Good afternoon, everybody. Welcome to the Charter Fireside Chat at the Goldman Sachs Communacopia + Technology Conference. My name is Mike Ng, and I cover media, cable, telecom here at the firm. I have the wonderful privilege of introducing Chris Winfrey, who's the CEO of Charter. First and foremost, thank you so much for being here this afternoon and for participating in our conference, Chris. It's an absolute pleasure.
Good as always.
Awesome. To start things out, I was just wondering if we could talk a little bit about Cox and the overall strategy. The transaction recently closed, so maybe you can walk through the broader opportunity for Charter at a high level.
Sure. The combination now makes Spectrum the leading internet and video provider in the country and the fastest mobile operator in our footprint with the fastest growth inside of our footprint. We get the privilege of doing that over 70 million passings, meaning residential and business passings, 45 different states. Doing that with a network that is, in all respects, ubiquitously deployed and vastly superior to the majority of the competition in the marketplace. Also, not only because it's gigabit capable everywhere and it's now increasingly symmetric and multi-gig capable, but also because we have the benefit of wireline and wireless convergence everywhere we operate. You combine that with a commitment and a guarantee to save customers over $1,000 when they take two mobile lines together with our internet. I think the best video product in the industry today through Xumo together with our seamless entertainment.
You end up with something that's a really compelling opportunity. Best network, best products, save customers lots of money, 24/7 U.S.-based service. It doesn't mean that we're not without challenges. We got new competition, we got low mover rates and low new build rates. I think we have opportunities short term to really improve both our go-to-market and our Net Promoter Score, our service reputation. But long term, I do think we win in the marketplace because of the assets that we have and our ability to service those 70 million passings. There's 37 million of those customers. The opportunity to your question is really nearly 35 million passings that don't take a service from us today, and we still think that's the real opportunity here.
Great. Wonderful. Maybe you can expand a little bit around the opportunity related to the new Cox asset specifically. What does that integration look like? How does the go-to-market strategy within the Cox footprint change? Any thoughts on the timeline that you could share with us?
Sure. We closed a couple of weeks ago. We started introducing our Spectrum Internet standalone pricing, free mobile line offer. That's really preliminary out of the gate. In about a week's time, we'll rebrand the entire former Cox markets into Spectrum. We'll launch new pricing and packaging with our products. A guarantee to save $1,000 when you take our products. Having our products pricing and packaging in the marketplace for both residential and business services. So far the integration has gone very well, and we expect to have success doing that. Over time, we'll onshore the offshore call center activity into the U.S. We've already started hiring for over 1,000 employees for different sales positions that did not exist in the former Cox markets to begin with. We'll normalize the overall operations over time. But it's really significant.
I think the upside that we'll get with Cox, and upside for the legacy Spectrum footprint with the new B2B assets that we're acquiring inside of Cox as well.
Right. Continuing to execute and invest in the asset. One of the notable new executives is Nick Jeffery.
Yeah.
Unrelated to Cox, but he started at Charter last week.
Yes.
How does Nick fit into the overall goals and plans?
Nick has a lot of great qualities, but if you take a look at his track record, a couple of things really stand out in terms of what he was able to do is walk into businesses and significantly improve both their go-to-market capability as well as their Net Promoter Score and their service reputation in the marketplace. He has experience across B2B, wireless at Vodafone, and then most recently Frontier, where it was a fiber overbuilder. Being able to take those businesses with the assets that they had versus what I think is a much stronger set of assets that we have today.
Really somebody coming from the outside of the cable industry with the view and the ability to go make a pretty significant change in the two areas that we need the most right now, which is an improved go-to-market strategy and an improvement in our service reputation and Net Promoter Score. It really was opportune, so I think it's a great fit. Now, it's a week in, so he's still finding his way around the building and whatnot, but he's going to move fairly quickly, and we're open-minded to doing things differently, and I think we need to. We could have sat back and just said, "Rest on our laurels." Know that the level of new competition will subside. It's not competition, but the level of new competition. We do have the best networks and products. We can save customers money.
