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

For those of you that I haven't met, I'm Mike Rollins. I cover communication services and infrastructure for Citi. Very pleased to welcome Jessica Fischer, Chief Financial Officer of Charter. Thank you so much for being with us today. It's great to see you.

Great to be here. Thanks.

So maybe to get us started, first, congratulations on your upcoming role. Last week, you announced your intention to leave Spectrum. Can you tell us a little bit about your decision and the opportunity in front of Charter?

Sure. So first off, I just have to express my gratitude to my teams at Spectrum, to Chris who was a sponsor and mentor through a big chunk of my career, to the Board who has been very supportive. Look, I think we've done the right things for the future of the business, right? We've made some great investments across the business that I think will carry it into the future. We took a stand in video that has changed the trajectory of the video business, which ultimately is good for broadband and will grow the broadband side of the business. And we stuck to the strategy, right, which is that we're selling high-quality products at a value to customers and doing that, coupled with high-quality customer service. When you put that together, the industry has been really challenging, but we've been one of the most successful teams in the industry against that very challenging backdrop. That was what enabled us to close the Cox transaction and the Liberty Broadband transaction in the last couple of weeks, and it set the company up quite well to continue to grow its cash flow over the next few years. There's a lot of exciting stuff still to come at Charter. That being the case, for me, it was a good time to go take on a new challenge. And so I've accepted a role at Crux AI, which is a partnership between Google and Blackstone. We'll be building AI infrastructure, which, as we were just talking is sort of being a different piece in the chain here, building what will create demand on the network going forward. It's an exciting space. I'm excited to go do it. But I wish the team well, and I think that -- I think there's still a lot more to come here at Charter as well.

Okay. Well, let's dig into that. It's great to have you here to be able to talk about this. So you mentioned the big news of the last few weeks was closing the Cox transaction. And so can you discuss the opportunity to take your playbook, the Charter playbook, and the converged connectivity strategy now across a larger footprint?

Yes. So the total footprint coming out of this, we have more than 70 million passings, only around 37 million customers. So the opportunity that's there is around almost 35 million homes and businesses that we can go sell to. And the way that we're going to do that, look, on the Cox side, the lever that we have is the ability to bundle products much better than what they've done before. So their video penetration is a little under 10%. Their mobile penetration is very low. Their broadband ARPUs are high. And so what we will go do and we've already sort of started to go do is we're going to go sell using our pricing and packaging strategy, which has performed better than theirs, to drive lower pricing at acquisition and lower pricing actually sort of throughout the life cycle of the customer from a broadband perspective, but to couple that with video and mobile such that we do what we've always done across our footprint, which is to maximize the amount of cash flow that you can get per household. And when you look at where customer ARPUs are on the Cox side versus on our side, they're -- excluding the seamless entertainment allocation, they're not that different. And so there's really a clear opportunity to be able to sort of migrate the base in a way that will be good for the customer because it will make customers churn less because we'll be delivering more value and will be good for the business because I think that we can generate unit growth over time related to sort of creating that better package for customers. And you bring that together with like it's -- so you have what you need to do on the revenue side, but a lot of real opportunity on the other side as well. There are some good things inside of the business, whether it's AI tools or what they're doing on the B2B side where we can take things that they do well and bring them to our business. There are things that we do well where we can push them into their business, some opportunities in advertising and some spaces like that. The confidence that we have in the synergies that will come from the transaction, I'd say, has increased dramatically as we've sort of dug in further. And so we've raised our synergy target to more than $1 billion. And so overall, there's a lot of work to do. And we're excited. I didn't mention it, but in the pricing and packaging, actually, I think in the next 1 week, 1.5 weeks that we'll be rolling that out over their footprint sort of at full scale. So lots of exciting work to do on that side, but I think we're really confident in our ability to sort of bend the trajectory that they've been on to put that business in a better place and to create value for the company in doing so.

So you mentioned the over $1 billion in synergy now. Is there a view on speed of travel to get there?

Yes. So I actually think that there's a big chunk of the synergies that come very quickly. So you get to a run rate like something on the order of half, probably in a very, very short time frame. And then I think the trajectory from there is a little more that you have to do to go get to the other pieces. But look, there's a lot of opportunity, whether it's around things like organizational structure and overhead or whether it's around just sort of the bread and butter contracts and operating efficiencies that we'll get implementing across the business. So I think you can get to a good amount of it quickly.

