Charter Communications Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Stefan Anninger, Vice President, Investor Relations
• Christopher Winfrey, President and Chief Executive Officer
• Jessica Fischer, Chief Financial Officer

Analysts

• Douglas Mitchelson, Credit Suisse Group AG
• Benjamin Swinburne, Morgan Stanley
• John Hodulik, UBS Group AG
• Philip Cusick, JP Morgan Cazenove
• Peter Supino, Wolfe Research
• Jonathan Chaplin, New Street Research
• Craig Moffett, MoffettNathanson
• Jessica Reif Ehrlich, Bank of America Merrill Lynch
• Michael Rollins, Smith Barney Citigroup

Presentation

[Operator]

Hello, and welcome to the Charter Communications First Quarter 2023 Investor 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 call is being recorded today. If you have any objections, please disconnect at this time.

I will now turn the call over to Stefan Anninger. Please go ahead.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Good morning, and welcome to Charter's first quarter 2023 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 Chris Winfrey, our President and CEO; Tom Rutledge, our Executive Chairman; and Jessica Fischer, our CFO.

With that, let's turn the call over to Chris.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thanks, Stefan. During the first quarter, we added 76,000 internet customers, with contributions from our Spectrum One offering and our rural construction initiative. We continue to operate in a low transaction environment and yet, we added 686,000 Spectrum Mobile lines.

At the end of the first quarter, we had 6 million total mobile lines. Just over 10% of our internet customers now have mobile service, and we expect mobile penetration to meaningfully grow over the next several years and our increasing convergence capabilities will contribute to internet growth. We grew revenue and EBITDA by 3.4% and 2.6% respectively during the first quarter and our capital expenditures reflect progress on our key initiatives.

This is a very unique time for the cable industry, with generational opportunities across our three key initiatives, each of which is designed to drive customer growth and long-term cash flow growth. The first initiative is evolution, which includes the most significant spectrum enhancement to the cable network since the late 1990s at a very low cost. Network evolution also includes the convergence of our connectivity products.

Second is the largest expansion of our footprint since the 1980s, bringing broadband to unserved and underserved areas. And finally execution, which is all about investing in and delivering great service. I'll provide a brief update on these initiatives.

Our network evolution plan is progressing well. We have now completed the physical work for high split in two mid-sized markets. We increase the network capacity to 1.2 gigahertz, which is equivalent to the acquisition of 400 megahertz a spectrum. We also allocated more spectrum for upstream use.

In these markets, we're now capable of delivering two-by-one gigabit per second service and we're launching the same CMTS-based 1.2 gigahertz high-split to an additional six markets. These DMAs represent about 15% of our footprint.

In parallel, we are preparing the second step of our network evolution plan, which will cover about 50% of our footprint and which adds to the deployment of Distributed Access Architecture, allowing us to deliver five-by-one gigabit per second speeds.

Step three of our network evolution plan covers about 35% of our footprint and should begin in late 2024. That step adds a further expansion of our network to 1.8 gigahertz. We expect our network evolution initiatives will be essentially complete by the end of 2025 at the previously noted $100 per passing target, excluding the benefit of any network savings which will come.

Our converged product offering also continues to evolve. Spectrum One is performing well in the marketplace. It offers the fastest connectivity and includes differentiated features like mobile speed burst and Spectrum Mobile Network, each of which runs on our advanced Wi-Fi product.

Today, over 40% of our residential internet customers have our advanced Wi-Fi product, which just last month, we also launched to the SMB marketplace. Over 75% -- 70% of our customers -- our mobile customers now use the Spectrum Mobile Network outside of their homes.

Spectrum One also offers significant savings for customers in both promotional and retail pricing. So, our opportunity in converged connectivity in mobile is very large. We particularly like our ability to mix the lease economics of our 5G MVNO for the 10% to 15% of the time that our mobile customers don't have access to our faster Spectrum Mobile Network. We have a strategic partner and Verizon and we are a meaningful contributor to active lines on its network and its financials.

When we look at the pricing and the usage of fixed wireless access disclosed by T-Mobile, it's clear that the MVNO price we pay per gigabyte is dramatically better than the economics mobile operators achieve with fixed wireless access offerings.

In the expansion category, our plans are on track. During the quarter, we activated 44,000 subsidized rural passings. Subsidized rural passings growth is accelerating, with 20,000 subsidized rural passings activated in March. Costs are coming in as planned and we have the labor, the equipment and the supply necessary to execute our build.

If we get the permits support we need, we can complete our RDOF commitments 2 years ahead of the RDOF deadline. The pace of penetration gains and subsidized rural passings continues to exceed our expectations, with 6-month penetrations at approximately 40%.

