Yahoo Finance Charter Communications, Inc. (NASDAQ:CHTR) Q1 2024 Earnings Call Transcript
Charter Communications, Inc. (NASDAQ:CHTR) Q1 2024 Earnings Call Transcript April 26, 2024
Charter Communications, Inc. misses on earnings expectations. Reported EPS is $7.55 EPS, expectations were $7.59. Charter Communications, Inc. 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 Charter Communications' First Quarter Investor Call. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll 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 will now 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 this 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. During the first quarter, we lost 72,000 Internet customers. Despite lower Internet sales, we added nearly 500,000 Spectrum Mobile lines and close to 2.3 million lines year-over-year. We now have more than 8.2 million total mobile lines with still low mobile penetration of Internet customers and passings. We have a long runway for customer and financial growth with the nation's fastest mobile service at incredible value. Revenue was relatively flat in the quarter, while adjusted EBITDA grew by 2.8%. And during the first quarter, our Internet customer growth remained challenged by a low move and generally low activity environment, coupled with continued elevated competition at least in the short term and a small impact from fewer low income connects due to discontinued ACP availability.
Churn remains at historically low levels. Cell phone Internet continues to compete for gross additions and has expanded its addressable market within our footprint, and we remain confident in our ability to return to healthy long-term growth. Our Internet product is faster and it's more reliable. Our pricing is lower when similarly bundled with mobile, and the cell phone companies will face capacity challenges as customer bandwidth grows. In the first quarter, wireline overbuild activity continued at a similar pace. And given the value of our converged products, we resisted chasing some less rational promotional offers from overbuilders. As we move forward with our key strategic initiatives, we believe that our differentiated converged connectivity products with superior speeds that save customers' money and a video product with increasing value and utility to customers provide us with significant competitive advantages and a platform to grow customers, penetration, EBITDA and free cash flow over time.
In Internet, data usage continues to grow and demand for faster speeds will grow with it. During the first quarter, Internet customers who do not buy traditional video from us used nearly 800 gigabytes per month. And we now offer 300 meg, 500 meg and 1 gig symmetrical speeds in our first high split markets. Later this year, we'll begin launching the next wave of markets with Distributed Access Architecture technology. When completed, we'll be able -- we'll be capable of offering 5/1 gigabit per second speeds in these markets with even better network performance. The next phase of markets will be upgraded to 10/1 gigabit per second speed and the ability to offer fiber on demand. And ultimately, we'll see lower contact rates and truck rolls across these upgraded markets, achieving both lower cost and a superior product.
We expect to complete our network evolution initiative in 2026, all at an incremental cost of just over -- just $100 per passing, excluding the benefit of operating and capital savings that result from the project. Our mobile offering also continues to evolve and improve. Earlier this month, we began offering Anytime Upgrade to customers within our Unlimited Plus offering. Anytime Upgrade allows new and existing Unlimited Plus customers to upgrade their phones whenever they want, eliminating traditional wait times, upgrade fees and condition requirements. We are the first mobile provider to include this level of freedom within a rate plan. And we also recently launched a new repair and replacement plan for just $5 per month. Anytime Upgrade, part of Unlimited Plus and our repair and replacement plan are each profitable.
Spectrum One continues to perform well beyond its first anniversary and offers the fastest connectivity with differentiated features like mobile speed boost and seamless connectivity to the Spectrum Mobile network across Android and iOS devices. We still have a lot of room to grow our mobile business. Today, less than 8% of our total passings take our converged offering of Internet and mobile. We remain underpenetrated despite having a differentiated and superior offering with market-leading pricing at promotion and retail. And from a dollars perspective, we captured less than 30% share of residential mobile and Internet dollars spent in our footprint today. Mobile will be a meaningful driver of EBITDA and cash flow going forward with what is still an untapped ability to drive overall customer relationship growth.
Finally, turning to the evolution of our video product, we now offer a unique modern user experience with Xumo, which offers both linear and direct-to-consumer content on one device, combined with packaging and pricing options that offer choice, value, and utility across FAST, SVOD, direct-to-consumer apps and linear video services. In January, Disney+ became available to all Spectrum TV Select customers nationwide at no additional cost with ESPN+ launched to Select Plus customers in March. ViX, a Spanish language DTC product and regional sports DTC products will also be available to customers at no extra cost within their respective packages. We expect our hybrid DTC linear model to be fully deployed next year and we'll be able to deliver value for our customers and programming partners through fully bundled hybrid services, genre-based packages, selling DTC a la carte, and potentially bundled DTC services to our broadband customers.
