Charter Communications Inc (CHTR) — Q2 2023 Earnings Call Transcript

Good morning, and welcome to Charter's second 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 expectation, 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 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 second quarter, we added 77,000 Internet customers, and we continue to benefit from our Spectrum One offering and our network expansion initiatives. We also added 648,000 Spectrum mobile lines. At the end of the second quarter, we had over 6.6 million total mobile lines. Over 11% of our Internet customers now have mobile service, and we expect mobile penetration to meaningfully grow over the next several years. Spectrum Mobile is the nation's fastest mobile service. We see mobile lines as an extension of our WiFi and seamless connectivity service, and we expect our increasing convergence capabilities will contribute to further Internet growth. We're pleased with the progress of our growth initiatives and our performance in the second quarter, and we maintained EBITDA despite the significant employee investments we made through 2022, which will start generating growth benefits later this year. We remain focused on our three key strategic initiatives: evolution, expansion, and execution, each of which is designed to help us grow our business and each of which remains very much on plan. Our network evolution plan is progressing well and offers us significant benefits. First, it will allow us to maintain our fastest Internet and WiFi service claims in front of our customers and competitors everywhere we operate, with symmetrical and multi-gig speeds via DOCSIS 4.0 and the ability to provide 25, 50, or even 100 gigabit per second speeds with fiber on demand. This evolution path also creates fallow upstream and downstream capacity for years, driving lower node spot capital. By upgrading the actives and amplifiers and nodes and converting analog optics to digital, we lower our future operating and maintenance expenses all at a very low cost, much of which was funded from capital and operating cost savings over time. Unlike telco companies who prioritize more attractive footprints for their upgrades, our deployment is across our entire footprint. The cable industry is nearly ubiquitous deployment of a tremendous amount of spectrum to each home, which will provide the scaled platform for software and product developers to create new bandwidth-intensive, low latency, high compute services. This uniform deployment of network capabilities is what cable has always done to lead the development of new technologies into our networks at scale. And that unique approach is what has and will maintain our competitiveness into the future. So our network evolution is good for the communities we serve, and it's good for Charter. So far, the execution of this large physical upgrade has gone well, and capital costs are coming in on target. Excluding the benefit of any network savings, we continue to expect to spend $100 per passing. 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 Spectrum Mobile network, each of which runs on our advanced WiFi product. Today, over 45% of our Internet customers have our advanced WiFi product, and over 75% of our mobile customers now attach to the Spectrum Mobile network outside of their homes, providing higher speeds with more reliability to customers with lower cost to Charter. Spectrum One also offers significant savings for customers with market-leading pricing at both promotion and retail. We're excited for the upcoming release of the Xumo product, which I believe will be an industry-leading platform for customers to access all of their linear and direct-to-consumer video content with unified search and discovery. Together with our Spectrum TV app, the most viewed linear MVPD streaming service in the US, Xumo will be our go-to-market platform for new video sales. We're currently conducting field trials on the product, and we remain on track for deployment later this year. Our expansion initiative with subsidized rural construction is also on plan. Penetration gains in subsidized rural passings continue to grow at a better pace than planned. Charter is the largest and fastest-growing rural provider in the nation. Our scale and reputation as a rural builder positions us well for winning additional state and local funds, and we hope for significant BEAD infrastructure funding. Although the rules and recommendations from NTIA on BEAD funding differ from successful programs currently deployed by the states in which we operate, we'll work with key stakeholders and government officials to reach a place where the rules remain conducive to private investment. Finally, we remain committed to the execution of our core operating strategy, which prioritizes customer experience and satisfaction, driving faster customer growth. We continue to see the benefits of our investments in training and tenure, including better employee retention, higher quality service transactions, and better sales yields. Additionally, the increasing digitization of our customer service platforms will further reduce transactions. There's been a lot of discussion about what artificial intelligence and machine learning can do to improve products and business models. Charter already uses advanced analytics and machine learning in various stages and forms across sales, service, and network operations. We expect to continue our investments in AI, machine learning, and digital service in ways that meet customers where and how they want to receive service and continually enhance tools for our sales and service employees to simplify their jobs. Ultimately, AI will improve both customer and employee satisfaction and enhance our operating efficiency by driving fewer physical service transactions, lower costs, and lower churn for years to come. Our operating strategy is focused on running our business for long-term value creation for our shareholders, which includes two of the cable industry's most successful investors. Simply put, our operating strategy is founded on having great products, pricing, and packaging that creates value for customers and is very difficult for competitors to replicate so that we get more products into each household and drive more penetration across the network, which lowers our cost to serve. Then combine that with investments in high-quality service, which increases our competitiveness to acquire more customers. We have a great team here at Charter, and we're committed to disciplined execution and investment in this operating strategy, which we believe is good for customers, employees, and the communities we serve and will drive significant long-term value creation for shareholders. With that, I'll turn the call over to Jessica.

