Charter Communications Inc (CHTR) — Q1 2023 Earnings Call Transcript

Good morning and welcome to Charter’s first quarter 2023 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. On today’s call, we have Chris Winfrey, our President and CEO; Tom Rutledge, our Executive Chairman; and Jessica Fischer, our CFO. With that, let’s turn the call over to Chris.

Thanks, Stefan. During the first quarter, we added 76,000 Internet customers with contributions from our Spectrum One offering and our rural construction initiative. We continue to operate in a low transaction environment and yet we added 686,000 Spectrum Mobile lines. At the end of the first quarter, we had 6 million total mobile lines. Just over 10% of our Internet customers now have mobile service and we expect mobile penetration to meaningfully grow over the next several years, and our increasing convergence capabilities will contribute to Internet growth. We grew revenue and EBITDA by 3.4% and 2.6% respectively during the first quarter and our capital expenditures reflect progress on our key initiatives. This is a very unique time for the cable industry with generational opportunities across our three key initiatives, each of which is designed to drive customer growth and long-term cash flow growth. The first initiative is evolution, which includes the most significant spectrum enhancement to the cable network since the late 1990s at a very low cost. Network evolution also includes the convergence of our connectivity products. Second is the largest expansion of our footprint since the 1980s, bringing broadband to unserved and underserved areas. And finally, execution, which is all about investing in and delivering great service. I will provide a brief update on these initiatives. Our network evolution plan is progressing well. We have now completed the physical work for high split in two midsized markets. We increased the network capacity to 1.2 gigahertz, which is equivalent to the acquisition of 400 megahertz of spectrum. We also allocated more spectrum for upstream use. In these markets, we are now capable of delivering 2 x 1 gigabit per second service and we are launching the same CMTS-based 1.2 gigahertz high split to an additional 6 markets. These DMAs represent about 15% of our footprint. In parallel, we are preparing the second step of our network evolution plan, which will cover about 50% of our footprint and which adds the deployment of distributed access architecture, allowing us to deliver 5 x 1 gigabit per second speeds. Step three of our network evolution plan covers about 35% of our footprint and should begin in late 2024. That step adds a further expansion of our network to 1.8 gigahertz. We expect our network evolution initiative will be essentially complete by the end of 2025 at the previously noted $100 per passing target, excluding the benefit of any network savings, which will come. Our converged product offering also continues to evolve. Spectrum One is performing well in the marketplace. It offers the fastest connectivity and includes differentiated features like Mobile Speed Boost and seamless access to the Spectrum Mobile network, each of which run on our advanced WiFi product. Today, over 40% of our residential Internet customers have our advanced WiFi product, which just last month, we also launched to the SMB marketplace. Over 70% of our mobile customers now use the Spectrum Mobile network outside of their homes. Spectrum One also offers significant savings for customers in both promotional and retail pricing. So, our opportunity in converged connectivity in mobile is very large. We particularly like our ability to leverage the lease economics of our 5G MVNO for the 10% to 15% of the time that our mobile customers don’t have access to our faster Spectrum Mobile network. We have a strategic partner in Verizon and we are a meaningful contributor to active lines on this network and its financials. When we look at the pricing and the usage of fixed wireless access disclosed by T-Mobile, it’s clear that the MVNO price we pay per gigabyte is dramatically better than the economics mobile operators achieve with fixed wireless access offerings. In the expansion category, our plans are on track. During the quarter, we activated 44,000 subsidized rural passings. Subsidized rural passings growth is accelerating with 20,000 subsidized rural passings activated in March. Costs are coming in as planned and we have the labor, the equipment, and the supply necessary to execute our build. If we get the pull permit support we need, we can complete our RDOF commitments 2 years ahead of the RDOF deadline. The pace of penetration gains in subsidized rural passings continues to exceed our expectations with 6-month penetrations at approximately 40%. We remain committed to the execution of our core operating strategy, prioritizing customer experience and customer satisfaction, ultimately driving faster customer growth. Our proactive maintenance efforts are fundamentally changing the customer experience by allowing us to address service impairments before customers even know they exist, preventing service-related disconnects. While investments in our employees generate upfront expenses, they ultimately deliver longer tenured employees, which produce higher quality transactions, fewer repeat transactions, lower average handle times, and better sales yields. We expect the mix of proactive truck rolls will significantly increase in the coming years. The increasing digitization of our service platforms through investments in machine learning and AI will further reduce transactions. The combination of longer employee tenure, network evolution benefits, the conversion of our video platform to IP, and digital service investments creates a long runway for us to continue to reduce service transactions, operating costs, and churn, thereby increasing customer satisfaction, customer lifetime value, and our returns. Our strategy is focused on delivering differentiated converged connectivity products that improve people’s lives and create value for shareholders. Now, I will turn the call over to Jessica.

