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

Welcome, everyone, to our lunch keynote this afternoon. I'm Bryan Kraft, and I'm really pleased to introduce Jessica Schiffer -- excuse me, Jessica Fischer, the CEO (sic) [ CFO ] of Charter. We've only done this a few other times so that's a no -- CFO of Charter Communications. So Jessica, thanks so much for joining us.

Happy to.

I really appreciate you making the trip down.

Yes.

There's a lot going on at Charter, including transformative investment initiatives, the evolution of the video product, continuing to drive convergence. Can you just walk us through the company's priorities and the areas that you're focused on this year as a management team?

Yes. So the big focus remains on our key initiatives: evolution, expansion and execution. When I think about evolution, it actually has multiple parts that you mentioned, right? The first one being our network evolution plan, where we'll be able to upgrade to multi-gigabit speeds in the downstream and gigabit in the upstream to the low cost of $100 per passing. I think that's important in terms of how we think about the marketing claims that we'll have as a company going forward, and also important in the connectivity that we'll provide ubiquitous service that I think can drive the next generation of products. That will ultimately drive broadband usage across the network, which increases the value of our products as well. The second piece in evolution is really thinking about mobile. We continue to grow mobile extremely well, and we can make mobile service better by coupling it with the connectivity that a customer has to our WiFi and then coming after that to our CBRS network. And so we're really excited about the continued path we're forging around convergence and mobile products in that space. And then finally, when you think about video and what we're doing there, making sure that we can drive value to video packages and making sure that customers don't have to pay twice for the content, and by creating packages that provide value at prices that customers can afford or are willing to pay and delivering all of those over a seamless integrated platform where you can watch linear and DTC right next to each other in really a very user-friendly experience to the consumer via Xumo. So that's on the evolution front. On the expansion front, that also continues to go well. We had almost 300,000 new roll of patents that we added last year, 450,000 that we plan to add in the coming year. Those projects continue to perform well. We provided some additional data in our quarterly results that hopefully is helpful to people in demonstrating just how high the IRRs are on those projects as we build them. And then finally on the execution front. Here, I'll talk a little bit more about digitization. We have a number of projects in 2024 that are focused on improving digitization, both in what I would say are the typical digital channels and in terms of the tools that we provide to our frontline customer-surveying professionals, whether they be in the field or customer service or sales agents, that I think will improve the efficiency of our interactions with customers. So we'll improve both customer service and improve cost efficiency of those interactions. And so you bring those together and I think the initiatives that we're working on are going to be really great for the long term of growth at Charter. Although we're very focused on those long-term initiatives, I have to recognize that we also have challenges in the short term, right? And so we're laser focused on continuing to compete well in what is an overall competitive environment. We're preparing for the possibility of the ACP program not receiving additional funding and what we'll do in those circumstances. And so very focused on how it is that we drive and deliver results, including EBITDA growth in the short term, while we continue to focus on those long-term initiatives.

Great. That's a great overview. Why don't we get into more detail on some of those areas? Maybe to start with, broadband competition and the ARPU outlook. The competitive environment in broadband and the impact on the growth outlook has been obviously a major focus for investors. What are you seeing now from a competitive standpoint? Have there been any changes since your earnings call in January?

I think that the competitive environment, it continues to be very competitive. That being the case, we offer products that have high-quality that we sell at a price that's a value for consumers. And I think we continue to compete well there, but the environment is still quite competitive.

Are you beginning to see any slowdown in competition on the fixed wireless side? I mean, we saw T-Mobile raised price earlier this year so they've talked about their net adds coming down. I was wondering if you were -- if you can see that, if that's visible to you in the marketplace?

I think it's too soon to tell sort of what happens or what results happen from the price increase itself. But I think it points out 2 things are worth noting. One is that when you combine the Internet and mobile products, we were a price leader already before they took those price increases in fixed wireless. I think we continue to be a price leader when you put the 2 products together. And we certainly believe that we can continue to sort of grow share in the market by continuing to reprice them in that way. The second one is when you think about what's happened with fixed wireless, all of the providers who are offering fixed wireless are offering it at a price that assumes that there's no capital cost associated with that product, right, that it's sort of excess capacity. And so I might as well sell it so there's no capital load. And the reality is that Spectrum is a constrained asset, and that it's a costly asset on top of that, right? And so the things that can come out of that on the other side are 1 of 2 things. One is that you can sort of reach those capacity constraints and then you have to bring your customer count back down. Or the other is you can start pricing the product consistent with the amount of data it uses, which is 30x what you use for a wireless mobile line. And it's the combination of those things that sort of leads us to believe that, in the long term, we're going to get a good share of those customers back. Because the reality is that it's not a costless product, that Spectrum has a real cost.

