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

Look, I'd feel a lot better if we were growing broadband in the way that I know that we can. But yes, I think being in the position that we're in, to be able to temporarily manage through and have financial growth to deliver EBITDA growth, even in spite of ACP going away now, I think, leaves us in a position where we feel good about the decisions that we've made.

And I know you've talked about the impact of Spectrum One and the allocation of some of that discount to broadband that holds down your broadband ARPU growth. But if I think long-term, how confident should we all be that you can grow broadband ARPU by 3% to 4%, which I think is kind of where you've said the sweet spot is?

I don't know that we've given, maybe Jessica did. I don't think we've given a target, but I think not dissimilar from some of our real peers. I think we have the ability to continue to earn ARPU over time, not only by passing through inflationary cost increases, but we're relatively underpenetrated in some of our higher tiers. And I think our ability to have higher upsell into those tiers, particularly now that you have Spectrum One combined, where you're driving in this value, is significant.

We'll talk more about mobile in a minute, and so we'll come back to Spectrum One. But I want to just talk about convergence. I had an interesting conversation with Verizon on this stage 45 minutes ago. And as I think about convergence, your footprint is obviously an advantage, right? You do offer wireless and wired everywhere that you are. So there's no, here's what I offer here and here's what I offer there. Talk about that a little bit and how that informs the way you're thinking about the offer that you have for customers.

So if you think about mobile for us, it's a little different than, I think, mobile for a lot of people. In my mind, and we've said it before, I don't think mobile is a product. I think it's an extension of your broadband service. And so when you pull out of the driveway and I say, "who's your operator right now?" You'd say, "I don't know. I don't care. It just has to work, it has to be fast and it has to be seamless connectivity." And that's your broadband connection. It's how we all use these services. And so broadband is just an extension of -- mobile is just an extension of broadband, kind of like a value-added service. It doesn't mean that we fully combine it in. People still have multiple lines. It's still a profitable product for us. But more and more, I think it's just going to be an extension of what we have. Today, roughly 88% of the bits that go over our mobile phones really are carried by our own network, primarily Spectrum WiFi. And so you end up with a product that is faster than any other mobile operator in the country, because it has seamless connectivity, it's gigabit wireless, because it's piggybacking off of WiFi. And interestingly enough, the 5G radios that we have a lease arrangement with is only 12% of our traffic. The 5G radios are backup. It's when nothing else is really working that same way. We have the ability to, on one hand, increase our offload to faster speeds and a lower cost framework for ourselves by utilizing more WiFi deployment and more CBRS deployment. But we also have a very attractive long-term relationship with Verizon, and they've been a good partner and that's attractive as well. And so we'll continue to manage through that over time. But the mobile attribute to our broadband service, I think, is really unique, because nobody else, other than Comcast, and now Cox, and I guess, I assume Optimum as well is able. So cable is the only one who is able to do that. They have a structural advantage.

Do you feel like you're making headway in explaining that to customers, so that they can start to think about it as converged service? Or is it still you get 2 products and the advantage...

Yes, it's not as fast as I'd like. And so what we've seen so far is a demonstrable improvement in churn for broadband customers who take mobile, which is still relatively low. And for a long time, we were hesitant to talk too much about that, because you have self-selection. And so I didn't want to brag about that or advertise that, we did maybe a quarter or 2 ago, because how much of that self-selection, they took your product because they already like you. But now when you're sitting over 8 million lines, you still have some self-selection that's in there, but it's enough data to actually take a look and say, it's meaningful, it has a real impact. So I think that piece has gone extremely well. And Spectrum One, when it rolls off, it sticks. Why? Because it's faster product, seamless connectivity. And it's at a lower price point than you can find anywhere else inside the marketplace. So where else would you go? The piece that I think, to your question about educating the market, is on acquisition. And I don't think it's had the pull-through effect yet that I think it's really capable of doing. And that's just going to take a combination of time, word of mouth, and for us to try new things in the marketplace of seeing how can you stimulate demand? How can you educate customers? It still is recognized, much as I believe in convergence, historically, the household is where you sold broadband and the individuals are where you sell the mobile lines.

But for example, I haven't seen you do advertising yet that sort of says -- that tries to illustrate this as a connectivity everywhere service.

