Charter Communications Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 28, 2021

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Charter Third Quarter 2021 Investor Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the conference over to your speaker today, Stefan Anninger. Please go ahead, sir.

Speaker 1

Good morning, and welcome to Charter's Q3 2021 investor call. 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 ks and also our 10 Q filed this morning. We will not review those risk factors and other cautionary statements on this call.

Speaker 1

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.

Speaker 1

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 Fisher, our CFO. With that, let's turn the call over to Tom.

Speaker 2

Good morning and thank you, Stefan. We performed well in the Q3 with good customer growth and very strong financial results. However, we're operating in an unusual environment where the market effects of COVID-nineteen have not yet normalized. Market churn remains historically low such that Net gains are being driven by much lower transaction activity. Despite that, for the full quarter, we added 185,000 customer relationships with Customer growth of 3.3 percent year over year.

Speaker 2

We also added 265,000 Internet customers in the quarter $1,300,000 over the last year for a year over year growth of 4.4%. We added 244,000 mobile lines and Reported by lower churn and a more tenured customer base, we grew our adjusted EBITDA by a strong 13.9% and our quarterly free cash flow by over $700,000,000 year over year. Our view We have a long and robust runway of customer growth ahead of us. Today, our network passes over 54,000,000 homes and businesses, And we're doing business with approximately 32,000,000 of them, leaving us with over 20,000,000 opportunities to create new customer relationships. There are also approximately 120,000,000 mobile broadband lines in our footprint, and we're currently serving 3,200,000 of those.

Speaker 2

We're currently very underpenetrated. Looking forward, we remain focused on improving both the quality and value of our products as data usage in the home and outside the home continues to increase at a rapid pace. Earlier this month, we launched our new and highly attractive unlimited multi line pricing structure, which allows customers to save even more on their mobile bills. Early next year, we will launch a field trial of our CBRS small cells in a full market area, Allowing participants to attach to our CBRS small cell access points when they are outside of Wi Fi coverage, providing our Spectrum Mobile customers with even faster speeds, while improving the economics of our mobile business. We also continued to deliver improving wireline connectivity products.

Speaker 2

Today, over 70% of our Internet customers Subscribed to tiers that provide 200 megabits or more of speed and our new Wi Fi 6 routers and Spectrum Wi Fi Pods Managed by our advanced home WiFi platform and our My Spectrum app We continue to see very high demand for data by our customers. During the quarter, non video Internet customers used over 600 gigabytes per month, Stable as of late, but more than 30% higher than pre pandemic levels. And today, close to 20% of our non video Internet customers Use a terabyte or more of data per month. In order to increase the capacity and speed on our network for next generation products and services, We've developed a multifaceted approach to our network evolution comprised of a number of technologies, which will be deployed where they make the most sense Strategically and economically delivering the very fastest speeds and lowest latency at the lowest cost and time to deploy, We continue to expand our capacity by splitting nodes, but we have a cost effective approach to deliver multi gigabit speeds in the downstream All using our deployed DOCSIS 3.1 platform and high splits, which are currently being tested in market, Not only allow for increased speeds in the near term, but are also a capital efficient way as they currently Use deployed DOCSIS 3.1 customer premises equipment and reduce the need Node splits, which require an average consumer bandwidth utilization, which were required As consumer bandwidth utilization increased, so what I'm saying there is that the High Split actually uses the capital that was needed for Note splits.

Speaker 2

We also continue to actively develop our DOCSIS 4.0 technology plant architecture and rollout, which allows us to cost effectively and cost efficiently offer greater Gigabit speeds in both the downstream and upstream. And of course, we're already using fiber to the home technology In a number of use cases across our footprint, including rural areas such as our Ardagh build and in MDUs and greenfield build areas where the economics make sense. Ultimately, our plant will be comprised of the most bandwidth rich and cost effective technologies, enabling us to deliver The fastest speeds in the industry in a more cost efficient manner than competitors, ubiquitously across 24,000,000 passings and growing. So with our network and product capabilities, we remain confident in our ability to grow our customers' penetration, EBITDA and free cash flow for many years Before turning the call over to Chris, I want to make a few comments about our recently announced management changes and promotions. On October 19, we announced that John Bickham had been appointed Vice Chairman ahead of his previously announced retirement at the end of 2022.

Speaker 2

I've worked with John for 3 decades and at every turn, his knowledge, leadership and steady hand have not only contributed greatly to the success of the companies we led, It made a profound impact on the growth of our industry. I'm grateful that John will continue to serve Charter in his new capacity as Strategic advisor to me and the executive team. We also recently announced that Chris Winfrey had been promoted to Chief Operating Officer. Over the past 11 years, Chris' influence on Charter has expanded far beyond that of a typical CFO. He's been actively involved in all our business operations and that deep knowledge combined with his previous operational experience in Europe will serve us well as Charter's Next, Chief Operating Officer and John's guidance as Vice Chairman will help ensure successful transition for Chris into the COO role.

