Charter Communications Inc (CHTR) — Q3 2022 Earnings Call Transcript

Good morning, and welcome to Charter's third quarter 2022 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K and also our 10-Q filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. On today's call, we have Tom Rutledge, Chairman and CEO; Chris Winfrey, our COO; and Jessica Fischer, our CFO. With that, let's turn the call over to Tom.

Thank you, Stefan. As I look at our current advanced offerings, our future product plans, and the underpenetration of our network, we're well positioned to grow our business at very attractive rates for many years to come. During the quarter, we added 75,000 Internet customers. Customer relationship churn remains very low due to current consumer behavior. And while the lower year-over-year connect activity improved, connects remain challenged due to the low activity environment. We continue to see very strong mobile line growth with net additions of 396,000, our best quarter yet. Over the last year, we've grown our mobile lines by nearly 50%, and as of the end of the quarter, we had nearly 4.7 million total mobile lines. Our opportunity in mobile is very large, and we're still at the beginning of developing that business. Today, we only captured 28% of the combined household spend on wireline and mobile connectivity within our footprint. So we remain significantly underpenetrated versus the opportunity in front of us. And we're delivering the fastest Internet and the fastest Wi-Fi speeds in the nation and the fastest mobile speeds when combined with Wi-Fi, all while saving customers thousands of dollars a year. Today, we have close to 500 million devices connected to our network, the vast majority of which are connected to us wirelessly. Ultimately, I expect that virtually all devices connected to our network will connect wirelessly. To continue to improve our services, we also remain focused on evolving our network to offer the fastest speeds in the most cost and time-efficient manner. Data usage continues to grow at a fast pace. Internet customers who do not buy traditional video from us use nearly 700 gigabytes per month. Nearly 25% of those customers use a terabyte or more of data per month. The downstream traffic still dominates usage at a ratio of 14:1 versus upstream traffic. In the near-term, we're implementing spectrum split upgrades, which will expand our plant capacity bi-directionally and allow us to allocate more bandwidth to the upstream, all using our existing DOCSIS 3.1 infrastructure. In turn, we'll be able to offer our customers higher symmetrical speeds and multi-gigabit speeds in the downstream. Our network evolution path also includes DOCSIS 4.0, so we can maintain a state-of-the-art network that delivers the most compelling converged connectivity services in a capital and time-efficient manner and turn offer those advanced services to consumers at highly attractive prices. As you may know, I plan to step down as CEO on December 1st. At that time, Chris Winfrey will become our new CEO, and I will become Executive Chairman. It's been personally fulfilling to lead Charter over the last 10 years. We've grown our company through innovation and strategic investments that position Charter to provide the best connectivity products and services available today everywhere we operate. Our products have continually evolved and changed the world during my career from the carriage of broadcast signals when I began to the development of robust video and multi-channel cable networks. And from the early days of broadband, Internet and voice to now offering fully ubiquitous wireless connectivity, we continue to drive new uses for our networks to bring value to consumers; and our opportunity to innovate and grow is greater today than ever before. Having worked closely with Chris for more than 10 years, I know that he's the right choice to be our next CEO. He will serve Charter with both vision and skill, leading the company to new heights. Chris' leadership and expertise in both operations and finance have been pivotal to Charter's growth and success over the past 10 years. He's repeatedly demonstrated strategic insight and key market and industry awareness to drive our organization to perform at the highest levels. And with that, I'll turn the call over to Chris.