And finally, we remain committed to the execution of our core operating strategy, which prioritizes customer experience and customer satisfaction, ultimately driving faster customer growth. Our proactive maintenance efforts are fundamentally changing the customer experience. And using telemetry, we can address service impairments before customers even know they exist, pulling forward service calls that otherwise would have occurred and preventing service-related disconnects. We expect the mix of proactive truck rolls will increase significantly in the coming years.

We're also seeing the benefits of our investments in training and tenure faster than expected. Employee retention among our frontline service employees during the first quarter was the best I've ever seen. And while investments in our employees generate upfront expense, they ultimately deliver longer tenured employees, which produced higher-quality transactions, fewer repeat transactions, lower average handle times and better sales yields. So, increasing tenure also allows for a greater amount of our network evolution projects to be performed with our own employees, which will save money and increase the quality of the upgrade.

Additionally, the increasing digitization of our service platforms where we've invested significantly in machine-learning and the precursors to AI will further reduce transactions. More to come on that in future quarters. But the key point here is that the combination of longer employee tenure, network evolution benefits, the conversion of our video platform to IP and digital service investments, all create a long runway for us to continue to reduce service transactions, operating cost and churn, which increases customer satisfaction, customer lifetime value and our returns.

So ultimately, we're focused on doing everything that a customer would want us to do, investing in the network to offer even faster speeds, providing seamless connectivity products not available elsewhere. Then bringing that same seamless connectivity to markets that have never had broadband before and delivering better customer service by investing in digital service platforms and a more tenured, more qualified service employee, all while helping save customers significant money in an inflationary environment.

So, our strategy is focused on delivering differentiated, converged connectivity products that essentially improves people's lives and create value for shareholders.

Now, I'll turn the call over to Jessica.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thanks guys. Before discussing our first-quarter results. I want to remind everyone that starting this quarter, we've made some changes to the way we report our P&L. First, we now include mobile service revenue in the residential and SMB revenue as appropriate and mobile equipment revenue is now reported in other revenue.

On the expense side, we no longer report mobile expenses separately and those are now included in the applicable expense category. Ultimately, these changes better reflect the converged and integrated nature of our mobile business and our operations and offer structure. For additional information regarding these changes, please review Footnote A on page seven of the trending schedule we posted this morning.

Now, let's turn to our customer results on slide five. Including residential and SMB, we added 76,000 internet customers in the first quarter. Video customers declined by 241,000, partly driven by a programming expense increase passed through in January of this year.

Wireline voice declined by 220,000, and we added a record 686,000 mobile lines. Although our internet customer growth continued to be positive in the first quarter, market activity levels remained low. During the quarter, total churn was slightly higher than last year but still near-record lows and well below pre-pandemic levels.

We've seen a small impact from fixed wireless across -- fixed wireless access competitors in the price-sensitive customer segment. Generally speaking, however, these customers typically exhibit higher levels of churn regardless of competition. And given the issues with fixed wireless product speeds, as confirmed by third parties, and questions surrounding that product's reliability and scalability, we expect fixed wireless customers to find their way back to us over time.

We continue to drive very strong mobile growth with our high-quality, differentiated and attractively-priced service. The majority of new lines continue to come from existing internet customers though the percentage of lines coming from acquisition has increased significantly since the introduction of our Spectrum One product. And as we mentioned last quarter, our converged customers have meaningfully lower internet and customer relationship churn.

As Chris mentioned, we also continue to perform well in rural areas. The new rural disclosures we issued today on page five of our trending schedule show that we continue to see robust growth in rural passings. During the quarter, we activated 44,000 subsidized rural passings despite winter's construction seasonality.

Penetration of subsidized rural passings continues to exceed our original target. And these rural customers are purchasing products beyond internet, including mobile, video and wireline voice.

Moving to financial results starting on slide six, over the last year, residential customers were down slightly with new customer growth driven by internet, offset by video-only customer churn. Residential revenue per customer relationship grew by 2.5%, with promotional rate step-ups, rate adjustments and the accelerated growth of Spectrum Mobile, partly offset by a higher mix of non-video customers and growth of lower-priced video packages within our base.

As slide six shows, residential revenue grew by 2.5% year-over-year. And as a reminder, starting this quarter, our residential revenue now includes mobile service revenue, which grew from $387 million in the first quarter of 2022 to $497 million in the first quarter of 2023.

