Charter Communications Inc (CHTR) — Q4 2023 Earnings Call Transcript

Thanks, operator, and welcome everyone. The presentation that accompanies this call can be found on our website 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 today's 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. In 2023, we added 155,000 Internet customers, and we added nearly 2.5 million Spectrum Mobile lines for growth of nearly 50%. At the end of 2023, we had more than 7.7 million total mobile lines. Only 13% of our Internet customers now have mobile service. And we expect mobile penetration to meaningfully grow over the next several years, as the quality and value of our converged connectivity services gains wider recognition. Revenue was up by 1% in 2023, while EBITDA grew by 1.3% and 2.5% when excluding advertising. While we are executing well on our long-term strategic initiatives and Spectrum One is working to drive mobile growth, Internet growth in our existing footprint has been challenging, driven by admittedly more persistent competition from fixed wireless and similar levels of wireline overbuild activity. Small changes in gross additions and churn in a low transaction environment have driven outsized impacts to net gains, which was clearly the case as we moved through the last quarter. I own that. So, let me start with what we believe on the competitive environment and then what we're doing to drive long-term growth by delivering high-quality products and service at a great price. Fixed wireless access: While an inferior product with limited capacity and geographic coverage, which is fluid, is often marketed by the phone companies at a perceived lower price to their existing customers. We continue to believe the impact from fixed wireless is temporary. Our Internet product is faster and more reliable. Our pricing is lower when similarly bundled with mobile. Customer bandwidth needs continue to increase. MNOs will face capacity challenges and will be required to allocate their Spectrum and capital to maintain profitable mobile services. While we can't promise when that happens, I believe bandwidth needs to increase and quality and value win. On the wireline overbuild front, we continue to compete well. Overbuild impact tends to be limited to a few percentage points of Internet penetration during the first year of a new overbuild vintage coming online. It's painful, but it's tied to the pace of overbuild. We don't see overbuilders reaching their penetration and ROI goals now - within our footprint now or in the future. They don't have the same ubiquitous convergence capabilities as we do; their lower-cost passings have likely been built. Some of the planned overbuild was duplicative between operators, meaning less opportunity, and incremental financing cost has increased, putting even more pressure on overbuilder returns. We also expect BEAD passings will provide better capital allocation and ROI for many of these operators. Our assumption is that our competitors are rational economic players with shareholders and balance sheets, which require adequate return on investment. That isn't within our control. So, we are focused on the key strategic initiatives that enhance our long-term competitiveness and growth capabilities, and we expect to return to a more normalized Internet growth over time. Just over a year from when we detailed those initiatives, I wanted to remind everyone of the rationale and update you on their status, as laid out in Slide 4. Our footprint expansion is beating our pacing, penetration, ARPU, and ROI targets. New construction will help drive Internet customer growth despite the temporary challenges I mentioned within our existing footprint. 2023 subsidized rural customer growth was already over 100,000. Our penetration also continues to grow at a better-than-expected pace, and we'll activate more subsidized rural passings this year, both of which Jessica will cover. BEAD will provide additional opportunities, although the potential is uncertain given our concerns regarding how states will apply NTIA guidelines. We'll focus BEAD investments in states where the rules are conducive to private investment. Outside of rural, we also have accelerated greenfield, market fill-in, and serviceability builds, expanding our existing footprint in both residential and commercial passings. Penetration curves and returns here are similarly strong and predictable with a lower build cost. We also remain committed to prioritizing the customer experience via our execution initiative, which is intended to enhance frontline employees' tenure while simultaneously investing in digitization, all to drive better sales yields, higher-quality transactions, lower overall service transactions and higher levels of customer satisfaction. Our targeted investments in employees over the last two years resulted in a significant reduction in employee attrition in 2023. Our investments in the digitization of service is also driving efficiencies. In 2024, we have a number of new automated platforms that are launching to facilitate better service for customers and better digital and AI tools for agents to enhance service quality and the quality of their day-to-day jobs. Finally, our evolution initiative, which includes our network evolution project, our convergence efforts, and video product development all remain on course. We fully launched symmetrical speed tiers in two markets and currently launching in six more, completing our step one markets. We'll also begin to work in our step two markets with DAA later this year. 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. And we expect to complete the project in 2026, so fast, ubiquitous, low-cost upgrade of our capabilities, which our competitors can't replicate. Our converged product offering also continues to evolve and grow. 