Thanks, Chris. Let's turn to our customer results on slide 6. Including residential and SMB, we added 77,000 Internet customers in the second quarter, versus 38,000 in the prior year period when excluding last year's Internet disconnects related to the transition from EBB to ACP. Video customers in the second quarter declined by 200,000 and wireline voice declined by 221,000, and we added 648,000 mobile lines. Internet churn remained near record lows for the second quarter and flat year-over-year, while Internet gross additions improved year-over-year. The year-over-year improvement in Internet net additions was driven by tailwinds from our rural construction initiative, the continued success of our Spectrum One product, better sales yields from higher tenured employees, and a slower pace of fiber overbuild in our footprint during the quarter. Despite the year-over-year improvement in net adds, overall market activity remains well below pre-COVID levels, partly driven by very low move rates. We also continue to see some impact from fixed wireless access competitors in the price-sensitive customer segment of residential and SMB. As Chris mentioned, our Spectrum Mobile product continued to perform well in the quarter. The majority of new lines continue to come from existing Internet customers, though the percentage of lines coming from new customers continued to increase and was higher than what we saw in the first quarter. Important to note, the proportion of our gross additions from other carriers is essentially the same today as it was prior to the launch of Spectrum One despite much higher mobile sales. With good usage on those promotional lines and unbeatable quality and value at a $30 retail price point, we expect these lines to perform well as long-term customers. Turning to rural, subsidized rural passings growth accelerated in the quarter with 68,000 passing activated, and we continue to expect approximately 300,000 new subsidized rural passings this year. Additionally, costs are coming in as planned, and we have the labor, equipment, and supply necessary to execute our builds. We continue to bid on additional subsidies. In addition to RDOF, we've now won over $700 million in state subsidies for over 300,000 passings with a gross build cost of approximately $1.7 billion and a per passing cost to Charter, net of subsidies, of approximately $3,200. As Chris mentioned, we also look forward to the bidding process, assuming the right regulatory conditions. Moving to financial results, starting on slide 7. Over the last year, residential customers grew by 0.2%, with new customer growth driven by Internet, partly offset by video-only customer churn. Residential revenue per customer relationship declined by 0.3% year-over-year given a higher mix of non-video customers and growth of lower-priced video packages within our base, partly offset by promotional rate step-ups, rate adjustments, and the accelerated growth of Spectrum Mobile. As Slide 7 shows, residential revenue declined by 0.3% year-over-year. Turning to commercial, SMB revenue grew by 0.2% year-over-year, reflecting SMB customer growth of 1.7%, partly offset by lower monthly SMB revenue per customer, primarily due to a higher mix of lower-priced video packages and a lower number of voice lines per SMB customer. Enterprise revenue was up by 3.2% year-over-year. Enterprise PSUs grew by 6.2% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 7.2%. Second quarter advertising revenue declined by 16.5% year-over-year due to less political revenue. Core advertising revenue was down 3.5% year-over-year due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew 28.5% year-over-year, driven by higher mobile device sales. In total, consolidated second quarter revenue was up 0.5% year-over-year and up 1.1% year-over-year when excluding advertising. Moving to operating expense and adjusted EBITDA on Slide 8. In the second quarter, total operating expenses grew by $48 million, or 0.6% year-over-year. Programming costs declined by 7.8% year-over-year due to a decline in video customers of 5.1% year-over-year, a higher mix of lighter video packages, partly offset by higher programming rates in the second half of 2022. In the second half of 2023, we now expect year-over-year growth in programming cost per video customer to be similar to the growth we saw in the first half of 2023. Other costs of revenue increased by 15.4%, primarily driven by higher mobile device sales, other mobile direct costs, and higher RSN costs driven by more Lakers games, partly offset by lower ad sales costs. Costs