Charter Communications, Inc. ($CHTR)

Good morning, everyone. I'm Sebastiano Petti, and I cover the cable, telecom and satellite space for JPMorgan. I want to introduce Jessica Fischer, CFO of Charter Communications. Jessica, thanks for joining us today.

Happy to be here. Thanks.

Great. Just to start, maybe we can zoom out a bit. You have the Cox integration ahead of you, a subsidized rural build and a network evolution project nearing completion and also a competitive environment that continues to evolve. But free cash flow, a free cash flow inflection on the horizon. Can you walk us through where you are and where you and the management team are spending most of your time today and what you see as the key priorities for the next 12 to 18 months?

Sure. So our top priority continues to be to grow the connectivity business. And we're doing that through customer focus through things like improving our customer service, making the customer commitment, improving NPS scores through a focus on our messaging around utility and value inside the marketplace and through product differentiation and things like our mobile product, on Invincible WiFi, the seamless entertainment where customers receive access to programmer streaming apps with their video product and really pulling all of those things together to continue to create growth in connectivity services. The second piece was on your list, thinking about our investment initiatives. So the 2 most important of those that we're working through now on the network evolution side, we expect to be 50% complete with the plant upgrades in our network by the end of the year. And with those, to be able to offer multi-gig speeds in the downstream and a gig in the upstream on a go-forward basis, which we think enhances the competitiveness of our network going forward. And the rural initiative, which actually we started on this all the way back in 2020, really bidding on RDOF and finally, we'll bring it to an end inside of this year. An important piece of that is that the rural initiative has really been one of the very large users of capital. And so when you think about the higher capital spending that we've had as a result of our investment initiatives, completing that one is a big piece of the puzzle and then moving that capital spending out and creating the additional free cash flow that we will create as we end those initiatives. If I sort of take that free cash flow point forward, then the third one is really around creating operational efficiency across the business, which we're doing through, I would say, bread and butter work around expenses but also then real investments in digitization and automation that are improving tools for agents, improving telemetry on the network. And through doing that, we think, can drive down transactions, ultimately create a better customer experience and also a more efficient expense path. And then finally, there is that last thing on the list, which was the Cox transaction. Look, we look forward to incorporating the Cox assets with that transaction, assuming that it closes. And what we do there, so first step, I think, is really around what is it that you do in the business? It's about applying our operating strategy, which is about being able to roll higher-quality products to their customers, being able to roll them at a value the way that we do in our existing footprint and using that to generate sort of operating synergies inside of the business. In addition to that, we'll have transactional synergies and we go after those as well. But when you put all of those things together, yes, there's a lot on the plate, but we're excited about where things are headed and the ability to continue to generate value for investors.

Great. A lot to come back to there. But maybe let's start with the second quarter and maybe update on the competitive environment. Has anything changed competitively since the first quarter call, whether in promotional intensity, pace of fiber build or FWA expansion or even the macro environment? And as we think about the second quarter, should we still assume typical seasonality will hold for broadband adds? Or are there other factors that could cause this to deviate maybe one way or another?

There's not anything that's significant that's changed. It continues to be very competitive out there in the broadband market. I do think that there is probably seasonality inside of Q2 as we would typically see.

Okay. Great. And so maybe we can start with the top of the funnel. Chris has framed the broadband subscriber challenge as primarily a top of the funnel issue, with yields and churn are strong, but customer consideration remains pressured. He's also acknowledged that Charter hasn't yet earned the service reputation that matches its investments in part due to some legacy perception of cable. So how much of this is structural inertia that the cable industry faces versus Charter specific? And beyond continued messaging around value, what concretely changes this dynamic? Is it simply time and word of mouth? Or are there other levers you can pull to accelerate brand consideration?