Thanks, Tom, and thanks for the kind words. I'm both honored and excited about the opportunity to continue to help Charter grow and to create shareholder value as the incoming CEO. It has also been a privilege for all of us here at Charter to work for and learn from Tom over the past 10 years. His leadership is the reason Charter exists as it does today, and he's mentored all of us here to keep reinventing cable and we're fortunate that he'll continue to do the same as our Executive Chairman. So Tom covered the quarterly headlines, so I thought I'd give some additional market color. While our Internet net additions improved from last quarter, they remained below last year. The largest driver by far is that activity level remains low. Total churn and voluntary churn were slightly lower year-over-year and were at all-time lows for the third quarter. Non-pay and move churn remains well below pre-pandemic levels. Those are market issues that also reduce our selling opportunities. While we've seen some improving trends, gross additions also remain down across the footprint by similar amounts in both overbuild and non-overbuild areas, similar to what we've seen in the past few quarters. In terms of competitive impact, some of the lower gross additions we see probably relate to DSL conversion going to a new entrant, fixed wireless instead of coming to us. Given the issues with fixed wireless product reliability and scalability and usage trends, we expect those customers to find their way back to us over the long-term. We've also seen a similar pace of fiber reported telco Internet numbers confirm what we saw, a small mix issue from newly overbuilt footprints, no different from the past. I would also note that we've seen a small amount of market share return to mobile-only service over the past several quarters, the reversal of some COVID effects. So we're in a unique moment, the opposite of the one we saw in 2020 and early 2021, in fact. Market transaction volume will eventually pick up, and so will our Internet net adds. In the meantime, we're growing mobile at record rates, even in a low volume environment by saving customers thousands of dollars. That growth is also good for broadband. So we remain well positioned. Our fixed and mobile broadband services continue to converge technically and operationally, and our Spectrum 1 offering launched earlier this month exemplifies that. As Tom mentioned, we have a path to drive significantly higher speeds at a much faster pace and at much lower cost than our competitors. And we can sustain good revenue growth and lower the cost of service per customer relationship for many years. I've been in the cable industry for almost 25 years and at Charter for over 10 years. I've played a key role in developing our operating strategy. So our recipe for creating shareholder value through better products, pricing, packaging, and service, coupled with a levered equity return strategy will remain intact. At the same time, I do think the CEO transition will be a good opportunity for us, both in this market and with the transition taking place to update investors on what I expect over the next few years, including details of our network evolution plan, convergence capabilities, service experience for customers, and our rural expansion and build-out plans. That's a lot to cover, so I look forward to a virtual event with the investment community that we'll schedule for a date following the CEO transition in December. Now, I'll turn the call over to Jessica.