Yes. What about on the fiber-to-the-premises side? Are you seeing any slowdown in competitive build activity? What's the velocity of those competitive builds been like? Maybe look back at -- over the past few years and if you could talk about how that velocity has changed and particularly more recently.

In terms of total velocity, I don't think that we've seen a big change. There are quarters where there's volatility so where we might see it come up and down. There's volatility across carriers as to the building in a particular corner. But we haven't yet seen a change in sort of the velocity of total fiber overbuild. And it's interesting. I think that many of the passings will perhaps -- I think that they're reaching the point where the passings that were the least expensive to build and that were in the best demographic footprints have already been built. I think as you get into those next rounds of passings, the passings become more expensive or sort of -- or it's harder to reach penetration. Certainly, I think we've seen some activity in the market that leads me to believe that people are struggling to reach the penetration that they had intended for those passings. And the cost of capital now is higher than the cost of capital was when a lot of those overbuilds were announced. And so my hope is that the combination of those things, it should come together to say that there's overbuild that probably shouldn't be done. And so we should see a decrease in the velocity, but we haven't yet.

Okay. Your company is always focused on a revenue growth algorithm that has balanced volume and ARPU. What's your philosophy and approach to driving ARPU growth for both rate increases and mix?

Our philosophy hasn't changed. So we continue to believe that the best way to generate the most revenue from our network is to have the most customers buying the most products. To do that, we believe you have to have high-quality products and you have to put them on the market at attractive prices. But I do think, on the other side of that, we haven't been afraid to push through inflationary price increases, where that's appropriate, because of our long-term philosophy around pricing. I think we have more space than some of our peers and competitors to be able to push through inflationary adjustments, where it's necessary. And from a mix perspective, we haven't gone after some of those higher-tier mix customers to the extent of some of our peers and competitors. So I think that there's some space there as well from an ARPU perspective.

Okay. Maybe we could talk about CapEx and network evolution and role expansion a bit. You're in this capital investment cycle that has increased CapEx from about $8 billion in 2021 to a little more than $12 billion in 2024 and 2025 based on your guidance. You've been generous enough to guide out to 2027 on CapEx. And when you expect a return, I think, $8 billion in 2027 or in that range, and that excludes any BEAD projects that you might secure. Can you just talk about the visibility you have into that CapEx decline being just a few years out? And is there anything other than BEAD that could cause some variability or cause it to be higher for longer?

Yes. So I think there's a lot of visibility. If I break it into pieces and you talk about the core capital expenditures, excluding line extensions there, we have a network evolution project that is finite, right, and where we've talked about pricing. And I think we have some comfort around what we'll spend on that project. And on the back end of that project, you have a network that has greater capacity, and where you've replaced the oldest active components of the network as well as some of the older plant components of the network. And so I think through that process, you actually build yourself some space, where there's a handful of years where you have a lower sort of core CapEx requirement related to the work that you did on network evolution. On the line extension side, certainly, when I think about rural, we've made the commitments in rural that are reflected largely in the outlook that we gave. We're far enough along in those projects that I have a pretty high level of comfort around the cost of the projects. And so I also think that, that piece is pretty well baked. Based on what you have in overall activity in the housing market, you can have some variation in that remaining piece of line extensions. But that's never been a huge sort of driver of CapEx one direction or the other. And so I think when you put those things together, excluding BEAD, which we left out, I think that we're very comfortable with the outlook. There's certainly nothing that we see on the horizon that I would say can meaningfully put us off track from what we laid out.

Okay. You mentioned network evolution in your opening remarks. Maybe you could talk a little more about how those will strengthen Charter's competitive position, customer value proposition. And if you could talk about the durability of that network advantage as you see it?