Yes. So obviously, cable as a whole does have a brand or a perception issue. But I think that among the cable providers over time, there have been providers that have distinguished themselves as a head above others on customer service and on their products. And that's what we seek to do and to continue to improve. And so when I think about the ways that we do that, it starts with pricing and packaging, making sure that we're not just sort of pushing rate at customers, but that we're earning that rate by adding additional value to the packages, which is what we've done through things like having a mobile product that works better because it's on our network, through having a video product with seamless entertainment included that really delivers extra value to the customer and with not sort of pushing broadband pricing as the first place to go. The second piece is about delivering on the customer service side, which is about, in our case, the customer commitment where we have really changed our level of responsiveness to customers over the last 1.5 years to 2 years. The commitment itself is that if you call in by 5:00 p.m. that we'll be there same day. Often now, instead of that being same day, it's actually much faster than that, and we continue to push ourselves there to really sort of delight the customer and the responsiveness that we can deliver. And then it goes beyond those couple of things as we're thinking about and the management team is now actually incentivized on NPS, there are intangibles as well. Are you telling the customer when they encounter a sales or service person that, that person is in-sourced, that they're an employee of the company, which matters to a lot of customers. And are you sort of giving people the incentive to go above and beyond to make sure that they address an issue that might not naturally be easy to address inside of our systems that they take ownership of that and address it inside of that call to really excel in the customer experience. And so all of those things, as you said, like, brand reputation does not change overnight. We have been making changes and improving. We will continue to make changes and continue to improve to drive that better reputation with customers, which we think ultimately makes them stickier. And it eventually enhances sales as we get better sort of word-of-mouth reputation over time.

Great. And just following up, I think Chris noted on the call that NPS scores are moving up, you just touched on that. Are those still -- are those trends still moving in the right direction? And have you seen a correlation between NPS and subscriber results or churn benefits?

So our NPS over time has been improving, and it's through those sort of changes that you have in the service metrics, as Chris said, not as fast as he would like but moving in the right direction. Q1, there's a little bit of a hiccup around that because we have seasonal price adjustments that we've pushed through largely in video related to programmer expense pass-through, and those do have an impact. But overall, I think the changes that we're making, we think, move us in the right direction, and we're confident in our ability to get there over time. And we do see the benefits on the churn side of having those service improvements and what it does to our ability to retain customers who otherwise might switch.

Okay. Great. And then just switching gears here to proactive base management efforts. You've migrated -- you've been migrating customers on legacy pricing and packaging to newer bundles that deliver more value, higher speeds, mobile and video product attached for roughly the same price. And I think Chris noted on the call that about 45% of your residential customers are now on that framework that you guys launched in late 2024. So where are we in the migration today? And how quickly do you expect to move through the remaining base? And is this exercise of proactive base management, is it beginning to yield measurable improvements in churn and subscriber growth? Or is it -- or should we think about it as primarily more defensive, trying to prevent further sub losses?

So we expect to be about 60% of the way through the base and moving to the new pricing and packaging by the end of the year. I think what we see as we've rolled it out is that by having the structure that we have, we tend to get more customers into bundles of products and that those bundles do increase customer longevity. And so we're confident in the benefit that it has from the churn side. As I've talked about, we continue to work through sort of what's the right messaging and what are the right steps to get customers into those packages. And so we'll continue to work that. But ultimately, I think it's about sort of meeting the moment with pricing and packaging that we think works well for consumers. I think the economic model is still the same and that we can ultimately sort of do well by generating higher customer lifetime value by bringing customers into stickier packages, which is what we've been doing.

So just sticking with that for a second here and the proactive base management. I think on the call, Jessica, you noted that broadband ARPU growth for the year would be "close either way to flat," a step back from prior expectations for modest growth due in part to the proactive base management and retention efforts that you just touched on. So with 45% of the base migrated on your way to 60% by year-end, is it still too early to know which side of 0 the residential broadband ARPU growth will land for the year? And I guess, again, help us think about or how do we weigh the near-term ARPU trade-off against the customer lifetime value benefits?

Yes. So, first, I just want to say that we've never managed the business for product level ARPUs. We're focused on how much total revenue or total cash flow can you generate from the customer, which involves, in many cases, bundling additional products and using that to generate additional value rather than focusing solely on broadband ARPU. So while I know that it is important to investors, and I answer the question, a guide around that isn't exactly consistent with the way that we manage our business. That being said, I think there's no change to what we've said around our expectations on ARPU. I would, though, put with that, I think many of you heard Chris say last week that we expect to pass through cost increases to consumers along with some additional value in our packages later this year. And in spite of what I just said, we do recognize the importance that the market puts on broadband ARPU growth. And so it's part of our -- we're conscientious of it as we make decisions across the business. But what we think about often is what you described in the next step of the question, which is how do you generate the most customer lifetime value from the network. And so we've been pretty confident as we've rolled changes to pricing and packaging and as we look at sort of changes to offers that are there to either generate additional top of funnel or to generate reduced churn that we're comfortable that we're generating good positive customer lifetime value with those offers. If we don't get the results that we want, we pull them back and try something different. But I think that we ultimately end up getting to the right place in terms of doing what we intend to do, which is ultimately to drive overall value in the business by selling the most products that we can to the most customers. And the last piece that I would say there is I think that we believe, while we've never intended to grow our business by growing broadband ARPU or even just to grow it by growing ARPU just generally for products, we do think that the markets that we operate in continue to be rational. And so I think that we believe that over time that the pricing structures in those markets will be conducive to generating financial growth across the business.

