Charter Communications Inc (CHTR) — Q4 2020 Earnings Call Transcript

Thank you, Stefan. 2020 was an unusual year, but it demonstrated and enhanced the strength of our business and we performed better than expected in a number of areas. The past year has also highlighted the importance of the services we provide and our robust network handled the immediate conversion to a remote-based economy, enabling work from home, remote education, and telehealth services. Over the last 10 months, our broadband infrastructure was tested and performed very well. That's because at Charter, we've spent over $35 billion on our network and infrastructure since the close of our transactions in 2016 and it showed up in our 2020 performance. For the full year 2020, we added 1.9 million new customer relationships for growth of 6.5% and we added 2.2 million new Internet customers for growth of 8.3%. We also performed well financially. We grew our adjusted EBITDA by 10% and our free cash flow by 53%. Our residential business performed particularly well with strength in Internet and we added 800,000 more customers than we did the prior year. We remain very optimistic about our opportunity to grow our Internet business given the quality and value of our product. Despite the outsized growth and some pull-forward of demand into 2020, which will drive continued benefits to our revenue and EBITDA going forward, our expectation and plan for 2021 is to revert to the trend we were on pre-COVID and meet or exceed the customer relationship and Internet net adds that we achieved in 2019. We believe our long-term broadband penetration and market position has actually been enhanced.

Thanks, Tom. Due to significant timing impacts of COVID and the different quarterly reporting methodologies for COVID programs across the industry, our customer and financial results on a full-year basis are the better overview. So I'll give a brief readout of the fourth quarter and then I'll discuss our very good 2020 results, set up 2021 and where that leaves us in 2022. Looking at Slide 6, including Residential and SMB, we grew our Internet customers by 246,000 in the fourth quarter. Internet net adds were down 93,000 versus last year's fourth quarter because our first three quarters of this year were above last year's first three quarters by 900,000 net adds. For the full year, we grew our Internet customers by 2.2 million or by 8.3%, our highest ever on an absolute basis. The significant creation of new broadband customers and shifts from competitors to Charter earlier in the year, plus lower market churn resulting in fewer selling opportunities, drove lower net adds in the fourth quarter when compared to last year. Trends have been improving more recently, subject to COVID and economic developments. We currently expect full-year 2021 customer relationship and Internet net adds to meet or exceed 2019. Residential and SMB video customers declined by 35,000 in the fourth quarter, but grew by 56,000 or 0.3% for the full year. Voice customers declined by 103,000 in the quarter and by 148,000 for the full year. Mobile line net adds grew by 315,000 during the quarter, more than last year's fourth quarter. Our yield on mobile sales opportunities continues to improve across our channels. The lower sequential net additions reflect the lower fourth quarter cable sales I just mentioned. So we're growing mobile nicely and we're not giving away free handsets to do it. For the full year, we added 1.3 million mobile lines and we believe we were the fastest growing mobile operator in our footprint during the fourth quarter and for the full year. Turning to Slide 7, fourth-quarter revenue increased by 7.3% year-over-year or 5.6% excluding political advertising. Full year revenue grew by 5.1% or 4.3% excluding political. Fourth quarter EBITDA, as shown on Slide 8, increased by 10.2% year-over-year and 9.9% for the full year. You'll notice in today's materials that we are no longer isolating cable specific revenue, EBITDA and free cash flow metrics. But we will continue to isolate mobile revenue, expenses, working capital, and CapEx for investors through 2021.

Thanks. Two quick questions if I may, Chris. First, you finished off by saying that 2022 could be the year you deliver the performance you expected in 2020. Can you remind us what you're anticipating in 2020 in terms of financial performance? And then, with the CBRS deployments kicking in, it sounds like from the pacing of CapEx that a lot of the deployment will happen perhaps towards the end of 2021. How do you expect that to impact wireless margins in 2022? What could the margin for the wireless business look like once the CBRS is fully deployed?

So the first question was what we were expecting in 2020. Well, the trends we were expecting in 2020 were an acceleration of customer and Internet net additions relative to 2019 and a political advertising year, which indeed we had, and the continued benefits of our service model driving lower transactions, increasing the underlying profitability of the services by providing great customer service, all of which actually happened at some different degrees. But we had a tremendous amount of other unrelated noise that was in the system for 2020, some of which was difficult and put pressure on the financial, some of which was artificially good. And in 2021, what we will have is the reversal of many of those trends, good and bad. And so it’s just going to create a whole bunch of noise inside of 2021, including the pressure around political advertising. And I think if you use the schedule that we've provided on 2019 and the previous disclosure we had around political advertising, there's a lot of detail there and it will require some work. But I think it puts everybody in a position to really understand how 2021 will develop.

