Good morning. I'm Sebastiano Petti, and I cover the telecom, cable, and satellite space here at JP Morgan. I'd like to welcome Jessica Fischer, CFO of Charter Communications. Jessica, thanks for joining us.
Happy to be here. Thanks, Sebastiano.
So, Jessica, while the operating environment for cable has been unique post-pandemic, you and Chris have focused on three main initiatives to position Charter for long-term growth. Perhaps update us on where you are with each of those initiatives and help us think about timelines and milestones from here.
Yeah. So the initiatives are all going really well. If I start with network evolution, we expect to complete our Step 1 markets inside of this year and to start on our Step 2 markets. If you think about what's happening across the data space, you know, having an upgraded network becomes increasingly important, because we think that speed and reliability, along with quality customer service, matter in the long term to winning in broadband. When we look at customers who do not take our video product, they're taking close to 800 GB a month of total data.
And when you upgrade the network across the board, and when cable ubiquitously upgrades across all customer spaces, I think you see what will become additional, data usage, across all markets, which continues to grow and make that, you know, speed and reliability more important. So we're excited about where we're going with network evolution, having multi-gigabit speeds in the downstream, gigabit speeds in the upstream. We think it'll allow us to win from a competitive perspective as we have better marketing claims against our competitors. And, we're doing well from a cost perspective as well, so coming in line with the $100 per passing, I think that we had expected.
And that doesn't include the benefits that you get from a financial perspective going forward, thinking about the benefits that you'll get both from a capital and an operating expense perspective, on a go-forward basis once you've sort of upgraded the components of the network. So I think that one is going well. And move on to the second initiative, thinking about expansion. The expansion projects are going extremely well. They continue to be in line from a cost perspective. Penetrations and early penetrations in particular continue to be quite strong inside of those markets, which puts us on target to achieve the mid to high teens IRRs that we set out to achieve in building those spaces.
We're still on track to complete 450,000 subsidized rural passings over the course of 2024. As a reminder, that starts out a little more slowly because of winter seasonality, but similar to last year, I think we'll pick up speed as we go further into the year. And so really excited with how execution against that expansion project is going. And then in the last one, thinking about execution and what we've been doing there, you know, we talked about in our fourth quarter call that we're working on really driving some automation and digitization initiatives in the business this year that'll help increase the efficiency of how the business operates.
We've gotten some of those sort of started, and they're starting to scale them, and I think we're seeing benefits both in terms of sort of lower calls handled in truck rolls, as well as in the efficiency and effectiveness with which our sales employees, our salespeople can handle calls. And so generating those tools that make our employee set more effective, I think is an important part of the story going forward and how you make the business financially more efficient as well. And when you put all of those together, you know, we've talked about that we know while we're investing in all of those initiatives, that it's also important for us to show growth on the EBITDA side. We have an expense initiative that I now sort of consider part of execution as well, right?
That, going and driving expense savings across the business in a way that doesn't negatively impact either our sales or service capabilities. And we are. We've been pretty successful in what we're finding and able to do there. And so when you bring it all together, I think we're happy with how all of the initiatives are progressing across the business.
Great. A lot to come back to there. But starting with broadband, on the 1Q call, you highlighted that churn remains near lows, but gross adds have remained, have been pressured due to the competition, as well as some perhaps reversion back to mobile only. So as we approach the halfway mark of the seasonally softer second quarter, any update you can give us on what you're seeing in the broadband ecosystem?
Yeah, the market continues to be challenging. We're competing well, but you continue to have lower market activity, and you also have sort of the incoming disruption from ACP.
Yeah.
And so it's still a challenging space.
Okay, and so with ACP, you have several attempts to renew funding for the program in the Senate recently. Any hopes this can get done in a timeline so as to limit disruption? And I guess help us think, you know, or remind us on some of the ways that you're managing through, you know, the program, you know, the unwind, given the uncertainty.