Turning to commercial, SMB revenue grew by 2% year-over-year, reflecting SMB customer growth of 2.4%. Enterprise revenue was up by 3.1% year-over-year. Enterprise PSUs grew by 4.9% year-over-year. And excluding all wholesale revenue, enterprise revenue grew by 7.3%.

First quarter advertising revenue declined by 7.2% year-over-year due to less political revenue. Core ad revenue was down 2.1% year-over-year, driven by lower local and national advertising revenue, offset by our growing advanced advertising capabilities. Other revenue grew by 34% year-over-year, primarily driven by higher mobile device sales and higher rural subsidies. In total, consolidated first quarter revenue was up 3.4% year-over-year.

Looking to second quarter revenue growth, I would remind you that we will lap April 2022 rate adjustments and face the headwind of strong political advertising revenue in the prior year.

Moving to operating expenses and EBITDA on slide seven, in the first quarter, total operating expenses grew by $316 million or 3.9% year-over-year. Programming costs declined by 6% year-over-year due to decline in video customers of 5.2% year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates.

Note that our first quarter programming costs included $50 million of favorable adjustments, which is similar in size to sports network rebates and other favorable adjustments we saw in the first quarter last year.

Looking at the full-year 2023, we continue to expect programming cost per video customer to be approximately flat year-over-year. Other cost of revenue increased by 19.9%, primarily driven by higher mobile device sales and other mobile direct costs.

Constant service customers increased by 6.9% year-over-year, driven by adjustments to job structure, pay and benefits to build a more skilled and longer-tenured workforce, resulting in lower front-line employee attrition compared to 2020 and additional activity to support the accelerated growth of Spectrum Mobile.

Partly offset by productivity improvements as a result of the programs we discussed at our December Investor meeting, our employee attrition declined more quickly than we had expected, which is allowing us to lower our normal hiring in the first half of this year and increase overall tenure and quality. Longer-term, we continue to expect additional efficiencies and cost to service customers over-time as a result of our continuing lower service transactions, service tenure and digital service investments, proactive maintenance and network evolution investments.

Sales and marketing costs grew by 7.6%, primarily driven by higher staffing across sales channels and the accelerated growth of Spectrum Mobile. And other expenses grew by 6.7%, driven by higher labor costs. Adjusted EBITDA grew 2.6% year-over-year in the quarter.

Turning to net income on slide eight, we generated $1 billion of net income attributable to Charter shareholders in the first quarter, down from $1.2 billion last year, with higher adjusted EBITDA more than offset by higher interest expense.

Turning to slide nine, capital expenditures totaled $2.5 billion in the first quarter, above last year's first quarter spend of $1.9 billion. The increase was primarily driven by higher spend on line extensions, which totaled $890 million in the first quarter of 2023 compared to $541 million in the prior quarter, driven by Charter's subsidized rural construction initiatives and continued network expansion across residential and commercial greenfield and market fill-in opportunity.

I would also note that in the first quarter, we saw a sequential decline in total capex associated with our subsidized rural construction initiatives, as we purchased a significant amount of rural construction equipment inventory as supply chain issues improved in the fourth quarter.

First quarter capital expenditures, excluding line extensions, totaled $1.6 billion compared to $1.3 billion in the first quarter of 2022.,We spent more on upgrade rebuild, given our network evolution initiatives. Customer premise equipment which includes installation costs was higher year-over-year, and support capital was also up, just given timing.

Our expectations for full-year 2023 capital expenditures have not changed, in part because the costs associated with our network evolution and rural construction initiatives are coming in as planned.

For the full year, we continue to expect capital expenditures excluding line extensions to be between $6.5 billion and $6.8 billion. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, capex excluding line extensions as a percentage of revenue should decline to below 2022 levels and continue to decline thereafter. And we expect 2023 line extension and capital expenditures to reach approximately $4 billion.

We continue to expect 2024 and 1,025 line extension capex to look similar to our outlook for 2023 at approximately $4 billion per year. And our 2024 and 2025 line extension capital expenditure expectations assume that we win funding for or otherwise commit to additional overall spending.

As slide 10 shows, we generated $664 million of consolidated free cash flow this quarter versus $1.8 billion in the first quarter of last year. The decline was primarily driven by higher capex, mostly driven by our network expansion and network evolution initiatives, and an unfavorable change in working capital, excluding the impact of mobile devices, which was typical seasonality for our first quarter but larger than last year.

The year-over-year headwind was partly driven by outgoing payments related to the larger inventory buildup in Q4 of 2022 that I just mentioned. For the full year, however, we expect the change in working capital, excluding the impact of mobile devices, to be roughly neutral, as our capital and payroll accruals should rise over the course of the year. Mobile device working capital will remain a headwind, given the mismatch in timing between when we receive EIP payments and when we pay handset providers.