to service customers increased by 3.6% year-over-year, driven by 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, which is partly offset by productivity improvements, lower service transactions per customer, and lower bad debt. As we mentioned last quarter, our employee attrition has declined more quickly than we expected, given the programs we discussed at our December investor meeting. In response, we lowered our normal hiring in the first half of this year, and our overall headcount is now normalizing with increasing overall tenure and quality. Longer term, we continue to expect to see additional efficiencies in cost to service customers as a result of our continuing lower service transactions, service tenure and digital service investments, proactive maintenance, and network evolution investments. Sales and marketing costs grew by 3.6%, primarily driven by higher staffing across sales channels and the accelerated growth of Spectrum Mobile. Other expenses declined by 0.4%, driven by favorability in insurance expense, mostly offset by higher labor costs. Adjusted EBITDA grew by 0.2% year-over-year in the quarter. Turning to net income on Slide 9. We generated $1.2 billion of net income attributable to Charter shareholders in the second quarter, down from $1.5 billion last year, with higher adjusted EBITDA more than offset by additional interest expense. Turning to Slide 10. Capital expenditures totaled $2.8 billion in the second quarter, above last year's second quarter spend of $2.2 billion. The increase was primarily driven by higher spend on line extensions, which totaled $1.1 billion in the second quarter of 2023 compared to $693 million in the second quarter of 2022. The increase in line extension was driven by Charter's subsidized rural construction initiative and continued network expansion across residential and commercial greenfield and market selling opportunity. Second quarter capital expenditures, excluding line extensions, totaled $1.8 billion compared to $1.5 billion in the second quarter of 2022. We spent more on upgrade rebuild primarily due to our network evolution initiative, and support capital was higher primarily due to investments in information technology systems. For the full year, we continue to expect capital expenditures, excluding line extensions, 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, capital expenditures, excluding line extensions, as a percentage of revenue, should decline to below 2022 levels and continue to decline thereafter. We expect 2023 line extension capital expenditures to reach approximately $4 billion. We continue to expect 2024 and 2025 line extension CapEx to look similar to our outlook for 2023 at approximately $4 billion per year. Our 2024 and 2025 line extension capital expenditure expectations assume we win funding for or otherwise commit to additional rural spending, including BEAD. As Slide 11 shows, we generated $668 million of consolidated free cash flow this quarter versus $1.7 billion in the second quarter of last year. The decline was driven by higher CapEx, mostly from our network expansion and network evolution initiatives, along with higher cash taxes as we became a full federal cash taxpayer in 2023. We finished the quarter with $97.8 billion in debt principal. Our current run rate annualized cash interest is $5.1 billion. As of the end of the second quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47 times. We intend to stay at or just below the high end of our 4 times to 4.5 times target leverage range. During the quarter, we repurchased 1.1 million Charter shares in Charter Holdings common units, totaling about $400 million at an average price of $341 per share. While our goal is to grow the business in the long term, our focus on execution is driving operating leverage in the business even now. When you take out the noise from political ads, EBITDA grew by 1.3% year-over-year in the quarter, which means that we were more efficient despite significant mobile growth and a one-time step-up in labor investments. We believe our financials will improve as we move later into the year with additional revenue growth in Internet and mobile that will begin showing in Q4 and lower service costs per customer as we realize the 10-year benefits of our investment in employees and last year's labor step-up. Longer-term, we also expect to see continuing benefits in operating expenses from further digitization, network improvements, and benefits of programs like proactive maintenance. We're well poised for the future. Operator, we're now ready for Q&A.