Yeah, we're still hopeful, but the disruption has already started, right? So, bills started going out with $15 rather than $30 subsidies on May 1. But I think what we've done is really to—we've been proceeding forward as though ACP would end, and we have all of the tools that we need to be able to manage through the process, which include that we have a high-quality sales and retention workforce, we have a solid set of offers available to them, so the tools that they need to be able to retain customers. And we have a mobile product that can save people hundreds or even thousands of dollars.
And so the opportunity for us to bring people into mobile and to use that, as a way to have savings that can replace ACP, if you will, I think is really strong. So we believe that we are well prepared, to deal with the coming disruption in activity, and we'll do it.
It's still too early in terms of, you know, helping us think about the impacts of the program in terms of churn, non-pay, in terms of what you're seeing thus far?
Yeah, I think it's still way too early. You know, there's been very little thus far in terms of residual disconnects related to ACP in May, but that's not inconsistent with what we would have expected. I think the real impact that we'll see will probably come over the June and July time frames, with, you know, non-pay then even extending beyond that.
Right. And so just on that point, because I think you talked a little bit about it or alluded to it a little bit on the call, but in terms of the subscriber headwind, it's probably more of a 3Q thing, or, you know, the bulk of it would perhaps be in 3Q, but bad debt is more of something we'd see in 2Q as you start to accrue for some of that?
Yeah
Is that the right way to think about it?
I think you can think of the subscriber headwind happens across both quarters, but it's split. What hits inside of 2Q is more related to people who call in because they wanna because they're seeking change or because they wanna disconnect their service. And then it's non-pay that extends into Q3, and even maybe a tiny amount into Q4. From a bad debt perspective, I think you'll have some bad debt impact across both quarters. Yeah, so I... But I think we'll have more visibility as we get to the 2Q call.
Okay. So, just at a high level, as you look across the cable industry, I'm thinking about, you know, and I think, Chris touched on this a little bit last week, but what, you know, what underlies the confidence in rebounding broadband gross adds, you know, over the long term for cable, as you think about competitive environment, FWA? You know, pressure might fade, but you have that fiber overlap that will continue to march higher. So I guess, what are some of the levers at Charter's disposal to, you know, help improve the broadband gross add trajectory, just, again, given the outsized market share?
Yeah. And so I think about speed and reliability. I think about high-quality customer service, and then differentiation, right? So on the speed and reliability side, the investments that we're making in the network upgrades, I think both will improve our ability to have marketing claims in the market. They'll improve the reliability of our service as you sort of change out the components of the network, as well as going to the Distributed Access Architecture, which improves your speed and reliability there. And they'll seed the products in the market that will generate the next stage of demand for broadband, which will actually then, in turn, make speed and reliability more important. And then you combine those with the other things that we're doing, right?
With a mobile product, where mobile works better because of being combined with our broadband product. So driving convergence, which drives growth both in mobile, and which delivers margin to the business and drives growth because of the way that the mobile enhances the stickiness of the broadband product. You think about what we're doing in video, where we're looking at ways to drive value into the video product. Video, still today, provides some differentiation from a sales perspective in the market. If we have a differentiated video product by virtue of being able to pull all of those things in that people want or to deliver right-sized packages to customers, I think the combination of those things drives differentiation then in video.
You combine that all with the investments we're making in having a really high-quality customer service infrastructure, being able to deliver on that service to customers when it matters. I think you pull those together, and we have the ability to continue to win in the broadband market, and to sort of move past this moment that we have, where both the market growth and the competitive moment is different from where we've been before, into a longer term, where I think, I think cable and broadband do continue to grow.
Sure. So you've been, you know, touching on it this morning, but can you just remind us of the network evolution and RDOF build timelines? Still on track to complete all the network evolution by 2026 and RDOF builds by 2026 as well, which I think is a couple of years ahead of schedule. So maybe help us think about the pace of those builds and, you know, also balancing that against the backdrop of delevering share repurchases, share repurchases.
Yeah. So, if I hit the second question first, from a capital allocation perspective, our priorities haven't changed, right?
