlier. We'll come to some of the BEAD stuff sooner, but that permit's allowing you could build 2 years -- you could finish 2 years early.

Yes.

Is that really about permitting? Is permitting the biggest bottleneck? Or is there -- are there other pace-limiting factors?

Permitting and the issues around it are the only limiting factors. So if you think about it today, when we have to go get a new poll agreement, that is taking upwards of 9 months just to get a poll agreement. And then you get permits, which we have hundreds of thousands of permits that are over 4 or 6 months waiting just for a response. And then you get into make-ready, where companies are coming back and saying, yes, but here's the work that you've got to do, or you have to replace these poles and saying we have to replace the poles that they've had for 50 years that are decrepit. And you get into this whole debate, and in some cases, we fund it. In some cases, we negotiate it; in some cases, we go underground. The point is that all of that process is making the -- we can't begin construction until all of that is completed and ready. And so from a government standpoint, the amount of passings construction for rural America that has no broadband is taking longer, and it's costing more money as a result of some of these practices. And so we're trying to get some help from federal, state and local governments, and we -- people are listening, but we don't have everything that we're looking for to speed up that process.

Is it an issue of opportunism or is it an issue of obstruction?

Right now, it's a question -- well, it's both. Yes, it is both. And it varies case by case. In a lot of cases, these are small operators and they just haven't had the capacity. In some cases, what we're doing is say, fine, we'll hire the resources for you at your direction. Just let us go. And that's new for them as well. So in fairness, this is a major project. It's only going to get bigger with BEAD. I want to be clear, all of the comments that we've made about our build-out for this year, we're going to hit all of those. All I'm saying is that we have a commitment with RDOF. We're doing very well. I think we'll be ahead of schedule. For sure, we'll be ahead of schedule, but I think we could be faster if we got a little help along the way.

How much are you doing in-house versus contractor?

In terms of labor?

Yes.

The majority of the labor that we're using is contract labor, but we have pivoted in areas where we're doing a tremendous amount of construction, think about Texas, Carolinas or the South, and where we know that we'll have a permanent higher level of construction because of homes passing growth. We have stood up in-house teams that can do both aerial and underground construction, both to be able to control our own destiny as well as I think it's a pretty good sourcing strategy over time.

I've got to imagine that access to those teams -- I would imagine that BEAD does a couple of things, right? On the one hand, more demand for labor in the market drives up the price. Pretty easy to understand. But I would imagine also that a lot of the competitive overbuild projects will want to shift to BEAD projects because the returns are more certain, so you're likely to just see a tremendous amount of rural activity.

I think that's right. And I think the returns that you get on rural is dramatically better than in overbuild, so it's better than negative. So I agree. I think that's where the resources will go.

And it sounds like your contract labor, you've already struck relatively longer-term agreements. Are people going to be able to get contract labor?

I think it's going to be a challenge, which is why I think reputation matters. I think given what we've done -- you mentioned you were going to ask about our ability to scale, but think back to what we've done already. We've done 185,000 upstate New York passings rural, and we did that as part of the deal with Time Warner Cable. It was a merger requirement. We didn't think we'd make that much money on it. We kind of looked at it as a tax on the deal. It actually turned out to be great, which is why we had so much confidence going to RDOF. We're ahead of schedule on the million homes that we're building on RDOF. We've committed to another 260,000 in state grants through ARPA and other funding. That's still going on, so that's going to grow. And so we're -- we've got this pipeline, and we're delivering and we're ahead of schedule. And so if you think about it from a supply standpoint, who do you want to deal with? Charter has a proven success rate, is committed to the project, has demonstrated they can do it, has a fantastic balance sheet and isn't at risk. We're not going to come in and out of the market. And so if you're a contract labor or you're a supplier or even if you're the federal or state government, you look and say, well, who would you rather give your money to in the case of grants or in the case of make long-term commitments to? You want the one who's actually going to do the work. And so Charter is the largest rural builder today, and I think our chances for success are very high inside of BEAD. We do need -- I should mention in BEAD, we're working through still with the different governmental body, some of the guidelines in there. We've got to make sure that it works for private capital, and that's not done-done yet. So it's all subject to making sure that it works for both private and public capital.

And that may be different from state to state? Or do you think...