Thanks, Chris. Before discussing our first quarter results, I want to remind everyone that starting this quarter, we have made some changes to the way we report our P&L. First, we now include mobile service revenue in the residential and SMB revenue as appropriate, and mobile equipment revenue is now reported in other revenue. On the expense side, we no longer report mobile expenses separately, and those are now included in the applicable expense category. Ultimately, these changes better reflect the converged and integrated nature of our mobile business and our operations. For additional information regarding these changes, please review Footnote A on Page 7 of the trending schedule we posted this morning. Now, let’s turn to our customer results on Slide 5. Including residential and SMB, we added 76,000 Internet customers in the first quarter. Video customers declined by 241,000 partly driven by a programming expense increase passed through in January of this year. Wireline voice declined by 220,000, and we added a record 686,000 mobile lines. Although our Internet customer growth continued to be positive in the first quarter, market activity levels remain low. During the quarter, total churn was slightly higher than last year, but still near record lows and well below pre-pandemic levels. We have seen a small impact from fixed wireless access competitors in the price-sensitive customer segment, but generally speaking, these customers typically exhibit higher levels of churn regardless of competition. Given the issues with fixed wireless product feeds, as confirmed by third parties and questions surrounding that product’s reliability and scalability, we expect fixed wireless customers to return to us over time. We continue to drive strong mobile growth with our high-quality, differentiated, and attractively priced service. The majority of new lines continue to come from existing Internet customers, though the percentage of lines coming from acquisition has increased significantly since the introduction of our Spectrum One product. As Chris mentioned, we continue to perform well in rural areas. The new rural disclosures we issued today on Page 5 of our trending schedule show that we see robust growth in rural passings. During the quarter, we activated 44,000 subsidized rural passings despite winter’s construction seasonality. Penetration of subsidized rural passings continues to exceed our original target, and these rural customers are purchasing products beyond Internet, including mobile, video, and wireline voice. Moving to financial results on Slide 6, residential customers declined slightly over the last year, with new customer growth driven by Internet offset by video-only customer churn. Residential revenue per customer relationship grew by 2.5% with promotional rate step-ups, rate adjustments, and accelerated growth of Spectrum Mobile partly offset by a higher mix of non-video customers and growth of lower priced video packages within our base. As Slide 6 shows, residential revenue grew by 2.5% year-over-year. Residential revenue now includes mobile service revenue, which grew from $387 million in the first quarter of 2022 to $497 million in the first quarter of 2023. Turning to commercial, SMB revenue grew by 2% year-over-year, reflecting SMB customer growth of 2.4%. Enterprise revenue was up by 3.1% year-over-year. Enterprise PSUs grew by 4.9% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 7.3%. First quarter advertising revenue declined by 7.2% year-over-year due to less political revenue. Other revenue grew by 34% year-over-year, primarily driven by higher mobile device sales and higher rural subsidies. In total, consolidated first quarter revenue was up 3.4% year-over-year. Looking ahead to second quarter revenue growth, I would remind you that we will lap April 22 rate adjustments and face the headwind of strong political advertising revenue in the prior year. Moving to operating expenses and EBITDA on Slide 7, total operating expenses grew by $316 million or 3.9% year-over-year. Programming costs declined by 6% year-over-year due to a decline in video customers of 5.2% year-over-year and a higher mix of lighter video packages partly offset by higher programming rates. Other cost of revenue increased by 19.9% primarily driven by higher mobile device sales and other mobile direct costs. Cost to service customers increased by 6.9% year-over-year due to adjustments to job structure, pay, and benefits to build a more skilled and longer tenured workforce, resulting in lower frontline employee attrition compared to 2022 and additional activity to support the accelerated growth of Spectrum Mobile. Our employee attrition declined more quickly than expected, allowing us to lower our normal hiring in the first half of this year and increase overall tenure and quality. Longer term, we expect additional efficiencies and cost to service customers over time as a result of continuing lower service transactions, service tenure, digital service investments, proactive maintenance, and network evolution investments. Adjusted EBITDA grew 2.6% year-over-year in the quarter. Turning to net income on Slide 8, we generated $1 billion of net income attributable to Charter shareholders in the first quarter, down from $1.2 billion last year with higher adjusted EBITDA more than offset by higher interest expense. Turning to Slide 9, capital expenditures totaled $2.5 billion in the first quarter, above last year’s first quarter spend of $1.9 billion. The increase was primarily driven by higher spend on line extensions, which totaled $890 million in the first quarter of 2023 compared to $541 million in the prior quarter driven by Charter’s subsidized rural construction initiative and continued network expansion across residential and commercial greenfield and market fill-in opportunities. We expect full year 2023 capital expenditures to be between $6.5 billion and $6.8 billion. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, CapEx, excluding line extensions, as a percentage of revenue should decline to below 2022 levels and continue to decline thereafter. We continue to expect 2024 and 2025 line extension CapEx to look similar to our outlook for 2023 at approximately $4 billion per year. We generated $664 million of consolidated free cash flow this quarter versus $1.8 billion in the first quarter of last year. The decline was primarily driven by higher CapEx, mostly driven by our network expansion and network evolution initiatives, as well as an unfavorable change in working capital. We finished the quarter with $97.8 billion in debt principal and our current run rate annualized cash interest is $5.1 billion. As of the end of the first quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47x, and we intend to stay at or just below the high end of our 4 to 4.5x target leverage range. During the quarter, we repurchased 2.6 million Charter shares totaling about $1 billion at an average price of $375 per share. Charter’s bandwidth-rich two-way network passes nearly 56 million homes and businesses with gigabit and converged services everywhere. Our significant investments in that network over a multiyear period allow us to upgrade it further in a cost-efficient and time-efficient manner to offer the fastest speeds and most advanced telecommunication services in the country. Given the scale and capabilities, we're rapidly expanding that network, both to unserved and underserved areas through our rural construction initiative and to other high ROI expansion opportunities. Those initiatives, combined with our service-oriented operating strategy and prudent capital allocation, are poised to drive long-term customer growth, higher free cash flow, and shareholder value. Operator, we’re now ready for Q&A.

