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

Okay. Thanks, everyone, for joining us for our next session. I'm really excited to introduce Jessica Fischer, who is the Chief Financial Officer of Charter Communications. So Jessica, welcome.

Thank you. Happy to be here.

Why don't we maybe start off with where you are today in executing the strategy, give us an overview of the key initiatives and priorities that you and the team are focused on for the rest of this year.

Yes. It's a big execution year given that it's the peak of our CapEx cycle. And so there's a lot going on. We're planning to build 450,000 rural passings this year. We're taking the next steps in our network evolution. So finishing out our eight step 1 markets and getting well into our step 2 markets where we're delivering distributed access architecture. We're continuing to invest in the service component of our business, rolling out AI and machine learning and digitization as well as investing in that employee population to make sure that we're delivering the best service to customers and also to drive down transaction volume, which is beneficial from an operating income perspective. And then we're continuing to roll out the pricing and packaging that we started at the end of last year, which is really about returning to our roots with the bundle, driving more value into packages and utilizing that additional value to grow our revenue per customer relationship, and ultimately, to grow the margin that we can offer to each customer in a way that we think is sustainable for the long term. And so when you pull all of those things together, it's really about executing against the set of things that we think that we need to drive growth in the business and to drive value going forward. So a lot in that year, but we're excited about it.

Okay. Great. There's a lot there to do. Just maybe we could talk about broadband a little bit. I think, obviously, ACP had a disruptive impact on net adds last year, but net adds were actually quite positive in the second half of the year. On an underlying basis, it seemed pretty encouraging. Can you just talk about are you seeing any additional ACP impacts this quarter? Or is that sort of behind you at this point?

So the onetime impact from the end of the ACP program is over. What we do see on the other side is something that we've talked a lot about and that we expected to see, which is slightly higher nonpay rates across the business. And then the other side of that where people who nonpay, either with us or with someone else, come back in the form of growth additions. And so that just generates additional transactions in the business, both acquisitions and disconnect that will bring the transaction level up a bit from where it was before.

Okay. Great. And then can you just talk a little bit about the fiber build activity that you're seeing? Has the velocity of those builds changed at all? Any update on how much the footprint is now covered by a fiber competitor?

Yes. So I see all of the same announcements that you do about build. But when we look across our footprint, the rate of fiber overbuild that we see inside of our footprint, really hasn't changed that significantly from where we were before. And so if you think about that, we're sitting in the mid- to high 50s in terms of percentage fiber overlap. It continues to grow at a relatively slow clip, but it's been doing that for a long time, and we're accustomed to competing with fiber across our business. We continue to compete well in those spaces.

A question that comes up more and more is whether satellite broadband will increasingly become competitive. Wire broadband access technologies as launch costs come down and a number of LEOs in orbit increases. Just any thoughts that you have on satellite as a potential competitor in the future?

There's a good application for low-earth orbit, which is really when you think about those areas that are very difficult to connect because the cost to pass is high and then even the cost to operate that network is high because of -- because of the remoteness of the locations. I think there's definitely a place for LEO competitors in the market. But that being said, I think it's less efficient to build and less efficient to operate than our network when you're in sort of higher density locations. And so ultimately, I think it has this application, and we see it, and we think it's good for that, but not necessarily -- not necessarily one that's as prevalent in our footprint.

Okay. Back in 2022, you had launched Spectrum One and more recently, Life Unlimited this past September, which sort of turned Spectrum One upside down, shifting that discount to broadband and charging full price for mobile. How are you using both of these brands that offer structures in the market today? And how effective has Life Unlimited had been in driving customer acquisition? It seems to have coincided with the improvement in the underlying net adds in 2024.

Yes. So we've launched Life Unlimited in mid-September. So really the impact, I think you saw in Q4. But it's doing the things that we wanted it to do. The first of those is that it's driving more products per customer, that customers are taking, which improve the customer ARPU, improve the direct margin that you're getting on a customer-by-customer basis. The second one is that it's driven better take rates in higher tiers of products. So if you think about the number of customers taking gig, the number of customers taking Unlimited Plus, number of customers taking WiFi, Life Unlimited is driving improvements in all of that sort of tiering side. And the third thing that it does is because of the price lock guarantees with two products for 2 years and with three products for 3 years, it will flatten, and the step-ups are lower, so fewer step-ups for customers and lower step-ups ultimately from a price perspective, which should be beneficial in terms of our relationships with customers over time. And we can do that, and it makes sense economically to do that, because of the additional margin you're generating from having sold the customer additional product. And so we're happy with how Life Unlimited is performing. It's still fairly early in this sort of marketing cycle to say is it driving broadband. But I think that we are getting the things out of it that we wanted to get, which is increased take rates and more products where we can deliver more value to customers.