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 at retail. And Spectrum One customers reaching their first anniversary are performing ahead of our expectations. We'll continue to evolve our converged offering in 2024 with additional features and capabilities. Finally, turning to the evolution of our video product, in October, we launched the 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 MVPD streaming service in the U.S., Xumo is our go-to-market platform for new video sales. We're approaching 1 million deployed Xumo boxes since launch and we've been receiving great customer feedback, and we can keep improving our attach rates. In early January, Disney+ became available to all Spectrum TV Select customers nationwide at no additional cost. And in the next several months, ESPN+ and ViX, a Spanish language DTC product, will both become available to certain TV Select customers at no extra cost. This new hybrid distribution model is good for consumers and we plan to modernize all of our distribution agreements upon renewal. That means packaging flexibility, value and not asking customers or Charter to pay twice for similar DTC and linear programming. 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 and advanced search and discovery functionality. When we reflect on our key initiatives and what we believe are the short-term market challenges, we're acting as long-term Charter shareholders to maximize value. So, we have a posture of expectancy and excitement for the opportunity to execute on initiatives that enhance our long-term growth rate and value for Charter shareholders. In the short term, we are leaving no stone unturned as it relates to our go-to-market approach. Ultimately, the speed at which we can return to a more normalized broadband growth rate hinges on the assumption that our competitors' capital is not limitless for poor ROI projects and, frankly, our execution on our strategic initiatives. So, we're keeping our heads down and executing on a clear strategy to ensure we can offer customers the best products and services across our entire footprint, all while saving customers money, not only now but in the future. And 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 lost 61,000 Internet customers in the fourth quarter, while video customers declined by 257,000. In mobile, we added 546,000 mobile lines, and wireline voice customers declined by 251,000. Our Spectrum One product continued to perform well. Customers that signed up for our Spectrum One product in the fourth quarter of 2022 reached their 12-month anniversary this past quarter. Those promotional roll-offs didn't drive incremental Internet churn. In the quarter, we had slightly lower mobile line gross adds year-over-year tied to Internet gross additions with a lower churn rate year-over-year and flat sequentially. We continue to see healthy data usage at our Spectrum One promotional lines and remain confident that these lines will perform well as long-term customers. Turning to rural. We ended the year with 420,000 subsidized rural passings and grew those passings by 295,000 in 2023, in line with our target, and by 105,000 in the fourth quarter alone, an acceleration from the 78,000 we activated during the third quarter. Customer growth in our subsidized rural footprint also accelerated, with 34,000 net customer additions in the quarter. As Slide 13 shows, we're generating customer penetrations of close to 50% in cohorts that have reached or passed the 12-month mark. In 2024, we expect to activate approximately 450,000 new subsidized rural passings, about 50% more than in 2023, with seasonality in the first quarter tied to the winter weather. Slide 12 shows that so far with additional state bids that we expect, we will have committed to build approximately 1.75 million subsidized rural passings. We also expect our RDOF build to be completed by end of 2026, two years ahead of schedule. Moving to financial results, starting on Slide 7. Over the last year, residential customers declined by 0.3%, with video-only customer churn partly offset by new customer growth driven by Internet. Residential revenue per customer relationship was up 0.1% year-over-year, given promotional rate step-ups, rate adjustments, and the growth of Spectrum Mobile, mostly offset by a higher mix of non-video customers and growth of lower-priced video packages within our base. As Slide 7 shows, in total, residential revenue was flat year-over-year. Residential Internet ARPU grew by 2.2% year-over-year, but by 3.4% when excluding the impact of Spectrum One GAAP revenue allocation out of Internet into mobile. 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 0.7% year-over-year. Enterprise revenue grew 3.8% year-over-year, driven by enterprise PSU growth of 6.5% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 6.1%. Fourth quarter advertising revenue declined by 23.4% or $130 million year-over-year due to less political revenue. Core ad revenue was down 0.7% year-over-year due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew by 24.4% year-over-year, driven by higher mobile device sales. And in total, consolidated fourth quarter revenue was up 0.3% year-over-year and up 1.3% year-over-year when excluding advertising. Moving to operating expenses and adjusted EBITDA on Slide 8. In the fourth quarter, total operating expenses declined by 0.7% year-over-year. Programming costs declined by 10.6% year-over-year due to a decline in video customers of 6.8% year-over-year and a higher mix of lighter video packages. These factors were partly offset by higher programming rates. For the full year 2024, we expect programming cost per video customer to grow in the 1% to 2% range year-over-year with our video package mix being the largest variable. Other cost of revenue increased by 15%, primarily driven by higher mobile device sales and other mobile direct costs, partly offset by lower ad sales costs. Cost to service customers increased by 2.1% year-over-year, driven by additional activity to support the growth of Spectrum Mobile, partly offset by productivity improvements, including from 10-year investments and lower service transactions per customer. Looking forward, I would note that our previous investments related to job structure, pay, and benefits to build a more skilled and longer-tenured workforce are now largely complete and service transaction trends are back on trajectory after the programming dispute in September. Sales and marketing costs declined by 1.6%, primarily driven by lower labor costs. Finally, other expenses grew by 1.5%, driven by labor costs. Adjusted EBITDA grew by 1.6% year-over-year in the quarter and by 3.6% when excluding advertising. Turning