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

No. I think, look, we have flexibility to be able to offer different packages for different audiences. The one that we typically focus on is the traditional expanded basic, which does have all of these apps included. I think it's the best value but because it includes sports and it includes retrans, by definition, it's the most expensive. So we're not going to take the video package and force it upon customers. It's going to be for those customers who are going to take that type of package anyway and can get a lot of value and save money as a result. So it's going to be helping our broadband relationship as opposed to creating a liability. I think the rate increases that come through from programmers, not helpful to their ecosystem. I also understand where they're coming from with an increase in sports right cost. But it's going to become a more expensive product for the programmers and for our customers, but it's also a much more expensive cost for individual subscribers who are trying to piecemeal it all together. When you start to take now sporting and Netflix, Amazon Prime, and you take a look at all the different DTC apps, we actually provide all of general news, entertainment, broadcast and sports in a way that if that's what you want to have in a typical family household, it's a lot of value and it's a lot of utility because you actually have it in one single place inside Zumo with unified search and discovery. But I think a long time ago, we crossed the rubicon of saying this is going to be for everybody. It's for the household that wants it. And for us, it's about driving broadband relationships.

Great. Moving over and just talking about cost savings and synergies. For Cox, the company has guided to at least $800 million of synergies, but you've certainly also noted that there's an upward bias to those numbers, right, and it could trend closer to $1 billion. What's driving that potential upside now that you've got the company officially folded in. Do you feel more confident about achieving those upside numbers?

Yes. Look, it will be over $1 billion of transaction, OpEx synergies. It's pretty clear to us now. And I feel comfortable saying that it comes through a combination of procurement and overhead, deep duplication of resources and the larger scale that we have and the different vendor contracts that existed at Spectrum today. I will also tell you that the transaction synergies, they're a onetime permanent step-up in a cost structure or a step down in a cost structure and a permanent step-up in margin. It is not the reason to do M&A. The reason is for the operating synergies, the ability to grow the company faster, to have a different operating model that sits on top and to grow in residential and in the B2B segment where Cox brings some real benefit to us along the way as well. So we're really confident around the transaction OpEx synergies. Certainly, it's helpful. It will be higher than we initially estimated, but that alone isn't really the reason to go do a transaction.

And maybe just on that point, as you think about the B2B opportunity, maybe you can just expand a little bit on that. Could you elaborate a little bit on the opportunities from the addition of Segra, which is Cox' fiber-based provider serving commercial enterprises and carriers and rapid scale, which is its cloud-based service provider, alongside everything else that they're doing in B2B?

This is one of those areas of a combination where it actually is very complementary. It's not just scale and certainly scale in the B2B space, having a near national footprint helps. But the things that we do really well are areas that could be improved at Cox in areas that Cox did really well are areas that certainly we were lacking. And pound for pound, Cox was -- is the largest cable provider with B2B services, more than XFINITY, more than Spectrum. And -- but the different segments, if you think about it, small business, Spectrum is much higher penetrated than Cox. So that's a real opportunity in the Cox footprint. It's driven predominantly based on our pricing and packaging, which will go into the market starting next week. On the other hand, if you think about Segra, which you asked about, Segra is a fiber-based provider who operates actually in a lot of these legacy spectrum markets. So as a separate brand and a separate clientele Segra now has the ability to go sell on-net inside of the Spectrum footprint, some of which they had before, now can do it at a lower cost, avoiding type 2 circuits for existing and new customers and some of it because they're getting into markets that they didn't exist before because they're now able to sell on footprint. So I think Segra is very attractive, rapid scale, managed services, managed cloud services products that we don't have today. And so from the rapid scale team, our goal is to make sure that we preserve them as a somewhat autonomous group that's a little more agile but has the existing customer relationships that exist at Spectrum to be able sell into and upsell to. And then another piece that I think Cox has done really well is if you think about hospitality. Think about stadiums and hotels, in particular, have a great track record. Their customer relationships are fantastic. And now if you think about the hospitality space, I'm going to pick a market, they do really well in Las Vegas, great hospitality market. But taking those products and taking those relationships and expanding that into Orlando, Los Angeles, New York, I mean, the entire spectrum footprint, but those markets, you think of Orlando, it's the top hospitality network or hospitality place in the country. And so I'm really excited about what the B2B team combined between former Cox markets and Spectrum into.

