Charter Communications, Inc. (CHTR) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Charter's First Quarter 2022 Investor Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I will now hand the conference over to your first speaker today Stefan Anninger. Sir you may begin Stefan Anninger: Good morning and welcome to Charter's First Quarter 2022 Investor Call. The presentation that accompanies this call can be found on our website ir.charter.com under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings including our most recent 10-K and also our 10-Q filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements 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 or to make additional forward-looking statements in the future During the course of today's call we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures as defined by Charter may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. On today's call, we have Tom Rutledge, Chairman and CEO; Chris Winfrey our COO; and Jessica Fischer our CFO. With that let's turn the call over to Tom. Tom Rutledge: Thank you, Stefan. We continue to grow our business by offering superior converged connectivity products. During the quarter, we added 129,000 customer relationships and 185000 Internet customers. Customer relationship churn remains low due to current consumer behavior while connect activity opportunities also remain low as a result. We continue to see very strong mobile line growth with net additions of 373,000. Over the last year we've grown our mobile lines by nearly 50%. We now have over 4 million total mobile lines Financials were also strong in the first quarter. First quarter revenue and EBITDA each grew by 5.4%. And when excluding a one-time payment free cash flow grew by 9% year-over-year. As always we remain focused on our primary goal of driving customer growth and market share leading to higher free cash flow. We're doing that in a number of ways including, expanding our footprint with good returns on investment, upgrading our network to ensure that we're offering our latest and fastest high-quality connectivity services and continuing to invest in high-quality customer service and finally investing in the mobile business to drive convergence of fixed and mobile connectivity products and earn a higher share of monthly household communication spend by saving customers money. Our rural construction initiative is also progressing as planned and we've started to work in all 24 of the states where we won Rural Digital Opportunity Fund bids. Our multiyear multibillion-dollar rural construction project will deliver gigabit high-speed broadband access to more than 1 million unserved rural customer locations across the country. Through RDOF, we'll add over 100,000 miles of new network infrastructure to our approximately 800,000 existing miles over the next five or so years. And our construction is not limited to RDOF commitments. We continue to build in other rural areas and are pursuing opportunities to receive other broadband stimulus funds. In addition, we regularly expand our network to additional residential SMB and enterprise passing, wherever it's economically attractive. Ultimately, our rural construction initiative is not only good for the millions of rural customers that will finally have access to fast and reliable Internet, but its also good for Charter and its shareholders. The expansion of our footprint will help us drive additional customer growth by growing customers in un-served and underserved areas. Demand for our customers for greater connectivity speeds and data throughput continue to grow at a very fast pace. During the quarter, Internet customers, who did not buy traditional video from us used approximately 700 gigabytes per month, more than 35% higher than pre-pandemic levels. And nearly 25% of those customers now use a terabyte or more of data per month. To meet that growing demand, we're both expanding the capacity and reallocating capacity within our network. And the technology to both expand and reallocate plant bandwidth is developing rapidly. Today, we're implementing high splits of what we prefer to call spectrum splits, which allocate more plant capacity to the upstream, all using our DOCSIS 3.1 infrastructure. In turn, we're able to offer our customers higher symmetrical speeds and multi-gigabit speeds. Additionally, by expanding and reallocating plant capacity, we reduced our network augmentation capital spending, including no split spending going forward. And the vast majority of our deployed modems are already spectrum split-capable, allowing us to provide faster service to our existing customers, without swapping out their CPE. We've been increasing the number of spectrum split projects in our service areas and we'll continue to do so. And as the technology develops further, we'll shift our strategy dynamically to further expand the capacity of our plant and reallocate bandwidth as necessary to meet customer needs by deploying additional technologies, including DOCSIS 4.0, which will allow us to deliver even greater capacity offering consumers the