Thanks, Chris. Before discussing our third quarter results, I want to mention that today's results do not include any impact related to Hurricane Ian, which hit the East Coast in late September. Initially, approximately 1 million of our customers lost service, primarily because of power outages, but our crews worked hard to repair our network and reconnect customers, and they did a great job. Broadly speaking, our plant fared well despite the storm and service was restored to nearly all impacted customers in a relatively short period of time. While we expect our fourth-quarter results to contain some bill credits, some incremental CapEx related to plant replacement and some incremental operating expense related to store cleanup and call center labor, we expect the overall impact of Hurricane Ian on our financials and customer numbers will be very small. Let's turn to customer results on slide five. Including residential and SMB, we added 75,000 Internet customers in the third quarter. Video customers declined by 204,000 in the third quarter, following a programming pass-through increase in the second quarter. Wireline voice declined by 271,000, and we added a record 396,000 mobile lines despite the lower number of selling opportunities from our reduced activity levels. We continue to drive mobile growth with our high-quality, attractively priced service. Looking forward, we expect our new Spectrum 1 offer to drive accelerating mobile line growth. Moving to financial results, starting on slide six. Over the last year, residential customers grew by 123,000 or 0.4% year-over-year. Residential revenue per customer relationship was flat year-over-year, with promotional rate step-ups and rate adjustments offset by a higher mix of non-video customers, higher expanded basic video losses in the last several quarters, and accelerated growth of lower-priced video packages within our base. Our year-over-year residential revenue per customer relationship growth was lower this quarter than last, given the timing of rate adjustments this year versus last and the mix factors I just mentioned. Also, keep in mind that our residential ARPU does not reflect any mobile revenue. As slide six shows, residential revenue grew by 0.7% year-over-year. Turning to commercial. SMB revenue grew by 1.9% year-over-year, reflecting SMB customer growth of 3.3%. Enterprise revenue was up by 2.6% year-over-year or by 5.2% year-over-year when excluding some one-time fees from the prior period, which were a benefit last year. Excluding all wholesale revenue, enterprise revenue grew by 9% and enterprise PSUs grew by 4.9% year-over-year. Third-quarter advertising revenue grew by 23% year-over-year, primarily driven by political revenue. Core ad revenue was flat year-over-year, with lower national and local advertising revenue offset by our growing advanced advertising capabilities. Mobile revenue totaled $750 million, with $303 million of that revenue being device revenue. Other revenue declined by 2.1% year-over-year, primarily driven by lower video CPE sold to customers, mostly offset by rural construction initiatives subsidies. In total, consolidated third-quarter revenue was up 3.1% year-over-year. Moving to operating expenses and EBITDA on Slide 7. In Q3, total operating expenses grew by $278 million or 3.5% year-over-year. Programming costs declined by 3.8% year-over-year due to a decline in video customers of 3.8% year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates. Looking at the full year 2022, we now expect programming cost per video customer to grow in the low single-digit percentage range. Regulatory connectivity and produced content declined 7.4% year-over-year, primarily driven by lower video CPE sold to customers. For the full year 2022, we now expect regulatory connectivity and produced content expense to decline in the mid- to high single-digit percentage range. Cost to service customers increased by 4.4% year-over-year. Excluding bad debt from both years, cost to service customers grew by 3%, primarily due to higher fuel and freight costs, partly offset by productivity improvements. While bad debt and non-pay churn were higher year-over-year, both remain well below pre-COVID levels. We now expect cost to service customers expense growth for the second half of 2022 to be more consistent with growth in the first half of 2022. Marketing expenses grew by 9.3% year-over-year, primarily due to higher staffing levels and wages, as Charter focuses on providing better service to new and existing customers. For the full year 2022, we now expect marketing expense to grow in the high single-digit percentage range. Mobile expenses totaled $846 million and were comprised of mobile device costs tied to device revenue, customer acquisition and service, and operating costs. Other expenses increased by 4.4%, primarily driven by higher labor costs, higher advertising sales expense related to political revenue, and higher computer and software expenses, partly offset by lower corporate costs this quarter. Adjusted EBITDA grew by 2.4% year-over-year in the quarter. Turning to net income on Slide 8. We generated $1.2 billion of net income attributable to Charter shareholders in the third quarter, essentially flat with last year, with higher adjusted EBITDA offset by higher interest expense. Turning to Slide 9. Capital expenditures totaled $2.4 billion in the third quarter, above last year's third-quarter spend of $1.9 billion. Most of that increase was driven by $525 million of spend on our rural construction initiative in the quarter, and the vast majority of that spend is accounted for in line extensions. In rural, we've accelerated our walkout and design nationally to allow for additional time for the process of securing full access. In addition, our access to inventory is improving, so we're carrying a more appropriate amount of inventory to support the build. As a result, we now expect to spend approximately $1.5 billion this year on the rural construction initiative. We spent $96 million on mobile-related CapEx, which is mostly accounted for in support capital and scalable infrastructure and was driven by investments in back-office systems. Core cable CapEx, which excludes our rural and mobile CapEx, increased from $1.7 billion last year to $1.8 billion this quarter, driven by modestly higher CPE and scalable infrastructure spending. We continue to expect core cable capital expenditures to be between $7.1 billion and $7.3 billion for the full year 2022. As Slide 10 shows, we generated $1.5 billion of consolidated free cash flow this quarter versus $2.5 billion in the third quarter of last year. The decline was primarily driven by higher cash tax payments and higher CapEx, mostly driven by our rural construction initiative. Excluding cash taxes, our rural construction initiative, and litigation settlements, free cash flow grew by 5% year-over-year. We finished the quarter with $96.8 billion in debt principal. Our current run rate annualized cash interest is $4.8 billion. As of the end of the third quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.48 times. We intend to stay at or just below the high end of our 4 to 4.5 times target leverage range. During the quarter, we repurchased 5.8 million Charter shares and Charter Holdings common units totaling about $2.6 billion at an average price of $445 per share.

Thanks so much. I think perhaps two questions. Tom, what a career, and Chris, congratulations. I wanted to ask about Spectrum One first. Tom reminds me of when you launched the triple play back in 2005 when FiOS and U-verse were launching, and it looked like a really intriguing price and value for customers, but also kind of lower than perhaps prior promotions. So I'm just hoping that you and Chris can walk through the strategy behind the Spectrum One promotion and the financial impact relative to your prior promotional strategies. And then separately, Chris, I know it's early and you're indicating that you're going to update us in December, but how broadly are you considering strategy shifts? Obviously, investors are a combination of nervous and excited about changes that might take place. I mean, is there a scope to rapidly accelerate capital spending or different pricing strategies? How wide is the net here in terms of what you're considering? Is this revolution or evolution? Thank you.

Thanks, Doug. Yes, your memory is good. And I'll turn the answer over to Chris. But when the triple play was first announced, there was a lot of skepticism, and some people thought it was foolish, but it turned out to be quite successful.