to net income on Slide 9, we generated $1.1 billion of net income attributable to Charter shareholders in the fourth quarter, down from $1.2 billion last year, driven by a pension remeasurement loss and higher interest expense, partly offset by a gain on the sale of towers and higher adjusted EBITDA. Turning to Slide 10, capital expenditures totaled $2.9 billion in the fourth quarter, just below last year's fourth quarter spend. Line extension spend totaled $978 million, $50 million higher than last year, driven by our subsidized rural construction initiative and increased residential and commercial greenfields and market sell-in opportunities. Fourth quarter capital expenditures, excluding line extensions, totaled $1.9 billion compared to $2 billion in the fourth quarter of 2022, driven by lower spend on scalable infrastructure and lower spend on CPE due to purchase timing, partly offset by higher spend on upgrade/rebuild, primarily network evolution. For the full year 2023, we spent $11.1 billion. Looking ahead at full year 2024, we expect capital expenditures to total between $12.2 billion and $12.4 billion, including line extensions of approximately $4.5 billion and network evolution spend of approximately $1.6 billion. On Slide 11, we've provided our current expectations for capital spending through the year 2027, excluding any possible line extension spend associated with the BEAD program. The slide divides our spending into three categories: line extensions, network evolution, and core CapEx spend. As the slide shows, we expect CapEx spend of just over $12 billion in 2024 to fall to approximately $8 billion by 2027. Our line extension CapEx includes spending for greenfield, market sell-in, and serviceability builds from our legacy footprint, driving continued expansion of residential and commercial passings. In turn, our non-rural passings growth should continue to be robust and similar to 2023 growth, subject to the pace of overall housing growth. These passings are natural extensions or pocket fill-ins to our network and have a long track record of low cost per passing and reliable penetration trends to contribute to growth at attractive ROI. We've not included the potential impact of BEAD in the passing figures on Slide 12 or in our CapEx outlook on Slide 11, given the regulatory and bidding uncertainty associated with the program. We don't expect any potential BEAD build subject to acceptable guidelines, as Chris mentioned, to begin until 2025. And similar to our peers and competitors, our success in BEAD will be an overlay to our capital expenditure outlook. Turning to network evolution, where our long-term capital expenditures outlook remains essentially unchanged, we continue to expect to spend approximately $100 per passing to evolve our network to offer multi-gigabit speeds. Finally, core capital expenditures, which excludes line extensions and network evolution, have remained consistent as a percentage of revenue since 2021. And following the completion of our network evolution initiative, capital expenditures, excluding line extensions as a percentage of revenue, should decline below 2022 level, which has important long-term cash flow implications. Turning to free cash flow on Slide 14. Free cash flow in the fourth quarter totaled $1.1 billion, a decrease of $75 million compared to last year. The decline was primarily driven by less favorable change in accrued expenses related to capital expenditures, partly offset by an increase in net cash flows from operating activities and a decrease in capital expenditures. Just a brief comment on cash taxes for 2024 before turning to the balance sheet. We currently expect our calendar year 2024 cash tax payments under current legislation to land between $1.5 billion and $1.9 billion, depending on a number of factors. We finished the quarter with $97.6 billion in debt principal. In the first weeks of 2024, we redeemed all of our outstanding 2024 senior secured floating rate notes and paid in full all of our outstanding 2024 senior secured notes. So, we no longer have any significant debt maturities due in 2024. Our current run rate annualized cash interest is $5.2 billion. Given our long-dated and 86% fixed rate debt structure, our sensitivity to higher rates is relatively low. If we refinanced all of our debt in the next three years at current rates, the impact on our run rate interest expense would be less than $90 million or 2% of that run rate interest expense. As of the end of the fourth quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.42 times, and 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 3.2 million Charter shares and Charter Holdings common units totaling $1.3 billion at an average price of $419 per share. Before turning the call over to Q&A, I want to make a few comments regarding the Affordable Connectivity Program for Internet and mobile customers. While we still hope the ACP program will be allocated additional funding, we're well aware that the program could end this spring, and we're designing programs to assist those that are on the ACP program. There is no doubt that the end of the program would be disruptive for many. Nonetheless, we will have the full benefit of our high-quality sales and retention force as well as our mobile product, which saves customers hundreds of dollars to preserve connections. With the continued temporary impact from fixed wireless and the potential end of ACP, we may continue to face short-term customer growth headwinds as we enter 2024. Despite those short-term challenges, we are competing well and are focused on driving healthy EBITDA growth in 2024. A component of that has been to reflect inflation in our pricing while preserving value to our customers. We're also actively managing expenses, and we believe we can do so without impacting our sales, service, and broader growth initiatives. But most importantly, we remain focused on the long term and a return to more normalized Internet growth. We have what we believe are the best products at the best prices in our industry and we remain underpenetrated relative to our long-term potential. Taking advantage of that opportunity is what will ultimately create the most shareholder value. Operator, we're now ready for Q&A.