fastest and lowest latency connectivity products in a highly capital-efficient way, driving customer and market share growth and free cash flow. In mobile, we continue to improve and enhance our products in a number of ways, differentiating our offering helping to drive customer growth, and improving mobile business economics. In April, we began the market rollout of mobile speed boost. Mobile speed boost allows Spectrum Mobile customers to receive speeds up to one gigabit per second on their Spectrum Mobile service devices, when inside their homes even when their provisioned wireline Internet speed is less than a gigabit. The rollout of our first trial of our CBS small cells in full market area continues to progress nicely. In the first quarter, we completed the build-out of our mobile core network for the upcoming trial. We expect the trial to begin in the middle of next year and to offer faster speeds, a better all mobile experience, all the while saving us costs. Ultimately, with our mobile product, we're offering to consumers a unique and superior fully converged connectivity service package, while saving customers hundreds or thousands of dollars per year. And our share of household connectivity spend, including mobile and fixed broadband is still very low. In fact, we capture well less than 30% of household spend on wireline and mobile connectivity within our footprint. So there's a large opportunity for us to increase market share by saving customers money. And through our latest offering, we can do that, which in turn raises connects, reduces churn and drives customer growth. Before turning the call over to Jessica, I wanted to make a few comments about the joint venture with Comcast that we announced earlier this week. Our joint venture will provide video, delivered by apps, a competitive app store, on-TV applications and is capable of aggregation, navigation, search and curation, billing and content security. It will give consumers new devices and content providers new opportunities to create customer relationships on a platform designed to help them sell video effectively. Comcast has created excellent IP for this venture and we have high expectations that we can work together to continue its development and distribution. We have a history of success in our mobile JV operating systems, demonstrated by the fact that between our two respective mobile businesses we added more mobile lines in the first quarter of this year than the rest of the mobile industry added collectively. Now, I'll turn the call over to Jessica. Jessica Fischer: Thanks, Tom. Let's now turn to our customer results on slide five. We grew total residential and SMB customer relationships by 129,000 in the first quarter. Including residential and SMB, we grew our Internet customer relationships by 185,000 in the quarter. We continue to see record low combined competitive and move churn, which has reduced our selling opportunities and very low non-pay churn across our footprint. Similar to the fourth quarter, we saw both lower Internet churn and lower Internet connects than in the first quarters of 2021, 2020 and 2019. And this was true across our footprint regardless of computing technology. Turning to video. Video customers declined by 112,000 in the first quarter. Wireline voice declined by 150,000 and we added 373,000 mobile lines. Despite the lower number of selling opportunities from reduced activity levels, we continue to drive mobile growth with our high-quality attractively priced service. Moving to financial results starting on slide six. Over the last year we grew total residential customers by 674,000 or 2.3%. Residential revenue per customer relationship increased by 1% year-over-year, driven by promotional rate step-ups and video rate adjustments that pass through programmer rate increases. These effects were partially offset by the same bundle and mix trends we've seen over the past year, including a higher mix of non-video customers and a higher mix of low-priced video packages within our base. Additionally, this quarter's revenue was negatively impacted by $20 million in adjustments related to sports network rebates, which we intend to credit to qualified video consumers. These rebates are also reflected in lower programming expense this quarter, with no impact to adjusted EBITDA. Excluding the impact of sports network credit I just mentioned, our residential ARPU grew by 1.2% year-over-year. Also keep in mind that our residential ARPU does not reflect any mobile revenue or video programming pass-through increases announced late in the first quarter. As slide six shows, residential revenue grew by 3.7% year-over-year and by 3.9% year-over-year, when excluding the sports network credit. Turning to commercial. SMB revenue grew by 4.6% year-over-year, reflecting SMB customer growth of 4.4%. Enterprise revenue was up by 3.7% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 6.5% and enterprise PSUs grew by 5.2% year-over-year. First quarter advertising revenue grew by 11.5% year-over-year or by 5.1% excluding political revenue, primarily due to our growing advanced