Yes. So really, there are 2 ways that network evolution helps us competitively. The first one is just thinking about the marketing claim component, right? So you're going out, you'll have multi-gigabit speeds in the downstream, at least a gigabit in the upstream. And in addition to that, across most of the footprint, you have what we call remote OLTs that sit inside the node. That give us the ability to do a success-based fiber-to-the-home connection, which really gives you a marketing plan that I think has a lot of durability in terms of being able to compete well in that space. The second thing that you have is what you do from a product from a market perspective, right? So when fiber upgrades -- fiber is always upgrading a portion of the footprint. And because of that, there's not enough total addressable market for some of the products that will really consume a lot more bandwidth to be able to come to market and have what they need. Cable, on the other hand, is going to upgrade, I think -- well, we will, and I think many of our peers almost everywhere. And so you really have a total addressable market that allows for products to be produced that will consume more bandwidth. That additional consumption is well supported by our network. I think those products will work better on our network, and that increases the gap between our product and a product like fixed wireless that is less reliable and less fast in terms of what they can produce. So I think that it's helpful in our competition, both with fiber and with fixed wireless, in a durable way to generating competitive value going forward.

Talk about your experience with the RDOF rural build-out. It looks like you've had a lot of success in penetrating these areas fairly quickly after they become available for sale. And maybe if you could talk about the return on the rural builds and how they're tracking to your original business case, and if there have been any variables that have deviated from your plan one way or the other.

Yes. We're really happy with how rural is performing. If I sort of go through the components, how do you -- how you get to the return, right? From a cost perspective, in spite of the fact that we committed to these builds back in 2020, where we were in a very different marketplace, we're running it across the passing that I think is going to be consistent with what our commitment was back then, right? So that's good news. From a penetrations perspective, then we're hitting 40% -- just under 40% after 6 months, over 50% on our stuff that's been -- that's 12 months and longer. And in both of those segments, you have penetrations that are continuing to grow, which I think you could see from the information that we put out. And so that is ahead of the expectations that we had when we originally laid out the plan. And I think we're really happy with the penetrations that we're getting across those markets. From an ARPU perspective, I think we're continuing -- we're performing quite well there as well. And if you think back when we made the commitment, we didn't have nearly as large of a mobile business as we had today. And so our ability to sell mobile into those passings was not really part of the math at that point in time. So I think those ARPUs are also performing quite well relative to our expectations. And I'd sort of boil it down as we do, sort of thinking about, well, how much cash flow per passing are you producing, right, which is, I think, going really well. So all of the ways in which things have been surprising at this point, I think our upside -- there were, on the cost side, maybe some puts and takes that got us there. But I think we're in a really good place. I don't want, though, anyone to interpret this in a wrong way. So say, our expectation of those mid- to high teens IRRs on the total project are still the same as they were before. I wouldn't change the guide around them. But I do think it's going really well.

Okay. Great. Current state of BEAD right now, can you talk about what you're seeing in terms of the states finalizing the rules versus those that are still working on them? Do you have a sense for how broad Charter's participation will be in these state-level BEAD processes at this point? I saw you won some in Alabama recently.

Yes, that would have been state grant, not BEAD.

It was not BEAD? Okay.

But we continue to bid on state grants sort of across the board. On the BEAD side, I think most states are still working through their rules. The real question is, in order to make those rules conducive to private investment by a skilled provider, like what we are, the state needs to request some waivers for NTIA -- from NTIA, and NTIA needs to grant those waivers. I do think -- I mean, I'm hopeful that we'll get a good contingent of state sort of in that process. We won't have great visibility to how much BEAD we're committed to until the process is a fair bit further along. But I think there's enough opportunity out there. And I think there are enough states now sort of working toward having that set of rules that will be conducive to private investment, then I'm confident that there will be sort of some investments for us to go get and with the returns on those investments, I think, over time.

Okay. Let's turn to ACP. I mean, you mentioned earlier in the discussion about, there's obviously some near-term noise around that, that you have to work through. So the end of funding for ACP has been a concern for investors, given the exposure that you have. I guess, first, what are the chances at this point that the program gets renewed? And then secondly, if it's not renewed, how are you going to manage the process around those customers?