I believe there may be some confusion regarding what Spectrum One is. It is our initial attempt at this offering, and it may evolve over time. Spectrum One combines seamless connectivity with our products, enhancing their performance when used together. It is available at a promotional price for the first year, meaning our pricing for the underlying products, including Internet, advanced WiFi, and mobile, remains unchanged. Even after the promotional period ends, Spectrum One continues to provide value for customers in a way that our competitors struggle to match. This approach is quite similar to the original design of Tom's triple-play. We also include additional products or mobile lines in the promotional sales. Contrary to any concerns, we have not reduced our prices in the market, nor do we see a need to do so. Regarding strategy shifts, I want to clarify that I have been involved in shaping our operational strategy alongside Tom, John Bickham, and others over the last decade. A new title does not alter one’s perspective on how to create shareholder value overnight. I am fully committed to our current strategies related to products, pricing, packaging, and service. Our capital structure has played a role in this approach as well as our balance sheet and M&A strategy. Consequently, I do not anticipate any drastic changes. I have always believed that if we are pursuing capital investments, we should continue to push forward to facilitate faster growth. If opportunities arise to expedite our current efforts, we will pursue them. However, I do not think people should expect any fundamental shifts in how we manage the business or generate value for shareholders.

Thank you.

Thanks, Doug. Katie, we’ll take our next question, please.

Thank you and congrats, Tom. I'm sure we'll miss you more than you'll miss us, but please stay in touch. Yes, I guess sticking with the wireless scheme and the network, Chris, last quarter, you were willing to highlight to us that maybe we on the sell-side have got the wireless economics wrong. Obviously, you've got the Spectrum One plan in the market, which seems to be doing what you hoped it would, which is to drive faster growth. I'm sure we'll see more of that in Q4. The losses in wireless, and I know product P&Ls are of limited use to some extent, but it looks like they'll be pretty flattish year-on-year this year. I'm just wondering, is there a way you can sort of take us into the cost structure on the wireless side, speak to the network offload opportunities? And is there any way to help us think about, as you continue down this convergence path, is there a time line towards EBITDA starting to inflect and really benefit from the wireless revenue scale you're building? Because it sounds like we're not going to see that at least in the near term. And then, I'm just wondering, what are the returns you're seeing on the high split activity so far? And you mentioned DOCSIS 4.0, Tom did in his prepared remarks. Do you have a sort of a time line you want to sort of lay out for us or how you think about the benefits of high split and DOCSIS 4.0 over the course of the next few years to the business?

So, two quick things, and then I'm going to pass it over to Jessica. On Spectrum One, we didn't launch that until October. So it had no impact on our Q3 results. On your question regarding high split, we're going to go into lots of detail in December. I'm going to try to be quiet today around all that. There's nothing shocking. I think Tom and others may elaborate on the benefits of high split, but we'll give a more detailed plan in December. The question is on mobile, and I'm going to hand that over to Jessica around the financials on mobile, and she can go through that.

Yes. So, mobile EBITDA losses remained due to a few things. The first one, I'm sure you saw this is our best quarter yet for mobile growth, and we continue to have additional sort of customer acquisition costs because of that that weigh on mobile EBITDA. Also, we did see both in mobile and in the cable side increases in bad debt year-over-year. And so there's some of that that's impacting mobile EBITDA. We did implement a new system earlier in the year. I think Tom has talked about it. We're still sort of working through the last of the costs related to having implemented that system. There's a little weight there that I think will come down as we settle in a bit more. The key here is that you should know that gross margin in the mobile product continues to be very good. As Chris mentioned, Spectrum One, while it offers a promotional price on mobile, we're both selling additional lines in with that promotional offer and at our rack rate, which rolls to in 12 months, we make very solid margins off of the mobile business. Because of that, we remain well positioned for profitability in that business absent the growth cost even with the promotional pricing to drive overall customer relationships.

Yes, at a high level, spectrum splits provide the opportunity to significantly increase both download and upload speeds and to offer products symmetrically at a relatively low capital cost. When we implemented DOCSIS 3.1, we spent about $9 a point beyond the cost of customer premises equipment, which amounted to approximately $450 million to prepare the network. This new upgrade will cost slightly more, but it remains a low-cost investment that substantially boosts capacity. It positions us to continue investing in additional technologies, including DOCSIS 4.0, which will further enhance network capabilities in a capital-efficient manner, leading us toward the 10G environment we've discussed. Additionally, making these investments reduces operating and capital costs since the upgrades cater to growth. As I mentioned in my prepared remarks, the demand for capacity is continually increasing, and we have a standard capital budget to accommodate this growth. These spectrum split upgrades allow us to include that capacity in our investment, eliminating the need for additional augmentation costs. This is an efficient approach to deploying extensive capabilities across our entire service area. I believe the cable industry as a whole will achieve this capacity across its footprint quite rapidly.