We're impatient, and that's good, and we want to do better now. So the opportunity to bring somebody like Nick in was great for us. So I'm excited. He joins us as Chief Operating Officer September 1st.
Great. On that topic of competition, maybe specifically on broadband. Cable broadband is certainly facing competition at the high end from fiber, at the value side from Fixed Wireless. Obviously, satellite is also coming into the picture in a more meaningful way. I was just wondering if you could mark to market, talk to us about what the competitive dynamics look like in the market for cable broadband right now, and maybe just hit some of those key competitor cohorts.
Look, I think we compete really well against any one of those in a regular environment where there's less new forms of competition taking place. If you think about fiber, people talk about it as the high end. I look at it and say we've got competitive speeds and capability, but with wireless combined in a way that nobody else can do. So we have the opportunity to go to market and save customers lots of money with a market-leading speed on broadband and the fastest mobile product in the marketplace because of our convergence. When I look at Fixed Wireless Access, it's a faster, more reliable product, and even though they will tell you that they're saving money because of the low price point, the reality is if you take a look at how they sell it's together generally with mobile, together with Fixed Wireless Access.
When you look at it that way, we are a much better value. We save customers money. It goes back a little bit to we need to improve our messaging on value and utility. I think we win in that space long term because of quality and value as well. Finally on satellite, certainly keeping a close eye on it. There is a lot of smart people doing satellite with pretty significant capital allocation capabilities. It is not lost on us. We are keeping a close eye on it. Right now, it really is much more reserved for the rural space, and I think it is a great product in that environment. We are keeping a close eye on it. Could it be complementary to us? Yes, maybe.
So far, our product has faster speeds, it has better reliability, it has a better installation process, and it is more ubiquitously available, and it has video, and it has mobile to the extent you want those. So I think we are pretty well situated for the long term. Great.
Relatedly, I think what has been top of mind for a lot of people is just what is happening in the broadband industry as it relates to pricing and promotion. The telco carrier is obviously progressively marketing converged offerings. Some of that materializes in the form of fiber pricing. One of your peers talked about aggressive fiber pricing in the quarter.
Yeah.
Maybe you could just share your thoughts around promotional intensity pricing on broadband in the industry right now.
Look, it was very competitive in Q1, it was very competitive in Q2, and it continues to be competitive in Q3. You see ebbs and flows of who's getting more competitive, who's backing off, who's doing it with a convergence bundle, who's doing it single play. There's a lot of ebbs and flows. But it's been competitive, and it remains competitive, and it doesn't change anything that I just talked about, either for the long term or what we can do in the short term and do better ourselves instead of focusing externally and say, "What can we do better to lower our churn, improve sales by having a better service reputation, and doing a better job of articulating our value and utility?
Great. Then for Charter specifically, just sticking with the theme of pricing, I think Charter expects overall connectivity ARPU to expand this year. What are the primary drivers here? How important is pricing that I think was implemented in July through August in achieving some of that ARPU growth?
Yeah. We think about ARPU in terms of ARPU per passing, ARPU per customer relationship, and then the third one is connectivity ARPU, which you asked about. The ability to sustain connectivity ARPU, a healthy connectivity ARPU, comes about mobile line growth is significant. It's untapped for us still, even more so in Cox. The ability to have up-tiering of our existing services on higher speeds like Gig. We're very low penetrated on Gig, and we didn't really start to push that until probably a year and a half, two years ago. So we had a long runway for higher tier speeds. Now with the introduction of Invincible WiFi, which is a value-added service, and it's gone very well, then promotional roll-offs, and we recently had a legacy cost pass-through on broadband as well.
So we have a lot of different levers all at work to be able to help us maintain a healthy connectivity ARPU and be competitive in the marketplace.
Great. You mentioned at the onset that Cox Internet customers who do not subscribe to Cox Mobile now can get a free wireless line from Charter. How do the converge penetration rates at Cox compare to what you are seeing—
Yeah.