I would just add to that. The returns on CBRS deployment after 2021 will obviously be specific to the demand utilization in the location where the radios are placed. And to some extent, it’s an opportunistic strategy, wherever our cost would be lower by investing in more CBRS radio deployment, our costs will go down in such a way that we'll get a return on investment. And I guess just to sort of fill out Chris' response on trends, if you think about the long-run trend that we've been on of an accelerating growth rate in terms of broadband growth, that trend is still in place and it exists for '19, '20, '21, and we think as well into 2022.

Thanks. So Chris, I just wanted to come back to broadband numbers. Obviously, your wireless attachment to broadband historically has been, I think, 70% to 90%. This quarter, it's like 145%. And I think you mentioned that churn you got was low. Did 4Q see elevated churn in broadband tied to Keep America Connected? And how much of that 600,000, I think, cohort is still sort of in the system and needs to be sort of planned out, any thoughts on that? And then, obviously your video subscribers in 2020 were pretty good and I think you've sort of used some of your flex on your carriage minimums on your lower-tier offer, can you just talk about, is that a trend we should continue to see in '21 or are we sort of saturated that opportunity given how much you've done on those lower-tier video? Thank you.

So Vijay, let me answer the trend question and the Keep America Connected and the REO effect and whether that's in or out of the system, I think that's the thrust of your question. I think the REO pulled demand forward from an acquisition point of view. And the Keep America Connected program pulled reduced churn forward and therefore pushed net gain up forward. And if you think about the way churn works, if you have more disconnects, you have more connects to keep the same growth, just keep the same net adds. So there are less net adds in the fourth quarter because those net adds were pulled forward by the Keep America Connected program and therefore there was less activity in the fourth quarter as a result of the normal way that churn interacts with sales. But as we look at '21 and look at how our sales have returned and we look at the behavior of our customers, we think that the effects of all of that are pretty much out of our numbers already. And we expect to return to a more normal kind of connect and disconnect rate and a more normal net adds rate that's consistent with the kinds of growth rates that we had in 2019.

Vijay, I think you go back and take a look at what both Tom and I said, not just now in the Q&A, but also in the prepared remarks. But to just list them out in the Q4 impacts for broadband and relationships. One, we had some pull forward of sales that we've talked about earlier in the year. Two, there was less market churn that drives lower sales funnel, particularly for a share taker like us that has an impact. And three, the nuance that Tom was going through is that the Keep Americans Connected customers meant we kept those subs already in Q2 and Q3, which was helpful to our net adds, but the subs might have turned around and reconnected in Q4 as a sales opportunity. We had already retained them to their stock and so they didn't turn into a sales or net add opportunity inside the fourth quarter.

Yeah, thanks. Just some points of clarification around just the answer you just gave before. It sounds like all of the churn that you might have experienced from Keep America Connected and other payment plans, were sort of addressed prior to the fourth quarter. So the first question is, was there any residual churn from that customer base in the fourth quarter or do you feel like you have just gotten to a normalized churn rate? And then, you talked about lower overall churn in the market, I was hoping to get your thoughts on that. Do you think this has to do with lockdowns or anything that was COVID related? And are you seeing so far this year, admittedly early in this year, evidence that market behavior is returning to normal? Thank you.

When we discuss the Keep Americans Connected churn and the Remote Education Offer, we are addressing both issues simultaneously. The Remote Education Offer has been effective in retaining customers, resembling typical acquisition patterns. This trend observed earlier in the year has continued into Q4, and we have been closely monitoring it for obvious reasons. The Keep Americans Connected customers, from whom we wrote off significant balances, have returned to a current status and have been making payments. They have been retained as customers and are paying even better than we anticipated. Although they exhibit a slightly higher non-payment rate compared to the average customer due to their background, the overall retention remains solid with only a slight percentage difference. This factor did not influence Q4 performance. Since we began monitoring payment trends in July or August when we initiated the program to reset receivables, we do not foresee any emerging issues now or in the future. These are good customers, and we believe we made the right decision in reinstating them to a current receivable status.

Thank you very much. I have a couple of questions. I'd like to delve deeper into the wireless situation. Tom and Chris mentioned that we're not giving away free phones to boost wireless net additions. Is there a scenario in which it would make sense to do that? From an MVNO perspective, just acquiring new broadband subscribers may not be sustainable beyond a certain level. It could be a viable and profitable business for a time. However, does working with Verizon change the financial dynamics, particularly in terms of offloading wireless traffic? Is there a point where you could be more competitive in attracting customers compared to your larger competitors? Additionally, I noticed that your marketing expenses increased by 1% while the number of connections declined, and you mentioned that the environment for Q4 remained quite subdued. Could you elaborate on your marketing strategy and how you plan to adapt it in 2021? Thank you.