Speaker 2

As Chris moves to COO, we've also promoted Jessica Fisher, previously Executive Vice President of Finance to Chief Financial Officer. Jessica's leadership and financial expertise has benefited Charter for many years, both in her roles at Charter And while at Ian Wy, where she was a key advisor during our 2016 transactions. In her new role, Jessica will have an even greater impact on Charter's success. Finally, Rich DeGeronimo, our Chief Product and Technology Officer, adds oversight of network and software operations to his current responsibilities Leading the product and technology organization. With expanded responsibility, Rich will both shape the customer experience and lead our network's critical evolution into the 10 gs future delivering to our customers a superior broadband connectivity experience.

Speaker 2

Now I'll turn the call over to Chris.

Speaker 3

Thanks, Tom. I wanted to make a few comments about what we're seeing in the marketplace and briefly discuss our long term market Residential customer activity, particularly churn, has taken longer than we expected to return to normal levels. The overall lower level of market churn Has reduced sales opportunities available to us, but interestingly the value of net additions is even higher in this environment. We still maintain good continued customer growth. Given that the start of Q4 feels similar to Q3, we now current year Internet net adds to look more like 2018 than 2019 as record load churn of every type Has not offset the higher loss of selling opportunities from competitors' churn.

Speaker 3

That lower overall transaction volume Customers on promotion benefiting our customer relationship ARPU. Additionally, the lower sales volume has driven lower expense and capital expenditures associated with sales Ultimately, market churn will return, driving more sales opportunities and a return to normal net addition environment for Charter. As that happens, we would expect a reversal of some of the transactional financial benefits I mentioned a moment ago. We thought that would happen by the summer of this year, But it hasn't happened quite yet. Lower transactions have lowered cost and at the same time, our cost per existing customer relationship continues to get better.

Speaker 3

Our service model drives lower service calls and truck rolls with nearly 100% in sourcing of our call centers now, improving tools for employees and increasing customer usage of our digital and automated platforms. The service, churn and expense benefits of those initiatives will continue for years. We've also continued to invest in our product, marketing and sales capabilities and our yield or close rate Has been growing, albeit on lower sales traffic. And we continue to grow Internet customers across our footprint regardless of the competitive technology Earlier this month, we announced new mobile multi line pricing designed to drive new mobile relationships or lines per relationship and ultimately stimulate overall market movement and sales opportunities for all of our products, including Internet. Mobile and wireline broadband are converging into a single connectivity service package, and we offer the nation's fastest overall mobile service, Combined with our WiFi and best mobile pricing, which offers unlimited service for just $29.99 per line per month An average household served by the big three mobile broadband competitors With two lines of mobile broadband and wireline broadband spends approximately $200 per month on its telecom services.

Speaker 3

With our pricing and packaging, a Spectrum customer can purchase our Internet product and two lines of our unlimited mobile product with faster service for nearly 50% less. And with more lines means more savings. And customers can also combine by the gig rate plans for $14 per With 1 or more unlimited lines to take advantage of the new $29.99 unlimited line pricing. Today, we have roughly 2,000,000 of our 54,000,000 passing subscribed to this converged connectivity service. So as Tom mentioned, we have a very long runway for customer and market share growth created by an ability to save customers 100 or even 1,000 of dollars per year with better product capabilities and service.

Speaker 3

As Tom mentioned, Jessica has been promoted to CFO. I had the opportunity to work with Jessica for over 10 years, 5 years while she was a partner at E and Y advising us, including on the structure of the Time Warner Cable and Bright House transactions. In the past 5 years, she's been at Charter. She's steadily grown her responsibilities from initially tax and treasury to adding procurement, internal audit, Investor Relations and Acquisitions and Capital Markets activities, all of which has prepared her to take over the CFO role. Now I'll turn the call over to Jessica to cover our Q3 results in more detail.

Speaker 4

Thanks, Chris. Now let's turn to our results on Slide 5. We will continue to reference the COVID schedules we provided last And included again on Slide 17 and 18 of today's presentation to help with year over year financial comparisons. We grew total residential and SMB customer relationships by 185,000 in the 3rd quarter and by $1,000,000 in the last 12 months. Including residential and SMB, we grew our Internet customers by 265,000 in the quarter and by 1,300,000 over the last 12 months.

Speaker 4

Video declined by 121,000 in the 3rd quarter, wireline voice declined by 216,000 And we added 244,000 mobile lines in the quarter. As of the end of the quarter, we had 3,200,000 mobile lines. Despite the lower number of selling opportunities from cable sales, we continue to drive mobile growth with our high quality, Attractively priced service rather than using device subsidies. Moving to our financial results, starting on Slide 6. Over the last year, we grew total residential customers by over 900,000 or 3.2%.