The advertising shows Spectrum One with the broadband service, the advanced WiFi and the mobile, and it's just a picture of people out on the yard and traveling and moving around and the combination of all those things together. So I do think that's my point. Maybe we can do a better job of that. But finding different ways to try to educate people that this is potentially a brand-new definition of broadband. And not only is it faster, more seamless connectivity, but it can save you hundreds or thousands of dollars per year.

By the way, I'm going to go off-script for a second because I got an interesting question. I asked this to Brian also. Somebody asked a question, which is why don't you call your service fiber service? And I'm sure you've seen...

The cases out and I guess it was Portugal and Spain and maybe Spain and New Zealand. Yes, I have. Look, 99-point -- don't take this as exact number, but 99.8% or 99.9% of our network is fiber. It's really the drop is effectively coax. But when you have a fiber overbuilder, what do you think your drop is inside the home? It's the in-home wiring, right? So I don't think there's much difference at all, and we continue to go deeper and deeper with that fiber. We have given it some thought and we're watching what takes place in different environments. I think our point of view has been less marketing about the technology and more marketing about the utility. What are you going to get? How is it going to change the way you live? How is it going to save you money? Instead of trying to get into war about definition of technology. As sexy as DOCSIS 4.0 may sound -- so that's a cable joke.

So let's go back to wireless for a second. So I would assume that wireless net additions will continue to decelerate somewhat, simply because the base is getting bigger. So churn is operating -- even if it's low churn, it's operating on a big base. But I guess the obvious question is, at what point do you need to start handset subsidies to keep the base engaged and keep them from going somewhere else to get a free phone?

Well, let me start by maybe disagreeing with you. I think the fact that we added 0.5 million net adds, lines inside of Q1 in what is probably the lowest growth -- temporarily lowest growth broadband market, so less selling opportunities, to me, gives me a lot of confidence that when household formation comes back, movers come back, ACP is behind us, and you're in a market that has more jump balls, our mobile sales should actually increase for all the reasons that we've talked about, the value and the quality. So I'm pretty pleased about that. We've never thought that being in the subsidies business for handsets was really a great business. I still think that's the case. When you have the fastest product, you have seamless connectivity, you save customers' money, you got the lowest price point for that type of product in the marketplace, I don't think we need to today and I don't think we need to in the future. Now that being said, we are rolling out what we think are unique features. One is Anytime Upgrade, which is unique in the marketplace, for an extra $10 per month, not only do you have higher limits, but you also have the ability to swap out your phones and get into a new EIP at any given point in time. That's attractive. And then shortly, maybe within the next few days, we'll be rolling out contract buyout, which is our opportunity from a subscriber acquisition standpoint to rip out multiple lines.

So really big family plans.

Correct. That are stuck in contracts by these large MNOs that have locked up these devices and tied up these consumers. And so doing contract buyout is another way of subscriber acquisition. That's not device subsidy. That's a way of digging them out, as we say, in cable.

You built CBRS offload in Charlotte. What did you learn? And I think you've said that you think you can offload as much as 1/3 of what you currently put over the MVNO agreement eventually? Is that the right number and how'd you come up with that number?

We set it at a point in time where we were 85% offload. We're now at roughly 88%.

So you're getting close to that...

You're getting close, but most of that's really come about through WiFi proliferation of having the Spectrum mobile SSID enabled in all of our different households. CBRS is just beginning. So I'm comfortable with where we said we could get to. But we're not in a race either. The reality is that if you think about the network evolution, the network expansion, not only do we have a large number of capital programs at play, but there's still effectively construction on the plant to go install these radios at the same time that we have those same groups of people doing other type of work. And they take the trade-off there with the fact that we have very good attractive relationship with Verizon. And so we can go at our own pace. We don't have to rush. The interesting piece is the more lines we have, the better the ROI. And so the ROI is only going to continue to get better and better as we have more lines. But we are rolling out another market this year.

It's funny. I asked a question to Brian also this morning that whether he sees wireless primarily as a stand-alone business, that is you're in wireless because it's wireless, and it's 3x the size of the broadband market, or you're in wireless because it helps your broadband business? He answered it by the latter, saying it's primarily about broadband. My sense is you see it as a stand-alone business or as revenue in its own right.

Well, it is revenue in its own right, because it just is. But if you go back to what I said before, it's really an attribute of your broadband service. Today, if you have one of the MNOs as a mobile provider at a much higher rate, with less connectivity, with less speed, you're still offloading to our network. Still, for the most part, it's an extension of our broadband network it already is. So I actually don't think of it as a true stand-alone product. I don't think the mobile products are actually that good of a product. I think it's a great product when it's combined together with our broadband service.