Okay. And what's your view on the broadband growth outlook over the next few years? The opportunity -- in particular, the opportunity to grow ARPU for factors outside of price? And also just interested in understanding how you think the new Life Unlimited bundles could impact ARPU going forward?

Yes. So as I was saying, we often don't think about ARPU on a product-by-product basis because for us, it's a matter of with each customer. How much additional value can you generate for the company through like an additional direct margin, if you will. But I think Life Unlimited is helpful in allowing us to drive value into the bundle, which then allows us to drive additional ARPU. And on the mobile side, we've gotten better penetration and more brand recognition for our product. That's enabled us to not need free lines to push growth in that space. And in addition to that, with the addition of Anytime Upgrade, we're selling more customers into Unlimited Plus. Combination of those things is, I think, what's driving the increased mobile ARPU that you see already. And I think there's still space for that to continue as it infiltrates the product to drive growth there. And on the Internet side, in the past, we've leaned less heavily into Internet speed tiers than some of our peers have. And so our opportunity through Life Unlimited, which incentivizes customers to move into some of these higher tiered products is more than what I think you might see at some of our peers. So our ability to continue to drive price the way that we would like to, which is to drive more value and to earn pricing tied to the bundle is clearly there.

Okay. All right. Why don't we shift to video. So in 4Q, I think you had the best video subscriber quarter since the first quarter of '22. Could you walk us through the factors that contributed to the improvement and your -- Charters' video strategy more broadly? Talk about the path forward from here in terms of the different types of bundles, streaming apps, Xumo, and all that kind of comes together for strategy?

So what happened in Q4, just to start there, was really about reintroducing product bundling and how we were selling the video product with our broadband product. And so I think the results that you've seen so far in video are just sort of what happens when we put the package back together. We had been in a place where we weren't comfortable bundling the video product. But as we've added in value from the programmer streaming apps, which now with our linear product, you can get up to $80 of value, of programmer streaming apps, as we make our way through this year, that additional value into the bundle, I think, gives us confidence in being able to differentiate the broadband product by having the high-value video product to pair it with. And that really gave us the confidence to go back to the bundle and really drive increases in video customers. We haven't yet reached the point that we're scaled in marketing on that product yet. It's about needing to make sure that we have the activation structure right. And so I think later this year, you'll see us sort of get the last of the programmer streaming apps connected into our systems. And once we can do that, you'll see us and the programmers together really go to market those products, which should be exciting in terms of being able to bundle them with the broadband products to create value for customers.

What -- just a follow-up. I mean, what about how do you see the strategy rolling out on the streaming app direct side? So you have your Xumo Box and then you could purchase streaming services outside of the bundle any sort of timing or look on that?

Yes. So I think about there being 3 product categories, if you will, right? You have your fully provisioned bundles that will include a lot of high-value programmer streaming apps. Those products are great for a set of customers, but they continue to be expensive, right? And then you have skinnier bundles that are appropriate to customers who are more price-sensitive and who can then sort of go try to buy what they want. And then you have customers who don't want to be part of your linear universe, but want to be able to bundle streaming apps with their products. And what we have inside of Xumo is the ability to deliver all of those products seamlessly, right? So you're accessing all of them through the same interface and the ability to allow customers to move through those environments back and forth as is appropriate to them in a seamless way. And so as we think about it, we've called it sort of seamless entertainment, like how can we provide all of the set of things that customers want, provide them through an interface where it's easy to access all of those things as well as easy to move between them, if that's what you want to do. And to do it through an interface that I think actually is very user-friendly and good for consumers as well.

Okay. And it seems as though we're really in a different place versus, say, a couple of years ago in terms of video packaging flexibility that you have, as you just discussed. How did we get here in terms of -- or how did you arrive at this point, I should say, in terms of identifying the strategy and then being able to reach the right agreements with programmers in order to actually put this into the market?