Speaker 4

Residential revenue per customer relationship increased by 5.6% year over year. Given last year's Q3 residential revenue adjustment of 2 $218,000,000 for Sports Network credits that we provided to video customers as well as promotional rate step ups, Video rate adjustments that pass through programmer rate increases and a greater mix of longer tenured customers. Those were partially offset by the same bundle and mix trends we have seen over the past year, including a higher mix of non video customers and a higher mix of Choice, Essentials and Stream customers within our video base. Keep in mind that As Slide 6 shows, residential revenue grew by 9.4% year over year, reflecting customer relationship growth and last year's COVID impacts. Turning to commercial, SMB revenue grew by 7.5%.

Speaker 4

This growth rate reflects COVID related impacts of $11,000,000 that negatively impacted the Q3 of 2020. Excluding this impact from last year, SMB revenue grew by 6.3% faster than the 2nd quarter growth when making the same COVID related adjustment. Enterprise revenue was up 6.4% year over year and included some one time fees, which were a benefit in this quarter. Excluding the benefit from this year, enterprise revenue grew by 3.8% and by 6.5% when additionally excluding all wholesale revenue. Enterprise PSUs grew by 4.5% year over year.

Speaker 4

3rd When compared to the Q3 of 2019, advertising revenue declined by 0.8%, primarily due to local ad revenue, particularly auto, mostly offset by our growing advanced advertising capabilities. Excluding auto, the 3rd quarter advertising grew by 8% over the Q3 of 2019. Mobile revenue totaled $535,000,000 with $201,000,000 of that revenue being device revenue and other revenue grew by 6.5% year over year. In total, consolidated third quarter revenue was up 9 point Moving to operating expenses on Slide 7. In Q3, total operating expenses grew by 4 1,000,000 or 6.2 percent year over year.

Speaker 4

Similar to revenue, the year over year operating expense growth rate is elevated due to 2020 COVID effects. Programming increased 9.4% year over year due to last year's Q3 benefit of $163,000,000 related to sports network rebates and higher programming rates. These factors were partially offset by a higher mix of lighter video packages such as Choice, Essentials and Stream. Regulatory connectivity and produced content grew by 3.5%, primarily driven by Higher regulatory and franchise fees and video CPE sold to customers. Cost to service customers were essentially flat year over year compared to 3.3 percent customer relationship growth.

Speaker 4

Excluding bad debt, cost to service customers combined by 2.8% year over year. That's despite a higher number of customers and outsized hourly wage increases that we put through earlier this year. Bad debt was higher by $47,000,000 year over year, but still nearly $75,000,000 lower when compared to the Q3 of 2019. Marketing expenses were also flat year over year, primarily driven by the lower sales environment. Mobile expenses totaled $607,000,000 and were comprised of mobile device costs tied to device revenue, customer acquisition and service and operating costs.

Speaker 4

And other expenses grew by 3.8 percent, driven primarily by higher corporate costs, partially offset by lower advertising sales year over year given the absence of political revenue this year. Adjusted EBITDA grew by 13.9% in the quarter. Turning to net income on Slide 8, we generated $1,200,000,000 of net income attributable to Charter shareholders in the 3rd quarter versus $814,000,000 last year. The year over year increase was driven by higher adjusted EBITDA. Turning to Slide 9, capital expenditures totaled $1,900,000,000 in the 3rd quarter, below last year's 3rd quarter spend of $2,000,000,000 driven by lower scalable infrastructure spend, primarily due to a stabilized level of network traffic growth and investments made earlier this year, A decrease in line extension spend driven by housing build delays due to supply chain constraints in the housing industry and lower support capital primarily due to timing.

Speaker 4

We spent $119,000,000 on mobile related CapEx this quarter, which is mostly accounted for in support capital and was driven by investments in back office systems and mobile store build outs. For the full year 2021, We expect cable capital expenditures to be relatively consistent as a percentage of cable revenue versus 2020. As Slide 10 shows, we generated nearly $2,500,000,000 of consolidated free cash flow this quarter, an increase of $722,000,000 or 41.2 percent year over year. We finished the quarter with $87,900,000,000 in debt principal. Our current run rate annualized cash interest Pro form a for financing activity completed in October is $4,100,000,000 As of the end of the third quarter, our net debt to last 12 month adjusted EBITDA was 4.32 times.

Speaker 4

We intend to stay at or just below the high end of our 4 to 4.5 During the quarter, we repurchased 5,300,000 Charter shares in Charter Holdings common units, totaling about $4,000,000,000 at an average price of $7.53 per share. Year to date, we've purchased $12,000,000,000 of our stock and common units. And since September of 2016, we have repurchased $51,400,000,000 or 37.5 percent of Charter's equity at an average price of $4.36 per share. Our results show that even in this unusual environment, our flexible and robust business and service model, which benefits economically from lower customer

Operator

Your first question comes from Vijay Jayant with Evercore.

Speaker 5

Hi, good morning. Just wanted to sort of unpack, obviously, some of the trends on broadband. There's some sense out there that some of this could be competition. Is there any way you can talk about what you're seeing in the marketplace from fiber Or fixed wireless in any sense. And then a question on for Tom really on your CapEx comments this morning.