Which is that first we wanna be able to invest in higher ROI projects in the business, and then after that, we think about accretive M&A, and then really managing the balance sheet comes at the end of that. The business is continuing to deliver strong cash flows, and we believe that we have enough cash flows to be able to execute against our initiatives while still doing what we've talked about from a leverage and buybacks perspective. In terms of the projects themselves, you know, the projects are executing on time. So I think we have the ability both to complete RDOF and network evolution by the end of 2026. The things that would take that off track, right?
So if there were technological changes coming and you said, "Hey, maybe I need to wait a moment to be ready for the next stage of technology," on the network evolution side, like, I think there are changes you might make there. If there's an efficiency of delivery, where across the business, we say: "Hey, we will be more efficient in delivering these upgrades overall if we slow them down in one way or another," and I would categorise those. If it's the best thing to do for the business, then we'll slow those investments down.
And if for some reason you came to a moment where you said, from a total capital perspective, it makes sense for us to shift what we're doing here to accommodate what the market can expect, which I think we did a little bit of that this year, we could make that decision. But right now, I think that we believe that with what we've laid out, what we laid out in the long-term capital plan, we can execute against the investments that we need to make, and we can do it while continuing to do what we've said we will on the buyback and the leverage side.
I definitely wanna come back to the capital allocation in a minute, but just sticking with network and how you're thinking about build cadence, does BEAD look any less interesting today, given your maybe updated views on leverage?
So BEAD continues to be a really interesting project because it is a first-of-its-kind opportunity for subsidies at the level that they're available to be available to build broadband. And there are good high ROI opportunities that we think that we should be able to go get, and we think the subsidy will be available once to get those. And either it will be us or it will be someone else, right? And so we continue to have reason to go, to want to go after those BEAD builds. The impediment really is, I think some states it appears could have rules that are not conducive to private investment or to our investment.
So there could be some limitation to the total amount we invest that's related to our lack of willingness to bid in states where we won't be able to get the returns because the rules aren't conducive to it. But I think even in spite of that, you know, we're going to make the right long-term decision for the business, which I think in many cases involves investing in those high ROI projects, and I think that there will be a good amount of them available for us to go get.
Yeah, and so speaking of one of those high ROI projects, rural remains a key priority. And so why is this such an attractive opportunity as you think about... You know, obviously, you touched upon it a little bit with BEAD, you know, good ROI opportunities, but the current, I guess, rural subsidized program that you have, how should we think about that, you know, setting up Charter or positioning Charter for, you know, great returns or over the long run here?
Yeah. It's hard to overstate the tremendous demand for proper broadband in rural markets, right? And so, I think that's why we continue to see, as we go into those markets, higher penetrations than we might have anticipated, and why I think you can have a higher cost per passing and still deliver well from an overall return perspective in those markets. In addition to that, you know, when you provide rural broadband to a community, it's not just the connection you provide. You're providing connectivity to telehealth, you're providing connectivity to education opportunities. You're providing the ability for someone who sometimes works from home or who has a child who might wanna do education from home, to buy homes in that community.
And so some of those communities we invest in over time will move from being rural communities to being suburban communities because they have connectivity. And we haven't factored that into the way we sort of model for returns in those spaces, but I think even the returns that we are getting will lead to future growth opportunities because of what it means to bring broadband to rural.
Okay. So, segueing to convergence on the 1Q call, Chris said less than 8% of total passings take the company's internet or mobile bundle today. Similarly, from a dollars perspective, Charter captures less than 30% of residential internet and mobile spend. So where can these go long- term? I think on the call, the team talked about maybe needing to perhaps educate consumers on Charter's value proposition in convergence. How do you do that?
Yeah. So we have high expectations for the mobile product. And we can have those because it's the fastest product in the market, because it is priced better than any other product in the market, and because it's differentiated because of things like Mobile Speed Boost and Anytime Upgrade. And so with all of those things, we have a lot of confidence in our ability to grow mobile. I think there's sort of two things, when we talk about sort of how we've been packaging it, that we've been thinking through. One is about how you market the bundle, or how you talk to consumers about the bundle instead of the components. You might have someone who would call in and say, "Hey, I can get this pricing for standalone cell phone internet," right?