Yes. ACP has been great for consumers who struggled with affordability, both in getting them connected to broadband and keeping them connected to broadband. I think that the issue of whether ACP is renewed is a bipartisan issue. I think there's support on both sides for getting it there. We need leadership to actually attach it to a bill. And so I'm hopeful that, that happens because I think that it's the right thing to do and the support for it is there. But the time is coming when they're going to need to do that or it's going to be disruptive to consumers, right? From our perspective, on the other side of that to this question like, what is it that we do? We have a highly skilled sales and retention workforce. We have a mobile product that can save people hundreds or even thousands of dollars. I think that we will sort of use the full might of that force to try to keep as many customers connected as we can. But without a doubt, it won't be disruptive. The other piece that I might sort of take a step back and say is that ACP, while it might create short-term volatility, if its funding is not renewed, it's not an impediment to long-term growth, right? And so our belief about the long-term trajectory of the business and our ability to grow the business in the long term isn't impacted by what will ultimately be a short-term issue if it isn't refunded. It feels like the valuation impact in the market is outsized relative to the actual number of customers who are at risk. But I think that we'll be prepared. We'll work our way through it. It will disrupt customers in the meantime, but we'll do it.

Is there a certain date that if this doesn't get renewed, then you just have to kind of move and there's no turning back?

I don't have a date to sort of put a line in the sand. But I would say, the closer you get to the date when the subsidy has to stop showing up on customers' bills, our business is as complex -- it's complex, right, to implement against something like that. And so it is much more difficult if there is not a window of some time prior to when the actual sort of adjustment has to start coming off a bill to implement in a way that doesn't end up being as disruptive to consumers.

And that funding is exhausted in what, April, isn't it?

April.

Okay. Is there a certain date or is it...

I don't know.

You don't know? That's fine. Sorry. Okay. Well, why don't we move on to mobile? That was a helpful discussion on ACP. You've been really growing mobile subscribers and have had a lot of success since launching the product almost 6 years ago, and especially after launching Spectrum One in the fourth quarter of 2022. What's the growth opportunity you see for mobile in over the next 5 to 6 years? What are all the benefits that accrue to the business from providing mobile service?

The growth opportunity is large. I think mobile can make up a meaningful portion of our EBITDA growth over the next 5 to 6 years. If you think about it, there are 130 million mobile lines in our footprint. We currently have around 8 million of those lines. The share of gross additions that we're taking in the market is much larger than our share of those mobile lines, even sort of in the setup we have today. I think we don't yet have the full brand acceptance of people believing that we're a real mobile carrier. So I think as that brand acceptance increases, that the value message becomes stronger. I think our product actually works better, right, because of the ability to backhaul or to offload to our WiFi and then CBRS network. And I think our service infrastructure continues to improve and to get more efficient, so I think you can also increase margin on the mobile product. All of those things come together to say that I think that mobile is an important part of the business. And I haven't even talked yet about the impact it has on broadband, right? I think mobile, on its own, is a valuable component of the business. But then I think the impact that it can have on broadband and reducing churn of customers who take both products is also impactful. And so I think it's really an important piece of the business and an important piece of our story going forward.

Yes. The pace of quarterly mobile net adds has moderated a bit from the peak a year ago, which, I think was to be expected as Spectrum Mobile season. Do you see opportunities to reaccelerate net adds? Would you look at the fourth quarter pacing as a reasonable way to think about net adds going forward?

So even if that were the case, the fourth quarter was a great quarter as well from mobile line net adds. Overall activity matters. We've acknowledged that there's been a slowdown in gross adds in the broadband business. That also slows, to some extent, gross adds in the mobile business. To the extent that activity increased in the broadband business, I think that would increase our growth in the mobile business. In addition to that, the marketing engine is always out there trying to tweak the message, to tweak what we're doing. And so I think that there will be opportunities. I don't know what they are exactly yet, but that also could take us back to where we were before. But in the meantime, I think we're growing mobile at a really rapid rate. We're happy with the progress that we're making in the business. And so I think it continues to be good.

Okay. At the investor event you had back in December of 2022, you had talked about mobile margins, excluding SAC, approaching 20%. Can you talk about how the economics have evolved since then and where you see those economics headed in the future?