Thanks. Good morning. I guess two questions. Maybe first, I think you guys will start to lap Spectrum One later this year, and it will probably be one of the first indications for all of us externally to sort of see the promotional roll-off activity and sort of the impact on churn, if any. I don't know if you could just maybe talk about what we should be expecting or how you guys are approaching that or what your expectations are as you go through that sort of first wave of promotional roll-off. And then, I know we don't typically talk about video on these calls, but you guys have a lot going on there. And I was just wondering if you could spend a minute talking about sort of your strategy with Xumo and also the new sort of RSN changes you've made? And just anything we should be thinking about in terms of the implications of this strategy on your financials, whether there's set-top box revenues we should be thinking about or capital intensity coming down, et cetera. Obviously, these are kind of big changes to a part of the business that we don't tend to spend a lot of time on. So I wanted to get your thoughts there. Thank you very much.

Sure. Hi Ben, there's actually a lot in there. So on Spectrum One, we started - we launched Spectrum One at the beginning of October last year. And so you'll have the beginning anniversary dates start occurring then. The usage on these is high. If you think through the comments in Jessica's prepared remarks, these are really good customers. And when you put the Internet, WiFi, and mobile together, you can't get that product, you can't get that quality, and you can't get that pricing anywhere else inside the marketplace. Even if you just take a look at it as mobile stand-alone, at $30, at retail pricing, that's unmatchable. To have that with the fastest mobile product in the marketplace, I don't see any reason to think that we're going to have difficulty managing through those roll-offs. That doesn't mean that you'll have to evaluate and make sure that you're poised to handle and address customer questions, but I think it sticks. We'll also have quietly in the marketplace this time last year, beginning in late July and through August. We did do some testing. We'll have the opportunity as we go through the course of this quarter to perfect any reactions that we have from customers in small scale along the way. I think we're well set up to do that. We could have a small amount of churn potentially, but I don't think it's going to be material given the quality and the value that we're providing. I think we've found something that sticks. I don't know that Spectrum One will be permanently our end-state convergence and seamless connectivity, branding, and platform. It's working well today, but we're going to continue to try things in the marketplace because I think we have a technology and a structure and capability that none of our competitors can really replicate in the marketplace. I think that product and seamless connectivity will stick, and I think the value is very tied to customers. On video strategy, there hasn't been a fundamental change in our video strategy. We're losing the least amount of video customers of any of our peers or competitors. The reason that we've been able to do that is for two reasons. One is that we have flexibility, and we've tried to use that wisely in a way that is valuable to consumers to create products, pricing, and packaging that will stick. Secondly, I think we have a high-quality video product as you think about our capabilities. If you want live TV, if you want DVR video on demand, if you want expanded basic, which is the majority of what we sell, or smaller packages, if you want that inside the home, outside the home across multiple devices, Cloud DVR, no set-top box, Roku, Apple TV, or on your iPad, all of those things exist. Not many providers can provide that breadth of content and that level of functionality across the marketplace. The product is good and is designed for the vast majority of people in the marketplace. The issue has been price. The fact that programmers have required us to take and provide content that customers may not necessarily watch or value, and at the same time, increase the pricing. As we've talked about in the past, programmers have priced out a large number of customers through that strategy. They’ve gone around and sold that same content at a lower price in a less secure environment. This has created a structural problem for the business. We’ve always thought that if we had the ability to create packages and we had better security in the marketplace of the content that these programmers have, we could sell more video, and that would be good, obviously, for customers, for programmers ultimately, and for us. This will take substantial leadership in the programming space to create that environment. What we found in the RSNs is that prior to Diamond entering into a restructuring environment, we had already created the capacity to have significant flexibility with our packages. We’ve achieved that across the RSN space for the vast majority of the country, and we're rolling out versions of our select expanded basic with and without RSNs. We’ll be doing that soon, which enables us to have lower cost video packages for those who are not interested in RSNs because we have that flexibility. I think that as a result, we’ll sell more video. If you think about the deal we just did or announced regarding the Dodgers and Lakers, we took our own medicine. We increased flexibility to an affiliate dramatically. We announced that we would eventually launch a direct-to-consumer app, not just in the marketplace, but it will be available to all affiliates, including DIRECTV and including our own customers. We think that's a model that, having flexibility and access to DTC for the affiliates, could have legs going forward and create packages valuable to consumers, which will allow us to sell more video. Xumo is really an extension of what we've been doing already. Two-thirds of our video sales today are without a set-top box, meaning they're going on Roku, Apple TV, Samsung TV, or other platforms. The concept around Xumo was to, through a joint venture with Comcast, have an ownership in an independent entity, which provides better functionality and exists for customers today where they can integrate all of their DTC, SVOD, and linear services in a single place with unified search and discovery with a voice remote. This will be our platform of choice to deliver our video subscriptions going forward. Ultimately, I expect us to provide that to some broadband customers over time as well. That will be good for Xumo as an independent platform, and I think it provides functionality to our connectivity customers, and we can provide the level of video services to our customers through our connectivity packages. So the financial implications of that will be an attractively priced box for customers as well as for us. I don't expect any material change to our capital expenditure outlook as a result of that. We've already been on a path where equipment revenue we've historically had from set-top boxes has been on decline. This kind of continues that path, so I think the financial implications are not that material.