In late January, we launched our Spectrum TV Stream package, a 90-channel non-sports general entertainment package priced at $40 per month. TV Stream provides a compelling content offering at an attractive price from programmers like Paramount, Warner Bros. Discovery, Disney, Fox, and A&E. And so while the video business is clearly under pressure, we believe that flexible and attractively priced packaging options across all forms of video -- channels really, integrated within a modern user interface in a more frictionless environment can recreate value in the ecosystem for our customers, programmers and distributors. So when we step back, we clearly recognize some short-term market challenges and we've embraced the opportunity to become an even better operator.
We're leaving no stone unturned in our go-to-market and our efficiency initiatives. And in the meantime, we're growing a unique converged product at a rapid pace and we can grow EBITDA through a competitive investment cycle. In long term, our network and customer demand, products, pricing, and packaging capabilities, our service infrastructure, and the associated investments we're making today position Charter for sustainable growth and value creation. With that, I'll turn the call over to Jessica.
Jessica Fischer: Thanks, Chris. Let's turn to our customer results on Slide 5. Including residential and SMB, we lost 72,000 Internet customers in the first quarter and video customers declined by 405,000. In mobile, we added 486,000 mobile lines and wireline voice customers declined by 279,000. Our mobile product continued to perform well. And although we saw lower mobile gross adds year-over-year tied to lower gross Internet additions, we also saw lower overall -- a lower overall mobile churn rate year-over-year and sequentially. Customers who signed up for our Spectrum One product in the first quarter of 2023 reached their 12-month anniversary this past quarter. Similar to last quarter, those promotional roll-offs did not drive incremental Internet churn.
In fact, our Internet churn rate also declined year-over-year. So as we always expected, Spectrum One lines are performing well and our converged offering drives higher mobile sales and longer customer lifetimes. Turning to rural, we ended the quarter with 493,000 subsidized rural passings. And we grew those passings by 324,000 over the last 12 months and 73,000 in the first quarter. It's a bit of a slowdown from Q4, as we noted it would be on our last call given winter construction seasonality. Penetration growth continues to exceed our expectations and customer growth in our subsidized rural footprint increased with 35,000 net customer additions in the quarter. We continue to expect to activate approximately 450,000 new subsidized rural passings in 2024, about 50% more than in 2023.
We also continue to expect our RDOF build to be completed by the end of 2026, two years ahead of schedule. The RDOF and ARPA program rules have been successful in driving large-scale private capital builds. With respect to BEAD, most of the state's rules are still working through the NTIA review process. We expect some states will have a regulatory environment conducive to private investment, while others will not. And we'll be disciplined in our investment approach with the continued expectation that some opportunities with appropriate ROIs will be available. Before turning to our financial results, I wanted to make a few comments regarding the Affordable Connectivity Program. An ACP renewal now appears unlikely for the program's 23 million recipients nationwide and for our 5.0 million Internet customers receiving a subsidy.
We will do everything we can to preserve our relationship with the ACP subsidy recipients and we expect to keep the vast majority of them as customers. We have a number of ways to assist those that may lose their ACP subsidy, including our Spectrum Internet Assist program and Internet 100 product. We're also offering all of our ACP customers a free mobile line for one year. The success of our Spectrum One offering has shown that we can create long-term converged connectivity customers by saving consumers hundreds or even thousands of dollars on their mobile bill. And even after the initial promotional period ends, we will still be able to save these customers the equivalent or more than the $30 ACP subsidy benefit that they are currently receiving.
The majority of ACP recipients in our customer base were Internet customers before the start of the ACP program. And the vast majority of our ACP customers also pay something out of pocket for their Internet service. Ultimately, we will lose some customers, and our Internet ARPU and bad debt expense may have one-time pressure. But we expect the impact to Charter to be mostly limited to the second and third quarters of this year and we will provide transparency for those impacts in our quarterly reporting. Moving to the first quarter financial results starting on Slide 6. Over the last year, residential customers declined by 0.7%, driven by video-only customer churn. Residential revenue per customer relationship declined 0.1% over year, given a higher mix of non-video customers and growth of lower-priced video packages within our base, mostly offset by promotional rate step-ups, rate adjustments, and the growth of Spectrum Mobile.
As Slide 6 shows, in total, residential revenue declined by 0.4% year-over-year. Turning to commercial, SMB revenue declined by 0.3% 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 slightly offset by SMB customer growth of 0.2% year-over-year. Enterprise revenue grew 3.8% year-over-year, driven by enterprise PSU growth of 6.9% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 5.5%. First quarter advertising revenue grew by 10% year-over-year, given political revenue growth and core ad revenue was essentially flat year-over-year. Other revenue grew by 2.4% year-over-year, primarily driven by higher mobile device sale.