Speaker 5

It looks like you're going to deploy high splits and that will probably reduce the need of doing node splits going forward. Can you sort of talk about Broadly the cost impact of that shift in strategy, if you sort of go down that path, does it sort of bring forward some CapEx, while the total CapEx There's not really change over the long term. Is that really the message?

Speaker 2

Let me start with the HiSplit question first. And We are deploying it in market to see how it works and how it actually works in the real world. But Our sense of it is that you get symmetrical gigabit speeds out of it, But you also get the augmentation capacity that we've been spending capital on for years As average consumer growth in usage of data continues to increase. And so when you take the actual capital and net that against it, It becomes a very low cost of incremental capital and at the same time becomes Operationally a lot more capable in terms of the products that you can deliver on the network. So We think it's a very capitally efficient way of upgrading the network and maintaining our superiority from a competitive point of view everywhere we operate.

Speaker 2

In terms of how we're doing in the marketplace and what The competitive environment is similar to what it's been. And when we look at the Effects of the marketplace in terms of net adds and in the churn environment we're in, we're seeing the same effect where there are no wireline competitors As we do with wireline competitors in terms of net adds proportionally to say 2019. And so we're seeing that the competitive environment doesn't appear to be significantly different than it has been. It's always been a competitive environment. And that the effects of lower activity are Throughout the marketplace, regardless of what the infrastructure we're competing against is.

Speaker 5

Great. Thanks so much.

Speaker 1

Thanks, Vijay. April, we'll take our next question, please.

Operator

Your next question is from Ben Swinburne with Morgan Stanley.

Speaker 6

Thanks. Good morning, everybody, and congratulations, Chris and Jessica, on the promotions. I want I asked questions similar to Vijay's, if you don't mind. I guess 2 of them. 1 is, you guys are obviously describing an environment That is impacting net adds tied to activity, but the market is focused on competition.

Speaker 6

If we were to look at markets that Charter operates in with fiber Competition, I know AT and T has been adding fiber for a number of years. Would we see a dramatically different business in And then if we look to Charter's footprint in DSL markets, I think that'd be a Helpful framework to think about this. And then number 2 is on the network. Again, sort of following PJ's line of thought And Chris, be interested in your perspective given your European experience. We're seeing some cable companies in Europe essentially skip DOCSIS 4.0 and Go Fiber, I know there's major structural differences there versus here.

Speaker 6

But I'm just wondering if there's If there's any thought in your head about where fiber might make sense or what would cause you to move towards fiber to the home versus 4.0 and extended Spectrum DOCSIS, which seems to be your sort of plan A right now. Anyway, we'd love to hear your thoughts

Speaker 3

on those 2. Thank you.

Speaker 2

Well, I would just I would say that in fiber markets versus DSL markets, that Our business model works pretty much the same way. And there are slight variations And penetration everywhere we operate for a variety of reasons, but they're very similar businesses and our growth rates Are similar structurally. We've been able to grow market share in every environment we operate in pretty much In terms of facilities based competition,

Speaker 5

for a

Speaker 2

variety of reasons, it's not just Capacity in every case, it's sometimes service, sometimes the overall product mix, including the mobile piece of it. So we've found ways to make our product work regardless of the operating environment.

Speaker 3

The difference between Europe and the U. S, they're completely different densities. We do fiber Today in rural environments, often in the EU environment and on the increment where we're doing greenfield. But the capabilities of the DOCSIS 3.1 network really has a very long runway, which is what Tom was mentioning, at an extremely low capital cost. And It provides all kinds of opportunity, including picking over time how you attack with DOCSIS 4.0 and fiber to the home.

Speaker 3

We have a really capital efficient path that doesn't that means that we don't have to go down that same path. And a lot of the difference here is, I think, driven More by density than anything else.

Speaker 2

Density and conduits and the way markets are built. It's a much different environment here, but the reality is that we can upgrade our network at way less than it cost to build a fiber platform over top of it. And fiber works for us on the increment in ARGOV. It works for us In certain kinds of MDU environments, certain kinds of greenfield new construction environments, But in terms of taking existing infrastructure that we've already deployed in 3 quarters or 1,000,000 miles of infrastructure essentially that we can upgrade at very low costs, Orders of magnitude less than a cost to build fiber and get equal performance

Speaker 7

in

Speaker 3

those cases faster.

Speaker 2

Yes. And do it quickly. Thank you.

Speaker 1

Thanks, Ben. April, we'll take our next question please.

Operator

Your next question is from Ketan Maral with RBC Capital Markets.