Great. Maybe we can talk a little bit about the impacts of AI, first, on how that changes the demands on the network. What does that mean for the opportunities around data center connectivity, your service capabilities, the potential utilization of edge data centers? Maybe you can talk through some of those respective opportunities and size them to the extent that they're far along enough that you can actually size them?

There's a lot in that statement. But I think the biggest opportunity for us is the amount of traffic demand that's going to come about because of AI, not just on the download, but you're seeing it on the upload as well. And it's significant. You can already see it. That puts us in a position to be able to have not just a network that's capable and a network that's followed today for that type of data and bandwidth increase but gives us a clear competitive advantage for a product that customers are increasingly using. And so the revenue opportunity for us is really about subscription growth and retention as it relates to network demand. The second piece that you mentioned is network connectivity for data centers. That's another area that Segra and the rest of Cox has done a really good job. I think we're a little bit behind as Spectrum. And so the opportunity for Segra and the Cox team to really drive their relationships into the Spectrum footprint, we're doing it. It's just not as -- it's a little bit behind where Cox was, so we get a chance to accelerate there. The third piece you mentioned, maybe a little bit further out, but you're hearing people both our competitors and our peers, some of which makes a whole lot of sense to go partner with. But at Spectrum, we now have over 1,200 local edge data centers, former hubs and head ends that have -- now that we've virtualized a lot of the equipment that was in there to software, have space, have cooling, have fiber, have backup power. And there's, just today, without any additional investment, there's 250 megawatts of fallow capacity that's sitting across about 600 of those data centers. And we're looking -- thinking about what is the right way to partner with other people to be able to, for lack of a better term, occupy that space in a way that's the best ROI for the assets that we have. The other piece that you mentioned on the cost side for AI, we're very focused on using AI to improve the network reliability that we have. It's a really amazing tool that exists, combined with the fact that through the upgrade, the network evolution that we're doing, we now have transponders going in as part of the upgrade to all the actives in the network. When you combine that with power, I think that hybrid network of having power actives that have telemetry gives us a unique advantage when combined with AI to be able to provide better maintenance and better network reliability into the network. And then on the other side, as you think about the call center environment or from a field tech perspective, the ability to take a look at all the data that we have across these 70 million passings and to look at all the data through an active network in the home, a customer premise equipment, previous transactions and the ability for an agent to know where -- exactly where the problem is or the field tech or maintenance tech to know exactly where to go, if you asked our field techs or agents that are using AI, they might tell you no. But the reality is, behind the scenes, their tools have gotten much, much better, much more precise and it's enabled them to do a better job and to be happier employees by using AI in that context. And so I think there's a tremendous quality improvement opportunity through AI, which will reduce service transactions, which reduces churn, which then turns into a significant, both cost and revenue opportunity for us by using it. But that's how we're approaching it is really what works for the customer and what works for our frontline employee to go create value.

Great. If I could ask a little bit about the financials, Charter had stand-alone EBITDA guidance for a 1% decline this year. Is that still on track? What will we know come for [indiscernible]?

Yes. I mean we now include Cox. So in some sense, we'll be reporting a combined and using pro forma financial state. But there's been no change in terms of the trajectory of the financial outlook, capital allocation, return of capital, any of that type of stuff that we said on our last earnings call, none of that's changed.

Great. And then one of the things that I think a lot of people are excited about is the inflection in free cash flow that's expected to happen as a result of meaningful reduction in CapEx over the years. Could you just talk a little bit about that? What are the key drivers of that CapEx reduction? And is that all on track?