Thanks, everyone. I have one question for Chris and one for Jessica. Chris, could you provide some insight into whether there was a shift in competitive dynamics during the fourth quarter? It seemed that the competition among fixed wireless and fiber providers remained stable over the last few quarters. I'm curious if there has been a greater emphasis from fixed wireless or fiber in new markets specifically. And Jessica, the cash tax guidance looks promising. If bonus depreciation is extended this year, how much will that reduce the cash tax? Thank you.

Good. So, in terms of the competitive environment in the fourth quarter, as you mentioned, we saw some continued expansion of fixed wireless footprint within the quarter. We also saw heavier competitive marketing and some aggressive promotions from both fixed wireless and from the overbuilders. And as you know, Jonathan, slight impacts to gross adds and churn, in this case, it was particularly on the gross adds front, can drive what appear to be outsized changes to net adds, especially when net adds are slightly positive or slightly negative, really has an outsized impact. As you know, we're of course focused very much on the long term, but that doesn't mean that we're not focused on the short term either, particularly what was going on inside of the fourth quarter. And so, as I mentioned in the prepared remarks, we're really leaving no stone unturned on potential ways to improve go-to-market in the short term, particularly addressing gross adds in the existing footprint. We're doing all that though, looking at all aspects, but trying to make sure that we do that in a controlled fashion and don't overreact either given that it is small changes that are driving an outsized impact here.