At Charter's legacy footprint? More broadly, how would you define success for the free line promotional strategy? What are you seeing in some of those free-to-paid conversions to date?
Look, the mobile penetration to internet at Cox is tiny. It is almost nonexistent, so the opportunity there is big. It is 20% at legacy Spectrum, and that is untapped. When you think about the fastest mobile product in terms of speeds combined with the best pricing in the marketplace, you would ask and say, "Well, why is it that every internet customer has at least a couple mobile lines attached?" I would agree. That same opportunity exists for Cox. The free mobile line, something we put in place years ago together with Spectrum One, which is the combination of high-speed internet together with WiFi and mobile, 5G mobile, working together in a converged way across our entire footprint and across the Xfinity and the legacy Cox footprint as well. That opportunity is significant, and when we offer the free mobile line, it sticks.
We found that a year and a half, two years ago, I think it caught people by surprise, but it is because it is such a good product because even when it rolls off, it rolls off at a price point that you cannot match in the marketplace. So of course it sticks. It is great value. So we have started doing the same thing at Cox. No surprise, I think it is well known, the level of net losses for internet and video and the level were much higher at Cox. So coming into that, even from day one at close, we started introducing the free mobile line, better internet pricing. So it is late in the quarter, so do not take this for more than it is, but already you can see a sales uplift.
And that's prior to Spectrum Day, which takes place really next week, where we launch the full set of products in our pricing and packaging. I expect us to sell more, and I expect us to have lower churn as a result of those products and pricing being in the marketplace.
Great. Continuing with the bundling theme, maybe we could talk about video, where broadband customers who also have video have 40% lower churn, and your video subscriber losses have shown a notable improvement. I think what you've done in terms of the streaming inclusions is very impressive, and there clearly is a lot of value for customers. So, maybe you can talk about the video outlook, the opportunity within Cox.
Yeah.
Yeah.
Look, I think we've got the best video product in the country. We have the number one rated Spectrum TV App. It is the most used virtual MVPD, if you want to call it that, across the entire country. It creates incredible value for customers by having $130 worth of programmer apps included. We've done the unthinkable, which was stabilized at the current Spectrum. We stabled the video base. I want to be clear, our goal is not about video net ads. It's not about stabilization. I tell this to the programmers all the time. The only reason that we've continued to invest in the video business is to the extent it can help our broadband business, either at the point of acquisition or the point of retention. Yes, we still have gross margin in video, but not a whole lot.
The real value here is to use video, similar to what we do with mobile, which actually has a much better margin on a standalone basis, is to use video in a way that drives internet acquisition and retention. At Cox, the former Cox footprint, soon to be the new Spectrum footprint, the video penetration is around 10%. Not that that's the objective, but just because so much tremendous value is in Spectrum TV App, combination with Xumo, the streaming apps all included. I predict we're going to grow video for a period of time in the former Cox market simply because of the value and utility that's there and the low penetration that exists today. But again, we're not in it for some pyrrhic victory to go pound our chest on growing video.
It's really about making sure that we and the programmers can do everything we can to support the ecosystem so that we can support our broadband ecosystem.
Yeah. If I could just follow up around the comment you made around the discussions with the programmers. I think there's a long-held belief that TV networks always get an increase in rate per subscriber, and I think there's a justification in the sense that programming costs for them go up, whether that's contractually because of sports or otherwise. But as you rightfully pointed out, it's not as strategic as it once was for Charter.
Yep.
What's the right way to think about programming cost per sub increases on your side? Is it more about packaging? Yeah, just—
No, I think, look, we have flexibility to be able to offer different packages for different audiences. The one that we typically focus on is the traditional expanded basic, which does have all of these apps included. I think it's the best value. But because it includes sports and it includes retrans, by definitions, it's the most expensive. So we're not going to take the video package and force it upon customers. It's going to be for those customers who are going to take that type of package anyway and can get a lot of value and save money as a result. So it's going to be helping our broadband relationship as opposed to creating a liability. I think the rate increases that come through from programmers, not helpful to their ecosystem.