And as we think about Life Unlimited that you introduced in late 2024, which has price locks of 2 to 3 years, depending upon the bundle depth, this also, I think, has maybe contributed to some of the -- again, I know you're not focused on ARPU, so I don't mean to keep hammering away here. But focused on some of the -- maybe it's weighed on ARPU growth somewhat. But as more and more of the base migrates to these locked-in price points, I mean, how should we think about the duration and magnitude of this life unlimited ARPU dynamic? And is this something, a pressure point, that should persist into 2027 because you just -- again, as the base goes from 45% to 60% and higher, it seems like, again, you're just going to have less and less of the base stepping up to a promo roll.

Yes. So the way that I think about the ARPU impact from price locks is that the pressure from not having customer roll-off lasts for as long as the price lock is from the beginning of the time when you start having that as your primary offer set. So if I put that in context, then, in our Life Unlimited packages where customers took 2 products, that's a 2-year price lock. Those start sunsetting in Q4 of this year and the pressure on ARPU from those lifts at that time. And for the 3 product packages, it's a 3-year price lock and the pressure on ARPU from those then starts to lift in Q4 of next year. I would say, while that's a factor in sort of the set of things that are influencing what's happening with ARPU overall, it is not the only factor, right? The level of your offers, what you're doing in retention, what you do in pricing adjustments and what you do with value-added services like things like Life Unlimited all have an impact -- or sorry, not Life Unlimited, Invincible WiFi, all have an impact. And so putting those things together, it's actually also the reason why trying to get to an exact ARPU, like this is where we will land is difficult is because there are a lot of factors that play into it along with bundling and how much bundled product you have. But I think -- so the question was about -- so I think the pressure from the price locks lifts. I think what you have to think about underneath it is that sort of big set of other factors that also continue to have an impact.

Okay. And then lastly, I think, given the competitive environment, we got this question from -- a big focus from the investment community. But given the competitive environment, ongoing repricing and tuning efforts, should investors conclude that pricing power has structurally diminished across the ecosystem? Or is this perhaps a little bit more cyclical and again, tied to where we stand today in the competitive environment?

Yes. So the biggest thing that happened that sort of changed the conversation inside of Q1, in particular, is that we didn't take a price adjustment on broadband in Q1 that was similar to what we had in the prior year. And there are a lot of reasons not to take a price adjustment at a particular point in time on a particular product. Some of those are competitive, some of them are not. But if I sort of look out at the competitive environment and say, well, what's going on and what would influence that right now, Chris and I have both talked about the level of new competition matters. And so the level of sort of opening up of additional fixed wireless passings that you had with AT&T coming in over the last few quarters, the pacing of fiber overbuild tends to matter to what's happening to the level of competitiveness in the market. And the intensity of that competition is strongest when the competitors are new. I think, as I said before, we continue to believe that in the market structures that we function in based on the competitors that we know are out there that those markets will be rational over time. And so once -- while we don't intend to grow the business sort of based on price, I think that we do believe that in the medium and long term, there's certainly the opportunity to have sort of a rational pricing structure over time.

Okay. And then on the call, you reiterated plans to grow EBITDA slightly this year, excluding transition costs related to Cox transaction but caution that the tuning exercise will impact how close to the line we are on EBITDA growth. Is that still the right framing or the right way to think about? And as we think about the path to organic EBITDA growth in 2026, ex political advertising, what levers remain to be pulled specifically? You talked about cost to service customers being down slightly, marketing expense growth meaningfully slowing. Is there other room or further room to pull back on these lines or other areas that don't impact your service investments?

Yes. So as a starting point, there's no change to what we've said about EBITDA for the year. I do think that there continues to be space for us to do work on the cost side, both continuing to do sort of changes that we think will not impact the sales and service levels, but can make our business more operationally efficient. And probably the more impactful one really going after that digitization and automation that ultimately drives down the number of customer transactions, drives -- makes you more efficient in dealing with those customer transactions and ultimately then results in better service for the customer as well as sort of greater operating leverage.

And sticking with that, you've deployed AI across sales, service and field operations. You previously noted that some of the benefits from -- to the P&L from the use of AI. Chris also emphasized that improved service leads to fewer transactions, which we've touched on. As we think about Charter stand-alone over the next several years, I guess, you touched on digitization, automation. Is there other runway and other areas from AI that maybe haven't unpacked? Or is that, again, the automation side? is there network improvement efforts?

