Charter Communications, Inc. (NASDAQ:CHTR) Q4 2023 Earnings Call Transcript

Charter Communications, Inc. (NASDAQ:CHTR) Q4 2023 Earnings Call Transcript February 2, 2024

Charter Communications, Inc. misses on earnings expectations. Reported EPS is $7.07 EPS, expectations were $8.93. CHTR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Charter Communications Q4 Conference Call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to turn the call over to Stefan Anninger.

Stefan Anninger: 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.

Chris Winfrey: 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-priced 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. And 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 have 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 cover more — 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.

And 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 getting 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.

Jessica Fischer: 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 this 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, has 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 principle. 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 to 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 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.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Jonathan Chaplin with New Street Research. Your line is now open.

Jonathan Chaplin: Thanks, guys. One for Chris and one for Jessica. For Chris, I’m wondering if you can give us some context on whether there was a change in competitive dynamics in the fourth quarter. As we look out across the fixed wireless guys and the fiber guys, it seemed pretty steady over the course of the last few quarters, sort of competitive pressures that seem to stabilize. And I’m wondering if there was just a bigger focus on — from fixed wireless or potentially fiber in newer markets specifically? And then, for Jessica, the cash tax guidance is great. If bonus depreciation is expanded — extended this year, how much of that cash tax go down by? Thank you.

Chris Winfrey: 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.

Jessica Fischer: 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.

Jonathan Chaplin: Great. Thanks, guys.

Stefan Anninger: Thanks, Jonathan. Luke, we’ll take our next question, please.

Operator: Our next question will come from the line of Craig Moffett with MoffettNathanson. Your line is now open.

Craig Moffett: 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?

Chris Winfrey: So maybe I’ll start off with ACP and just take a step back, and then Jessica can answer what you were requesting. ACP program, I think as everybody knows, it really has brought Internet connectivity to customers who would not have been able to have access to broadband otherwise. But more importantly, it’s allowed customers who would have been coming in and out of the broadband marketplace given affordability issues to remain connected consistently. So, we really think, as you know, it’s been an effective program. We’re proud to be the largest ACP provider in the country. We still — we’re hopeful that the ACP can be refunded in order to keep households that are in the program today connected to the Internet. But if it’s not refunded, Craig, we’re going to work very hard to keep customers connected.

And we’ve been working on this possibility for some time. We have significant tools to save customers hundreds or even thousands of dollars, as Jessica mentioned. And I’d highlight that, keep in mind, most of our ACP customers were Internet customers before the ACP program began. And in the meantime, having said all that, it’s actually pretty challenging for us to predict the impact that a potential end of the program is going to have to our customer disconnects, but we’re going to report that consistently over time.