I want to begin by discussing the wireless business model as an independent entity. We have consistently expressed our belief that it is not particularly strong, especially when it comes to subsidizing handsets, which we would prefer to avoid if possible. The true benefit for Charter lies in enhancing the overall connectivity of our existing services, as a significant portion of mobile traffic—80%—is already routed through our network. Our goal is to expand our reach with internet and connectivity options, allowing us to offer customers a combined broadband and mobile connection at a lower price than current household mobile costs. This approach aims to boost our connectivity penetration. Currently, we see immense value in our bundled mobile and broadband offering and have no intention of subsidizing handsets. Modern handsets also tend to have a longer lifespan than before, so we wish to steer clear of subsidies for various reasons. While it is possible that our strategy could evolve over time due to the value generated through customer relationships, it is not a priority for us at the moment.

It's working very nicely for us. Our sales yield, which refers to the sales we generate per available transaction, continues to improve, and our overall opportunities for selling mobile connections are getting better. Even during the pandemic, we managed to open 180 new stores in 2020, and we expect to complete our store construction in 2021. This will give us a fully operational walk-in retail environment, which has not yet been fully realized. We anticipate this will positively impact our growth rate in 2021.

Hey guys, thanks. I understand you're still restricted on RDOF, but you called out the extensions to rural markets in your presentation. Can you confirm that the steady CapEx intensity guide includes anything you might do in rural? Should we expect to see a step change in line extension CapEx as you push harder on those new home build-outs, both brownfield and greenfield? And then any change we should expect next year as rural maybe becomes more important?

So, Phil, the capital intensity outlook I provided did not factor in any additional amounts for RDOF. Furthermore, given the extent of planning we need to do this year, I doubt it will be significant this year anyway. It would likely come later this year. Looking ahead, our core cable capital intensity continues to decline. We had some delays with network projects in 2020 to manage the substantial scalable infrastructure spending needed for the traffic increase. In 2021, we're focusing on those previously delayed projects while also addressing the high traffic demand with increased spending on node splitting and additional capacity expenditures that exceed our usual expectations.

Thanks, good morning. Tom, I wanted to revisit your comments on video in 2021 and beyond. I believe you or Chris mentioned streaming apps on WorldBox and the acceleration of those trends. How would you describe your video strategy today? Do you have any idea of the installed base for WorldBox? Is this a strategy that could be beneficial for broadband-only customers in the future?

Yes. The answer is yes. It can be. So our video strategy is to continue, obviously, to sell the products that we have historically sold and to sell them with a reasonable margin attached to them and to make money with them, but to also include them as part of our overall connectivity relationship with our customer base in a way that allows us to satisfy the needs of as many customers as possible as a result of our network. That includes the addition of new video tiers or products that may be skinnier or differentiated or targeted in a way that they create customer satisfaction at reasonable price because of the long-run price trend of the core video product continues to be negative, meaning programming costs continue to go up.

We have deployed several million WorldBoxes, and they now include an app store or app section where we can offer products alongside our traditional cable TV services. Additionally, we have the chance to provide an app-based platform for our data-only customers. While we haven't released the IP-only app product yet, we have made some of our video offerings accessible through apps to our Internet-only customer base, such as our news channels.

Hi, good morning. Chris, I wanted to ask you, how are you now thinking about where you want to be ideally within your target leverage range and unrelated topic? Would you expect the pace of share repurchases to be similar, more or less in '21 versus '20? And then lastly, if the corporate tax rate does increase back to 28% for the 2022 tax year and beyond, would that change the way you think about the target leverage ratio? Thank you.

So, Bryan, the target leverage range, we're comfortable in the 4 to 4.5 times. We've been at the high end of that range on a consolidated basis and declining in that range on a cable-only basis depending on how you want to look at it, you can pick which one you think is more relevant. But we're comfortable inside the range. We don't have any plans to change that target leverage range. That would include the tax rate next year were to go up. We've been in that tax rate before, admittedly within well, which will be expiring. But given the strength of cash flow, subscriber growth, cash flow and the business performance and the sustainability of not only the operating model, but the balance sheet structure that we have, it’s pretty unique. I don't see any reason at this stage, as we sit here today, that we would be changing our target leverage range.