Speaker 8

Good morning and thanks for taking the question. I was hoping for more color on residential ARPU trends. The quarter came in strong even when backing out the COVID comps against last year. I know this was partly related to the June rate event, But you also noted benefits from a more favorable customer mix, customer mix given how low churn has been. I guess, given your Commentary on 2021 net adds looking more like 2018, should we assume these positive ARPU trends could continue not only into the 4th quarter, But also into early 2022, it's just I assume that even if market activity picks up, it would likely take a few quarters to reverse some of this tailwind in your overall

Speaker 4

So first I would point you back just to be sure in the COVID picture that there is a big piece of the year over year ARPU increase that's related to the revenue credits in Q3 of last year. But I do think you pointed out something. The lower churn environment benefits us in And one of those is on the ARPU side. The longer that a customer stays with us, you have more customers who sort of roll off of promotional Packages and therefore, roll into higher pricing packages. And as we have Sort of a low churn environment where you have additional longer tenured customers.

Speaker 4

We do see some impact on ARPU from that. The other piece that's in there that you pointed out is the additional programmer sort of pass through costs that we pushed at the end of the quarter. So there's a mix of the 3. There will, I think, if we continue to be in a low churn environment,

Speaker 2

I would just add to that, that if you think about it from a return on investment perspective, every customer you add in a low churn environment It's more valuable than a customer you had a higher charter environment because the average life of the customer is longer. Therefore, the total cash flow of the customer is longer and the cost to Sir, the passing from a transaction cost perspective is less. So it's from a financial point of view, A slower growth environment related to churn being reduced is actually economically

Operator

Your next question is from Phil Cusick with JPMorgan.

Speaker 8

Follow-up and a question and Echo my congratulations to Chris, Jessica and Rich. It's well deserved. First on Vijay's question, you said that ads are more valuable, Chris, does that mean you're seeing something similar to Comcast in a slower low end customer and consistent high end? And any thoughts on whether wireless, fixed or mobile might be pulling more of that low end in? And then Tom, can you expand on your CBRS Trial comments, how wide a trial is this?

Speaker 8

How many sites? Anything you can help us with there? Thank you.

Speaker 2

I'll do a quick answer on the CVRs. It's an entire DMA market test, thousands of sites, Because they're full monitored sites, Small sales, relatively speaking. I don't know the exact number, but it's an entire DMA.

Speaker 3

In terms of customer mix acquisition, it's true that the programs that we put in place in The midst of COVID last year, whether it was the remote education offer or the way that we worked with customers for the Keep Americans Connected credit Meant that both from a sales as well as from a retention perspective, there was a locking in or securing the Lower income population and bringing them on as Charter customers. We're really pleased that we did it. So is that a pull forward? Maybe. That took place last year, but that doesn't mean that we haven't stopped that we stopped marketing and selling into that base.

Speaker 3

We've been an active participant The Emergency Broadband Fund, I wouldn't say that it's created in the 3rd quarter any incremental acquisition. Vast majority has come into that program through our existing subscribers, but we're utilizing that federal program to make sure that we service that Community have continued to actively market, sell and service into the space. But your point is true. There was Certainly, a lot of people who had been on wireless substitution in the past or had affordability issues that through the things that we did cooperating with the federal We were able to get them to proper broadband and we benefited from that last year. We've managed to keep those customers through the course of this year, but the same level of Inflow sales, a little lower.

Speaker 8

Thanks, Chris.

Speaker 2

Yes, and that contributes to the lower churn environment as well. Correct.

Speaker 1

Thanks, Phil. April, we'll take our next question please.

Operator

Your next question is from Craig Moffett with MoffettNathanson.

Speaker 7

Hi, good morning. And let me join the parade of all the congratulations to Jessica and to Chris and to Rich And to John. So two questions, if I could. First, just digging into the broadband Dynamics one more time. In this low churn environment, have you seen any change in the Share of gross additions that you're winning.

Speaker 7

So my understanding is the gross addition pool is clearly suppressed by low churn, but Has there been any change in your win share as far as you can tell among what's left in gross additions? And then As you think about the upcoming CBRS offload trial, what's your expected offload? What's your target for how much of the what would otherwise go over the cellular contract with Verizon that you think you can offload onto the

Speaker 2

On the first part of your question on the broadband growth, are you talking about new construction growth?

Speaker 7

No, just in the smaller gross addition pool that's available, given that customers are just moving less And churning less. But in that smaller pool that's available, do you have any sense that your share of wins has changed at all?

Speaker 4

So, I guess, we've seen that in the sales that do come in the door that yields are So the number of sales that come in the door that we're able to close and convert to customers has been increasing. I I haven't looked at it exactly in the course.

Speaker 2

Yes. That's our share of activity is actually higher From the activity that we see in front of us, so our ability to attach mobile units to a transaction is going up. There's just less of them. And but no, in terms of I don't see really a change or a shift Any material way that I can see in the numbers in terms of our acquisition share.

Speaker 3

Our churn is down in all types of markets with all types of Infrastructure that we operate in front of and our gross adds are down proportionately inside all of those same footprints. So there isn't any incremental A change in any material way in gross adds based on the footprint in which we operate. It's just lower transaction volume taking place across the entire board.

Speaker 7

And so it sounds a lot like what you're describing is just that a low mobility and low household formation market.

