Charter Communications Inc (CHTR) — Q3 2023 Earnings Call Transcript

Thanks, operator, and welcome, everyone. The presentation that accompanies this call can be found on our website at ir.charter.com. I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, which we encourage you to read carefully. Various remarks that we make on this call, concerning expectations, predictions, plans and prospects, constitute forward-looking statements, which 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. On today's call, we have Chris Winfrey, our President and CEO; and Jessica Fischer, our CFO. With that, let's turn the call over to Chris.

Thanks, Stefan. During the third quarter, we added 63,000 Internet customers, as we continue to benefit from growth in both our existing footprint and new subsidized rural footprint. We also added nearly 600,000 Spectrum mobile lines, benefiting from our Spectrum One offering. At the end of the third quarter, we had over 7 million total mobile lines, and over 12% of our Internet customers now have mobile service. We expect mobile penetration to meaningfully grow over the next several years as the quality and the value of our converged connectivity service gains wider recognition. Revenue was essentially flat year-over-year, with some temporary headwinds within the quarter. And adjusted EBITDA grew by 0.7% year-over-year, moving past the low point last quarter. We expect that upward trend to continue as we realize the benefit of our operating investments. More importantly, we're making significant progress against the multi-year strategic initiatives we outlined late last year. Our footprint expansion initiative remains on track. We expect to add approximately 300,000 new subsidized rural passings in 2023 and to accelerate that pace in 2024. Our penetration gains in subsidized rural passings continue to grow at a better-than-expected pace. At the 12-month mark, our rural builds are achieving nearly 50% penetration, faster than our initial expectations. Our execution initiative also continues to progress, and we remain committed to prioritizing the customer experience. We continue to see the benefits of our investments in employee tenure and training, including better employee retention, higher quality service transactions, and better sales yields. Additionally, the increasing digitization of our service platforms for both customers and employees will further reduce transactions, driving higher levels of customer satisfaction and employee satisfaction, driving tenure and quality. And finally, our evolution initiative, which is comprised of our network evolution project, our convergence efforts, and our video product transformation, all of which remain on track. Our network evolution project continues to progress well and will allow us to maintain our fastest Internet and WiFi service claims in front of customers and competitors everywhere we operate. Unlike the telcos, which prioritize the most attractive footprints for upgrades, our multi-gig speed offerings will be available across our entire footprint. Our network evolution is good for the communities we serve, and it's good for Charter. And excluding the benefit of any savings that result from the project, we continue to expect our network evolution to cost a very low $100 per passing. We're very much on target. Whether we finish our network evolution initiative by the end of 2025 or mid-2026 will really depend on the supply chain for distributed access architecture components and managing annual capital spend, given the larger customer growth opportunity and construction speed of RDOF, where we're ahead of the build requirements and we'll end up with more passings than originally expected. State grants are also hopeful to beat passings. However, I want to reiterate and be very clear that where state BEAD rules are not conducive to private investments, we will not participate in those states. Our converged product offering also continues to evolve and succeed. Spectrum One is performing well and offers the fastest connectivity, with differentiated features like mobile Speed Boost and the Spectrum Mobile Network. Spectrum One also offers significant savings for customers, with market-leading pricing at both promotion and retail. Finally, turning to the evolution of our video product. Earlier this month, we launched our Xumo platform across our entire footprint. This industry-leading video platform allows our customers to access their linear and direct-to-consumer video content with unified search and discovery within one easy-to-use interface. Combined with our Spectrum TV app, the most viewed linear and VPD streaming service in the US, Xumo is now our go-to-market platform for new video sales. In September, we announced an agreement to carry Disney's linear networks and direct-to-consumer services for our customers. This new hybrid distribution model is good for consumers, and we believe a significant step forward for the video ecosystem. For Charter, the agreement adds value to our video packages and better aligns linear content and DTC apps, which will be included for free in our video products. We also maintained flexibility to offer lower-cost packages. Disney gets broader distribution of its DTC products with ad revenues from our video customers and upgrade subscriptions to ad free. We'll also sell Disney's DTC apps to our Internet customers, including via Xumo over time. Together with Disney, we created a glide path to bridge from linear video into new growth with both linear and DTC services. Disney and ESPN were a key first step to repairing the video ecosystem, but our goal is to have a product that is valuable and that we're proud to sell. We plan to modernize all of our distribution agreements upon renewal in a way that works for customers. That means packaging flexibility, value and not asking customers or us to pay twice for similar DTC and linear programming. If programmers insist on customers paying twice, we just won't carry those channels. But we’d still be happy to sell their content in an à la carte app, the same way as they do. Our goal is to modernize these agreements quietly and seamlessly for our mutual customer base. Our new hybrid distribution model, combined with Xumo's content-forward interface, provides a clear path to solve key customer issues of choice, value, and utility, with seamless linear DTC and SVOD integration in advanced search and discovery functionality. For Charter and programmers, this creates a state-of-the-art video marketplace, supported by our scaled distribution, sales, and service infrastructure, and we believe a glide path to broader distribution, better economics, and more choice for everyone. Through expansion, network evolution, convergence, video transformation, and investing in quality, we are executing successfully the strategy we laid out last December. Our strategy remains to provide the highest quality products, which we then price and package in customer-friendly ways to drive higher penetration of our services across our footprint. We then combined that with investments in high-quality service, which also increases our competitiveness to acquire more customers. Ultimately, continued execution of our strategy will drive significant long-term value for shareholders, and we continue to make good progress. Before handing the call over to Jessica, I want to note that earlier this week, we announced Tom Rutledge's plan of retirement, and that Eric Zinterhofer is reassuming the non-Executive Chairman role at Charter. I'm pleased that Tom will remain as Director Emeritus, and grateful to Tom, Eric, and our full Board, including two of the most successful cable investors in Liberty Media and Advanced New House, for their work to achieve a smooth CEO transition for Charter.