Yes. That being said, I mean, the margin from the video product has been sort of - has shrunk over time. Our position has been that we're not willing to lose money in video. We believe the product is valuable for our customers. We're continuing to seek out ways to provide those products in the way that people want, but to do it while still generating some financial return, whether that's in the form of set-top box revenue or in the way that we package the product overall. Ultimately, we're continuing to try to defend having margin in that business.

Look, the video platform adds value to our connectivity services on a stand-alone basis. We're at or near the point of indifference. But we're committed to trying to find a path forward for video because we think it's a good product. We think it adds value to customers. If we can have the flexibility to package and price it the right way, we think it's good for customers and it's good for us. Ultimately, it's much better for programmers over time as opposed to having cord-cutting continue to accelerate at the pace it's going.

Thank you.

Thanks. Operator, we will take our next question, please.

Thanks, guys. A couple of questions. Nice margin in the quarter. Jessica, you mentioned headcount. Can you remind us of the expected trend in costs in the second half of the year and into 2024? How will those be impacted by rural initiatives and that headcount sort of normalizing? Then can you talk about the cadence of CapEx for the balance of the year and into 2024, encompassing that line extensions and regular way business? Thank you.

Yes. First, on the expense side, I gave some outlook in the first quarter investor call during the Q&A regarding cost-to-service expense and sales and marketing expense growth, and that really - that outlook hasn't changed. I think we'll have a difficult comp in other expense in Q3 because there were lower corporate costs in the third quarter. Aside from that, I think what we have said already continues to be true about the trajectory on the expense side. Regarding capital expenditures and timing across the year, our rural construction initiative now is spending at a more consistent pace than the history of the business. You saw it was somewhat more CapEx loaded into the front half of this year relative to our outlook for the entire year than what you would often see in a year. I would expect due to that rural build continuing at a steady pace over time, you will see that greater level of consistency in CapEx across the quarters, with maybe less back-end loading into Q4 than you've seen us do in the past. I would expect that as we continue into next year.

Thanks, Jessica.

Thanks, Phil. Shall we? We’ll take our next question, please.

Thanks. Two questions for you. First, could you comment on the recent price increase? I think it's a $5 increase on high-speed data. First, is that across the whole base? Maybe if you could compare it to prior price increases? And do you think it's enough to get the revenue per customer back into the black? That’s sort of number one. Secondly, you guys over-indexed to the ACP program. Is there any way you could size that for us in terms of how large it is within the base and talk about the strategy a little bit? As we sort of go through that process, does that potentially become a headwind for you all in terms of broadband growth? Thanks.