Speaker 2

That's true. And how that unwinds is unclear. I mean, there was it's a very unusual market situation, people Sheltered in place, so to speak. And so you had all the friction of the market came out That used to exist people in transition and they settled into subscriptions and when the market Remobilize, so to speak. I think there'll be continued pressure on growth, because of the pull forward of all of that activity.

Speaker 2

But it is I mean, I think the fundamental opportunity for growth And long term growth is still the same and our ability to take share out of the market is still the same. In terms of CBRS, today 80% of the traffic On mobile platforms is on WiFi and we continue to use the WiFi network effectively and there's a whole new piece Spectrum available to WiFi available to us. So WiFi And CBRS together have an opportunity to make a significant change in How much traffic is on our network versus on the MVNO? Our target for CBRS, I've said before, Could be pushing a third of the marketplace if everything works and it's fully deployed. Now You're talking years of runway necessary to deploy that And to get it fully utilized, but the good thing about it is that the capital associated with Any construction we do is dedicated to the to a lower cost.

Speaker 2

In other words, If we're going to put out a device or a radio, we know where the traffic flows are and we know that the traffic flows in that This particular area justify the capital of placing that device and that the offload percentage that's associated With that specific geography is sufficient to pay back the capital investment in the radio. So it's a we'll deploy that based on actual utilization. But Our modeling shows that it could be a significant reduction in the overall traffic load on the MVNO.

Speaker 7

Thanks. That's helpful.

Speaker 1

Thanks, Craig. April, we'll take our next question please.

Operator

Your next Question is from Jonathan Chaplin with New Street Research.

Speaker 9

Thanks, guys. Just to start off a quick housekeeping question and then I've got another one

Speaker 8

as well. For

Speaker 9

anchoring off of 2018, and I guess this is a question for Chris. Should we be anchoring off of residential net adds of $1,100,000 or Total net adds of closer to $1,300,000 And then following up from one of the earlier questions, I recognize the color you're giving on the transition of the network to high splits and that's extremely helpful. I'm wondering if you can give us some indication of how long that transition to high splits across the network will take? And then when more or less you expect to start folding in the DOCSIS 4.0 upgrade? And then My final question on broadband adds.

Speaker 9

Are you assuming any benefit in the broadband add guidance that you're giving for 4Q effectively From a pull through from the lower wireless plan rate plans that you've put out there. So If wireless accelerates, should that have a pull through benefit to broadband and is that baked into your expectations? Thanks guys.

Speaker 2

Okay. In the timing of the high split opportunity from a timing is also opportunistic, like I was describing CBRS, but it's relatively inexpensive Like a CBRS deployment was excuse me, not like a 3.1 DOCSIS deployment was. And it's on a per passing basis, we think it will be quite efficient. But The other beauty of it is it's pretty much an electronic drop in and it could be done quite rapidly and cover huge slots of geography in a very short period of time. And so it has 2 benefits.

Speaker 2

1 is just If you do it in a sort of a normal management of augmentation network growth Pattern sort of deployment. It replaces the need to do node splits, If you do it quickly, it also has the same effect, but it gives you greater capacity in terms of What products you can deploy in a market and what marketing claims you can make. So it can be done quite quickly, and that's the beauty of it.

Speaker 3

Sure. The 2018 comments that I made was really in the context of total Internet additions. So the answer to

Speaker 2

And it's got to pull forward. Does mobile pricing pull forward?

Speaker 3

It's only been out in the market for 2 weeks, so we should be careful what we say. But the initial Uplift of mobile sales has been fairly significant as we expected. And while we think it could and should have The impact on broadband over a multiyear period, we haven't seen anything yet that indicates that's the case. And so I think it's nor would we expect it, And we didn't expect it. So I think it's premature to think that we're going to see that kind of pull through to Internet just yet.

Speaker 9

Got it. Thanks guys and congratulations to both you and Jessica, Chris.

Speaker 4

Thank you. Thank you.

Speaker 1

Thanks, Jonathan. April, we'll take our next question, Please.

Operator

Your next question is from Brett Feldman with Goldman Sachs.

Speaker 8

Thanks. Just a couple of On wireless, when we look at your wireless pricing strategy, you've done the exact opposite of what the major carriers are doing, Which is you've offered your consumers a great deal on their service price, but you're not necessarily offering them a promo on the handset. So at least it's sort of 2 questions. The first is, What are you thinking about handset promotions? Meaning, would you be willing to also incorporate them into your price point, particularly as consumers look to upgrade to 5 gs devices and they're offered promos elsewhere.