Thanks, Chris. Let's turn to our customer results on Slide 5. Including residential and SMB, we added 63,000 Internet customers in the third quarter. We estimate that approximately 15,000 third-quarter Internet disconnects were driven by the temporary loss of ESPN in September. Video customers declined by 327,000 in the third quarter, with about 100,000 video disconnects driven by the Disney programming dispute. The overall impact on customer relationships was less than we expected, facilitated in part by the wide availability of over-the-top alternatives. The loss of Disney programming occurred both at the beginning of football season and in the midst of a programming cost pass-through and the launch of our new Auto Pay discount incentive on the Internet. Nonetheless, operationally, we handled the Disney dispute very well. But our billing and retention call centers were not fully back to normal until early October, so there was lingering customer net add impact early in the fourth quarter. Turning to mobile. We added 594,000 mobile lines in the third quarter. Wireline voice customers declined by 286,000 in the third quarter. Overall market activity, churn and gross adds remained well below pre-COVID levels, partly driven by persistently low move rates. We continue to compete well in a portion of our footprint that is overlapped by fiber, but we also continue to see some impact from fixed wireless access competitors in the lower usage and price-sensitive customer segments of our residential and SMB businesses. That product remains slower and less reliable than what we can deliver, and will be additionally constrained as consumers demand more and more data. In fact, high data usage customers that switched to fixed wireless have a higher propensity to return to our Internet service. Despite our Disney dispute, third-quarter residential Internet churn was at a new record low for the third quarter. Our Spectrum Mobile product also 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 has continued to increase. Boarding from other carriers as a portion of our gross additions grew year-over-year, despite much higher mobile sales. We also continue to see healthy data usage on our Spectrum One promotional lines and remain confident that these lines should perform well as long-term customers. In the third quarter of last year, we launched Spectrum One pilot programs in a handful of markets. The pilot program customers reached their 12-month anniversary during the third quarter of this year, and incremental churn on those lines was small and even less than we expected. Turning to rural. Subsidized rural passings growth accelerated in the third quarter, with 78,000 passings activated. And we continue to expect approximately 300,000 new subsidized rural passings this year. As our RDOF build has progressed, we have identified roughly 300,000 adjacent passings along the way that are not in the sense of slot groups we want, but we will add to our network as we complete the RDOF build. Because of these adjacent passings, we now expect that our RDOF initiative will yield a total of 1.3 million passings to be constructed over a multiyear period. And while labor and equipment costs have both increased, we expect the average net cost per passing of these 1.3 million passings to be similar to our original RDOF net cost per passing estimate. We don't expect any potential BEAD build, subject to what Chris mentioned, to begin until 2025. Moving to financial results, starting on slide 6. 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 0.6% year-over-year, given a higher mix of non-video customers, growth of lower-priced video packages within our base and $63 million of residential customer credits related to the Disney lockout, partly offset by promotional rate step-ups, rate adjustments and the accelerated growth of Spectrum Mobile. Excluding Disney-related credits, residential revenue per customer relationship was flat year-over-year. As slide 6 shows, in total, residential revenue declined by 0.3% year-over-year. Excluding Disney-related credits, residential revenue grew by 0.3% year-over-year. Turning to commercial. SMB revenue declined by 0.9% year-over-year, reflecting lower monthly SMB revenue per SMB customer, primarily due to a higher mix of lower-priced video packages and a lower number of voice lines per SMB customer. These factors were partly offset by SMB customer growth of 1.3% year-over-year. Enterprise revenue grew by 3.7% year-over-year, driven by enterprise PSU growth of 5.9% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 5.5%. Third-quarter advertising revenue declined by 20.3% or $97 million year-over-year due to less political revenue. Core ad revenue was down 1.8%, due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew by 28.8% year-over-year, driven by higher mobile device sales. In total, consolidated third-quarter revenue was up 0.2% year-over-year, and up 1.5% year-over-year when excluding advertising and the impact of the $68 million in total Disney-related customer credits. Moving to operating expenses and adjusted EBITDA on slide 7. In the third quarter, total operating expenses were approximately flat year-over-year. Programming costs declined by 9.6% year-over-year due to a decline in video customers of 6% year-over-year, a higher mix of lighter video packages and a $61 million benefit related to the temporary loss of Disney programming in early September. These factors were partly offset by higher programming rates. We now expect that for the full year 2023, programming cost per video customer will decline by approximately 3% year-over-year. Other costs of revenue increased by 15.2%, primarily driven by higher mobile device