Let's talk about your rural build. So as you finish your network evolution project and your RDOF build is going to be coming off at around the same time, the next big CapEx project was and I presume still is going to be BEAD. When do you think you're going to have some clarity about how big that opportunity is for you?

I think it's still going to be a little ways down the road. The states need to get through their waiver process and then they'll need to run their auction and then you'll have the contracting process. But probably by the end of this year, we'll have the ability to really size it. We're still excited about it. It's a very unique opportunity. Nobody has ever offered to help subsidize these network builds in the past. And over the past few years, now with BEAD, it's a onetime unique opportunity. And so we're committed to being part of that so long as it can happen under the right rules and regulations. At the same time, we're going to be disciplined. We recognize that we're in a different capital market environment than we were just a couple of years ago. The build that we're doing today has fantastic returns. It's fantastic capital, but we're going to be very disciplined both on capacity as well as the returns that we need to make sure that we can get.

So there's 2 questions that I struggle with about BEAD. One is that relative to RDOF, you're starting to get much less dense, and that means that if you're going to try to -- right now, you're growing your homes past at 2.5% a year. To try to sustain 2.5% a year, once you get to low density means the sheer volume of mileage that you're building starts to be so large that you're becoming a contractor for the government rather than an operator.

That's an interesting way of putting it. But a good return contractor with a permanent perpetuity growth rate and really a free option to have further expansion, particularly in some of these markets.

But isn't it just the sheer scale of labor and all that, that you have to add? Doesn't that eventually become so onerous that you say it's getting to you?

That's premised on you thought the density is going to be lower than what we're doing in RDOF and ARPA. I don't think that's the case. There are density thresholds, and for competitive reasons, I'm not going to go into that. But there are density thresholds where we take a look. And for exactly the reasons you said, it doesn't matter how much subsidy you get, we're not going to go there, because there's an operating cost windshield time of the tech even able to get there. And particularly when you're limited in terms of how you could price and package, then you want to be really careful about getting into that environment. So we've always had limitations on low density in terms of what we're doing. There are markets that even though it's low density today, take Florida, Carolinas, Texas, where it's not built inside of our model. I'll pick on my home state of Florida. If you build in Florida and it's 10 homes per mile today, chances that, that's going to be 10 homes per mile in 15 years from now is pretty low, right? It's going to be much higher. And so you have to kind of mentally think about that, too, along the way. And your question around labor and supply. Because we're the largest rural operator in the country, we're the largest rural builder in the country, we've been at this for a long time, I think we're seeing is both scaled and committed and reliable. And I think we're advantaged because of our past behavior, both from a labor as well as from a material standpoint, and from a pricing standpoint, too.

The other concern I have, though, is that as you -- I think in RDOF, you were sort of 4:1 private to public capital or somewhere in that range.

Yes.

If that flips on its head, you can still be fully compensated, but it works the same way as leverage. You start to take on a tremendous amount of risk where a 10% cost overrun suddenly puts the whole project underwater.

Yes. And nobody knows that better than we do. So we've managed to have our average cost per passing be at where we expected it to be, but that doesn't mean that there wasn't a tremendous amount of puts and takes. Some of the good guys that we received are synergy passings, the other side of the county road. Some of the negatives, obviously, would have been that the labor market did increase. Access to poles has been very frustrating, been very difficult. And it's probably the largest impediment to the rural build-out is access to poles, where it either costs you to have to fund an appropriately replacement cost for an electrical company that should have done it many years ago, or to go underground at a much higher cost. So we've taken our learning lessons. We've factored that into everything we're doing. It doesn't mean that you can't have some surprises. But I think we're pretty well equipped into what we're getting into.

All right. Well, you can imagine, I'm going to ask my last question here about why not buy back stock instead, but I'm going to hold that question. And I just want to very quickly touch on...

Nobody here wants to hear that.

Yes, nobody wants to hear that. I just want to keep people hanging for the last 4 minutes. But I do want to just quickly touch on the video business. In the wake of your Disney deal, has that sort of changed your expectation of the trajectory of the business? Or in retrospect, was that no, we're still -- because your video declines were actually, at the time, a lot slower than everybody else's, and you're starting to look a little bit more like the industry.