I also understand where they're coming from with an increase in sports right cost, but it's going to become a more expensive product for the programmers and for our customers. But it's also a much more expensive cost for individual subscribers who are trying to piecemeal it all together. When you start to take now sports being in Netflix, Amazon Prime, and you take a look at all the different DTC apps, we actually provide all of general news, entertainment, broadcast, and sports in a way that if that's what you want to have in a typical family household, it's a lot of value, and it's a lot of utility because you actually have it in one single place inside Xumo with unified search and discovery. I think a long time ago, we crossed the Rubicon of saying this is going to be for everybody.
It's for the household that wants it. For us, it's about driving broadband relationships.
Great. Moving over and just talking about cost savings and synergies. For Cox, the company has guided to at least $800 million of synergies, but you've certainly also noted that there's an upward bias to those numbers, and it could trend closer to $1 billion. What's driving that potential upside now that you've got the company officially folded in? Do you feel more confident about achieving those upside numbers?
Yeah. Look, it'll be over $1 billion of transaction OPEX synergies. It's pretty clear to us now, and I feel comfortable saying that it comes through a combination of procurement and overhead, deep duplication of resources, and the larger scale that we have and the different vendor contracts that exist at Spectrum today. I will also tell you that transaction synergies, they're a one-time permanent step up in a cost structure or a step down in a cost structure and a permanent step up in margin. It is not the reason to do M&A. The reason is for the operating synergies, the ability to grow the company faster, to have a different operating model that sits on top, and to grow in residential and in the B2B segment, where Cox brings some real benefits to us along the way as well.
We're really confident around the transaction OPEX synergies. Certainly, it's helpful. It will be higher than we initially estimated. But that alone isn't really the reason to go do a transaction.
And maybe just on that point, as you think about the B2B opportunity, maybe you can just expand a little bit on that. Could you elaborate a little bit on the opportunities from the addition of, I think, Segra, which is Cox's fiber-based provider serving commercial enterprises and carriers, and RapidScale, which is its cloud-based services provider, alongside everything else that they're doing in B2B?
This is one of those areas and of a combination where it actually is very complementary. It's not just scale, and certainly scale in a B2B space to have a near national footprint helps. But the things that we do really well are areas that could be improved at Cox, and the areas that Cox did really well are areas that certainly we were lacking. And pound for pound, Cox is the largest cable provider with B2B services, more than Xfinity, more than Spectrum. But the different segments, if you think about it, small business, Spectrum is much higher penetrated than Cox. So that's a real opportunity in the Cox footprint. It's driven predominantly based on our pricing and packaging, which will go into the market starting next week.
On the other hand, if you think about Segra, which you asked about, Segra is a fiber-based provider who operates actually in a lot of these legacy Spectrum markets. So as a separate brand and a separate clientele, Segra now has the ability to go sell on net inside of the Spectrum footprint. Some of which they had before, now can do it at lower cost of avoiding T ype 2 circuits for existing and new customers. And some of it, because they're getting into markets that they didn't exist before because they're now able to sell on footprint. So I think Segra is very attractive. RapidScale, managed services, managed cloud services, products that we don't have today.
From the RapidScale team, our goal is to make sure that we preserve them as a somewhat autonomous group that's a little more agile, but has the existing customer relationships that exist at Spectrum to be able to sell into and upsell to. Another piece that Cox has done really well is if you think about hospitality. Think about stadiums and hotels in particular, have a great track record. Their customer relationships are fantastic. Now, if you think about the hospitality space, I'm going to pick a market, they do really well in Las Vegas. Great hospitality market. But taking those products and taking those relationships and expanding that into Orlando, Los Angeles, New York, I mean, the entire Spectrum footprint. But those markets, you think of Orlando, it's the top hospitality network or hospitality place in the country.
I'm really excited about what the B2B team combined between former Cox markets and Spectrum can do.