Speaker 8

And then bigger picture, I mean, the key reason it looks like you were able to lower your prices recently is because you were able to get a better Cost structure under the MVNO agreement, meaning that you took your lower costs and you converted them into lower prices. And so the question would be, If you're pleased with the success of the CBRS trial, what does that mean for your wireless business? Does it mean that you have an opportunity to be more profitable? Or do you think that it's an

Speaker 4

If you look at our total opportunity relative to Customer spend on combined mobile and broadband. There's a lot of broadband spend or A lot of mobile spend out there relative to broadband spend. So if you think about a customer, a typical 2 line household, And so if we continue to sell mobile product, even if we do it by bringing the pricing of mobile down, Our expectation is that, that we'll continue to drive both revenue growth and bottom line EBITDA growth from that business all while driving pricing down in the mobile industry. And from the perspective of our mobile business, I mean even Today, our mobile business is profitable if you take customer acquisition costs out. And like what we've done across our business, our goal is always to Further penetrate the market and so if we can increase our penetration of the mobile market and have more sort of ongoing revenues and less customer acquisition cost or not less, even with additional customer acquisition costs.

Speaker 4

We'll generate strong profits out of that business just by penetrating the market, Sticking with our strategy of having sort of very competitive pricing for our customers.

Speaker 2

Yes. I agree that with I think that one way of thinking about it is We have about 55 percent penetration of our broadband business at about $60 ARPU On average and the average spend on mobile on a per home basis inside our footprint It's over $120 a month and the average Number of devices inside our footprint is about 120,000,000. And so When you really look at our 6% mobile penetration and our 55% broadband penetration And look at that as a share of spend, even if you cut the mobile average household price in half, where our penetration of the dollars is less than 30%, which means what I said earlier in the presentation, which is we're really under penetrated and there's lots of Telecom spend in which to grow our business at the household level. Thanks, Brett.

Speaker 1

April, we'll take our next question please.

Operator

Your next question is from Peter Cipino with

Speaker 10

Bernstein.

Speaker 2

Hey, good morning. I wanted to go back to the aspect of ARPU. With fiber and fixed wireless segmenting broadband presumably in 2022 and beyond, I wondered If you could talk with us a bit about how you manage local pricing in response to those local deployments and whether that might result Some ARPU growth deceleration, albeit still at next positive rates in the years to come.

Speaker 3

Let me take a start at that. Sure. So we have national pricing everywhere for our retail pricing and it's low compared to any of our peers or competitors. And we have the ability to bundle products that most of those competitors that you mentioned don't have. So if you think about Low broadband pricing is at national retail pricing, combined with the ability to save Customers 100 or 1,000 of dollars in mobile and increasingly because of where the rest of the market has gone, we have The very best video product out there, and that may not be for everybody because there's a lot of different ways to take video.

Speaker 3

But our video product, We have something for everybody, whether it's a full expanded package, whether it's Mi Plan Latino, whether it's Essential Stream Choice In the home, outside the home on every single device. So we have a package and a price point for just about everybody and still about half of our Internet sales still take Video and it causes them to retain. So we're able to add value to these households, not just by having a national low retail pricing Structure for broadband, but the ability to use video and to use the savings from mobile to compete Now and really for a long period of time. So that's how we approach the marketplace, Really how we've always approached the marketplace, including back to if you think about phone, where the pricing and again, it's Maybe half the customer base that's relevant for it, but it is relevant for half where we have a $12 price point for So we have different ways we can save customers' money. And we think the product that we offer anyway in broadband is As good, if not better than any of the competitive footprint that we face.

Speaker 2

And ultimately, price What you can do with price is a function of what costs are and we have lower costs.

Speaker 1

Thanks, Peter.

Speaker 2

Thanks very much.

Speaker 1

We'll take our next question, please.

Operator

Your next question is from John Hodulik with UBS.

Speaker 10

Great. Thanks, guys. First question on video. You guys saw some Accelerating video and voice losses actually this quarter. Is that just a function of the attach rates and lower broadband ads?

Speaker 10

Or is there a sort of a reopening issue there as well? Or maybe the price increase in June affect those numbers. And then getting back to the wireless, Clearly, wireless and broadband is sort of the new bundle. And thanks for the number, 2,000,000 households so far having that bundle. I mean, it's early yet, But can we look at the churn within that cohort and see whether or not you're actually seeing an improvement versus sort of standalone broadband?

Speaker 10

And if so, can you maybe give us a sense of the change in churn that you may be seeing? Thanks.

Speaker 4

On the video and voice losses front, I mean, I think that, that one is just The impact of having the not having the level of broadband additions that we had In 2020, when you have a lot of broadband additions, we pull through a lot of voice and video In bundling there and in this sort of lower gross add, lower churn environment, it's just a carry through

Speaker 3

On The churn benefit for a broadband customer also takes wireless. I mean, I could sit here and advertise and tell you how fantastic it is. The churn is definitely lower and I could beat our chest about it. But some of that a lot of that is really at this point due to self selection. The customers are happy with our service.

Speaker 3

Like who we are, they like the pricing that they have on the products and as a result they take more products from us. I don't know that that means there's enough evidence now Systemically, but our gut tells us the answer is yes. And while the numbers would tell us yes today as well, I don't think should rely on that in terms of an order of magnitude until we get further down the road.