Yes. So if we rewind 2 years, I think that we -- we were in a place where we had unbundled video from the broadband package. And it was really because what we saw as we were pushing price increases through once or twice a year to keep up with programmers. But when people saw our bill, they thought that price increase was from Spectrum, right? Not from the programmers. And on the other side, it wasn't clear that the programmer -- the linear product was delivering the increases in value that were commensurate with those price increases. So we were kind of at the point where we said, okay, well, if we want the product to be an asset to the business, we have to do something. And if not, it's time to sort of let it go. And that came to a head very publicly in our negotiation with Disney. But the good news is that I think that from there, we've had great interactions with the programmers around how we provide value for them and they provide value to us and to our customers. Through the utilization of our large sales force, through the fact that we have a lot of customer interactions where we can provide value to the consumer by bundling on the video product. And so ultimately, sort of coming out of that negotiation and then going through -- I mean, as I said, we now have $80 or so worth of value in programmer streaming apps, so we think we'll be able to bundle with the product. And ultimately, because of what we can do in terms of the sales force and reduced churn that we provide by bundling those products, we think we create value on both sides. And it's the best thing for us. I think it's the best thing for programmers. I think it's the best thing for the consumer. So it's really created an all-size win situation. And we're excited about going in and rolling it out.

I can tell. Let's talk about mobile a little bit. How do you see Charter's positioning to compete for converged home broadband and mobile customer relationships? How do you continue to win in the market there?

We have the fastest broadband and WiFi product in our footprint. We have, to go with that, the fastest wireless capabilities because of the ability to combine our MVNO with our WiFi and CBRS network. We put that together with award-winning customer service that is continuing to improve because of the investments that we're making in the network as well as in AI and machine learning to make our service infrastructure better. And we take all of those things, and we offer them at market-leading prices to consumers. And so I think the way that we win in the market is consistent with the way that we've always said that we'll win, which is that we have high-quality products. We provide high-quality customer service with them, and we call them to consumers in a way that delivers value to those consumers. And I think as we continue to do that, we continue to have the convergence play that wins and makes sense for our customers.

Okay. And I think mobile penetration is now of broadband subs is now in the high teens. Spectrum Mobile continues to grow at a really impressive pace of net adds. When you look a little deeper at gross add and churn trends as well as the profile of the customers you're adding, what does it suggest in terms of your ability to sustain net adds at these kind of levels going forward, which I think has been around 0.5 million a quarter.

Yes. So...

I'll be overly prescriptive about 0.5 million, but...

Not to be prescriptive, but we have the best product in the marketplace in terms of our ability to deliver high speeds because of the customers' access to our network as well as having great pricing and packaging. And even as we've moved out of -- as we have greater penetration, better branding, moved out of the need for free lines to grow that product. If you think about what's been happening, we've continued to post high levels of mobile line net adds in spite of the fact that our base is growing. And so churn on that base and on an absolute basis is also growing, which means we're continuing to grow net adds -- grow gross adds over time. And so I will not offer a prescriptive forward look at where I think we can go in mobile net adds, but I think that we are positioned well to continue to grow that business over time. And I think that we are going to continue to do so.

And when you say churn is growing, I assume you mean just the...

On an absolute basis. Yes. So churn on a relative basis, percentage churn of the base has actually been shrinking, which is both sort of the longevity of customers, customers who have been with us longer tend to churn less and our service infrastructure has been improving because of a lot of investments that we've made and making sure that we're serving our customers well. The combination of those things, percentage churn has definitely been coming down. But on an absolute basis, because the base is so much larger, the total number of customers who churn comes down.

What does mobile profitability look like today? Any color you could give on margin performance and where you see the economics of mobile heading?

Yes. So we continue to be really happy with how the mobile business is performing overall. And what I would say is that the growth in mobile contribution to EBITDA this year is really one of the things that gives us confidence in our ability to grow EBITDA in spite of the headwinds that we have in the form of the ACP customers that we lost in the year-over-year and it being a nonpolitical year for advertising. And the reason that we see that growth is sort of multifold. We talked about what has been happening in mobile ARPU as we sell into additional tiers and as we don't need to be so reliant on free lines. The other thing that's happening is just as the base grows, the margin that you get off of the existing base continues to grow. And customer acquisition costs, growth costs, which had been a very -- which have continued to be a very large portion of the total cost in that business just as a portion of your total cost, as the base gets larger, those customer acquisition costs have come down, which really puts you in a place to continue to grow mobile's impact on EBITDA. And so I think we expect to see very good growth from that this year. I think we expect to see that to continue into the future as well as we continue to add customers.

Okay. The big 3 mobile network operators have been raising prices for the past 4 to 5 years. And I think as a management team, you've consistently pointed out that a spectrum bundle of mobile and home broadband is better value than the offerings from the big 3 by a good margin. Is there an opportunity here though to maybe exercise some pricing power on your mobile product as a way to further improve the economics on the mobile side?

