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

Good morning. I'm Sebastiano Petti, and I cover the telecom, cable and satellite space here at JPMorgan. I'd like to welcome Jessica Fischer, CFO of Charter Communications. Jessica, thanks for joining us.

Happy to be here. Thanks, Sebastiano.

So Jessica, while the operating environment for cable has been unique post pandemic, you and Chris have focused on three main initiatives to position Charter for long-term growth. Perhaps update us on where you are with each of those initiatives and help us think about time lines and milestones from here.

Yes. So the initiatives are all going really well. If I start with network evolution, we expect to complete our step 1 markets inside of this year and to start on our step 2 markets. If you think about what's happening across the data space, having an upgraded network becomes increasingly important because we think that speed and reliability, along with quality customer service matter in the long term to winning in broadband. When we look at customers who do not take our video product, they're taking close to 800 gigabytes a month of total data. And when you upgrade the network across the board and when cable ubiquitously upgrades across all customer spaces, I think you seed what will become additional data usage across all markets, which continues to grow and make that speed and reliability more important. So we're excited about where we're going with network evolution, having multi-gigabit speeds in the downstream, gigabit speeds in the upstream. We think it will allow us to win from a competitive perspective as we have better marketing claims against our competitors. And we're doing well from a cost perspective as well. So coming in, in line with the $100 per passing, I think, that we had expected. And that doesn't include the benefits that you get from a financial perspective going forward, thinking about the benefits that you'll get both from a capital and an operating expense perspective on a go-forward basis once you've sort of upgraded the components of the network. So I think that one is going well. And move on to the second initiative, thinking about expansion. The expansion projects are going extremely well. They continue to be in line from a cost perspective. Penetrations and early penetrations in particular continue to be quite strong inside of those markets, which puts us on target to achieve the mid- to high teens IRRs that we set out to achieve in building those spaces. We're still on track to complete 450,000 passings over the -- subsidized rural passings over the course of 2024. As a reminder, that starts out a little more slowly because of winter seasonality. But similar to last year, I think we'll pick up speed as we go further into the year. And so really excited with how execution against that expansion project is going. And then in the last one, thinking about execution and what we've been doing there. We talked about in our fourth quarter call that we're working on really driving some automation and digitization initiatives in the business this year that will help increase the efficiency of how the business operates. We've gotten some of those, sort of started and are starting to scale them. And I think we're seeing benefits, both in terms of sort of lower calls handled than truck rolls as well as in the efficiency and effectiveness with which our sales employee -- our salespeople can handle calls. And so generating those tools that make our employee set more effective, I think, is an important part of the story going forward and how you make the business financially more efficient as well. And when you put all of those together, we've talked about that we know while we're investing in all of those initiatives, that it's also important for us to show growth on the EBITDA side. We have an expense initiative that I now sort of consider part of execution as well, right, that going and driving expense savings across the business in a way that doesn't negatively impact either our sales or service capabilities. And we are -- we've been pretty successful in what we're finding and able to do there. And so when you bring it all together, I think we're happy with how all of the initiatives are progressing across the business.

Great. A lot to come back to there. But starting with broadband, on the 1Q call, you highlighted that churn remains near lows, but gross adds have remained -- have been pressured due to the competition as well as some perhaps a reversion back to mobile only. So as we approach the halfway mark of the seasonally softer second quarter, any update you can give us on what you're seeing in the broadband ecosystem?

Yes. The market continues to be challenging. We're competing well, but you continue to have lower market activity, and you also have sort of the coming disruption from ACP. And so it's still a challenging space.

Okay. And so with ACP, you have several attempts to renew funding for the program in the Senate recently. Any hopes this can get done in the time line to -- and a time line so as to limit disruption? And I guess, help us think -- remind us on some of the ways that you're managing through the program, the unwind given the uncertainty.

Yes. We're still hopeful, but the disruption has already started, right? So bill started going out with $15 rather than $30 subsidies on May 1. But I think what we've done is really to -- we've been proceeding for it as though ACP would end. And we have all of the tools that we need to be able to manage through the process, which include that we have a high-quality sales and retention workforce; we have a solid set of offers available to them, so the tools that they need to be able to retain customers; and we have a mobile product that can save people hundreds or even thousands of dollars. And so the opportunity for us to bring people into mobile and to use that as a way to have savings that can replace ACP, if you will, I think is really strong. So we believe that we are well prepared to deal with the coming disruption in activity, and we'll do it.