So the price adjustment in August is a $5 retail Internet increase for flagship and above customers, but it's coupled with a new auto pay discount of $5, so customers who are currently on auto pay or who opt into auto pay won't see a change in their overall price for Internet. There's a lot going on in ARPU. As we move into Q3, we'll fully lap the April 2022 rate adjustment, which included a pass-through of video programming expenses. You'll have that August price adjustment, and similar to recent trends, when you talk about the reduction in ARPU on a per-customer basis, it's really the headwind from the lighter mix of non-video customers and lower-priced video tiers driving that, and that obviously continues going forward. If you move into Q4, you'll start to see the Spectrum One promotional roll-off, along with the continuance of the other factors I talked about. That will be partially offset by lapping the November 2022 Internet-only rate adjustment. I think that we've had fair consistent growth in ARPU. If you look at the Internet ARPU growth, ultimately, our strategy is never to grow the business just based on price. We aim to have competitive prices and good penetration because of that in our footprint. But that doesn't mean that we're immune to the inflation impact, and where it's appropriate, we don’t take adjustments in the market, which is what we've tried to do, but in a prudent way consistent with our overall strategy.

John, I think Jessica said it, but the $5 would not apply to anybody who's already on promotion, it will only be a retail increase and will only apply to new retail customers. To the extent that somebody is or comes on auto pay, that won't pass through. So it's not that material in the end. On ACP, our strategy is to respond to the governmental request from the White House, FCC, and Congress to use this program. I believe we have been the most successful in providing a way for new customers to get into broadband or have a local income space, as well as for existing customers to stay in the broadband space through times of affordability issues, meaning preventing them from coming in and out of the market through non-pay churn. We’ve been very successful at the government’s request, and it's worked well for those customers. I think there are questions regarding the renewal of the program. It has bipartisan support, and so we’re hopeful that it will be renewed. I think it's been a very good and successful program. It's brought in some new customers, particularly early on through EBB and ACP, and we've been able to also serve existing customers benefiting from staying in broadband through that program. If it went away, many of these customers were existing broadband customers and we have programs like Spectrum Internet Assist and low-income programs that we can accommodate in dealing with that at the back end. I hope that’s not the case and it gets renewed because I do think it's a successful program.

Thank you.

Thanks, John. We'll take our next question, shall we please.

Great, thanks, guys. I wonder if you can just stick with the ARPU theme for a second. It looks like ARPU in 2Q was a little bit lower than we expected; maybe you didn't get as much of a benefit from the November price increase as we thought you would - or again, as Jessica said, there's a lot going on in ARPU. Maybe it's a function of how the bundled discount for Spectrum One is allocated across the different products. If you can give us some insight into drivers of ARPU in 2Q, that would be really helpful. I think you mentioned during the call in your prepared remarks the benefit you're seeing in broadband from Spectrum. I just missed the comment. If you can give us more context on the pull-through effect you're seeing and how you think that progresses the longer that Spectrum One is in the market, that would be really helpful as well. Thank you.

Jonathan, on the ARPU point, we did continue, in the year-over-year, have the offsetting impact of having lapped last year's rate adjustments and with what you talked about, which is that you had the price adjustments made earlier in the year, offset by some gap allocation of the discount related to the Spectrum One offer. I think you have all the components right. That sums up what's happening in ARPU this quarter.

I think there's also a fallacy in trying to oversimplify it, too. There's a tremendous amount of activity that's taken place in the course of the year and the course of the quarter with acquisition, retention, bundle allocations, rate increases in the past, and more current rate increases. It's a very complicated model that goes into ARPU reporting. In the end, it was 2.5% ARPU growth in Internet year-over-year despite some of the allocation differences. Given that we're growing and taking share in all parts of our footprint, we're really pleased with that mix and that outcome. If we can accelerate the growth, particularly as we get through later this year, I think we'd be very happy with that. Regarding your second question, Jonathan, was Spectrum One and pull-through. The point that was being made is that a higher portion of our Mobile is coming from new customer connects through Spectrum One, and that is very promising. Still, the majority of our Mobile increments are coming through existing customers, but the portion of lines coming from new connects is increasing, which means that it's having an effect in the marketplace. The real key for us is to be able to educate customers about what seamless connectivity is and what gigabit wireless can provide. It's in essence a new category, and that takes time to resonate, which is why I said, in Spectrum One, our first iteration of convergence and seamless connectivity is going well. I think that bodes well for Internet, Mobile, and for Convergence for us over time.