sales and other mobile direct costs, partly offset by lower regulatory and franchise fees and lower ad sales costs. Costs to service customers increased by 3.7% year-over-year, driven by previous 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. Those were partly offset by productivity improvements, including from tenure investments, lower service transactions per customer and lower bad debt. Sales and marketing costs declined by 1.4%, primarily driven by lower labor costs, as we've lapped our prior year employee investments in sales and marketing. Overall, while we certainly had some additional overtime in our call centers, given the Disney dispute, it was not a material expense driver this quarter. Finally, other expenses grew by 2.5%, driven by labor costs. Adjusted EBITDA grew by 0.7% year-over-year in the quarter. Turning to net income on slide 8. We generated $1.3 billion of net income attributable to Charter shareholders in the third quarter, up from $1.2 billion last year, driven by higher adjusted EBITDA and lower other operating expense, partly offset by higher interest expense. Turning to slide 9. Capital expenditures totaled $3 billion in the third quarter, above last year's third quarter spend of $2.4 billion. The increase was primarily driven by higher spend on upgrade rebuild due to our network evolution initiative, higher spend on line extensions driven by Charter's subsidized rural construction initiative and continued network expansion across residential and commercial greenfield and market selling opportunities, and higher CPE, driven by the purchase of Xumo devices for our launch earlier this month. For the full year 2023, we now expect capital expenditures to total approximately $11.2 billion. Capital expenditures, excluding line extensions, should total approximately $7.2 billion, higher than our previous expectation. The increase reflects additional Xumo CPE purchases and an acceleration of network spend related to future high split markets, including inventory accumulation and other preparation activities like walk-out and design and proactive equipment swap-outs of both DTAs and MPEG2 boxes. As Chris noted, we continue to expect to spend approximately $100 per passing to evolve the network to offer multiple gigabit speeds. There has been no change to our longer-term network evolution CapEx outlook. We also continue to expect 2023 line extension capital expenditures to total approximately $4 billion. We are working through our 2024 operating plan right now. Given the greater subsidized rural passings and construction opportunity we currently see, we may partially fund that opportunity by very modestly slowing our network evolution plan, as Chris mentioned. And as we complete our 2024 plans, we will provide a more detailed outlook on our fourth quarter 2023 call in January. I want to highlight that capital expenditures, excluding line extensions and network evolution as a percentage of total revenue, have remained consistent since 2021. And following the completion of our network evolution initiative, capital expenditures, excluding line extensions as a percentage of revenue, should decline to below 2022 levels, which has important long-term cash flow implications. As slide 10 shows, we generated $1.1 billion of free cash flow this quarter versus $1.5 billion in the third quarter of last year. The decline was primarily driven by higher CapEx, mostly driven by our network evolution and expansion initiatives. A couple of brief comments on working capital and cash taxes before turning to the balance sheet. Excluding the impact of mobile devices, we now expect our full year 2023 change in working capital to be negative by a few hundred million dollars, given the timing of capital expenditures and lower-than-expected accrued programming at year-end. On cash taxes, we did have a lower cash tax payment in the third quarter, which is just a timing difference. The full-year cash tax outlook, which I provided during our fourth quarter 2022 call, still stands. We finished the quarter with $97.6 billion in debt principal. Our current run rate annualized cash interest is $5.2 billion. As of the end of the third quarter, our ratio of net debt to last 12 months adjusted EBITDA was 4.45 times, and we intend to stay at or just below the high end of our four to 4.5 times target leverage range. During the quarter, we repurchased 2 million Charter shares and Charter Holdings common units, totaling $854 million, at an average price of $421 per share. Our 2023 EBITDA growth has been pressured by significant investments we've made in the future growth of our business. As we move toward 2024, pressure on our EBITDA growth will begin to abate, with growing transaction efficiency as we benefit from building employee tenure and easier comps as we have now lapped the impact of those employee investments. Lower transactions in our mobile business drive down the per-customer cost of service, and as we move into next year, revenue growth acceleration from the roll-off of our mobile free line offers and positive impact from political advertising. In addition, faster pacing of our rural build should bring additional positive impact to customer net additions next year. In the longer term, the competitive impact and operational efficiencies from our network evolution will drive a stronger broadband business. Convergence momentum will improve our churn and generate financial growth for both broadband and mobile, and transformational changes to the video business can enhance the value of our product for our connectivity customers. The investments we have been making and will continue to make are set to drive the growth of our business going forward.