I think given what we've seen in the field implementations that have happened so far, our confidence in the capital efficiency of the implementation as well as our ability to do it at speed have both grown versus even, I would say, where we were last quarter or the quarter before. So, very good progress and what we've seen both in the field and from the supplier community as to how that upgrade will be able to be executed in.

Thank you so much.

Thanks, Ben. We’ll take our next question please.

Hi. Thank you. First, congratulations to you, Tom, and also to you, Chris, on the transition. Two questions, if I could. First, Tom, just a personal question for you. Can you elaborate a little bit on the timing of your decision? What made you decide now was the right time? And then second, with respect to broadband, what are you seeing in terms of broadband costs? You're obviously doing a lot at the edges of your network that would, I think, give you good insight into labor costs and the implications of cost of capital. What are you seeing both for you? And would you suspect for fiber overbuilders that are competitors? Does it have any implications for how you think about the RDOF build? Are there any of those markets that as costs have risen are now less attractive and potentially less interesting to continue to pursue?

There's a lot to unpack in that question. First, regarding my timing, two years ago I included in my contract an option to start transitioning to Executive Chairman and step down as CEO on August 15th of this year. I chose that date because it marks the 50th anniversary of my career in cable, which began in 1972 when I worked as a technician to pay for college. This date holds personal significance for me, and I saw it as a milestone worth considering. I also thought about the fact that I would be 70 years old at the end of my Executive Chairmanship, and I pondered the possibility of stepping back from work at that age. However, my passion for this business and the opportunities ahead keep me engaged, and I want to see it through. It's a thriving business with longevity, and I believe it's the right time to make this transition. Regarding your questions about broadband costs, we are facing cost challenges, and these are reflected in our financial numbers. This quarter, we have observed inflationary pressures and labor market disruptions caused by COVID and the economic measures taken to counter it. While these challenges are significant, our strategy is to position ourselves as the value provider by creating product bundles at lower prices that offer good value to consumers. Our focus is on increasing market share as the main driver of our revenue. We have initiated video price increases and recently raised broadband prices in response to inflation. However, this does not diminish our primary revenue strategy, which revolves around acquiring customers more quickly and ensuring they subscribe to more products, thereby increasing our average revenue per user. Concerning our cost strategy, we've experienced higher costs than expected, yet we've also achieved more success in terms of customer penetration and the number of service areas we can develop through our RDOF initiatives. Overall, our costs on a per-passing basis have aligned with our expectations, though attracting labor and completing projects has become more challenging. We are also facing supply chain issues and difficulties in workforce development, and the way we sequence our work has been influenced by labor and supply market conditions. I believe that rising costs for labor and capital will also impact our competitors' ability to build.

Yes. The advantage that we have there against many of them is scale. Certainly, when it comes to being able to acquire and then move supply around the areas where we're ready and most able to build. I think that we continue to have a very good ability to do that. From a cost of capital side, the advantage that we have is a large amount of free cash flow that we're able to deploy, really what's a relatively small portion to execute on these builds. We're not as beholden to borrowing on a regular basis to fund our builds as some others in the market are. We continue to be well positioned. The rural builds are actually performing at least as well or actually better than we expected. From a financial perspective, I'm still confident in where we are on the returns we said we would have against those builds.

Thank you. And again, congratulations to you and to Chris, Tom, for the transition.

Thank you.

Thanks, Craig. Katie, we’ll take our next question, please.

Hi, guys. Thank you. A couple of follow-ups, if I can. Chris, looking forward to your event in December, I know you addressed somewhat a couple of things a minute ago, but I noticed you didn't mention updates on core network capital intensity or leverage targets as part of this transition, which are things that we hear people asking about in the market. Any changes to consider here that you can give us a little preview on? And then second, I know it's early, but Jessica, can you follow up on the rural initiatives and the contribution there to broadband subs? How should we think about capital spending for RDOF and other rural initiatives next year? Thank you.