As I said, I think mobile ARPU is growing already, and it's growing for the right reasons, which is that we're adding value to the customer bundle. I think the other thing that happened when we introduced the plans that we introduced with our Life Unlimited branding is we've been able to utilize some of the bundled discount that we had to sit over on mobile and utilize that to drive better headline pricing for the Internet product by moving the discount across, which ultimately is because of our confidence in what we have behind the mobile product. And I think that our mobile network, well, our ability to deliver mobile service and high-quality mobile service is clearly sort of market-leading and having the fastest wireless product and so when you put those together, it's never our goal to grow our business by just growing pricing. But I think that we have the things that we need to be able to continue to add value to customers with some space around pricing in mobile if we need to take advantage of it.

Can you talk a little bit about the traffic offload opportunity to CBRS and public WiFi? How you see that effort progressing over the next few years and how you see it ultimately impacting the business?

Yes. So we are past the pilot stage in CBRS. We have a fully deployed market in Charlotte, we have thousands of radios deployed across North Carolina, Alabama and Georgia today, and we expect inside of 2025 to deploy thousands more radios, both in those markets and in several other markets across our footprint. I think as you get into 2026 and 2027, as we complete our network evolution in spaces, you'll see us come behind that and deploy tens of thousands of radios and deploy all of the active licenses that we have today across our footprint. And the good thing about it is that the amount of investment that's required for us to deploy that CBRS network is pretty limited in terms of the cost of the radios and putting them out. And when we place a radio, it drives MVNO offload. So from a cost perspective, those radios generate ROI on their own. And in addition to that, you're improving the customer experience by connecting them in areas that were more congested otherwise. And so I think we're really happy with where we're sitting in terms of having a product that's ready to go and being -- deploying it across our network in a way that will drive value for the business and sits inside of the capital envelope that we've provided to the market already.

Great. Let's shift to the business side, if we can. What are you seeing in the SMB part of the business? It seems like competition there is mirroring residential. I don't know if you agree with that assessment and can just give us a sense as to maybe where you are from a share perspective in that market segment?

Yes. We continue to be underpenetrated in the SMB market. Our growth in that space has been more muted, as you point out, over the last couple of years. And it is very much reflective of what's happened in residential in that the cellphone Internet product has come in and taken some of the very low data use cases out of SMB and the competition on that front has made our growth slower than it had been before. Ultimately, I think that, that use case is somewhat self-limiting. And so we will see for those businesses that require sort of high-quality broadband, I think we have the ability to continue to penetrate and to grow inside of SMB once we sort of make it through this more competitive window.

How about on the enterprise side? Revenue growth there has been pretty healthy despite the wholesale headwinds you've been dealing with for several years now. Can you maybe just talk about where you are there from a share perspective, from a growth perspective, what types of products and customers are driving that growth at this stage?

Yes. So we made a concentrated effort inside of enterprise to move upmarket a couple of years ago, thinking about verticals like hospitality, like medical and federal government. And the enterprise business, as you point out, has been really successful in going to some of those sort of larger market accounts and driving penetration there. But here, inside of the last several months, we've made some reassessments as you think about SMB and enterprise businesses and pulled them together into one business unit that operates now as Spectrum Business. And that's really because if you think about the historical SMB business, that really -- that was the HFC side of our offering. But as the DOCSIS network has matured and now offers much higher quality service, we now have enterprise clients that want to utilize the DOCSIS network in some of their locations. And on the other side, as we built out more fiber over time, we also have SMB businesses that are being served by the fiber network, including the networks that were sort of built for our enterprise clients. And in the middle of that, there's a middle market that we probably weren't doing as great of a job of serving as we should have been. And so as we pull the 2 sides of the business together, our expectation is that we will have a more fulsome product set to offer across all of those business customers, and we'll be able to better execute on that space in the middle market, where I think we could have done a better job. And so our expectations around our ability to grow the combined business going forward really strong.

How large is that middle market opportunity relative to the other 2? I mean it sounds like that's...

I think it's significant, particularly is there are always internal handoffs when you have like, well, how many employees does the business have and what business unit does it then fall into? I think there's a significant piece of the market in the middle space that we probably weren't serving as well as we should have.

Yes. Interesting. Maybe you could shift to cost for a moment. How are you managing the cost structure and finding efficiencies in this lower volume and revenue growth environment? What are some things you're doing?

Yes. So we had a pretty good-sized exercise last year where we went across the business and identified opportunities short term, middle term and longer term to go reduce the cost structure without impacting our sales and service capabilities. And the short-term things, I think, have been executed on, and we're seeing the benefits of those. The medium term, lots of them are through their execution process. So we'll see benefits over the course of this year. And we're continuing to take -- we're continuing to work on some of those things that take longer and you think about real estate leases and how often they turn over, there are some things that it just takes time to work them in. And so I think we've had a very effective run at reducing the overall cost of the business. We'll continue to keep our eye on evolve there, but we have some good exercises in process. The other piece, though, if you think about what makes up the bigger cost base in our business, it's really about service transactions. And so the investments that we're making around AI and machine learning to -- and digitization where we are improving the agent or improving the technician's ability to serve the customer and to serve them well. I think ultimately, it's those things that will drive down service transactions in the business, and we're seeing some of that already as well. And that's really where the bulk of the cost is.