And Chris, do you expect that percentage to continue to increase? Is this sort of building momentum in terms of the benefit it has for broadband subs?

Yes. But I also expect the Mobile attach rate to our existing Internet customers to increase too, because it's resonating not just for new customers, but for existing customers. You have benefits all around.

Great. Thanks, guys.

Thanks, Jonathan. Operator, we'll take our next question, please.

Yes, two questions. Thanks. One of the topics that have been discussed a lot so far this earnings season is that seasonality in the broadband business appears to be much more muted than we've seen previously. I'm curious for your take on it and how you're thinking about the significance of seasonal dynamics as you look into the remainder of the year. Just noted that cash taxes were up a lot year-on-year, as you've transitioned to being a full cash taxpayer. I was hoping you could give us some insight into how to think about the way cash taxes are likely to trend over the course of any given year. I think historically, 2Q tends to be a high watermark, but I'm not sure if there are nuances in terms of what we should be expecting for Charter. Thank you.

On the seasonality side, market activity, including move activity continues to be quite low. Because of that, it's really difficult to predict what we might see in terms of seasonality going forward. We think the drivers inside of Q2 or some other factors include tailwinds from our overall construction initiative, the continued success of Spectrum One, the performance of the sales force, and higher sales yields. The slower pace of fiber overbuild that we saw helps. I think you should view those factors as less tied to the seasonal patterns you’ve seen in past years when interpreting our Q2 results. Your second question was about cash taxes. Thank you. On cash taxes, there are two payments inside of Q2, making it the natural high watermark for cash tax payments. I think you should anticipate that our total cash taxes are consistent with the guidance we've previously given, and that those payments are spread between Q3 and Q4. You don't have that same phenomenon of the two cash tax payments in any other quarter.

Thank you.

Thanks, Brett. Operator, we'll take our next question please.

Hi. Thank you. I'm sure you guys have heard T-Mobile's discussion about your wireless net adds that they tend to be more non-port than would be the industry norm. I wonder if you could just talk about the kind of customers you're acquiring - whether they're coming from prepaid predominantly, whether a lot of them are new to wireless, meaning kind of younger kids, anything that you can share that could give some insight into where your subscribers are coming from. Then, obviously, always my favorite topic, anything that you can discuss particularly now that you're not reporting wireless profitability anymore. Anything you can discuss about margins and the trajectory towards profitability from that business?

Sure. I'd start by saying that any time you have your competitors continue to talk about you on their earnings call, I take that as a compliment. The second thing I would say is clearly, some of their data is not very accurate. The third thing I would say is that in Jessica's prepared remarks, she mentioned that the level of port activity is at or better than it was even prior to the Spectrum One launch. We feel good that these are high-quality customers, the majority of which are broadband customers today. The product is very attractive, it's selling in well, and it's going to stay with us. On the mobile margin, you had done some work at your conference; I mentioned that if we thought your work was wrong, we'd let you know, and that hasn't changed. We have a significant amount of customer acquisition, along with the costs of operating those customers, and we don't always have the full revenue attached to those customers just yet, and that will start to occur beginning in October and will grow from there. The overall profitability of the mobile product, if treated as a standalone product, is good. It's very good. But I want to be careful not to be dragged down into that. It's never how we thought about that product. It's really an extension of our broadband product and seamless connectivity. Our broadband product is something none of our competitors can deploy ubiquitously across their footprint. You have to think about the broader profitability, but if it were a standalone product, the profitability is good, and our expectations have continued moving in that direction.

Yes. The other thing I would point out in our December Investor Day, we showed the progress we had made in profitability excluding customer acquisition costs. We pointed out then that some of that progress was made not dependent on what you were paying in MVNO costs that we had work to do and that we were still driving down cost to serve mobile customers. That has been successful through the first part of this year. As we continue to scale up the mobile business and have longer-tenured customers there, we expect to improve service activity, and we'll continue to gain efficiency in expense, driving additional profitability for this business.