Thanks. Two quick questions. Starting with broadband, it looks like your progress in the new markets, the rural markets that you're pushing into is great. The 12-month penetration there is accelerating, which is fantastic. But it seems like the core markets are progressing a little bit more slowly than you expected. And I'm wondering, Chris, if you can give us some context for what was different from what you may be expecting in the core markets as sort of a function of just slower pull-through from Spectrum One, or greater pressures from fixed wireless broadband or something else? And then I'm wondering, sort of, taking a step back, whether you can give us a view of what you think the video business ultimately looks like five years down the line? I can imagine an environment, a world where you're collecting a platform fee, this lower ARPU, but very high margin from a large number of your customers, and it becomes a much more valuable business for you than the sort of the distribution business that you have today. But I would love to get your thoughts on how that business evolves? And when we sort of hit the point where it starts to become a growth driver for you as opposed to a drag on growth? Thanks.

Sure. And there's a lot in what you just asked, broadband. So, as you mentioned, our subsidized rural construction is going very well and it's pacing well. We're getting faster penetration than we anticipated, probably are used for higher terminal penetration. As Jessica mentioned, as we get into next year, not only do we have the accelerated pace of construction that we get into Q4 and then into next year, but also the tailwind of the construction that we've already completed. So, as a standalone investment, the transparency around that is actually pretty high. The core markets, I think similar to what you've heard probably from others, both in the second quarter as well as third quarter, the back-to-school dynamics, both at disconnect in Q2 and reconnected in Q3 is not gotten back to where it was several years ago. Some of that could tie into the low end of the market where you have some incremental fixed wireless access. I think importantly for us we're continuing well in fiber markets and as it relates to fixed wireless access where you have a lower quality, lower throughput, lower capacity product, that's really not even lower priced when you combine mobile and Internet together. But on the increment, it appears to be that way. We feel pretty good about that space, just given the amount of bandwidth usage that increases over time and the natural capacity constraints that we've all spoken about in the past. So, I think some combination of that, as well as Jessica mentioned, we had a relatively modest but small impact on the Disney programming dispute, which drove an additional 15,000 units. But just if you step back, for all the reasons that we know, the broadband market has been temporarily stunted for growth. But we are growing in both our existing footprint as well as in the rural subsidized footprint as well and we're providing that so people can evaluate where both pieces are. In terms of video, five years from now, I think there'll still be a traditional video business that exists. And then I'll talk a little bit about where it could evolve to. But a traditional video business that exists, hopefully with additional value in it with DTCs bundled in, is the way that increases the stickiness of the linear business, which is just to the benefit of ourselves and programmers. We can do that through these renovated agreements with the programmers and the combination of Xumo that creates utility for customers to find content in an easier way and have a deeper library and availability of that content. I do think, as you mentioned and as I mentioned in the prepared remarks, we have an opportunity to evolve to a state-of-the-art video marketplace where we can provide that type of traditional linear integrated DTC and SVOD product for customers who can afford it. It's a value. But when you get that, it's a very valuable product, and it's something that we’d be proud of. And for those customers who are going to be coming more in and out of the video market with different packages because of affordability, that's been driven by the programmers and because of the availability of DTC's à la carte, that Xumo, for us, can provide a really good marketplace to sell those products, again, for the benefit of the programmers as well and gives customers options wherever they want to go. And to your point, not only do we have the traditional video business delivered by Spectrum, but we also have the ability to monetize, from an advertising revenue perspective, the platform through our equity investment in the 50-50 joint venture of Xumo. So nobody sitting here is forecasting that traditional linear video is going to grow. But I do think it still remains very important to our connectivity relationships. I think we have a strategic advantage in the marketplace because of our capabilities as a broadband provider with a scaled video platform with the programming relationships that we have and the ability to package together a hybrid model that creates value for customers and is also a distribution engine for these DTC apps, either on a standalone or a bundled basis, for customers and programmers in the future. So if I step back from a video perspective, again, I'm not forecasting growth, but the past 15 years, there's been very little to be optimistic about, either from a customer perspective because of what the programmers have done or for ourselves as a distributor. And for the first time, I see a path where we can create value for customers and create utility and that ultimately will enhance the value of the connectivity services that we provide through our seamless connectivity in Spectrum One, which we're beginning to market now as part of Xumo.