And with that pricing, I'm lower than you-"... But if you come back to them and say, "Look, to get that pricing, that means that you're overpaying for mobile on this side, right?" Which means that what we need our sales force to be able to do is to say, "Look, let's not talk about just the broadband pricing. Let's talk about the total pricing of your connectivity services, because in the bundle, we're priced better than everyone else, and we also have a better product for the customer." And so I think if we can execute on that sort of conversation and bring consumers into that bundled discussion about both the quality of the products and the better pricing that they can get by being with Charter, that we'll be more successful there.
The second piece is just thinking about branding, right? So we have a mobile product. It's been in the market for a few years now, but we still haven't fully won consumer trust from a, like, this is a true high-quality connection that I want to have as my mobile connection. I think over time, through additional marketing, through having the fastest product in the market, and differentiating by being better because of its association with our Wi-Fi and broadband network, that we will move into that sort of being a more respected, sort of major brand in the market. And I think if we get those two things right, like, the path for mobile is really, like, pretty incredible.
We have a great product, and it's differentiated in the market, and it should be able to drive both the growth for the business on the mobile side and overall growth for the business, as it makes our broadband more valuable to consumers.
Should we think about some of the recent, I guess, initiatives, on the mobile side in terms of, I think, device and Contract Buyouts? You kinda had some other, interesting, I guess, product announcements recently. Is this just trying to continue to kinda spur demand in terms of trying to maybe unlock some of these maybe lines that might be stuck in contracts? How should we think about-
Yeah, so the two big launches, right? Anytime Upgrade-
Yep.
Exciting because it's a way for us to move people into our Unlimited Plus product, and to provide them with an opportunity to have new devices on a regular cadence, without doing the same kind of device subsidies that you've seen for other mobile providers.
Yep.
So, really limiting the financial impact and the cash flow impact of having to of the device ecosystem, while providing customers what they want, which is access to new devices on a regular basis. Contract Buyout is super targeted, but it is. It's exactly what you're talking about, trying to go after those multi-line homes that are difficult to get because you have someone who's wrapped into a contract on maybe one or two of the lines in a three or four-line household.
And so really, to give us the ability to go after that particular segment, and I think with it, because of what you're bringing in terms of bringing the multi-line household, still very accretive to the business, and targeted appropriately to go after exactly what it is that we're trying to grow.
So want to make sure we cover some, you know, some interesting other product questions, probably to go through, but wanted to jump ahead a little bit here. In thinking about the costs in the business and, you know, the opportunity for, you know, EBITDA growth, which you touched on earlier. So you provided some cost guidance on the 4Q call, but, you know, now expectations are now to probably trend maybe a little bit better than some of those targets, I think, which it seems as though these cost efforts could be quite sizable, given just the expense performance in the first quarter here. So can you help us think about maybe the geography of the cost savings programs, and maybe what could trend a little bit better or worse versus, you know, expectations, kinda given the environment we're in? Obviously, ACP-
Yeah
... A little bit of a wild card in terms of what that might mean, but broadly, I guess, you know, how should we be thinking about the different cost efforts underway?
Yeah, so cost efforts have been really successful, and I would tell you, it's both short-term and long-term, small, medium, and large, hitting kind of across the business. The line items that I would call out, so if you think about cost to service customers, we gave an outlook in Q4 that we thought that that would, that that item would be flattish across the year. I would highlight that we gave that outlook without being thinking about the impact of ACP going away at the time.
Yep.
So the bad debt that could come out of ACP wasn't included in that. If I continue to exclude that ACP bad debt, I think cost to serve does better than what we had there, well, as a result of the cost efforts.
Mm-hmm.
Excuse me. I think sales and marketing also does better, though perhaps by not as much as what you'll see in cost to service. And then I think, you know, the other initiatives that are happening across the business, you know, I think we could do... I think that we could have a sort of good expense management across kind of a number of other expense lines. But those are the two that I would highlight.