Yeah. And I'd add on, the environment wasn't consistent through the quarter. Early on, we had some carryover from the Disney dispute in the August rate event that we talked about in last quarter's call. We had expected November and December to recover to the levels that we had seen going into that event, and they didn't. But as we exited the quarter, we saw December slightly negative, and January net adds are consistent with what we saw in December. So that environment does continue. On the cash tax side, Jonathan, it's not just bonus, it's also R&D and interest expense deductions that will impact us. But I would say the reforms that are being considered support the economics of our investments in connecting rural America and upgrading the network. And so, we are fully in support of them. I think it's a little premature to adjust our guidance. But given the investments that we're making, we do expect there to be a material benefit to cash taxes if the legislation were to go through.

Great. Thanks, guys.

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

Hi, thank you. A couple of questions. Jessica, thank you for the comments you made about ACP. I'm wondering if you can just try to quantify a little bit more for us the number of ACP subscribers that you have, and if you have insight into how many of those are new subscribers versus previously were paying subscribers. And then, I wonder if you could also just comment about T-Mobile indicated that they expect 100,000 to 150,000 fewer net adds per quarter in fixed wireless. How do you think about that flowing into your footprint? And does that inform the way you think about the broadband growth rate going forward?

I'll begin with the ACP program and provide some context before Jessica addresses your questions. As many are aware, the ACP program has enabled internet connectivity for customers who otherwise wouldn't have had access to broadband. More importantly, it has allowed customers facing affordability challenges to stay consistently connected rather than fluctuating in and out of the broadband market. We believe this program has been highly effective, and we are proud to be the largest ACP provider in the nation. We remain hopeful that the ACP will receive funding to keep current participants connected. However, if funding is not renewed, we will work diligently to maintain connectivity for our customers. We have been preparing for this situation for a while and possess various tools that can help customers save significant amounts of money. It’s worth noting that most of our ACP customers were internet subscribers before the program started. That said, it is challenging for us to predict the potential impact of the program ending on our customer disconnects, but we will continue to provide updates over time.

Yeah. So, on the numbers side, Craig, we have a little over 5 million households that received the ACP benefit, all for wireline Internet. Very few of those customers used ACP to upgrade to higher speeds or take more PSUs when they began receiving the benefit. But many do have our flagship speed or higher or do take other services from us. And I guess the funding will continue through April. We'll try to keep people informed as we move through the process. But from our perspective, there's not a lot of visibility at this point as to anything that might happen when the program ends.

In the end, we're still focused on trying to make sure that ACP is refunded, and I still think there's a strong possibility that could be the case.

Yes. Do you want to talk to the fixed wireless lower net add guidance?

Sure. So, we noted the same thing that you saw, Craig. I think the bigger point there is that there is a rational approach to the marketplace and the utilization of Spectrum. And I believe a recognition that there's a limited amount of capacity, the bandwidth needs are increasing. I think that was the bigger takeaway from us. It's very difficult for us to sit back and take a look at the geographic footprint of fixed wireless access because it almost changes by the day in terms of sector availability on radius in terms of capacity and where they're actively marketing and where they're not. And then, you have the additional rural footprint versus urban and suburban, and what would be off-footprint for us versus on-footprint and the split between residential and commercial, which makes it pretty difficult to mathematically cascade that into an impact for us. But I thought it was rational what we said, and I thought it made a lot of sense, and I think it's consistent with what we've always thought. Frankly, the piece that's been more difficult is just the timing in terms of where that capacity is reached, and it's been a little bit harder to predict than we would like. But I took that as the same way that you did that it should have some positive impact on our existing footprint.