So still too early in terms of helping us think about the impacts of the program in terms of churn, nonpay in terms of what you're seeing thus far? Or...

Yes. I think it's still way too early. The -- there's been very little thus far in terms of residual disconnects related to ACP in May, but that's not inconsistent with what we would have expected. I think the real impact that we'll see will probably come over the June and July time frames with nonpay then even extending beyond that.

Right. And so just on that point because I think you talked a little bit about it or alluded to it a little bit on the call. But in terms of the subscriber headwind, it's probably more of a 3Q thing or the bulk of it would perhaps be in 3Q, but bad debt is more of something we'd see in 2Q as you start to accrue for some of that. Is that the right way to think about it?

Yes. I think you can think of -- the subscriber headwind happens across both quarters, but it's split. What hits inside of 2Q is more related to people who call in because they want to -- because they're seeking change or because they want to disconnect their service. And then it's nonpay that extends into Q3 and even maybe as tiny amount into Q4. From a bad debt perspective, I think you'll have some bad debt impact across both quarters. Yes, so I -- but I think we'll have more visibility as we get to the 2Q call.

Okay. And so just at a high level, as you look across the cable industry, I'm thinking about -- and I think Chris touched on this a little bit last week, but what underlies the confidence in rebounding broadband gross adds over the long term for cable as you think about competitive environment, FWA? Pressure might fade, but you have that fiber overlap that will continue to march higher. So I guess what are some of the levers at Charter's disposal to help improve the broadband gross add trajectory just, again, given the outsized market share?

Yes. And so I think about speed and reliability, I think about high-quality customer service and then differentiation, right? So on the speed and reliability side, the investments that we're making in the network upgrades, I think both will improve our ability to have marketing claims in the market. They'll improve the reliability of our service as you sort of change out the components of the network as well as going to the distributed access architecture, which improves your speed and reliability there. And they'll see the products in the market that will generate the next stage of demand for broadband, which will actually then, in turn, make speed and reliability more important. And then you combine those with the other things that we're doing, right, with a mobile product where mobile works better because of being combined with our broadband product. So driving convergence, which drives growth both in mobile and which delivers margin to the business and drives growth because of the way that the mobile enhances the stickiness of the broadband product. You think about what we're doing in video, where we're looking at ways to drive value into the video product. Video still today provides some differentiation from a sales perspective in the market, if we have a differentiated video product by virtue of being able to pull all of those things in that people want or to deliver right-sized packages to customers. I think the combination of those things drives differentiation then in video. And you combine that all with the investments we're making in having a really high-quality customer service infrastructure, being able to deliver on that service to customers when it matters. And then you pull those together, and we have the ability to continue to win in the broadband market and to sort of move past this moment that we have, where both the market growth and the competitive moment is different from where we've been before into a longer term where I think cable and broadband do continue to grow.

Okay. So been touching on it this morning. But can you just remind us of the network evolution and RDOF build time lines? Still on track to complete all the network evolution by 2026 and RDOF builds by 2026 as well, which I think is a couple of years ahead of schedule? So maybe help us think about the pace of those builds and also balancing that against the backdrop of delevering share repurposes -- share repurchases?

Yes. So from a -- if I hit the second question first. From a capital allocation perspective, our priorities haven't changed, right, which is that, first, we want to be able to invest in high ROI projects in the business. And then after that, we think about accretive M&A, and then really managing the balance sheet comes at the end of that. The business is continuing to deliver strong cash flows. And we believe that we have enough cash flows to be able to execute against our initiatives while still doing what we've talked about from a leverage and a buybacks perspective. From -- in terms of the projects themselves, the projects are executing on time. So I think we have the ability both to complete RDOF and network evolution by the end of 2026. The things that would take that off track, right, so if there were technological changes coming and you said, "Hey, maybe I need to wait a moment to be ready for the next stage of technology on the network evolution side," like I think there are changes you might make there. If there's an efficiency of delivery where across the business, we say, "Hey, we will be more efficient in delivering these upgrades overall if we slow them down in one way or another." And I would categorize those. If it's the best thing to do for the business, then we'll slow those investments down. And if for some reason, you came to a moment where you said from a capital -- from a total capital perspective, it makes sense for us to shift what we're doing here to accommodate what the market can expect, which I think we did a little bit of that this year, we could make that decision. But right now, I think that we believe that with what we've laid out, what we laid out in the long-term capital plan, we can execute against the investments that we need to make. And we can do it while continuing to do what we've said we will on the buyback and the leverage side.