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

Hi, thank you. I wonder, maybe for Jessica, if we could drill down a little bit on the ARPU impact of Spectrum One? And how we should expect, as you start to see the first cohorts roll off, how should we expect ARPU to track for both broadband and for wireless, I guess, over the next not just the next quarter or so, but maybe a little bit longer term as you start to roll off those cohorts?

Thank you, Craig. I'll begin with the wireless segment and then discuss the Internet segment. On the wireless side, our rate of net additions has been relatively stable over the past four quarters with Spectrum One implemented. As we compare the fourth quarter of this year to last year, while we see the effect of transitioning from free lines, it appears that their impact on overall ARPU will diminish. As the proportion of free lines decreases relative to the total lines, thanks to our growing customer base, we might even experience some slight positive pressure on ARPU. However, we still have some legacy pricing that needs to phase out. Therefore, we expect wireless to stabilize more next year. Regarding Internet ARPU growth, if we examine it at the product level, the year-over-year GAAP growth was 2.6%. Without the mobile allocation from Spectrum One, it would have been 3.7%. This indicates a 1.1% difference in product line ARPU growth tied to the free line allocation. As those free lines start to decrease, we anticipate that their total number will stabilize year-over-year; hence, the mobile allocation will also become stable as we approach Q4. Consequently, we may see improved ARPU growth in the Internet segment from a GAAP reporting standpoint, but this is mainly because the GAAP allocation won't be a factor in the Internet product moving forward.