Great. Maybe zooming out, just broadband competition broadly. Can you just give us an update on what's going on in the competitive environment for your broadband business?

Yes. The market is still very competitive. And I think you might have heard one of our peers talk about it yesterday. But I think our point of view, it was very competitive in Q1. It was very competitive in Q2. It continues to be very competitive in Q3. There are ebbs and flows as to which competitor is out there being more competitive and who has sort of backed off of offers. But the overall space, it hasn't changed, but it continues to be a competitive space.

How are you seeing the threats both near term and long term from fiber, FWA and now the LEOs like Starlink?

Yes. So if I think about the needs, so the need that AI is driving an overall data growth or data usage growth is driving, ultimately, you're going to need high-speed, highly reliable, low latency networks and those networks are wired networks primarily today, right? So the key competitor that we have across markets is going to be the wired network in those markets, which is fiber. On the fixed wireless side, are there customers who are satisfied with fixed wireless today? Yes. But does it have the same speed or the same reliability of a wired connection? It doesn't. And will it be capacity constrained at some point in the future? I think it probably will. It doesn't mean that you can't discount them as a competitor. But I think that ultimately sort of the wired networks prevail. And it's kind of interesting. So if you think about satellite, satellite has been really good in rural spaces where they couldn't get connectivity before. And we've talked about the impact that, that's had in terms of getting those RDOF markets that we've gotten to a bit later that it is harder to sort of pull customers away from satellite as an incumbent than it was to pull them away from some of the previous iterations, which were very bad in service for those areas. But if I look at the product, and I say, on fixed wireless, we have an idea of what happened, which was ease of installation with fixed wireless was much easier than waiting a few days for a cable tech to come and install your service. And so we've done a lot to actually sort of change and to be able to be there same day, if what you call before 5:00 or next day to be competitive with that aspect of fixed wireless, which was a place that we had a blind spot and we had to adjust to them coming into the market. In satellite, the product is more expensive. It requires a more difficult installation. The reliability data that we see today is not better. The speeds are not better. And so you look at it and you say, "Okay, will they win on brand alone?" Like that typically doesn't carry you all the way to the end of the day. And so I don't discount someone who is well funded and has a lot of really smart people working for them. And so we continue to monitor the situation with satellite. But ultimately, from a technology perspective, it certainly feels like the right technology to prevail is wired technology.

While we're talking on the subject of Starlink, can you add any perspective to the press reports on a possible relationship between Charter and Starlink and SpaceX?

Look, I think the right thing to do in any market is to be out there talking to people about ways that you can lower your costs, ways that you can utilize your network in a better way or improve the quality of service you can provide to customers, ways that you can create new products that don't exist today that might create revenue streams. We have those conversations with lots of different people all the time. And sometimes they come to fruition and something that you can announce and sometimes they don't. And I don't have anything to talk about. So -- but I think, ultimately, the fact that those conversations happen with peers and competitors across the industry shouldn't be a surprise to anyone.

Coming back to just the broadband dynamics. It feels like if I think about the broadband category, just across fiber, cable, the whole thing, ARPUs were a bit softer this year. And the question is whether or not we're hitting some kind of resistance point in terms of what customers are willing to pay? Is there something more secular going on? Or is this just the dynamics of things being a little bit more heated on competition and convergence? What can you share with us with what's happening with ARPUs?

I don't think that we've hit a ceiling, if you will. I think on our side, as I said, we don't always look at broadband ARPU on its own. And so one of the things in the dynamic that's happened is just in how we think about pricing inside of the bundle and there are scenarios where if you go with a lower broadband price that you add more products, like we see that as a win. And so we don't focus as much on broadband ARPU on its own. That being said, I think across the broadband market that there still is some space for pricing. I think it has to come in many cases for customers with additional value that you're providing. And so we did a cost pass-through in July, August time frame. And we did a speed uplift associated with it that for those customers, it was people in older pricing and packaging plans might have lower speeds. That was significant. We see things like our Invincible WiFi product, which adds in a cellular backup as something that provides additional value to the customer and therefore, is a good opportunity to go do something on pricing. And the market, I think, continues to bear some sort of additional pricing over time. I think that there are some folks out there who were pushing their ARPUs up rapidly. And so you see less of that, which is probably more healthy for everyone. But I think that there is still capacity for ARPUs to grow. It's just a question of where exactly you are.