Okay. That's helpful. And then, just thinking about... Excuse me here. Yep. Just thinking about the second quarter, I think, or on the first quarter, you talked about, you know, generating EBITDA growth in 2024, aided by these cost efforts. You also have Spectrum One promo roll-off, which'll be a tailwind, and political advertising. And so, but in the second quarter, you said growth would be, quote, "muted" due to the, some of the headwinds that you just kinda talked about: bad debt, tough comp, as well as one-time ARPU impact. Can you maybe help clarify the muted growth comment for us, and could we see year-over-year EBITDA growth within the second quarter?
... Could EBITDA grow in the second quarter? Yeah, that's our goal, right? But there are items that... There's still uncertainty there, right? You gotta think about, we have a close eye on ACP. We have a close eye on what is a pretty tough comp and other expenses. And so could we get there? Yes, I think it's quite possible. But we're keeping an eye on it.
Okay. So shifting back to capital allocation priorities and the balance sheet, you now expect to move closer to the middle of your 4x-4.5x leverage target through the end of this year, giving yourselves a little bit of headroom, given your peak levels of investment. How should we think about the timeline to get to this level? I mean, is the glide path down to the middle point of that range more something we should be thinking about as we get into maybe next year, or is it, you know, indeterminate?
So we guided that we'll get closer to the middle of the 4x-4.5 x range by the end of the year. We continue to assess leverage all the time, and I think where we'll move from there will be part of that sort of continual assessment. We are committed to maintaining our split-rated debt structure. We're committed, in particular, to maintaining the investment grade portion, the investment grade rating on that portion of the debt structure. And I think that we can continue to do that while we balance the set of things that we would like to do, right?
Which is make investments in the business, buy back shares at what I think are quite attractive levels, and manage leverage as we're in the height of our investment cycle.
I think some questions still about, you know, why does the 4x-4.5 x range still make sense long term?
Yeah, I mean, when I think about the trajectory of the business overall, right, we are always thinking about, in the long term, how do you manage to cash flow growth? And cash flow growth, I think, is the thing that makes the leverage then continue to be attractive for the business. And if I think about how you get there, you know, we talked about, like, well, how do you grow broadband in the long term? I think we're making the investments that'll be necessary to continue to grow broadband. I think we're growing the mobile business, and we'll have continuing growth out of the margin that you make in the mobile business.
I think we're differentiating, differentiating our video product such that you can hopefully slow the negative impact that video has had on cash flow growth, and, you know, utilize that video product to continue to, to continue to improve the trajectory that you can have in overall broadband. We're investing to make the, the business more efficient so that you can continue to increase the financial efficiency with which you sort of generate cash flow off the business. Then you look at where we are in the investment cycle.
You know, we provided that longer-term outlook for CapEx on our Q4 call, because what happens over the next few years, as we complete the RDOF build, as we complete our network evolution, is really that you have the chance to accelerate growth of cash flow quite quickly, just by sort of coming out of the end of your capital investments. And so I think you have the trajectory for a good acceleration in the cash flow of the business, followed by then reaping the benefits of the investments that we're making across evolution, across expanding our network, and across that increased efficiency that you get in execution to continue to grow cash flow in the long term.
That's the scenario in which leverage then provides a benefit, right, to the business in the long run. And based on our ability, our belief that we can continue to grow cash flow, I think that 4x-4.5 x range continues to make sense. Obviously, there are things that have changed over the last few years. Interest rates are higher than they were before, though they're not higher than they were when we set the 4x-4.5 x range more than 10 years ago. And we continue to have a very favorable overall balance sheet and debt structure.
There is this moment where we have more competitive, where we have more challenged growth in the business, driven by the combination of what's happening in the competitive environment and what's happening in the overall market environment, but we continue to believe that we can grow broadband in the long term. And so with all of those things put together, I think the range continues to be the right space.
On the call, you reiterated expectations to maintain buybacks this year, even as you focus on delevering. I don't believe you were trying to be prescriptive on the level of buybacks or cadence, but how should we think about this? And perhaps, maybe, how do you think about the trade-offs between share repurchases paying down debt?
Yeah. The shares are really attractive right now, right? But our overall capital allocation prioritization hasn't changed. We believe that we can continue to both execute against this delevering that we talked about, moving closer to the midpoint of the range over the course of the year, and maintain some level of share buybacks. But share buybacks do become kind of the last item in that equation, right? And so timing of cash flow, timing of CapEx, timing of cash tax payments and working capital does matter in kind of how you get there.