Yes. So we -- since then, I think we do see a steady increase in the mobile margins, ex SAC, that we've had. Some of that is, as I said, growing the efficiency of our customer service infrastructure, integrating it better back into our cable infrastructure as well as just improving the service that we're able to provide to customers. Some of it is related to offloading more data onto our own network through some of the product features that we've added and the connectivity to the WiFi and pushing some of that traffic back to WiFi. Then I think, eventually, we'll be able to do more of with CBRS, and that will also be helpful. And so the mobile business, we've had -- we've grown so fast. We've had high customer acquisition costs. We've had the drag from the Spectrum One free line offers, which sort of rolls off over the course of this year. But I think that as you have that revenue growth from that piece, as we continue to have the cost profile be better, and as the service revenue of the line base becomes larger relative to the customer acquisition cost or the potential for sort of continued financial growth from that business [ over time ].

Right. Okay. You mentioned CBRS. Where is Charter in the process of bringing that Spectrum to market? Is the previous estimate you had for 1/3 of the MNO traffic today shifting to CBRS still what you expect?

Yes. We've built out the Charlotte market, so that market is active with CBRS service. We have a second market planned for this year. The capital expenditures that you need to deploy CBRS aren't huge. But in the context of knowing that there are limits around sort of our total CapEx as well as limits around the amount of executive attention that you can apply across multiple projects, we haven't done as much of our investment in CBRS yet. I think that doesn't mean that we won't. CBRS continues to be a project that will have good ROI. As we grow more and more mobile customers, the ROI actually gets better. And I think it actually gives us a structural cost advantage in the long term. We can build CBRS, and we can use WiFi to offload in the densest areas where our customers are using the most data, and then rely on the mobile network in those areas that are less dense and where that investment doesn't make sense, which I think will make us cost advantaged in the long term. So eventually, I think that we will sort of roll out more CBRS on the spectrum that we purchased. I think the target that we had around that remains sort of a good overall target and the timing will be seen.

Okay. Understood. Let's get back to where it all started, the video business. The video ecosystem is undergoing a great deal of change right now, and you've been adapting strategy and response. Can you talk a bit about how you're advancing the video strategy with Xumo, the inclusion of streaming apps from Disney and Univision with those renewals? And how you put them in the programming tiers, I think, it's really interesting. If you could maybe talk about that a bit?

Yes. Our strategy around video is all about bringing value to consumers, right? So going to programmers and saying, look, we're not willing to make consumers pay twice for the same content in linear and direct-to-consumer. Going to them to ask for the flexibility to be able to size packages, both for what consumers want and for what they can afford, are both about bringing value to the customer. And then from a delivery platform, you have Xumo, where you have seamless integration and the ability to provide that linear and direct-to-consumer content in a way that's easy for the customer via the voice remote and via content forward presentation. And it all comes together. The margins in the video business are challenged. But if you can bring a product to customers that create value for them, that customer becomes stickier. And so you can create value through the video business, also in the broadband business, right, by creating a stickier customer base. And so we're on the road there trying to make a video product that works well for consumers and that can be resilient to the broader sort of market forces going forward.

Speaking of new products for consumers, what are your thoughts on the new sports bundle recently announced by Disney, Fox and Warner, commonly now referred to as Hulu? How does it impact your approach with those programmers? And what do you think of the value proposition of that product to consumers?

I certainly understand the attractiveness of wanting to be able to offer a sports content bundle -- sports-only content bundle to consumers. That's exactly the kind of programming flexibility that I was talking about that we've been looking for, right? And I'm glad that they finally agreed that, that's a good -- packaging is a good outcome. That being said, I mean, the Hulu venture itself, right, if you're a real sports fanatic, it doesn't have all of the sports content. And I think even this week, you've had some folks I'm talking about that people would have to bundle it with other products to get there. And the reality is, if what you want is a bundled sports product, I think we continue to have the best one that's available in the market. And certainly, I think if programmers are after flexibility to be able to have sports-only bundles for those customers who want it, we're all in, right?

Yes. It'll do that for them, right?

Right.

Shift gears maybe to commercial a bit. It's another part of your business, which has been a great growth engine and a large profit pool. Would you talk about what you're seeing in the small to medium business segment? It seems like growth has been pretty challenged there for the past several quarters. So if you could talk about the factors that are impacting growth there.