Thank you.

Thanks, Craig. Luke, we'll take our next question, pleas.

Good morning. Chris, I have a question for you regarding CapEx, and then I want to ask Jessica about EBITDA growth. You've been in the cable industry for a long time, so you're certainly aware that investment priorities can shift. I'm curious why you decided to project out to 2027, especially in such a competitive industry where strategies are constantly evolving. It seems like you've placed more emphasis on line extensions rather than completing network evolution by 2025. We had initially thought it might slip into 2026, but now it clearly has. I would like to understand your rationale behind this, whether it's related to equipment availability or a strategic choice. Jessica, there's an expectation that 2024 will be a strong year for EBITDA growth for Charter, given your investments in OpEx. You mentioned a 3.5% growth in Q4 excluding advertising. Any insights you can provide regarding the financial performance for the business in 2024 would be appreciated. Thank you, everyone.

Sure. Leading into the last earnings call, we heard from shareholders about their challenges in projecting long-term capital expenditure trends due to the significant investment opportunities we have. Typically, we do not provide a multi-year outlook, and the only guidance we usually give is for in-year capital expenditures. However, these opportunities are particularly unique and rare. The chance to subsidize rural build and to experience the largest expansion of broadband and cable since the 1980s is something that doesn't happen often and is significant. We thought it was important for investors to understand both the size of our commitments and the potential returns on those investments, which Jessica has elaborated on. We've shared this information over the past two years, but we aimed to present it in a consolidated way so that stakeholders could grasp the overall investment and the associated returns, ensuring that this won't continue indefinitely and highlighting the potential for free cash flow growth. Although we usually prefer to keep our strategies close to our chest for flexibility and competitive reasons, I felt it was worthwhile to ensure our shareholders understood the value of the returns from our investments. We aim to strike a balance between maintaining our ability to make sound long-term decisions to generate free cash flow and being responsive to shareholder feedback. Regarding the prioritization of line extensions versus the DAA or DOCSIS 4 upgrade, it was less about prioritizing and more about the certification process for DAA equipment taking longer than expected, which affected our rollout timeline. We had to decide whether to proceed with the 1.2 gigahertz high-split upgrade under an integrated CMTS setup at the original pace or to delay slightly to accommodate the DAA certification process. We chose the latter to ensure that we could support the full capabilities of DOCSIS 4.0 over time. However, if in a couple of years we find opportunities to accelerate capital spending, we will certainly consider that. For now, this is our best assessment of our capital spending plans, and we wanted to clarify that the higher expenditures won't continue indefinitely.

Thank you.

On the EBITDA performance for 2024, I won’t provide specific EBITDA guidance, but I can share some insights. We have a political advertising year ahead, which will be beneficial. We've fully compensated for the investments made in our workforce. From an expense perspective, I expect to keep our cost to serve flat in absolute terms. In sales and marketing, there might be slight growth, around 2% to 3%. As mentioned earlier, we're examining expenses across the business to find ways to be more efficient and reduce costs without sacrificing service levels or sales capabilities. We recognize the importance of maintaining EBITDA growth in this environment and achieving strong growth in the coming year to support our long-term goals of investing for growth and returning to Internet customer growth. We believe the underlying dynamics are aligning to facilitate that growth. That's our current position.

Okay. Thank you.

Thanks, Ben.

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

Thank you for that insight, Jessica. I wanted to follow up on EBITDA growth, particularly focusing on revenue per customer, which has been fairly stable over the last few quarters. There are numerous factors at play regarding pricing and the shifting customer base with Spectrum One. How should we approach the outlook for 2024, especially after the recent price increase in August? Additionally, do you think your ability to adjust prices in the broadband market has shifted due to the current competitive environment, or can you maintain pricing strategies as we move forward? Also, regarding your mobile strategy, can you share how mobile is impacting churn rates in the broadband sector? Is it aiding in acquiring new connections and driving subscriber growth, or mainly focused on reducing churn? Lastly, what changes should we anticipate as you continue to implement your capacity expansion measures?