And in total, consolidated first quarter revenue was up 0.2% year-over-year and down 0.1% year-over-year when excluding advertising. Moving to operating expenses and adjusted EBITDA on Slide 7. In the first quarter, total operating expenses declined by 1.5% year-over-year. Programming costs declined by 8.2% year-over-year due to the decline in video customers of 8% year-over-year and a higher mix of lighter video packages. These factors were partly offset by higher programming rates. And first quarter 2024 programming costs include around $30 million of favorable adjustments versus $50 million of favorable adjustments in the prior year period. Other costs of revenue increased by 9.8%, primarily driven by mobile service direct costs and higher mobile device sale.
Cost to service customers were essentially flat year-over-year with additional activity to support the growth of Spectrum Mobile and higher bad debt expense, mostly offset by lower service transactions per customer, including productivity from 10-year investments. Sales and marketing costs declined by 2.7%, primarily driven by lower labor costs, partly tied to lower connect volumes. Finally, other expense grew by 0.5%. Adjusted EBITDA grew by 2.8% year-over-year in the quarter. And when excluding advertising, EBITDA grew by 2.2% year-over-year. Looking ahead, our goal is to deliver solid EBITDA growth. And we believe we can do that even as we make significant investments in the business, face a challenging competitive environment and reach the likely end of the ACP program.
Our residential revenue will be supported by Internet ARPU growth and our growing mobile customer base. In addition, mobile's contribution to EBITDA continues to improve as the business scales. We've also lapped the significant investments that we made in our employee base, so the related EBITDA drag should be mostly behind us. And finally, we continue to carefully manage our expenses across the business. And while we're not going to do anything that would impact our sales or service capabilities, this quarter's cost-to-service customers and sales and marketing expense results demonstrate our ability to drive efficiencies into the business. In the second quarter, we will face some tough expense comparisons, particularly in other expense as well as ACP headwinds.
So while our second quarter EBITDA growth will be muted, our expense management process is clearly working and financial growth in the back half of the year should accelerate, given our expense management initiative, Spectrum One promotional roll-off and political advertising revenue. Turning to net income on Slide 8, we generated $1.1 billion of net income attributable to Charter shareholders in the first quarter, up from $1 billion last year, driven by higher adjusted EBITDA and a gain on the sale of towers, partly offset by higher income tax and interest expenses. Turning to Slide 9, capital expenditures totaled $2.8 billion in the first quarter, about $325 million above last year's first quarter spend. Line extensions totaled $1 billion, $69 million higher than last year, driven by our subsidized rural construction initiative and increased residential and commercial greenfield and market fill-in opportunities.
First quarter capital expenditures, excluding line extensions, totaled $1.8 billion compared to $1.6 billion in the first quarter of 2023, driven by higher spend on upgrade rebuild, primarily network evolution and higher CPE spend due to purchases of Xumo Stream Boxes. For the full year 2024, we continue to expect capital expenditures to total between $12.2 billion and $12.4 billion, including line extension spend of approximately $4.5 billion and network evolution spend of approximately $1.6 billion. Turning to free cash flow on Slide 10, free cash flow in the first quarter totaled $358 million, a decrease of approximately $300 million compared to last year. The decline was primarily driven by an increase in capital expenditures and a one-time settlement payment in the first quarter of 2024, partly offset by a less unfavorable change in working capital year-over-year and higher adjusted EBITDA.
We finished the quarter with $97.8 billion in debt principal. Our current run rate annualized cash interest is $5.2 billion. Given our long dated and 85% fixed-rate debt structure, our sensitivity to higher rates is relatively low. If we refinanced all of our debt due in 2025 and 2026 at current rates, the impact to our run rate interest expense would be less than $140 million. As of the end of the first quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.41 times, which is lower sequentially and year-over-year. We expect to continue that trend moving closer to the middle of our 4 times to 4.5 times target leverage range through the end of this year. We remain fully committed to maintaining our split rated debt structure, including access to the investment grade market given the significant benefits it offers to all of our providers of capital.
And we continue to be confident in the long-term trajectory of the business. We believe that our levered equity strategy, including share buybacks, combined with the investments that we are making in the business will drive value going forward. During the quarter, we repurchased 1.7 million Charter shares and Charter Holdings common units, totaling $567 million at an average price of $339 per share. With the continued temporary impact from cell phone Internet competition and the potential headwind from the end of ACP, we will continue to face short-term customer growth headwinds. Despite these short-term challenges, we are competing well. We have a very attractively structured balance sheet and we're focused on driving healthy EBITDA growth in 2024 through a short-term competitive and investment cycle.
So we're well-positioned today and for continued future growth. With that, I'll turn it over to the operator for Q&A.
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