I think it's best for shareholders that we not be prescriptive about exactly the amount of buybacks that we're going to do, because it might then cause you to make the wrong decisions in other sections of your capital allocation. But I do believe that with the trajectory that we're on, that we can continue to do both.
Okay. So, shifting gears a bit here, you mentioned the video strategy earlier on. Help us think about... You know, obviously, the strategy is an interesting topic for cable and media investors, particularly over the last nine months. Where are you in terms of modernizing your agreements?
You know, we've had conversations with all of the major programmers. Our position continues to be the same: we're not gonna pay twice for linear content. We're not gonna force consumers to pay twice for linear content, to then pay again in the DTC environment. We will either buy the content bundled together and deliver it to consumers that way, or we're happy to sell DTCs in as a standalone to our broadband customers. But ultimately, I think we continue to believe this is the right thing for the video ecosystem. I actually have thought it was interesting, even over the last few weeks. Clearly, the programmers have re-embraced the bundle or at least bundling.
Right.
And I think it's the right thing to do for consumers. I think it's the right thing to do for the video business. I think that we will get people to that place. And so we're really excited about what I think we'll be able to deliver over the course of the next year in terms of better video products for consumers.
Yeah, so Chris did touch on, you know, your hybrid DTC linear video model being fully deployed next year, which I think at that point, we'll, you know, we'll see probably more pricing, packaging, flexibility for, from Charter. But I, but I struggle with, you know, when, when do we see those efforts begin to show up in terms of volumes? I mean, should how should investors think about or measure success of this new, you know, opportunity in video?
Yeah. Video is still challenged, particularly linear, linear video. But I think from our perspective, what success looks like is being able to deliver a product that delivers value to the consumer and margin to us at the same time, right? And so, because if you can do that, what is it that video does for the business? It offers a halo. It creates selling opportunities for customers who are interested in your video packages. It creates a stickier customer who has both video and internet service from you, which means that it not only gives you some accretive margin, but it enhances the broadband business as well. And so I think if we're able to do that, ultimately, that will be success from our perspective, and I think that we'll get there.
Okay. And so finishing up here with business services. So SMB is a big focus for your telco competitors, and we've seen unit growth slow in this segment. Do you expect this pressure to be transient, and when can we expect SMB to return to growth?
So some of the problems that you see in SMB are the same as what you see in resi. Fixed wireless has obviously had an impact in the SMB space. There are also some additional pressures. You see slimming of video packages and taking fewer voice lines that has some impact on ARPU. But we still... You know, there is still good opportunity in the SMB space. I think that there will be good opportunity to sell mobile in SMB. And really, we're still under-penetrated versus incumbent telcos, who had taken a much larger portion of that space in particular. And so over time, I still expect us to be able to grow in SMB.
But once again, there's sort of this moment that you have to work your way through, particularly with fixed wireless and that.
Yeah, and I think on the enterprise side, there's obviously been that wholesale cell tower backhaul pressure for a while. But on the retail side, you know, enterprise, you know, you're seeing decent volume growth there. Any help on how we should be thinking about the drivers of that?
Yeah, I think we've had really exciting growth in enterprise over the last few quarters, actually, particularly part of... You know, the retail and wholesale growth is a bit disguised by cell tower backhaul. But they've been executing really well. If I think about their... We don't have the same overhang that the incumbent telcos have with managed service businesses. And instead, you know, we've been really focused. We have a lot of connected buildings. We've been focused on moving into new verticals and expanding in verticals that are a good fit for our product. We've been focused on moving upmarket to deliver to larger clients across the enterprise space, as well as, you know, capitalizing on those conversions from managed services into more fiber internet access connections-
Yep
... and delivering those across businesses. I think all of those have been really successful, and we're excited about the trajectory that I think the enterprise business can continue to have going forward.
Great. Thanks, everyone, for joining us, and thank you, Jessica.
Thanks.