So if you keep it like slow and low in terms of the increases, it's just more -- it's easier and with value.

And with value, yes. I think that's right. But if somebody is pushing really hard, then you end up in one of those scenarios where you're working through the resetting process and the resetting process creates some drag. But I think that there's continued capacity for inflation-like or maybe, I don't know, target inflation-like movement across pricing over time.

And I know it's not the sole focus, but I think on the 2Q earnings call, it was discussed that these price actions can help the ARPUs improve for broadband, specifically 3Q, 4Q. Is that still the track?

Certainly, so with the couple of things that you see. So the price adjustments, which ran sort of mid-July to mid-August, so you get about 2 months of that inside of Q3. And then in addition to that, we talked about sort of what had been happening with retention offers, which were quite hot sort of early in the year and then came down in their intensity over the course of the second quarter and were mostly normalized by the time you get to June. Because of that, I think you get sequential positive movement as you go into Q3. And then there's always sort of lots of factors in ARPU as you get further on after that, but a good sequential movement.

Helpful. And so one other question that we've been just trying to think through is when I think about the Spectrum broadband strategy, it's been under the single brand, on a retail basis to the customer. And given just the pickup in competition across the category, is Charter thinking through the possibility of using what I think is commonly called like flanker brands, right, to create different segmentation for the market might give you different ways of going after different value propositions? And there's another side to this, which is would you only do it on a retail basis? Or could you see a world in which you might say, "You know what, there's other players out there, let's wholesale our broadband to someone." And now you have a much larger distribution engine selling on your platform.

Look, never say never. There are sort of lots of interesting ideas out there. But I think our focus right now from a brand perspective is really on improving our go-to-market and improving sort of customer satisfaction in the mainstay Spectrum brand. And so I suspect that where you'll see our focus in the short term is on the work that we're doing around improving in that respect.

One of the big focal points has been your focus and leadership on convergence. And it's not just on the mobile side, it's also on the seamless video and seamless entertainment side. So how is that going in terms of conveying that value proposition to customers?

So I think if you look at the couple of sets of sort of big new offer sets that we've done over the past few years, like Spectrum One was really effective going and driving mobile. The sort of Life Unlimited launch in those new pricing and packaging has been effective at keeping that mobile momentum. Actually, we've been generally continuing to grow gross adds in mobile on a year-over-year basis, which against our growing base allows us to continue to grow at rapid rate. And also really stabilizing the video product, along with the changes that we made to the product set there. And so both of those things, I'd say, they don't get all -- they don't get a great amount of credit in the market. Look, slowing video losses and increasing mobile uptake from a financial perspective is like sort of an unmitigated good in terms of where we've been from a financial perspective. And then it carries into and you say, "Okay, well, what do you get from it in broadband?" Because ultimately, even when we talked about like why do what we're doing around video? Well, we're doing it because you got to have an impact on broadband. And why do what we're doing in mobile? You're you doing it in part because there's good financial advantages, but also because ultimately, it's got to have an impact on broadband. We're seeing a big piece of that impact, right? So a customer who takes our video product churns at a rate that's about 40% less than a customer who's broadband only. And when they then go activate seamless entertainment apps, so then go activate streaming apps associated with that video product, that churn actually goes even lower. And at this point, about 55% of our customers who have access to those seamless entertainment apps have activated them. And so we're getting good uptake there, which is having good churn impact. Similarly, on the mobile side, a customer who takes Internet and mobile churns about 40% less than a customer who hasn't taken the mobile product. That gets better when they take more mobile lines. And today, mobile penetration of Internet customers is only about 20%. So we still have a lot of opportunity to grow the mobile business. We have opportunity to continue, and we've been effective at adding mobile lines inside of the base in order to increase that impact. And then you might say, "Okay, well, where does that go? And why don't we see it in net adds?" And the issue in net adds has been a gross additions problem. So then we go back to the prior question, and I say the focus that we have is on our go-to-market and not improving customer satisfaction because we think that's what we need on the gross addition side. We're actually doing really well on the things that are impacting churn, which is helpful, but we ought to go crack the nut on gross additions to get to the right answer.