Thanks so much. If I could do one for Chris, one for Jessica; Chris, on the go-to-market strategy for wireless, I’m just curious what percentage of the wireless lines being created by the 12-month promotion you’re hoping will convert to full pay after the promotional period expires. I think as part of that, we think about what’s the data usage, how is that tracking for the promotional wireless lines versus the non-promotional lines or how many of your gross adds are phone numbers being ported in versus creating new phone numbers. Just trying to understand the revenue opportunity from that promotion; I certainly get the retention benefits? And then Jessica, you’re not really sure what you’re willing to say, but when you think about your prior commentary about labor investments impacting both 1Q and 2Q, should we start to think about a little bit more margin expansion in the back half of the year? Or any comments you’re willing to make on swing factors for margins the remainder of the year would be helpful. Thank you.

So Doug, I’ll start with the go-to-market on Spectrum One. We have two offers out there today. One is for the acquisition of Freeline together with Internet, and essentially, the other one is if you purchase the line, you get the second one for free for an existing customer. Those customers are great customers that have good usage, and they are getting the fastest product in the country from a connectivity standpoint. When the promotional period rolls off, they are going to have not only the fastest connectivity product, but they are going to have the best price in the marketplace as well at $29.99, which includes taxes and fees without contracts. Our expectation is these are great customers. They are normal lines and they won't be able to replicate the service or pricing that they are getting from us anywhere else in the marketplace. Our expectation is that it all sticks.

Yes. I mean, Doug, we understand that there is some false market chatter. We should be clear on some other things. The majority of our gross adds are coming from paying lines. Less than 5% of our lines today are tablets, those have the same rate plans as phones. We don’t include wearables in our numbers either, so the lines that we’re putting up are good lines.

One other point to add to that is that this is not a moment in time. Our intent here is to grow and continue the path we are on. This is just the beginning, and we’re excited about what we’re doing, not just from a mobile perspective, but from an overall connectivity standpoint and the value that we can bring to customers both in qualitative product and saving them a lot of money.