I definitely want to come back to the capital allocation in a minute, but just sticking with the network and how you're thinking about build cadence. Does BEAD look any less interesting today, given your maybe updated views on leverage?

So BEAD continues to be a really interesting project because it is a first-of-its-kind opportunity for subsidies at the level that they're available, to be available to build broadband. And there are good high ROI opportunities that we think that we should be able to go get, and we think the subsidy will be available once to get those. And either it will be us or it will be someone else, right? And so we continue to have a reason to go to want to go after those BEAD builds. The impediment really is, I think, some states, it appears could have rules that are not conducive to private investment or to our investment. And so there could be some limitation to the total amount we invest that's related to our lack of willingness to bid in states where we won't be able to get the returns because the rules aren't conducive to it. But I think even in spite of that, we're going to make the right long-term decision for the business, which I think, in many cases, involves investing in those high ROI projects. And I think that there will be a good amount of them available for us to go get.

Yes. And so speaking of one of those high ROI projects, rural remains a key priority. And so why is this such an attractive opportunity as you think about, obviously, you touched upon it a little bit with BEAD, good ROI opportunities? But the current, I guess, rural subsidized program that you have, how should we think about that setting up Charter or positioning Charter for great returns over the long run here?

Yes. It's hard to overstate the tremendous demand for proper broadband in rural markets, right? And so I think that's why we continue to see, as we go into those markets, higher penetrations than we might have anticipated and why I think you can have a higher cost per passing and still deliver well from an overall return perspective in those markets. In addition to that, when you provide rural broadband to a community, it's not just the connection you provide, you're providing connectivity to telehealth. You're providing connectivity to education opportunities. You're providing the ability for someone who sometimes works from home or who has a child who might want to do education from home to buy homes in that community. And so some of those communities we invest in over time will move from being rural communities to being suburban communities because they have connectivity. And we haven't factored that into the way we sort of model for returns in those spaces. But I think even the returns that we are getting will lead to future growth opportunities because of what it means to bring broadband to rural.

Okay. So segueing to convergence on the 1Q call. Chris said less than 8% of total passings take the company's Internet or mobile bundle today. Similarly, from a dollars perspective, Charter captures less than 30% of residential Internet and mobile spend. So where can these go long term? I think on the call, the team talked about maybe needing to perhaps educate consumers on Charter's value proposition in convergence. How do you do that?

Yes. So we have high expectations for the mobile product, and we can have those because it's the fastest product in the market, because it is priced better than any other product in the market and because it's differentiated because of things like Mobile Speed Boost and Anytime Upgrade. And so with all of those things, we have a lot of confidence in our ability to grow mobile. I think there are sort of two things when we talk about sort of how we've been packaging it that we've been thinking through. One is about how you market the bundle or how you talk to consumers about the bundle instead of the components. You might have someone who would call in and say, "Hey, I can get this pricing for stand-alone cell phone Internet," right," "And with that pricing, I'm lower than you." But if you come back to them and say, "Look, to get that pricing, that means that you're overpaying for mobile on this side," right, which means that what we need our sales force to be able to do is to say, "Look, let's not talk about just the broadband pricing. Let's talk about the total pricing of your connectivity services because in the bundle, we're priced better than everyone else, and we also have a better product for the customer." And so I think if we can execute on that sort of conversation and bring consumers into that bundled discussion about both the quality of the products and the better pricing that they can get by being with Charter, that we'll be more successful there. The second piece is just thinking about branding, right? So we have a mobile product. It's been in the market for a few years now, but we still haven't fully won consumer trust from a -- like this is a true high-quality connection that I want to have as my mobile connection. I think over time through additional marketing, through having the fastest product in the market and differentiating by being better because of its association with our WiFi and broadband network, that we will move into that sort of being a more respected sort of major brand in the market. And I think if we get those two things right, like the path for mobile is really, I think, pretty incredible. We have a great product, and it's differentiated in the market. And it should be able to drive both the growth for the business on the mobile side and overall growth for the business as it makes our broadband more valuable to consumers.