Great. Maybe we can talk a little bit about the impacts of AI. First on how that changes the demands on the network. What does that mean for the opportunities around data center connectivity, your service capabilities, the potential utilization of edge data centers? Maybe you can talk through some of those respective opportunities and size them to the extent that they're far along enough that you can actually size them.
There's a lot in that statement. But I think the biggest opportunity for us is the amount of traffic demand that's going to come about because of AI. Not just on the download, but you're seeing it on the upload as well. It's significant. You can already see it. That puts us in a position to be able to have not just a network that's capable and a network that's fallow today for that type of data and bandwidth increase, but gives us a clear competitive advantage for a product that customers are increasingly using. The revenue opportunity for us is really about subscription growth and retention as it relates to network demand. The second piece that you mentioned is network connectivity for data centers. That's another area that Segra and the rest of Cox has done a really good job.
I think we're a little bit behind as Spectrum. The opportunity for Segra and the Cox team to really drive their relationships into the Spectrum footprint. We're doing it. It's a little bit behind where Cox was, so we get a chance to accelerate there. The third piece you mentioned, maybe a little bit further out, but you're hearing people, both our competitors and our peers, some of which makes a whole lot of sense to go partner with. But at Spectrum, we now have over 1,200 local edge data centers, former hubs and headends that have now that we've virtualized a lot of the equipment that was in there to software, have space, have cooling, have fiber, have backup power. There's just today, without any additional investment, there's 250 MW of fallow capacity that's sitting across about 600 of those data centers.
We're looking, thinking about what is the right way to partner with other people to be able to, for lack of a better term, occupy that space in a way that's the best ROI for the assets that we have. The other piece that you mentioned on the cost side for AI, we're very focused on using AI to improve the network reliability that we have. It's a really amazing tool that exists. Combined with the fact that through the upgrade, the network evolution that we're doing, we now have transponders going in as part of the upgrade to all the actives in the network. When you combine that with power, I think that hybrid network of having power actives that have telemetry gives us a unique advantage when combined with AI to be able to provide better maintenance and better network reliability into the network.
On the other side, as you think about in a call center environment or from a field tech perspective, the ability to take a look at all the data that we have across these 70 million passings. To look at all the data through an active network in the home, customer premise equipment, previous transactions, and the ability for an agent to know exactly where the problem is or the field tech or a maintenance tech to know exactly where to go. If you asked our field techs or our agents that are using AI, they might tell you no. But the reality is that behind the scenes, their tools have gotten much, much better, much more precise, and it's enabled them to do a better job and to be happier employees by using AI in that context.
I think there's a tremendous quality improvement opportunity through AI, which will reduce service transactions, which reduces churn, which then turns into significant both cost and revenue opportunity for us by using it. But that's how we're approaching it, is really what works for the customer and what works for our frontline employee to go create value.
Great. If I could ask a little bit about the financials. Charter had standalone EBITDA guidance for a 1% decline this year. Is that still on track? What will we know come 4Q earnings?
Yeah, we now include Cox.
Right.
In some sense, we'll be reporting it combined and using pro forma financial statements. But there's been no change in terms of the trajectory of the financial outlook, capital allocation, return to capital, any of that type of stuff that we said on our last earnings call, none of that's changed.
Great. One of the things that I think a lot of people are excited about is the inflection in free cash flow that—
Yes.
Expected to happen as a result of meaningful reduction in CapEx over the years. Could you just talk a little bit about that? What are the key drivers of that CapEx reduction, and is that all on track?
The CapEx reduction isn't a lack of investment.
Right.
The CapEx reduction is the conclusion of two very successful one-time investment programs. The first being subsidized rural expansion, which by the end of this year will be essentially done, so it just goes away. It's not a systemic part of our natural capital expenditure. The other one is our network evolution, which is the upgrade to symmetrical and multi-gig speeds and providing some of these reliability characteristics that I talked about before. That'll be largely done at the end of next year. But the biggest piece of that is the rural, and there's a pretty substantial immediate step down in the capital expenditure that we'll have at Legacy Spectrum, which is where we've given the outlook, and the trends will be the same, including Cox.