The CapEx reduction isn't a lack of investment, right? The CapEx reduction is the conclusion of 2 very successful onetime investment programs, the first being subsidized rural expansion, which we, by the end of this year, will be essentially done. So it just goes away. It's not a systemic part of our natural capital expenditure. The other one is our network evolution, which is the upgrade to symmetrical and multi-gig speeds and providing some of these reliability characteristics that I talked about before, and that will be largely done at the end of next year. But the biggest piece of that is the rural, and there's a pretty substantial immediate step down in the capital expenditure that we'll have at legacy Spectrum, which is where we've given the outlook, and the trends will be the same, including Cox. We talked about going from mid-$11 billion of CapEx down to a run rate that's under $8 billion in a very short period of time. And all of that flows to free cash flow. But if you look at that, it's still as a percentage of revenue of the legacy Spectrum. It's still a really healthy amount of capital expenditure. So we are not taking our foot off the gas in terms of investing in customer premise equipment, liability. All of that is still intact. It's just the conclusion of onetime programs that allow us to get there. Some people look and say, well, how do we know you're going to do it. And I look and say, well, what else would we be doing. And with the network expansion that's complete and the network evolution that will be complete, what you're really looking at is a much larger network, a fully upgraded network with all this fallow capacity and the opportunity to grow revenue without additional capital intensity. And I think that's the opportunity for us and for shareholders. Taking a look at that and saying, what does that do on a free cash flow per share basis, it's pretty amazing.

There were some news last week with your CFO leaving for an external opportunity. It does feel like Charter is at an inflection point of its story, certainly a new chapter. Could you talk a little bit about the departure, if there's anything that you'd like to share but also the executive and the type of the executive that you're looking to potentially replace her?

Sure. A little bit of background. I've worked with Jessica since I joined Spectrum in 2010. I actively recruited or for about 6 years. Got her to come to the company in 2016, and she became CFO in 2021, which was a high standard that I held for that position and always thought that she'd be really capable and she's run it and fantastic. And we're disappointed that she'll be moving on. She and her family will be moving out of the Northeast for another opportunity. On one hand, I'm excited for somebody I've worked with that long. On the other hand, disappointed that somebody that I've been that close to. But the reality is that when you think a couple of things. One is we haven't changed our capital allocation or outlook or any of that. There's no -- and we said that publicly. She's actually going to be speaking at another conference tomorrow, so you get to hear from her. She'll be with us through the middle of October. The interim CFO that's stepping in was the interim CFO when I got to Charter back in 2010. So it's a team that I know really well. When you think about all the transactions that they've been through, we're in say hands there. We have a really sophisticated capital markets operation, a very seasoned investor relations function and some of the world class from a cable prospective business planning. So functionally, we're in good shape. I've either worked with or hired all of those individuals. So we'll have stability. It's also a premier CFO job in the country. This is an amazing opportunity, an amazing balance sheet and a great industry and a great team. And so I think we'll have the best talent available in front of us. We've got great talent inside the company already as well. The focus for us will be making sure that we get somebody who's really capable from a capital markets perspective, understands the broader finance function, has top-notch communication skills because that matters in this competitive environment and frankly, somebody that everybody enjoys working with, which is what we all look for as part of the team, and that's a big, big important piece to the puzzle. That's how you gel and be productive together. So I'm disappointed, but excited for Jessica, and we'll be in great shape and moving forward.

Great. In the last few minutes that we have here, I was just wondering if you could talk a little bit about some of the key execution priorities, milestones that you'll be looking for the company to achieve over the next 1 to 2 years.

We've got to return to growth. Everything that we do is really about prioritizing broadband growth. And yes, there are areas that we can develop new revenue streams. That's always been the history of these networks, is the lo and behold you turn and there's a new product set. And certainly, we have some focus on business development on that side. But the core focus of the company is to return to broadband growth. It's not a North Star. It is exactly what we have to do. And looking at prioritization through that lens is something together with Nick, Jeronimo and the rest of the team that we're going to be very much focused on going and doing. And recognizing that you have that and it will take place, you've got the best network, the best products. You've got the ability to have 100% U.S.-based 24/7 service, which is a competitive advantage, save customers lots of money and -- but we're not going to rest and wait until all that becomes apparent to customers with the additional passings and growth and a reduction in the intensity of new competition, we're going to go after it today.

Great. Well, Chris, thank you so much for participating in our conference. It's been an absolute privilege to have you on stage here.

Great to be back and good to see you. Thank you.

Thank you, Chris.