advertising capabilities. Mobile revenue totaled $690 million with $292 million of that revenue being device revenue. Other revenue increased by 5.2% year-over-year and includes two months of rural construction initiative subsidies totaling $19 million. In total, consolidated first quarter revenue was up 5.4% year-over-year. Moving to operating expenses and EBITDA on Slide 7. In the first quarter, total operating expenses grew by $410 million or 5.4% year-over-year. Programming costs declined by 0.4% year-over-year, due to a decline in video customers of 2.1%, a higher mix of lighter video packages, a $20 million benefit related to sports network rebates that I mentioned and $34 million of other favorable adjustments, much of which was not unique year-over-year. All of that was mostly offset by higher programming rates. Excluding both of the adjustments I just mentioned, programming costs grew by 1.4%. And looking at the full year 2022, we now expect programming cost per video customer to grow in the low to mid single-digit percentage range versus mid single-digits previously. Regulatory connectivity and produced content declined by 7.4%, primarily driven by lower Lakers RSN costs, lower video CPE sold to customers and lower regulatory and franchise fees. The decline in Lakers costs was primarily driven by the delayed start to the NBA season in 2020, which drove more Lakers games charges into Q1 of 2021, making for an easier comparison this year. Excluding the RSN costs from both years, regulatory, connectivity and produced content declined by 5.6%. And for the full year 2022, we expect regulatory connectivity and produced content expense to decline in the mid single-digit percentage range versus 2021, primarily due to lower video CPE sold to customers and lower RSN costs given the abnormal Lakers game scheduled last year. Cost to service customers increased by 5.3% year-over-year. The increase was primarily driven by higher bad debt given unusually low bad debt in the first quarter of 2021 when bad debt was down $100 million versus the first quarter of 2020, benefiting from the government stimulus packages. In fact, payment trends in the first quarter continue to be very good. And excluding bad debt from both years, cost to service customers grew by 1.8%, primarily due to a larger customer base, previously planned wage increases to $20 per hour starting wage, for hourly field operations and call center employees and higher health benefit and fuel costs. As the year progresses, prior year bad debt expense normalizes and should drive meaningfully slower growth in cost to service expense line during the second half of the year. Marketing expenses grew by 10.1% year-over-year due to higher labor costs, driven by previously planned wage increases and temporarily greater staffing levels, as Charter completes the in-sourcing of its inbound sales and retention call centers with a focus on providing better service to new and existing customers. For the full year 2022, we expect marketing expense to grow in the mid single-digit percentage range versus 2021, although marketing expense growth is likely to remain at elevated levels in the second quarter. Mobile expense totaled $760 million and were comprised of mobile device cost tied to device revenue, customer acquisition and service and operating costs. And other expenses increased by 12.5%, primarily driven by a favorable non-recurring adjustment in the prior year period making for a challenging comparison this year and higher labor costs. Adjusted EBITDA grew by 5.4% year-over-year in the quarter. A quick note about inflation before moving on to net income. Certain costs of operating our business such as labor and fuel costs are currently subject to inflationary pressure. But given our previously planned move to a $20 per hour starting wage and our long-term relationships and contracts for goods and services, we haven't yet seen a significant impact on inflation in our P&L. I would also note that our consumers are experiencing inflationary pressure but given the availability of subsidies for broadband and our focus on saving customers hundreds of dollars per year by switching to our converged connectivity product, we believe we are well positioned for the changing market. Turning to net income on Slide 8. We generated $1.2 billion of net income attributable to Charter shareholders in the first quarter versus $800 million last year. The year-over-year increase was driven by a non-recurring litigation settlement charge in other operating expenses for the first quarter of 2021 and higher adjusted EBITDA. Turning to Slide 9. Capital expenditures totaled $1.9 billion in the first quarter just above last year's first quarter spend of $1.8 billion. We spent a total of $232 million on our rural construction initiative in the quarter. Most of that spend relates to design, walk out and make ready and as expected has not yet resulted in significant passings growth. And the vast majority of that spend is accounted for in line extension. We spent $74 million on mobile-related CapEx, which is mostly accounted for in support