I'll address the first question. Jessica highlighted in her prepared remarks our perspective on core capital intensity, and her comments reflect our shared belief about this outlook now and in the future. She mentioned excluding rural and noted there could be some variability with the timing related to achieving high split supply chain and inventory management. However, core capital intensity is continuing to decline. Regarding the leverage target, I've heard speculation in the market about it, which I find amusing because I've maintained a target of 4.5x since my time in Switzerland, Germany, and at Charter—4.5x has been my levered equity strategy for over 20 years, and I was instrumental in establishing that here at Charter. We're experiencing good growth, and interest rates are not significantly different now; in fact, they're likely lower for us at Charter compared to when I first joined. Our approach to creating value through our operating strategy and how it integrates with our balance sheet, M&A strategy, and levered equity strategy has remained consistent. While we're on the subject, I know there are discussions regarding whether we need to fully overbuild our fiber network, and I don't believe that's necessary. Operating two networks, as many overbuilders have done, doesn't make much sense. We have a solid path forward. This doesn't mean we're avoiding fiber; we are implementing it as needed. There may be sections of the network in the long term where we find it economical to invest in fiber, but overall, the strategy that Tom outlined is the one we're following. I don't see a need to switch to a complete fiber build for a network that's otherwise in excellent shape and can be significantly upgraded at a lower cost while providing the same capabilities.

On the rural side, I guess on your first question, the contribution to broadband subs. Certainly, we are seeing broadband subs coming in off of the rural builds that we're executing already. I think I've said we will start providing some more detailed information about rural build and we weren't quite to do that this quarter. But I would expect coming into year-end that we'll provide some better information. It's not the entire growth in broadband. So the growth that you see, the 75,000 additions reflects growth off of our legacy footprint as well as a smaller amount of incremental growth off of the broadband subs. But we are doing very well in those markets that we build out. As far as thinking about how you should think about rural for next year, I don't want to front-run giving guidance on that piece just yet. I would tell you that I think what we did in this year to try to accelerate, walkout and design is certainly in an effort to be able to build the rural builds at a good pace, which I think is both consistent with what strategically we'd like to do because having the passings and service sooner than later is good for the business. From a regulatory perspective, we are certainly doing everything we can to meet expectations on that side as well and in placing the build in service. But I don't, on that basis, sort of have a number to give you for next year. I'd just tell you that I would expect our pace to continue to be strong because we're trying to build what we need to build as quickly as we're able to do so.

Thank you. And congratulations again, Tom and Chris, that's well deserved.

Thank you.

Thanks, Phil. Katie, we’ll take our next question please.

Thanks. Tom, I want to add my congratulations to everyone else's. It's been an impressive run. I only wish the stock was where it was a year ago as you were leaving. Hopefully, it will outperform by December; also congratulations on your fund, Chris. I'm curious if you could talk about the pricing environment with your competitors. You noted that you haven't changed prices on any of your packages or plans and that you don't see the Spectrum One-off as a price cut. How do you think the introduction of fixed wireless broadband is affecting industry pricing overall? Additionally, Tom, you reiterated Charter's long-standing strategy of driving growth through volumes while being cautious about pricing. This approach has clearly contributed to creating long-term value for Charter. Can you help us understand how quickly EBITDA might grow in an environment where volumes may be lower for a while, considering your conservative pricing strategy? Thank you.

I'll jump in first. We haven't changed, sorry, I just wanted to correct that. I said we haven't lowered our pricing. Tom mentioned that we have passed through some of the inflationary cost increases, and that includes broadband, which should be indicative in terms of how you're thinking about that. And then on the fixed lines, I'm just throwing in a few pieces here and let others cover the rest. The fixed wireless access, the pricing really is designed for a full suite bundle of multiple mobile lines and, in some cases, high-priced mobile lines combined with the access. I think the right comparison is if you take a look at our existing pricing in September with both broadband and mobile lines because that's a comparable comparison. We're now with Spectrum One and compare that to the combined fixed wireless access offering. I think that's the best way to take a look at it. When you do that, you'll see that we're dramatically lower in terms of price and higher in terms of value, but the quality of the product is not really comparable. I think that's the right way to think about those.

Yes. I guess I would just add that the opportunity for our ability to continue to grow against the market share is significant. I said in my prepared remarks that we're 28% penetrated in terms of dollar takeout of consumer spend for mobile and broadband combined. We have this big physical infrastructure where every customer we connect to requires no significant capital. The opportunity for us to drive growth using that network with superior products at attractive prices is huge, and the dollar value of what is in front of us is huge. So that's the big opportunity in our structure; and it really hasn't changed. What has changed is the technologies we're using and the product sets and how they're combined, but the basic notion that there's a huge marketplace with a lot of spend in it, and we're not getting much of it, and we'd like to get more, and we will.