Yes. To your question on margin and what happens in the second half of the year, the increases we see in sales and marketing expense and cost to serve right now are driven by strong mobile sales. If you think about what happens to them for the rest of the year, in sales and marketing, Q2 should see lower sequential expenses compared to Q1, which could relieve year-over-year comp in Q2. But the year-over-year growth rate of sales and marketing expense should moderate over the second half of the year. Similarly, I expect year-over-year growth in cost to serve to moderate in the second half of 2023. We continue to expect the business to operate more efficiently and generate growth from it.

I'd just add two quick things to that, Doug. On the cost side, all the OpEx and CapEx investments we’ve talked about are setting us up for a prolonged multiyear period of reducing costs for customer relationships, which will benefit our cash flow for years to come. Additionally, at the end of this year, we have a wall of good customers receiving a promotional rate today that are going to roll to a retail rate at $29.99. This not only begins to lap the prior year investments but also brings excellent revenue potential.

Yes. Thank you both. And thanks for the rural disclosures as well.

Thanks, Doug. Katy, we will take our next question, please.

Thanks, good morning. I guess for either of you, just wanted to hear more about the process of accelerating those rural build-outs. Is this a matter of better weather allowing for greater and faster construction? Just what are the puts and takes of getting that number even higher as we move through the rest of spring and summer? Also, does the 6-month clock that you talk about start when homes are activated? Just want to clarify the definitions around activated and marketed.

Thanks, Ben. The point you made about seasonality with winter is right. I mentioned in March that it was much higher in terms of activity. The full-year target is 300,000 subsidized rural builds, and we intend to meet that. From an internal planning perspective, we’re on track. A lot of our build takes place in states like Ohio, Michigan, and Wisconsin. January and February present challenges. The clock for the 6-month target starts when the plant is constructed and marketed.

The way it’s being reported in the new trending schedule details starts when homes are activated.

Got it. Okay.

Regarding promotional lines, these are not coming from anywhere; they are just being created. Our expectation is that as those roll to pay, they will continue to exist as lines. We’re seeing good quality adds. We’ve had a great quarter; these are quality additions, and we said they will stick because it’s the fastest service in the market and saves customers money.

Thank you, Chris.

Thanks, Ben. Katy, we will take our next question, please.

Great. Thanks. And again, thanks for the rural disclosure. If you could talk about what you’re seeing incrementally from a competitive standpoint, particularly with fixed wireless competitors expanding capacity. Does that become more of an issue as they rollout? Also, you talked about the deployment of high split infrastructure. Would you expect to see better trends in those markets as you sort of turn on that service and improve upstream capacity?

In the trending schedule, you’ll see the subsidized rural customers added inside the quarter were 17,000, meaning the bulk of our net adds came from our existing footprint. We’re competing very well across the entire market, including areas where we have existing fiber overbuild and where there is new overbuild. We saw a bit of softness in gross adds, but mostly in non-gigabit areas where fixed wireless access presents an alternative until customers find out the throughput and capabilities aren’t the same as the broadband that we provide. The passings that we’re building that are subsidized rural will significantly contribute to our growth over time. With high split infrastructure, we are enhancing the spectrum availability of our network, which not only improves contention on the upstream but also improves both downstream and upstream capabilities, giving us competitive marketing claims.

Got it. If I could just follow-up, is the goal still to have higher adds this year than versus last year?

It is our goal to have higher net additions in Internet this year compared to last year.

Thanks, John. Katy, we will take our next question, please.

Hi, guys. Thank you. Chris, I have to tell you it’s a lot more fun from our side when companies do someone else’s IR. So, don’t be shy.

We won’t step into that rut.

Alright. First to follow-up, anything you can add about broadband activity through the quarter? And any thoughts on typical 2Q seasonality? And then in video, I understand a lot of video decline has been fewer broadband adds to connect to. Are you also seeing an acceleration in disconnects?

Yes. So, Phil, talking about going into Q2, typically, Q2 is a seasonally more difficult quarter. However, we have seen trends improving coming into March from where we were in February, which was better than January. Currently, trends look better than previously. We expect this will carry into the quarter.

On video, there is a correlation when we’ve taken rate increases, which has led to a downgrade element corresponding with programming pass-throughs. The length of the conversation with customers is now often focused on Internet and mobile. I think there are things we can enhance to improve our attach rate to video moving forward.