There are. So I sort of put things into a set of categories. There's sort of what can you do on tools, tools for agents to make them more efficient at addressing calls and tools for technicians to make them more efficient. And then there's telemetry. And when we talk about telemetry, what that is, is what data can you pull in from the network to learn about where you're having issues so that you can solve them before the customer identifies the issue or so that you can have sort of self-mending inside of the network. And that actually interestingly is enhanced. A lot of what we're doing in network evolution puts more telemetry inside of the network. So we're adding sensors, inside -- I'll use [indiscernible] sensors inside of things like amplifiers where we'll be able to see deep into the network, a lot of data around the performance of the network itself, which will help us to diagnose and correct issues more quickly. And the combination of those things, I think, is really focused around getting that data in, using the right tools to analyze it, dispatching the problem to the right area of the organization or in some cases, using tools that are able to self-heal the network as part of the tool itself.

Okay. And big focus this week has been on convergence and competitive intensity but also LEO satellite. On the call, you noted that Charter has not yet seen meaningful share loss to satellite broadband but acknowledge that satellite has had more of an impact on some of your rural subsidized penetration curves. So I guess can you elaborate on 2 fronts? First, are you seeing emerging LEO broadband competition today in your less densely populated areas, maybe some of the secondary and tertiary cities that you operate in just beyond pure rural? And then -- and secondarily, and to what extent has LEO -- has the availability of LEO satellite options, again, impacted those RDOF penetration curves either through lower gross adds, higher churn just relative to your, I guess, assumptions that you underwrote at the beginning of that program?

On the first question around what we see in terms of LEO satellite impact, we -- it's very difficult right now to discern what impact is from LEO in any individual market. It's very dispersed. And so while I don't discount it as a competitor, it's difficult for us to say right now sort of what impact that's having outside of rural. Inside of rural, if I think about the RDOF build and our other subsidized rural build, the change that we've seen is it's about pacing early on. So early on in our rural build projects, we had very, very high penetration super early post build, and it was because there was very little alternative available and the customers kind of came all at once. We're still seeing very good penetrations across those markets but it takes longer to displace customers from a satellite provider -- from the LEO satellite providers than it did from sort of the prior competitive options in those spaces. And so even with those somewhat slower penetration curves, when I look at it versus like as I said, back in 2020 when we were bidding on many of those passings, we have a much more significant mobile business today than we had then. We have sold more of our bundled products in those markets, I think, than we expected to sell, particularly when I think about something like landline voice, which because of cellular coverage in those markets actually is higher than you would think. But when you pull that all together and look at so what's the total return that you get off of the builds themselves, we continue to be quite happy with the return that we're getting on the builds in those markets.

Great. Just touching on the Cox deal. I guess maybe let's start with -- you're trending towards a summer close, I think Chris said on the call. Can you walk us through the integration game plan? What happens in the first 30, 60, 90 days? What's the expected time line to roll out the Spectrum brand pricing and packaging and other kind of work streams that are maybe top priority as you kind of hopefully get approval and close the transaction?

So the #1 priority is being able to deliver our high-value products, which includes our mobile and video product. and to do that in our pricing and packaging structure and with the brand, right? So I sort of package all of those together and say that you should expect us to roll all of those things in a pretty short window post close. We've been able to do a lot to get ready for that. And so we're excited about that. And I think it's important to really deploying our operating model in the footprint, which is a big way -- a big piece of how we think we derive value from those assets.

And so maybe a big theme over the last couple of quarters has been just a lot of focus on cable consolidation. And Chris has been clear that Charter likes cable as an investment and would pursue additional acquisitions at the right price. Just given your commitment to deleverage to the low end of the 3.5 to 3.75 target within 3 years of closing, -- and with shares trading at 3x free cash flow, how do you think about Charter's balance sheet capacity and equity currency perhaps as potential constraints or enablers of further M&A from here? And how do you view -- how do you weigh the strategic benefits of additional scale against the near-term financial cost of a transaction at current valuation?

Look, the way that we think about deploying capital hasn't changed, which is you deploy first to organic ROI investments and then we think about accretive M&A and then we manage leverage and then think about share buybacks. In that piece around accretive M&A, we continue to like cable assets. We have what we think is a very successful operating strategy to deploy against cable assets. A deal that you do, though, has to be accretive to shareholders, which encompasses a lot of what you said around how value of the shares today influences. And then in this market and given where valuations are, I think that the bar to increase leverage on the business today is very high. And so with all of those things in mind, as I said, we continue to like cable businesses. But how you think about transactions really around accretion and understanding that the bar for additional leverage is high.