That’s helpful. Thank you.

Thanks, Craig. We will go take our next question, please.

Thank you. Good morning, everyone. I would like to discuss the Capital Expenditure outlook and strategy focusing on three areas: digital evolution, line extensions, and Xumo, which pertains to video. It seems we should expect approximately $5.5 billion for network evolution spending, but the timing may have shifted, possibly resulting in less spending this year, a decrease over the next couple of years, and then an increase in 2026. Can you clarify if there has been any change in the $4 billion annual budget for line extensions in light of the higher RDOF opportunity you mentioned? Additionally, I assume you have not been investing much in video CPE given the recycling of set-top boxes. Can you elaborate on the Xumo plan? I'm trying to understand if you will gradually transition your video subscriber base to a new equipment fleet over time and what that might mean for Capital Expenditure. I know that's a lot to cover, but I would appreciate your insights.

It was our mistake, Ben, and that's true. Let me address two topics: network evolution and video CPE, and then Jessica can cover expansion and anything I might have missed on those two. Regarding network evolution, I mentioned that we might slow down by about six months. However, this could strengthen our competitive position. It’s worth noting that the time difference isn't significant, and we are currently competing effectively against fiber. Our objective remains to ensure we have superior speed claims across all our operational areas. We’ve always stated that we will ramp up investments whenever possible. However, we also believe it is important to show some discipline to our shareholders regarding overall capital and rural investments, which continue to grow in both scale and quick deployment capabilities, resulting in immediate benefits. When considering our traditional approach—if capital can be deployed with great returns, we act quickly—we must balance investor expectations and demonstrate discipline in terms of overall capital allocation. A six-month delay is unlikely to impact our long-term plans much. Moreover, extending the timeline allows our distributed access architecture suppliers to catch up with the latest technology, enabling us to deploy the most advanced equipment for our upcoming high split and DOCSIS 4.0 implementations. That's my perspective on network evolution. Jessica can elaborate if I missed anything. On video CPE, our spending has decreased because we've been able to recycle World Box during the initial deployment phase of Xumo, which required a starting inventory of Xumo Boxes and is counted in our capital. Moving forward, we will deploy more new boxes than we have in the past, as we're using Xumo as our primary deployment for video CPE, and that process is going very well. The cost of these boxes is lower than what traditional boxes have been, and we anticipate prices will continue to decline significantly. This will lead to a combination of increased volume, contingent on our success, and a lower price point over time, along with a reduced need to build up inventory through all our channels nationwide. There’s an improvement there, but I don’t expect it to have a material impact in the long run.

I can provide some insights on our network evolution and rural expansion, keeping in mind that we are still finalizing our operating plan for next year and won't provide guidance for 2024. To frame the issue, we need to reach a total of 300,000 rural passings by Q4, which requires about 110,000 passings in that quarter, a target we are confident we can achieve. If we maintain this rate into the next year, we would achieve 440,000 passings, which is 140,000 more than this year. However, the timing of passings does not always align with our spending, so it’s not a precise metric. Based on the cost per passing of $3,800 we discussed for RDOF, we could see next year’s spending run rate exceeding this year’s by around $500 million, assuming other line extension costs remain steady, noting there can be some variability. Moreover, our network evolution expenses, particularly rural construction, are heavily front-loaded. Significant preparation and inventory work are necessary before we can undertake high-split initiatives or equipment replacements. We anticipate spending over $1 billion on high split in 2023, with a considerable amount of this expense rolling into next year if we keep our current pace. Adjusting when we spend on high split might not fully balance the additional line extension costs, but it should provide some assistance. As we analyze this further, we are assessing how much capital expenditure is appropriate given our current situation. Additionally, we believe it is important to shed more light on the value derived from unique capital investments in rural areas. We are exploring various options, possibly including joint ventures or tracking stocks, to emphasize the significance of rural spending as a form of acquisition rather than just typical capital expenditures. If we do not pursue one of those paths, I am looking into providing more disclosures to enhance transparency, which we aim to introduce early next year. In terms of what has already been built, we established 315,000 rural passings so far, and the estimated value per passing is around $9,000, leading to a total value of about $2.8 billion. Considering our average net cost of $3,800 per passing for the subsidized rural build, we’ve spent approximately $1.6 billion on these completed passings. This results in a value creation of around $1.2 billion over that investment. As we accelerate our build pace, the value we add to our business will also increase, and we are committed to providing further transparency as we plan for next year's capital spending and help illustrate the value these investments contribute to our business.