Will Xumo be reported as a regular video sub or with a different category?

While we haven’t finalized the reporting definitions yet, customers taking a video service from Charter will be reported as a video PSU, while those merely utilizing Xumo for connectivity will likely be categorized separately as Xumo units.

As we get closer to the rollout, we will provide additional information on where we think that will land.

Thanks again.

Thank you, Phil.

Thanks, Phil. Katy, we will take our next question, please.

Good morning. Thank you. Could you discuss the evolution of device promotions as part of your mobile strategy and whether we should be modeling cash usage for device promotions in the future?

We don't see a need for aggressive subsidies regarding devices. We provide significant value with our current offerings and pricing structure. Our primary focus is on providing the fastest connectivity service and saving customers money.

Thanks, Peter. Katy, we will take our next question.

Thanks, guys. The early work suggests the returns in those markets could be phenomenal. Can you size the opportunity? You’ve got roughly 20% of the RDOF opportunity? Could it be something of that magnitude of the BEAD opportunity? Also, I’m wondering if you have any context for the overall industry slowdown in broadband adds this quarter. Is it just a pull forward of growth from the COVID period?

The RDOF returns we have are extremely attractive. We are pleased with both RDOF and other state grants. We've had significant success where we’ve won awards for the quality of our builds. For BEAD, it’s too early to predict, but we're bullish about our potential. The entire broadband market has pulled back due to the COVID pull forward and low transaction environments. We're adapting our approach to better compete.

What I want to highlight is that we are disciplined in our bidding for these offerings. We're comfortable with our ability to price passings appropriately and execute on the back end to generate the returns set out for.

We have visibility into our costs and expect to apply experiences from RDOF to bid effectively. The industry slowdown in broadband adds is likely temporary; our strategy positions us competitively as the market normalizes.

Thanks, Jonathan. Katy, we will take our next question.

Hi, thank you. I wonder if you could talk about wireless margins. Customer acquisition costs seem high relative to subscriber growth. What can you share about underlying wireless margins or customer lifetime values of wireless subscribers? How might traffic offload affect margins going forward?

Back in December, we provided details on where we stand regarding margins in the wireless business. We showed that we can make good margins when run standalone. However, our goal is to generate the most overall cash flow, which means pricing competitively, acquiring customers across services, and reducing churn.

We’ve deployed the Spectrum Mobile network to all capable devices. The advanced WiFi service is now in 40% of our residential customers. This deployment will enable significant traffic offload, which will enhance profitability and cash flow as we continue growing customer numbers and reducing costs.

Thank you.

Thanks, Craig. Katy, we will take our next question, please.

Thank you. Two questions. One on mobile pricing longer term, do you think this is similar to broadband? And then second on Xumo, can you remind us what the timing of the rollout is? Also, can you compare its advertising potential to linear? How should we think about inventory load and CPMs?

To clarify, Xumo will be fully deployed by the end of this year. The advertising business through Xumo will come from both live video and its connected TV CPMs, where we dominate. We will monetize through higher CPMs that will amplify our existing advertising revenue streams.

On mobile pricing, our focus right now is on taking market share, which requires competitive pricing. We’re not positioning for a long-term pricing game. We want to provide the fastest and best value in mobile, generating cash flow for the business.

To round off your point, we view mobile as potentially an attribute of connectivity services rather than a distinct product, allowing us to create a seamless offering that benefits the customer. We aim to innovate not just in service but also in bundling and pricing as we evolve.

Thank you.

Thanks, Jessica. Operator, we will take our last question, please.

Thanks, and good morning. Two topics. I was curious if you could share more details on activity you’re seeing in the business segment, any changes in behavior of customers and any specific impact from the macro backdrop. Then on the ACP, just curious how many ACP subscribers Charter currently has and how this program is contributing to broadband performance?

In the business segment, there’s a separation between SMB and enterprise performance. SMB is a bit soft right now, linked to some lower-quality competitors. Enterprise is doing well, particularly for retail, with favorable trends in fiber Internet access and managed services. Regarding ACP, we won’t disclose specific numbers but remain highly engaged with the program and expect it to positively impact our customer base.

Thanks.

Thanks, Michael. Back to you, Katy.

Thanks everyone and we will see you next quarter.

Thank you.

Thanks.