capital and was driven by investments in back-office systems. As Slide 10 shows,, we generated $1.8 billion of consolidated free cash flow this quarter, a decrease of $55 million or 3% year-over-year. Excluding a one-time litigation payment of $220 million made in the first quarter free cash flow grew by $165 million or 8.9% year-over-year. Please note that in the second quarter we'll begin making quarterly cash tax payments for fiscal year 2022. These payments are consistent with the cash tax outlook that we provided in our fourth quarter investor call. We finished the quarter with $94.9 billion in debt principal. Our current run rate annualized cash interest is $4.4 billion. As of the end of the first quarter our ratio of net debt to last 12-month adjusted EBITDA was 4.43 times. We intend to stay at or just below the high end of our four to 4.5 times target leverage range. During the quarter, we repurchased six million Charter shares and Charter Holdings common units totaling about $3.6 billion at an average purchase price of $600 per share. And since September of 2016, we've repurchased $60.4 billion or nearly 42% of Charter's equity. Our path to continue to grow our business remains strong and we will do that by furthering convergence in our connectivity business allowing us to capture additional share, focusing on expanding our footprint and by continuing to improve the customer experience and extending customer lives. By executing on those items we will drive customer and share growth, free cash flow growth and shareholder value. Operator, we're now ready for Q&A. Operator: Thank you. [Operator Instructions] And your first question will come from Craig Moffett with Moffett. Your line is open. Operator: Your next question will come from Jonathan Chaplin with New Street. Your line is open. Operator: Your next question will come from Brett Feldman with Goldman Sachs. Your line is open. Operator: Your next question will come from Phil Cusick with JPMorgan. Operator: Your next question will come from Jessica Reif Ehrlich with BofA Securities. Operator: And your next question will come from Doug Mitchelson with Credit Suisse. Operator: Your next question will come from Vijay Jayant with Evercore. Thanks. Operator: And your next question will come from Ben Swinburne with Morgan Stanley. Operator: Your last question will come from Michael Rollins with Citi. Your line is open. Stefan Anninger: Thanks, Mike. And Peter, we're going to pass it back to you. That concludes our call. Thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.CHTR Ratings Summary
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Charter Communications’ Investor Meeting Key Takeaways
RBC Capital provided its key takeaways from Charter Communications, Inc. (NASDAQ:CHTR) Investor Meeting, which provided an attractive outlook for the company’s network evolution, footprint expansion, converged go-to-market strategy, and efforts around improving the customer experience.
The analysts said they are highly encouraged that the target cost to upgrade the network is only $100 per passing ($5.5 billion in total; multiples lower than feared just a few months ago) and that early rural builds have seen approximately 40% penetration after only six months.
That said, the impact to broadband subscriber growth and ARPU could take years to fully manifest, and in the meantime, this spend is driving a new CAPEX cycle through 2025 that will pressure free cash flow and buybacks.
The analysts walked away with their constructive longer-term outlook reaffirmed, though they are cautious on how the free cash flow cuts will be digested in this tape, and don’t expect shares to really rally until there’s a sustainable improvement in broadband sub trends or moderation in interest rates. The analysts reduced their price target to $460 from $480 while maintaining their Outperform rating.
Charter Communications’ Investor Meeting Key Takeaways
RBC Capital provided its key takeaways from Charter Communications, Inc. (NASDAQ:CHTR) Investor Meeting, which provided an attractive outlook for the company’s network evolution, footprint expansion, converged go-to-market strategy, and efforts around improving the customer experience.
The analysts said they are highly encouraged that the target cost to upgrade the network is only $100 per passing ($5.5 billion in total; multiples lower than feared just a few months ago) and that early rural builds have seen approximately 40% penetration after only six months.
That said, the impact to broadband subscriber growth and ARPU could take years to fully manifest, and in the meantime, this spend is driving a new CAPEX cycle through 2025 that will pressure free cash flow and buybacks.
The analysts walked away with their constructive longer-term outlook reaffirmed, though they are cautious on how the free cash flow cuts will be digested in this tape, and don’t expect shares to really rally until there’s a sustainable improvement in broadband sub trends or moderation in interest rates. The analysts reduced their price target to $460 from $480 while maintaining their Outperform rating.