Little bit. Biggest driver of that is really tied to having to pass through these very large programming increases. And so we are, because of the other options available in the marketplace, seeing more churn tied to video rate increases than we did historically, because it's available in a pretty broad way, in some cases, at a cheaper price, because the programmers have done that directly. Now do we think that we can fundamentally change the course of video? That's not inside of our business plans. But I think what we're really trying to do, first and foremost, is make sure that we're proud of the product that we're putting on the build to our broadband customers, that it's actually not becoming a liability to our broadband service. And the way you do that is through some of the deals that we've been trying to get through and have gotten through. And so what we're trying to really do is find, "can you create a video ecosystem that works extremely well for customers, that actually works for programmers, and it works for distributors as well?" And that means these aren't easy conversations. They've been difficult. But I think we're starting to make some progress. And the way you do that is really to focus almost exclusively on the customer. Can I get value into the product? Something that I'm proud to charge for? And can I get utility, which is solved through Zumo. And the value equation really means us being able to distribute and sell the video product in a way that the customer wants to take it. And so if you think about the deals that we have been doing, on one end of the spectrum, you could have the full expanded product with sports, it's expensive, but it's going to have a lot of value in it. It's going to have Disney+, it's going to have ESPN+, it's going to have ViX, which is the Spanish language. And I'm not going to list off all the other ones because they're not done yet, but they will be there as well. And you think about that product and you say, combined with Zumo, I have the ability to have everything. It's expensive, but I have it all. And I can find it and it's at a cheaper price point if I want all that than I can find anywhere else in the marketplace. That is a great model for the programmers. They get paid more in that model than they get paid in any other way that I'm about to describe. And they have the subscription revenue. Whether the customer watches or not, they have the advertising, they have low churn. It's nirvana. It's what we used to call cable. And then you have the second segment, which is, if customers -- because the product has gotten so expensive, primarily because of sports, we do have a general entertainment, non-sports, non-broadcast, that is a skinny bundle, a streaming service. And that allows us to retain customers and be able to upsell them back into the more expensive package. And then finally, we have the DTCs, where we now have the ability to sell the direct-to-consumer products. And in some cases, because of where programmers have priced those products, that's actually going to make more sense for customers. And if that's where they want to go and come in and out with high churn and to move in and out of that environment, we could both sell a la carte as well as bundle those direct-to-consumer services. And so our endeavor here with video is to make sure we have value and utility, that we can go wherever the customer wants to go. And we are actually very focused on creating value, not just for us, and obviously, the consumers but also programmers.

The programmers have fought long and hard against things that create value for them, it seems.

They never wanted us to go to a la carte, but then they went a la carte. It's not a great business.

So look, now I'm going to ask the question everybody came for, which is your cable stocks right now are trading below replacement value. You're spending a tremendous amount of money to build fiber in what I think are attractive return areas. But there is this obvious question of when you're trading at below the replacement cost or the lower cost per connected home than what you're building in rural areas, would you be better off buying Charter?

I think temporarily, the answer might be yes. But I think if you think about it, we're trying to manage a triangle here. One is a unique organic growth investment opportunity that is not going to come around again. And you either execute on it now or it's forgone. The second is managing a leverage ratio in a way that in a volatile capital market that respects all classes of capital inside of our structure, including investment grade. And the third is where you can see me foaming in the mouth is can we buy more stock? And those are competing notions. And so we're trying to find the right balance. You've heard me talk about BEAD being disciplined. You've heard us talk about moving to the middle of our target leverage range and still trying to do as much as we can to buy back stock. Personally, I'm a big fan of that as well. And I'd like to do it all. Unfortunately, that's not the environment we're in, and so we're trying to thread that needle. I will tell you that when you think about our allocation of capital, which always started with organic growth, M&A, if it was better than buying your own stock, buying your own stock and leverage management. And then if you had nowhere better to put it, you could do dividends and let people be taxed on it, which is clearly not our favorite place to go. That strategy hasn't changed. But one of the things I think a lot of people forget is that if you're only about doing buybacks, and that's how you run your business, the only reason that works is if you can get growth. If you don't get growth, buying back your stock isn't an accretive thing to do. And so making the organic investments actually preserves and accelerates the return of your buybacks and it also increases the terminal value of the company, which is that's where you really want to go.

It's a great place to end the conversation. I can't thank you enough for being here, and I look forward to doing it again next year for our 20th time or whatever, on stage.

Excellent. Thanks.

Thank you very much. Good to see you.