In terms of how that translates into EBITDA trajectory, Jonathan, I don't think it will come as a surprise to anyone that based on the lower broadband customer growth we've had over the last year, really coming out of the accelerated growth in those customers that we pulled forward during COVID will mean that we had higher revenue growth followed by what's likely to be somewhat lower revenue growth versus that COVID time period. But based on what Tom talked about, as we execute on the converge connectivity plan and as we see it return to normalcy in the market, we certainly expect that in the medium to long term, that that will pick up back up and so you will have that increasing revenue growth again. Similarly, on the expense side, we've certainly seen some impact, and I think we called out some of the impact of inflation in the financials in Q3. But we think that that sort of is a temporary crunch on growth that is consistent with what people what we think that people expect. That will be followed by a return to more normal levels. In the medium and long term, I think the trajectory of EBITDA growth is back closer to pre-pandemic levels. But I acknowledge that I think that there could be a little bit of slowness in that growth in the short term.

That’s great. Thanks, Jessica. I appreciate that.

Thanks, Jonathan. We’ll take our next question, please.

Thanks. My congratulations to you both. I had just a couple of questions. One, you talked about a broadband rate increase. I mean we haven't seen in the market. Any details on what the magnitude of that is? And obviously, ARPU for broadband seems to be a big focus for all of us, given sort of flattish unit growth. So any sense on what that could drive broadband ARPU in 2023? And then just for housekeeping, was there any ACV impact on the broadband net adds for the quarter? Thanks so much.

I'll take the last one of those first. There was some impact of the EBB to ACP conversion on broadband in the quarter. It was much smaller than it was last quarter, and we expect it to be much smaller going forward. So I don't think we'll call it out at all separately. I would call Internet ARPU growth in the year-over-year. Overall ARPU was flat, but Internet ARPU was up 2.2%. If you included mobile and overall ARPU, it would have been up $1.60 versus last year. We think that there is ARPU growth happening in the market, really largely driven by mix issues and by our ability to penetrate the market further on the mobile side, driving additional real growth of the business beyond just what you can get from a pricing perspective. We feel like we're doing well there. I don't think that we'll give guidance on what ARPU growth we expect going forward, but that’s what we are seeing now.

Okay. Thanks so much.

All right. Thanks, Vijay. We’ll take our next question please.

Hi, and thank you. Two questions. One, mobile. Historically, Charter and Comcast have said that mobile is primarily added by existing customers. I'm wondering if it's fair to assume that Spectrum One represents an intent to invest in what you've called the high mobile contribution margin on the incremental sub in customer acquisitions and converged customers, whether that is the solution for this broadband problem. Separately, I just wondered if you could comment on sequential growth. It looks to me like broadband, commercial and mobile adjusted for a view of the EBB losses grew less than $50 million sequentially. I'm trying to square this with your leverage. I'm sure it's not your view that that is the future. Any comments on sequential growth would be helpful. Thank you.

Peter, to the first part of your question, I'd say yes we expect to be able to pull the broadband growth through. It's a complicated sale, obviously, but yes.

You mentioned Spectrum One as a solution to the broadband growth issue we have right now, and I think it could be additive, but it's not the solution. The problem right now is market activity. I know that's not the fashionable thing to say right now. The biggest problem we face is market activity. When that comes back, I think that's the solution to the broadband growth. Spectrum One has the opportunity, as Tom said, to drive incremental Internet growth. The biggest source of mobile growth is, by far, the upgrades to our existing Internet base, which should benefit that base as well.

On sequential growth, I guess I would point out a couple of things. One, I highlighted in the prepared remarks that the growth we saw in Q2 was impacted by pricing adjustments we had taken for video pass-through. The way those overlap year-over-year had an impact, and you had the effect of two in the second quarter versus only one in the third quarter. That explains part of what was happening there. Additionally, in enterprise, commercial, there was a one-time item that was a benefit last year that was not in this year that pressured those growth rates in the year-over-year or in the sequential quarter. Therefore, some of what you're seeing is just the impact of lumpiness, not overall growth trajectory. On the leverage point, I would say that where we're sitting right now, the free cash flow yield on equity is so high that I think that continuing to do share buybacks presents significant opportunity for the company based on where we're sitting on that point. The overall capital structure, I think, has been an advantage to the company in the long term. I don't see where we are even in what might be a temporarily pressured growth environment as being a reason to move off of where we've been from a leverage standpoint or as your buyback strategy. Consistent with what I said, we expect to stay at the top of our four to four and a half times leverage ratio.