Speaker 2

And the churn, it's all churn is so low Yes, it

Speaker 3

looks like it is a

Speaker 2

chart that is hard to attribute to it all. That's right. Thanks, Jessica.

Speaker 10

Thanks, Jessica.

Speaker 1

Thanks, Jessica. April, we'll take our next question, please.

Operator

Your next question is from Doug Mitchelson with Credit Suisse.

Speaker 11

Thanks so much. And I'll add my congratulations to Jessica and Chris and Rich. And I will stick with the broadband and wireless themes. Tom, just clarification on you sort of mentioned the pandemic was a pull forward and I think you emphasized share opportunity. Should we think about the growth opportunity really as Share focus going forward in that the broadband marketplace is broadly fairly mature after this pandemic pull forward.

Speaker 11

And then, I guess, jump ball, though, Chris, I know your experience in Europe might inform this. And it seemed like Brian and Robert yesterday was implying that they're thinking about launching a converged Sort of in home, out of home broadband offering, and I'm sure you've been thinking about the same thing. Is there an opportunity to disrupt the marketplace By having a single converged by the home subscription rather than thinking about it as a per phone

Speaker 2

So Doug, I wouldn't say broadband is mature in the sense that We think high capacity broadband, which we sell and packaged with Mobility and packaged with great home connectivity Managed WiFi is still a growth opportunity in 2 ways. You have what will the number of people that ultimately take that level of service be? And in our footprint today, We think 93% of houses are occupied. And I think the penetration of any kind of Internet service in that footprint is about 85%. So there's still opportunity to grow the overall connectivity broadband market.

Speaker 2

And then there's the opportunity to actually into the high capacity service that we sell and the high quality service we sell. So we think While we have 55% penetration, there's 37% penetration more to go In terms of what our possibilities are there, plus the whole broadband mobile broadband

Speaker 3

So Doug, your question, yes, it's Sure. It's been a decade in European cable, but it's also been a decade since I've been there. So I don't know that I'm any longer qualified To make comparisons or talk about it, but your question was, and I apologize if I haven't followed it, but the that could you offer a mobile

Speaker 11

Yes, just a single price for a household to have sort of as many devices as they want in and out of the home.

Speaker 3

It's an interesting concept and I know what it's trying to solve. I mean for all the reasons that you can think Convergence technically makes a lot of sense. The ability to have a ubiquitous Internet product inside the home, outside the home, in the neighborhood, in the coffee shop, etcetera, all that which we talk about and it works. The ability to save customers tons of money, which we do, there are not that many markets where from a marketing and sales machine, it's been So I think it's an interesting concept and one that we're keeping our eye on. And when you think about As our pricing gets lower on mobile, bridging our way towards that one way or another.

Speaker 3

It's another way of thinking about it. But I think those type of models and taking a look at how to fully get convergence also from marketing and sales and solve

Speaker 1

Thanks, Doug. April, we'll take our last question, please.

Operator

And your last question is from Jessica Reiss Ehrlich with Bank of America Securities.

Speaker 12

Thank you for getting me on. I guess one last question on broadband to beat a dead horse and then One of the questions. On the Internet ads on the SMB side, that slowed as well. And that's an area that seems to have kind of normalized a bit more than residential. Can you talk a little bit about what's going on in commercial?

Speaker 12

And then on X Class TV that Comcast talked about rolling out, is there anything In the service, to the extent that your subs buy an ex class TV, are there any benefits or economics that you get? Or would you consider shifting Becoming an aggregator of streaming services, which with a different set of economics from linear.

Speaker 3

You want to answer? I'll answer SMB. I think the SMB space is really more about cyclicality right now related COVID and how things have opened and shut down and businesses have closed and restarted and new businesses I think it's much more tied to that than the things that we're seeing in the residential side. Generally, I would say that our SMB Capabilities are as good as ever right now. And in a market where you have new businesses forming or coming back online, Our competitive posture there is very good and I don't see the same type of issues that we've talked about in residential for SMB.

Speaker 3

So the Fluctuations you've been seeing really much more about, just the overall economic cyclicality that's taking place with COVID, but We don't face the same type of issues from market movement that we're seeing in residential in the SMB space. Our opportunity to grow there remains good and same as residential long term.

Speaker 2

Yes. So From a streaming perspective, it's interesting, Charter is actually the biggest live streaming App in the country and the most highly rated app in the country. We distribute streaming products on Roku, Apple TV, On our own set top boxes, we've got a cloud based streaming application that can be placed on our app based Streaming app system that can be placed right on our set top boxes. And so we've got More than 10,000,000 customers who are connected to us strictly through a streaming relationship. And we like the Comcast strategy with regard to their putting their platform on televisions.

Speaker 2

And so to make the video model more efficient, for programmers and for operators

Speaker 1

Thanks, Jessica. That concludes our call. Thanks to everyone. And April, I'll pass

Speaker 3

the call back to you.

Operator

This does conclude today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Charter Communications Q3 2021
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