Sure, I'll begin with average revenue per user. When considering the overall average revenue per customer, the primary factor keeping it stable is the rate of video adoption. It is crucial for us to retain video customers through our package and pricing strategies. If we focus solely on Internet average revenue per user, you'll notice that, as I mentioned earlier, Internet ARPU continues to increase, and even when excluding the Spectrum One Mobile allocation, it is growing at a rate that is consistent with or possibly higher than historical trends. Regarding mobile, as I mentioned in the last call, since the free line offer has lapsed, the number of free lines in the system throughout 2024 is expected to remain more consistent compared to 2023. Consequently, the impact of the mobile allocation shifting to the Internet should stabilize over time, and mathematically, there will be a greater proportion of paying customers relative to free lines. I think that covers that point. Chris, do you want to discuss pricing power?

Sure. In broadband, our core perspective remains unchanged: in the long run, keeping prices low not only supports growth, but also reduces churn and minimizes the chance of being seen as an attractive target for overbuilding. While our views haven't shifted, we have faced inflationary pressures and are passing those costs through as much as possible. Lower pricing across the industry is generally a positive for long-term capacity and growth, but it doesn't mean we are immune to inflation or unwilling to adjust our prices when necessary. We are balancing significant investments in expansion with our goal of maintaining EBITDA growth, which is essential for our operations and our shareholders. Overall, I believe we are in a strong relative position. In the market, we've seen various operators raising their prices over time, reflecting the true value of the product and the need to recover costs, given the capital-intensive nature of the business. Regarding mobile churn, the connection of mobile services to our broadband business has significantly reduced churn among customers who opt for mobile, even though it currently represents only 13% of our customer base. This is a substantial positive development. However, we must be cautious not to overemphasize its benefits since it still constitutes a relatively small portion of our Internet customers. The percentage of new Internet customers who also take mobile has increased, raising the question of whether this is due to improved sales efforts or the actual influence of mobile on new customer acquisition. Given the numerous variables in play, I can't confidently say it's a major driver of new sales yet. Nonetheless, there is great potential not only for continuing churn reduction but also for driving acquisitions over time as we enhance product convergence. Our Spectrum One offering, which combines broadband, Internet, WiFi, and 5G as a backup, provides the fastest overall connectivity. This seamless connectivity is powerful and has the potential to not only decrease churn but also facilitate new customer acquisition in the future. We are at the beginning stages, but it is an exciting opportunity.

Okay. Thank you.

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

Good morning. I have a couple of questions on the subject of growth investment. Slide 11 discusses cost per core passing in your forecast of $2,000 to $2,500 and that struck me as high relative to historical core passings and even relative to fiber expansion. So, I wanted to see what you could share about your assumptions for penetration and ARPU in that footprint. And then, on a related note, again, on core growth investment, but moving over to BEAD, we've seen big increases over the last couple of years since the money for BEAD was allocated in the availability and uptake of fixed wireless services over midband. We expect more increases in the availability of LEO satellite services, not just Starlink, but Amazon's product. And so, I'm wondering if your outlook for penetration in that potential BEAD footprint is moderating and if that affects your appetite at all. Thank you.

I’ll begin with the question about cost per passing. The cost is influenced by the mix of commercial and enterprise passings alongside residential ones. The cost for residential passings is approximately $1,500. However, there are fewer commercial passings, but they contribute a larger dollar amount, which raises the average cost per passing. We aim to provide enough detail to help you develop a reasonable estimate for passings, allowing you to calculate the potential gains from the build.