Thank you. Tom, thanks for a great decade at Charter.

Thank you.

Thanks, Peter. We'll take our next question please.

Thanks. And I'll just echo my congrats to Tom and to Chris. My first question here is a follow-up for Jessica. You mentioned the merits of continuing to buy back your stock at these levels. Your debt is also trading at significant discounts to par. I'm wondering if that could also be an accretive opportunity to buy back some of your debt out of the market? And then we've seen cord cutting pick up on a year-over-year basis at your business and most other operators' businesses. I'm curious if you could give us some insight as to what's driving it. Meaning, we know that there have been fewer and fewer gross connects over the last several years. I'm wondering if you're actually seeing an uplift in people cutting the cord, meaning they get rid of their pay TV, but remain with you as a customer for broadband?

On the debt repurchase question, I’ve also noticed that our debt is trading at a discount in the market. We do modeling consistently as to what we think the best option between the two is, particularly given our plans to stay at the top end of our leverage range. I won't comment on anything in particular that we plan to do. We do certainly notice it, and we will continue to do our modeling, and we’ll make the next decision based on what appears appropriate given where the market sits at that moment.

Cord cutting; the biggest driver here is the pricing of video. The fact that we're having to pass through programming rate increases, which continue even relative to inflation means that customers have difficulty affording it, even if it's something that they'd like to have. Yes, it predominantly drives downgrades of video.

But not disconnects.

And retaining the connectivity.

Yes. In many instances, we disconnect video customers who downgrade and simultaneously offer them a mobile package. They often end up saving money because they eliminate their video service or opt for a smaller video package. At the same time, this strategy tends to increase our average revenue per user since they are purchasing mobile services, which provide good value. Overall, it's a savings for them.

Thank you.

Thanks, Brett. Katie, we’ll take our last question please.

Thanks. Two questions. First, if I could revisit the ARPU discussion. As you're looking at that relationship between broadband ARPU and volume performance in the quarter, does this signify that there's just greater price sensitivity to grow the broadband base going forward? Secondly, if the US goes into recession, how should investors think about the sensitivity in terms of Charter's KPIs and financial performance? And as you're describing the customers trading down in video, is there a risk that, that accelerates or that customers step down their broadband tiers?

I'll try to answer that. I've been through a lot of recessions in my career, and I have a hard time remembering them because our business performed so well during them. The reason is that our products are really attractive even when consumers are under stress. Obviously, there's a certain amount of stress you can't overcome. Video, I think, will be challenged. But on the other hand, it's a very attractive product if you're unemployed. It's still, even at the higher price that it is, a good value relative to other forms of entertainment. In a recessionary environment when people become more price-sensitive, the value proposition that we offer with our everyday pricing is superior to what they can get elsewhere, which means that we become more attractive when people are more conscious of the price they're paying for other products. I'm not that worried about a recession from our company's perspective.

There might be some impacts that you would see in spaces like advertising enterprise. But the performance that we could get in mobile, particularly given our pricing there, would be good. Even if it had video downgrades on the other side, the margins in mobile are actually better than the margins in the video. You get some advantages of more customers moving into the mobile side of the business as well.

We're not hoping for a recession, but...

We'll be fine.

On broadband, it's a staple product that insulated during that. Unlike many, we have not been pushing speed upgrades for the purpose of just generating rate. It's really been about when a customer wants a higher speed or feels they need a higher speed. That's when it's been offered and at an attractive rate. The risk of the downgrade of the speed upgrades, I think, is mitigated with us because we haven't artificially driven that into the base.

Are you noticing an increased sensitivity to pricing in order to expand the broadband customer base moving forward?

I mean, I think we've said that the issue in broadband is activity. It hasn't been that there's additional price sensitivity. It's just that there's not a lot of movement in the market overall. I don't think that, that scenario is significantly different than what it's been before. We've always competed across our footprint, and we continue to do that today. The price sensitivity of that competition is not significantly different than it was in the past. Price has always been important and continues to be important. That's why having packages that provide value to consumers help us to grow subscribers, which has helped us over time to grow subscribers at a faster pace than our competitors.

If there were price issues with broadband, we would see broadband disconnects, and they are currently at historic lows.

Thanks Mike. Katie, back to you.