So Ben, you got probably more than you asked for. But Jessica was talking, and if you step it up one level from that, I think it's important just to reiterate that this company has a very strong focus on long-term capital allocation and long-term shareholder value creation. However, we also recognize the importance of maintaining shareholder confidence along the way. Therefore, we plan to go outside of our comfort zone before finalizing our operating plan, aiming to provide additional disclosure and transparency and ensure that we have the full support of our shareholders along the way, demonstrating that we have consistently been strong allocators of capital.

Appreciate it. Thanks so much.

Thanks, Ben. Luke, we’ll take our next question please.

Thanks. Two, if I could. Jessica, you previously talked about cost items, cost to serve and sales and marketing sort of exiting this year close to zero. Obviously, cost of services elevated in the quarter. Can you just talk about where we are on the cost cycle, given you should be comping against some of your labor cost increases? And sort of what it sort of means sort of into 2024? And then Chris, you started mention, I think now two quarters in a row, about the BEAD process and the state process and how that may sort of play out and you may not participate kind of thing. Can you sort of talk about really what are the issues there? And if that is the case, are we still too optimistic on your line extension spend over the next few years, which I think is about $4 billion a year?

Yes. So Vijay, regarding the cost items, I don't have any changes in my expectations for the cost to serve in sales and marketing, ending the year at nearly zero. We've discussed in our remarks that we anticipate, as our tenure in those areas matures and considering that by the end of Q3, we've effectively overcome the one-time increase associated with the investments we made on the employee side.

For sales and marketing.

At the end of the quarter, I believe we have mostly accounted for the cost to serve. Therefore, we should anticipate improved efficiency in those areas moving forward, regardless of the quarterly mix. While I won't specify our exact position for the upcoming year and its quarters, I do believe our general outlook is that we will enhance efficiency in those areas from this point onwards.

Vijay discussed the challenges in forecasting BEAD due to state allocations and their proximity to our operations. We're currently addressing these issues, but it will take time. In the meantime, our RDOF and state grants are progressing well, and we have a significant pipeline apart from BEAD. We're somewhat disappointed with the guidelines released by NTIA. To clarify, the states that adopt NTIA's proposed guidelines, which include regulating Internet tiers and pricing, will not be appealing for our bids. Therefore, we'll concentrate our investments in states that provide the flexibility needed to respond to market demands and achieve a reasonable return. Given the current circumstances, it’s challenging to predict any potential BEAD investments at this point, and it will take time for us, as well as for others, to determine the situation.

And as we have said all along in rural, we've been extremely disciplined from a financial perspective and looking at the specific passings that we're bidding on to make sure that we're comfortable that it will generate financial returns and all things factor into that, including the limitations that you have under the regulatory environment.

Thanks Vijay. Thank you. We'll take our next question please.

Thank you. I guess a couple of follow-ups. Jessica, I heard your comment on October customer addition drag, do you think it's still a reasonable goal for 2023 to add more broadband subs year-over-year? And if not, do you think 4Q of last year is a reasonable proxy for this year? I know you love guidance. And then second, as I'm thinking about your cost commentary as well as maybe some revenue pick up, what is the outlook for EBITDA acceleration from here? We've talked about EBITDA accelerating in the back half, but I'm also thinking about what your Disney content costs are going to do for the fourth quarter. Just how should we think about that from here? Thank you.

Phil, regarding the customer aspect, our aim has been to increase our net additions for Internet year-over-year. Considering what we've observed in early October and the reasons we previously discussed, it seems we will need an exceptionally strong November and December to achieve that goal. Therefore, reaching our target may be quite challenging. However, we are optimistic about the underlying trends in the business as they position us well for 2024. It will require a robust November and December to meet our original objective.