Okay. And then within that context, the leverage target of 3.5 to 3.75 within 3 years, just maybe help us think about -- I don't want to give us forward guidance on buybacks or anything like that, but help us think about your approach to share repurchases and why within -- we've talked about this in the past, but like why 3 years, why not sooner? And do you see an opportunity to maybe accelerate buybacks? Or how do you weigh that against slowing buybacks? And just help us think about the team's, I guess, mindset in regard to that.

Yes. So as I said, so in the list of things, it's first managing to our leverage target and then having sort of the residual cash flow that goes to buybacks. And as I think about sort of how you manage to that leverage target over 2 to 3 years, the first piece of it is that the Cox transaction itself actually will delever the business. And so you get a good portion of the way there just in the transaction. In addition to that, I think that there's sort of multiple components. One is that you end up sort of paying down debt over that period of time. The next is that you have synergies from the transaction that generate positive EBITDA growth that causes you to delever over time and you have organic EBITDA growth as well. And so the combination of those things kind of gets you to the point of your leverage target over time. And we believe that with those things, the sort of automatic delevering from the Cox transaction and then the debt paydown plus EBITDA growth that there continues to be pretty substantial cash available for share buybacks. And so from a timing perspective, obviously, you're sort of weighing. Certainly, with the shares price where they are today, we believe that we can generate a lot of additional value for shareholders. And we think about that with the substantial free cash flow growth that's coming with the Cox acquisition, where you have the ability to generate these synergies and with the continuing potential for success from the operating model. But we recognize the value of all of our providers of capital, where we continue to be committed to the investment-grade rating at the CCO level. And so we will do the things that we think that we need to do in the meantime to manage leverage of the business in an appropriate way and that puts us on the right trajectory to get where we need to go.

So following up on leverage and some of the benefits that are coming out of the transaction there. So you raised the Cox OpEx synergy estimate to $800 million from $500 million on the 1Q call. And part of that was programming, procurement savings. But you also suggested there's maybe room to grow that further. But what we hear from some investors. You look at some of the Cox's financials that have been made public, it seems like some costs are already coming out. So I guess what gives you the confidence that Charter can deliver the $800 million or more on top of maybe what Cox has already done?

So we've been pretty close to their financials at this point. And the way that I think about a lot of that is sort of translating those financials into what they look like with a Charter operating model, a spectrum operating model going forward. And with that sort of baselining off of the 2025 financials, which is what we used as a starting point, I'm very confident in our ability to deliver at least the $800 million that we talked about. And I think if you -- as you mentioned, if you rolled that back to say, okay, well, when you actually did the deal, had you baselined off of those financials, it is actually even more dramatic than that, right, in terms of the synergies that you would generate.

Okay. So confidence in that?

Yes.

And then the other question is, so Cox, I guess their mid-split upgrade is nearly complete. So that positions them well for an eventual evolution to DOCSIS 4.0. But I think help us remind me, I think in the merger proxy, you guys put $1 billion of CapEx synergies in there, but before transition costs. So I guess, how do you -- how are you comfortable, I guess, with that level of, I guess, magnitude of reduction on the CapEx side, given they still have that 4.0 upgrade path still somewhat ahead of them?

So I think if you look at what's there, we took their capital down to a CapEx to revenue ratio that more closely matched ours, right? And if I think about the components of that, on one side, there actually should -- like as a business that you're sort of marginally adding to our existing business, their CapEx ratio should be lower because there are things, if you think about R&D across the business that you probably in a scaled scenario, only do once. On the other side of it, they're a little heavier in commercial than we are and commercial is a more capital-heavy business. And so when I offset those things against each other, we got pretty comfortable that, that's the right range for the sort of amount of capital that you have to spend on that set of additional assets. That's what you have to believe to get the $1 billion of synergies on capital itself. And then inside of the transition capital that we put inside of the proxy, we had in mind that there would be some pieces of a network evolution type project that you might need to do, and we sort of incorporated some expectations around that. But I think because of what they've done already, look, the Cox assets are not under-invested by any stretch of the imagination. And so I think that we feel like even with the mid-split upgrades that they're in a pretty good place. And so we can take some time to evaluate what's really necessary and to make decisions around that and deploy at an appropriate pace, that recognizes the cost of capital in the market. And so I think we can get there. It'll be good.

Well, great. Thank you again, Jessica, for joining us.