Improves customer experience as well.

It does. Yes. Yes, 2 sided.

On CapEx, so you recently provided updated CapEx guidance through 2028, excluding BEAD and really confirmed that 2025 will be peak CapEx at about $12 billion. And then you talked about a return to steady-state CapEx by 2028 at less than $8 billion. Can you talk a little bit about your confidence level in the guidance over that time horizon? What, if anything, could drive some variability in other direction? Obviously, BEAD is one of them, but we can get to that in a second.

Yes. So we're very confident in the overall trajectory that we've laid out, and we understand that investors expect us to hit the guidance that we've given. I never want to say never in terms of like we wouldn't want to turn down a high ROI opportunity inside of the business because of having a guide out there. But at this point in time, there is not anything that we see absent BEAD, which we've talked about, right, that would move us off of the guidance that we've given over that period.

Okay. And then on the BEAD side, you talked about the potential sizing of that at no more than a few hundred million dollars a year starting next year and citing regulatory conditions as a reason for not pursuing BEAD funding more aggressively. So given the change in administration and the talk of revisiting the BEAD program, what changes do you think we might see to the program? And could that increase your appetite to participate potentially?

So there was one additional thing when we think about the size of BEAD, which really was about the BDC maps and what passings are available. And over the last several years, the number of passings that have close proximity to our footprint, which is where we tend to do our rural expansion has shrunk quite a bit. And so that's also part of the reason that our expectation around the BEAD spending is lower. Ultimately, look, I know that there are some contemplated changes in rules. Some of those, I think, do the right thing in terms of picking the right technologies for what are sort of very high cost, very rural passings, which isn't a space that we would have been likely to play in, in the first place because it's hard to serve those passings and generate return, and we've always been return focused. So I think even with the changes that we see on the horizon, we're comfortable inside of that few hundred million window that we gave, just given the sizing of the opportunity and given what we see in terms of possibility across the changes.

Okay. Maybe we could talk about capital allocation a bit before we wrap up. So you're back in the market with share repurchases now post the shareholder meeting, I think, right?

We are.

Okay. Great. Is that going to continue? How are you managing leverage between now and closing the Liberty Broadband merger? If you can maybe talk about that outlook, that would be great.

Yes. So we continue to target leverage at the midpoint of our 4 to 4.5x target leverage range on a pro forma basis, inclusive of the Liberty Broadband debt, which is sort of wrapping in the way that the balance sheet of the combined companies would work together. And with that, I guess we always have -- we've had the same capital allocation for a long time, right? We're always looking to positive ROI investments first after that to accretive M&A and then to managing to our target leverage ratio. But ultimately, I expect that to continue to result in share buybacks given where we sit in terms of cash flow and EBITDA growth.

And is there anything that would come up from a transaction standpoint with Liberty Broadband that might require you to pause or anything, anything that you can think of or...

There's nothing I'm aware of at this time that would require us again to be in a pause phase.

Okay. All right. And then on the acquisition -- potential acquisition side, how should we think about the potential for Charter to pursue acquisitions? Are there assets out there that might be of interest? And does the administration change make any difference in your calculus for potential regulatory approval if you were to do something?

So I said our second priority for capital allocation has always been accretive M&A. That means a couple of things to me. It means that assets have to be at the right price. And it has to be an asset that you think that can deliver value for your shareholders. I mean we think that we operate cable assets well and that we can drive results from them that you have to have the combination of those things. The regulatory environment, while there is a lot of chatter about deals, I don't think it's clear that just any deal can get done. And so as we thought about that as a management team, I think our first priority continues to be to drive value by operating our business well, which means that we're operating it to create value for shareholders. Also for us, that means that we're operating it in a way that's friendly to customers by driving value to them and making sure that we're doing the right thing for the customer, which I think ultimately becomes the right thing for the business in the long term. And the right thing in an M&A environment as well, right? Yes, but I don't know that it necessarily means that there's anything that can get done. And so we continue to have confidence in operating the business to generate value from the business we have.

Take the opportunities and stride as they come, if they come. All right. Well, thanks very much, Jessica. We'll wrap up there. Thanks, everyone, for joining us.