Thank you.

Thanks, Craig. Operator, we'll take our next question please.

Thanks. I just want to talk about seasonality. Chris suggested we didn't see the same seasonal impact in Q2 in terms of college and/or snowbirds and so forth. Can you help us think about that? Has that really changed? Does that mean that 3Q and 4Q reversals may not be as pronounced?

Let me add some additional color. Of course, we still had college disconnects, and we had snowbirds effect coming out of Florida. The level of activity is a bit more muted compared to what it was pre-COVID. Over the past couple of years, the visibility for us and for everyone has been much less around seasonals in Q2 and Q3 than it was pre-pandemic. We want to be careful about how far we get ahead of ourselves, but our goal remains to have higher net adds this year than last year. Instead of focusing on quarters, we’d like to focus on the overall trajectory and the long-term trend that we see developing, which is good.

Thanks, Chris.

Thanks, Vijay. Operator, we’ll take our last question please.

Hi, good morning. I had two questions, if I could. First, I apologize if you said this and I missed it, but I was wondering if you could talk about the contribution to broadband net adds from the rural line extensions and RDOFs? Second, would you mind just giving us an update on your CBRS efforts? As part of that, I wanted to ask a hypothetical question. If a portfolio of fallow spectrum from low band through mid and high bands were available through auction or acquisition, is that something at this point that Charter would consider either alone or with a partner? Or is the current course still the preferred strategy? Thank you.

Hi Bryan, subsidized rural construction contributed 26,000 Internet net adds inside the quarter. Regarding CBRS, we are at a full commercial launch inside of a market today, and it is going well. We are ensuring that the handover times continue to perform like that at scale. That will set the stage for our broader CBRS rollout starting next year, but I don't want to alarm anyone. We will be very focused on deploying CBRS where there's a high and fast ROI. We have other accretive projects currently through network evolution and expansion. We're cognizant of the overall CapEx build. We'll build that in a measured way across our footprint and fully deploy the CBRS in the markets we've acquired over time, but we're going to do it in a way that's very targeted to generate fast returns. As for the third question around portfolio spectrum, we have a very strategic and good perpetual MVNO relationship with Verizon. The economics are very good. This allows us to continue using better WiFi and CBRS over time for the majority of traffic, which maintains higher speeds. We have the ability to lease macro cell towers at attractive rates and not be in the business of building and densifying those towers or acquiring additional spectrum. I think this capital-light model works well for us and has proven effective for our Verizon partnership. I’d never say never to future opportunities, but we haven’t felt the need to engage in macro cell tower construction or spectrum acquisition at scale.

Great, thank you, Chris.

Thanks, Bryan. Operator, we’ll take our last question.

Thanks, and good morning. I was just curious to follow up on the mobile discussion with a couple of questions on some of the segments. So one of the comments is that 11% of internet customers are taking mobile, which would infer almost two lines per account. Just curious if you’re starting to see more of a shift to multi-line and family plan adoption of your mobile services and if there's a significant opportunity to take up the number of lines per account over time. Then on the SMB side, are there opportunities to accelerate mobile gains there where they've been running at about 15,000 to 20,000 per quarter? Thanks.

So Michael, you're right; the opportunity to continue to increase lines per customer is high. Certain customers have multiple lines inside the household on different EIP plans and timelines. Our success has been using the high value and high speeds in our mobile product to acquire as many lines upfront in the household. Over time, we can upgrade those other lines that are on different EIP timelines. Our opportunity is to continue to grow not just mobile broadband customer penetration but to add new seamless connectivity customers through Spectrum One and to increase the number of lines per household, which increases stickiness and the overall value provided due to significant savings. On the SMB side, we're doing well there but can do even better over time. It's still early days in the SMB space, but we can add value there similar to residential.

Thanks, Michael. That concludes our call. Operator, back to you.

Thank you very much.