On the EBITDA side, so thinking about what the components are as you go into Q4 and next year, in Q4, you do still have an advertising headwind and actually the most significant advertising headwind of the year because of political advertising. But as you go into next year, then that turns around where you're back in a political year and you have the benefit of political advertising. As I said earlier, we've sort of lapped the last of our 2022 labor adjustments as of the end of Q3. So I think the trajectory from a cost perspective on cost to serve and sales and marketing gives you easier comps and you have growing efficiencies going into next year. In the fourth quarter, we'll start gaining revenue from the mobile free line roll-off. It's relatively small inside of Q4, but the impact builds as you go through next year. So we expect to have a good tailwind from that. And then we continue to expect to have just overall efficiency from our tenure investments across the business. So, as we said, I think that we recognized that EBITDA was challenged in 2023, by both the investments that we're making and doing it in a non-political year. But as we get into Q4 and going into next year, our expectation is that we've pushed through most of that headwind and that we'll be in a better position.

Thanks very much.

Thanks, Phil. Luke, we'll take our next question, please.

Thank you. So, you said that some of your initial Spectrum One roll-to-pay results were a little better than expected. Could you just expand on the tools you're employing to drive those retention rates? And what kind of targets you might have in mind for the Spectrum One mobile roll-to-pay as we think about how that retention could look going forward? And is it right to assume that it's about 300,000 lines per quarter that are up for grabs? And then additionally, we've received a lot of questions on the ACP program and what it means for Charter. Could you maybe just help us frame how you see that exposure? Do you think you require any contingency plans in case there's any changes to the political outlook for that? And is there a lot of overlap between ACP customers and Spectrum One customers? Or is that quite a different customer set? Thank you very much.

I'll do my best to answer as much of that as I can. The mobile retention, we're not having to do much of anything at all, simply because these lines are being actively used. They have similar port-in rates to what we have elsewhere. They also have similar nearly similar device purchase rates. So they are real customers, they are looking very much like any other existing customer. When they roll tier from a $0 price point for the first line, many of them are paying for a second line. But they go from a first line at $0 to $30, and that product is the fastest mobile product in the country, and it's providing it at the lowest rate relative to that speed. So, at $30, you can't replicate that mobile product anywhere else in the country that's producing that speed. And then all-in, when you think about it from a convergence standpoint, it's a product that has a structural advantage that's difficult for anyone else to replicate. So, we do have some small tactics around the edge that we can do to retain customers under different circumstances, but that's not being heavily used at this point, simply because it's sticking. On ACP, for the benefit of the broader audience, that's the affordable connectivity program. This program is a federal program; it's brought Internet connectivity to customers who really wouldn't have access to broadband otherwise. And it's also allowed existing customers who would have been coming in and out of the broadband marketplace, really given the affordability issues, to remain connected consistently. So, I think we think it's been a really effective program. We're proud to be the largest ACP provider in the country. Just this week, I understand the White House has asked Congress to authorize more money for ACP earlier. And I hope that Congress will fund it before running out next year. Now, you asked the question, what happens to the extent it's not funded? Just as I mentioned, most of these customers that received ACP support today were Internet customers before the program was founded. We have low-income broadband programs that existed before ACP began, and because of the value we provide in that connectivity, I do think that we'll continue to retain these customers. We have ways where they're moving them into the lower-speed products that we have to be able to save the money more importantly, if you think about the mobile build, the vast majority of these customers have inside their homes; we can save them hundreds or even thousands of dollars every year, even though ACP disappeared simply by moving them over to our mobile. So, we have a lot of tools available to us for these customers to make sure that they stay. I hope is that we don't need to go down that path. I hope is that we can still save them that money by kind of getting them onto Spectrum Mobile and Spectrum One. But I'm hopeful that the program, which has been very successful, gets successfully renewed.

And that concludes our call. Thanks very much, everybody.

Thank you all. Appreciate it.

Thanks.