In terms of market penetration, there are various types of builds involved. For serviceability, which refers to situations where customers request additional line extensions, the penetration rate is 85%, which is expected. In other segments like greenfield or market fill-in, penetration rates can vary between 45% and 70%, typically at a lower cost per passing, as noted by Jessica. The returns on these investments remain very attractive and have consistently been so. Regarding penetration in the context of BEAD with fixed wireless access or low Earth orbit satellite, LEO, I want to start with LEO. This service is relatively expensive on a monthly basis and also has high customer premise equipment costs. Given that our network may require significant capital investment every six to eight years, it's essential for pricing to reflect that. LEO may have specific use cases but isn't generally where our fiber network is implemented, so it hasn't influenced our penetration thoughts significantly. Fixed wireless access has proven to offer lower quality service at a reduced price, showing there's a market for it. However, our penetration expectations for RDOF and subsidized rural projects, which will contribute to BEAD, were already conservative in our projections compared to what we believe we can achieve. Presently, we are nearing 50% penetration in subsidized rural passings at the 12-month mark, whereas our initial estimate was to reach only half that within the same timeframe. We're performing significantly better than anticipated, and I believe the final penetration will surpass our initial RDOF projections, even with a stronger presence of fixed wireless access now compared to three or four years ago. In summary, this has been considered in our overall strategy, and it doesn't alter our expectations for terminal penetration since we were not overly ambitious in our initial assumptions.

We noted the growth rate at the 12-month mark is around 50%. However, as we analyze the different groups of customers, it's clear we are still experiencing solid growth at that stage. This indicates that we haven't exhausted our customer base for the product, and additional growth continues in those markets from that perspective.

It's early. It's going well.

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

Hi, thank you for taking my question. I wanted to follow up on the competitive landscape based on your earlier response. Can you provide insights on the impact of fixed wireless? Is it something specific to your non-fiber overlap areas, or is it affecting share in the 1-gig market as well in the fourth quarter and continuing into January? Additionally, can you give us an update on fiber overlap as we exit the year? Regarding the CBRS rollout, Comcast has been testing in partnership with you for some time and is now live in Philadelphia and other markets. How is your team approaching CBRS and what are your plans for offload strategy in the coming years? Thank you.

There's a lot there, Sebastiano. But here we go. So, fixed wireless impact, it is where they've deployed and it's in both fiber and non-fiber overlap. It's more acute in the non-fiber overlap because it’s the first time that somebody's had what they view as an alternative other than DSL. And so, it has a novelty factor in the non-overbuild footprint that is similar to a fiber overbuild that has an immediate short-term impact when it's new into the marketplace. So, it has a more pronounced impact there. But I think the overbuilders, the wireline overbuilders would tell you that fixed wireless access probably has had an impact on them as well. So, it's not that it doesn't have an impact in an overbuild territory. It's just much more pronounced in an area where the overbuild doesn't exist. Our overbuild percentage, in our 10-K today, I think, we disclosed as well that it's roughly 50% in terms of overbuild. And then, as it relates to CBRS, we are fully deployed and active with thousands of radio access networks out on the strand and MDUs in one large market today, and we're expanding into another market at some point this year. And that's going very well. And the pacing of that really is dictated by a few things. One is, our relationship with Verizon is good and strong. The economics are great. And this is an ROI-based deployment. So, it'll be there - the returns will be there when we deploy. But interestingly, the more penetrated we become, the more attractive the returns get. And so, from a deployment of capital perspective, CBRS is very exciting. It's a very clear mathematical return. But in an environment where we're deploying as much capital as we are and we have so much active activity on the outside plant in terms of high-split upgrade and construction of new networks, we're just pacing it along the way to manage all those factors in the way that we think about deployment of CBRS. But we're going to fully deploy it. It's exciting. It has a great return. The depth at which we employed in each market, it really is a function of utilization on a geographically specific area, and the attractive agreement and the great relationship that we have with Verizon today. So, that's strategic to us. So, all those factors play into the timing.

Thank you.

Thanks, operator. Thanks, everyone. We'll see you next quarter.

Thank you very much.