Yes. The factors impacting SMB are essentially the same things happening in resi in that, in SMB, there are a set of businesses that use a relatively small amount of data, and therefore, where fixed wireless is a viable alternative for them. So I think that there's competitive impact for fixed wireless in SMB. That being the case, I think we have areas of our footprint where we haven't extended lines to -- or we haven't invested in connecting customers who we should invest in connecting and part of what was in our line extension guidance. So I think we have some high-ROI projects that we can do to connect some SMB customers. And then long term, we're underpenetrated relative to the incumbent telcos who have most of that space. And so while there's impact from fixed wireless today, I think, ultimately, we should be able to take more of the SMB market than what we have now.

Okay. And then enterprise, that's been growing at a steady healthy rate for the past few years despite the drag from the wholesale side of the business. How are you going about continuing to drive growth in enterprise? And can you talk about where you are from a share perspective of your serviceable market?

Yes. Enterprise is growing really well. Lots of it in what I would say is bread-and-butter fiber Internet access, retail connections for customers. It's another space where we have a lot of connected buildings. We're willing to spend capital when it's high ROI to be able to connect additional buildings to the network. And so I think we're underpenetrated relative to the connections that we have today, and I think we have a great opportunity to continue to build inside of that business.

Okay. Lots of runway there still.

Lots of runway.

Shifting over to costs and margins. I think you mentioned on your earnings call the need to -- and you mentioned at the beginning of your comments today, you need to have strong EBITDA growth even in this slower broadband growth environment. How are you managing that goal? And how are you managing the cost structure through this?

Yes. So I'd reiterate, we know, right? We recognize that we need to grow EBITDA as we're making these investments across our business. We have good tailwinds for that this year. We have to roll off of Spectrum One in a political advertising year. We've lapped the investments that we made in the employee base, and so I think the drag that we saw in expenses related to those is potentially behind us. We pushed through some inflationary impacts to consumers. And we're making investments in digitization that I think, over time, will drive the cost profile down. And then in addition to that, we're doing an expense review across the business. And in each business unit, pulling together ideas, small and large, structural and functional, short term, medium term that I think will help us to get to that EBITDA goal. It's still a long term-focused project, right? So we're not doing anything that would impact the sales or service infrastructure of the business, but I think our ability to provide sales and service in the business. But I think we're making changes that will be good for the company in the short term and the long term. And so when you bring it all back together, we recognize that it's something that we have to do. And...

Very clear message today, Jess.

Yes.

I think the last topic I just wanted to hit on was capital allocation. Maybe first, just on the leverage target, I mean, do you continue to manage leverage to the high end of the 4 to 4.5x target range? Is that still the modus operandi there?

We continually evaluate the leverage range. We always have. We continue to have good cash flow in spite of the investments that we're making in the business, investments that I would actually say are good for the bondholders because they upgrade and add new assets to the security package. We're continuing to grow EBITDA in spite of the overall competitive market backdrop. And we have a long-dated, fixed-rate debt structure with relatively [ little ] in maturities in the next few years. I think if any of those things changed, like we could make an adjustment, but we still are confident in our 4 to 4.5x range. That being said, I realize we have been all the way at the top of that 4 to 4.5x range. If we needed to, we certainly could move down slightly off of that top end. We've done that before. But we continue to be confident in the long-term trajectory of the business. And we believe in the levered equity strategy that we have and the ability for that to drive value in the business going forward.

Okay. Great. And then last question. How should we think about the potential for Charter to pursue acquisitions? Are we at a point in time where M&A is going to be a higher priority for the company?

Our overall capital allocation strategy hasn't changed. The first thing that we do is to invest back in the business and organic growth. You see us doing that in our investment strategy. The second piece that we would pursue is accretive M&A. You guys might have heard Chris say it last week that I think we like cable businesses. But if you have to go in and invest in a business because it's underinvested or if you have to bring pricing down because their pricing is too high, that puts a lot of pressure on valuation. And so as I said, we look at opportunities, but they've got to create value for the business. And then the last piece of it is that we manage our capital structure, right, which includes share buyback where that's appropriate. So yes, so no change to the way that we've approached those things.

Yes, it's been very consistent for many years. All right. Great. Well, thank you very much, Jessica.

Thank you.

And thanks, everyone, for joining us.