We talked about going from mid $11 billion of CapEx down to a run rate that's under $8 billion in a very short period of time. All of that flows to free cash flow. But if you look at that still as a percentage of revenue of the Legacy Spectrum, it's still a really healthy amount of capital expenditure. So we are not taking our foot off the gas in terms of investing in customer premise equipment, reliability. All of that's still intact. It's just the conclusion of one-time programs that allow us to get there.
Some people look and say, "Well, how do we know you're going to do it?" I look and say, "Well, what else would we be doing?" With the network expansion that's complete and the network evolution that will be complete, what you're really looking at is a much larger network, a fully upgraded network with all this fellow capacity and the opportunity to grow revenue without additional capital intensity. I think that's the opportunity for us and for shareholders. Taking a look at that and saying, "What does that do on a free cash flow per share basis?" It's pretty amazing.
There was some news last week with your CFO leaving—
Yes.
For an external opportunity. It does feel like Charter is at an inflection point of its story, certainly a new chapter. Could you talk a little bit about the departure, if there's anything that you'd like to share, but also the executive or the type of executive that you're looking to potentially replace her with?
Sure. A little bit of background. I've worked with Jessica since I joined Spectrum in 2010. I actively recruited her for about six years, got her to come to the company in 2016. She became CFO in 2021, which was a high standard that I held for that position and always thought that she'd be really capable and she's grown and done fantastic and we're disappointed that she'll be moving on. She and her family will be moving out of the Northeast for another opportunity. On one hand, I'm excited for somebody I've worked with that long. On the other hand, disappointed that somebody that I've been that close to. The reality is that when you think a couple things. One is we haven't changed our capital allocation or outlook or any of that. We said that publicly.
She's actually going to be speaking at another conference tomorrow, so you'll get to hear from her. She'll be with us through middle of October. The interim CFO that's stepping in was the interim CFO when I got to Charter back in 2010, so it's a team that I know really well. When you think about all the transactions that they've been through, we're in safe hands there. We have a really sophisticated capital markets operation, a very seasoned investor relations function, and some of the world-class, from a cable perspective, business planning. Functionally, we're in good shape. I've either worked with or hired all of those individuals. So we'll have stability. It's also a premier CFO job in the country. This is an amazing opportunity, an amazing balance sheet, and a great industry and great team.
I think we'll have the best talent available in front of us. We got great talent inside the company already as well. The focus for us will be making sure that we get somebody who's really capable from a capital markets perspective, understands the broader finance function, has top-notch communication skills, because that matters in this competitive environment. Frankly, somebody that everybody enjoys working with, which is what we all look for as part of a team, and that's a big, big important piece to the puzzle. That's how you gel and be productive together. So I'm disappointed, but excited for Jessica, and we'll be in great shape and moving forward.
Great. In the last few minutes that we have here, I was just wondering if you could talk a little bit about some of the key execution priorities, milestones that you'll be looking for the company to achieve over the next one to two years.
We got to return to growth. Everything that we do is really about prioritizing broadband growth. Yes, there are areas that we can develop new revenue streams. That's always been the history of these networks, is that lo and behold, you turn and there's a new product set, and certainly we have some focus on business development on that side. But the core focus of the company is to return to broadband growth. It's not a North Star. It is exactly what we have to do. Looking at prioritization through that lens is something that, together with Nick, Richard DiGeronimo, and the rest of the team, that we're going to be very much focused on going and doing. Recognizing that you have that and it will take place. You've got the best network, the best products.
You've got the ability to have 100% U.S.-based 24/7 service, which is a competitive advantage, save customers lots of money. We're not going to rest and wait until all that becomes apparent to customers with the additional passings and growth and a reduction in the intensity of new competition. We're going to go after it today.
Great. Well, Chris, thank you so much for participating in our conference. It's been an absolute privilege to have you on stage here.
Good. It's great to be back and good to see you. Thank you.
Thank you, Chris.