Also in the first quarter, we didn't make significant cash tax payments. And generally speaking, we make four federal cash tax payments a year, with two quarterly payments made in the second quarter and one payment made in each of the third and fourth quarters. We're not changing our cash tax outlook that we provided on last quarter's call and simply providing a bit more clarity on the timing of cash tax payments.

We finished the quarter with $97.8 billion in debt principal. Our current run rate annualized cash interest is $5.1 billion. As of the end of the first quarter, our ratio of net debt to last 12 month adjusted EBITDA was 4.47 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 2.6 million Charter shares and Charter Holdings common units, totaling about $1 billion at an average price of $375 per share. Charter's bandwidth rich 2a network passes nearly 56 million homes and businesses, with gigabit and converged services everywhere. And given the significant investments we've made in that network over a multiyear period, we are now in a position to upgrade it further in both the cost-efficient and time efficient manager -- manner to offer the fastest speeds and the most advanced telecommunication services in the country.

Additionally, our scale and our capabilities are allowing us to rapidly expand that network, both to unserved and underserved areas, through our rural construction initiatives and two other high ROI expansion opportunities. Those initiatives combined with our service-oriented operating strategy and prudent capital allocation are poised to drive long-term customer growth, higher free cash flow and shareholder value.

Operator, we're now ready for Q&A.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Thank you. Our first question will come from Doug Mitchelson with Credit Suisse. Your line is now open.

[Douglas Mitchelson, Analyst at Credit Suisse Group]

Thanks so much. If I could do one for Chris, one for Jessica; Chris on the go-to-market strategy for wireless, I'm just curious, what percentage of the wireless lines being created by the 12-month promotion you're hoping will convert to full pay after the promotional period expires? I think as part of that we think about what's the data usage, how is that tracking for the promotional wireless lines versus the non-promotional lines or how many of your gross adds are phone numbers being imported in versus creating new phone numbers, just trying to understand the revenue opportunity from that promotion. I certainly get the retention benefits.

And then, Jessica, not really sure what you're willing to say, but when you think about your prior commentary about labor investments impacting both 1Q and 2Q, should we start to think about a little bit more margin expansion in the back half of the year or any comments you're willing to make on swing factors for margins the remainder of the year would be helpful. Thank you.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

So, Doug, I'll start it off with the go-to-market on Spectrum One. We have two offers out there today. One is for acquisition of free line together with internet and essentially, the other one is, if you purchase the line, you get the second one for free for an existing customer. Those customers are great customers. They have good usage and they're getting the fastest product in the country from a connectivity standpoint.

And when -- I've said it before, but when the promotional period goes off, they're going to have not only the fastest connectivity product, they're going to have the best price in the marketplace as well $29.99. That includes taxes and fees, their contracts, that's a very, very attractive offer from a quality standpoint and from a pricing standpoint, not only at promotion but at retail.

So, our expectation is these are great customers, they're normal lines and they're not going to be able to replicate the service or pricing that they're getting from us at retail or promotion anywhere else in the marketplace. Our expectation is that it all sticks.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yeah, I mean, Doug, we understand that there is some market false chatter. We should be clear on some other things. The majority of our gross adds are coming from paying lines. Less than 5% of our lines today are tablets and those have the same rate plans phones, and we don't include wearables in our numbers either. So, the lines that we're putting up are good line.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

One other thing to add to that. It's not a moment in time. We were talking about it before the call. Our intent here is to grow and to grow more and to continue the path that we're on. So, I think this is just the just the beginning and we're excited about work we're doing, not just from a mobile perspective but from an overall connectivity standpoint and the value that we can bring to customers, both in quality of the product and saving a lot of money.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yeah. To your to your question on margin and what happens in the second half of the year, you know, the increases that you see both in sales and marketing expense and cost to serve right now in the year-over-year are really driven by strong mobile sales. But if you think about what happens to them for the rest of the year, and sales and marketing, if you look back at last year, 2Q 2022 sales and marketing expense was sequentially lower than 1Q22, which might put a little bit of pressure on the year-over-year comp in Q2. But the year-over-year growth rate of sales and marketing expense should moderate over the course of the second half of the year. We'll have lapped our midyear 2022 staffing adjustments. And in Q4 we'll lap the Spectrum One related sales cost increase.

Similarly, on the cost to serve side, I expect year-over-year growth and cost to serve to moderate in the second half of 2023, which I think it's consistent with what we said before and end the year at growth levels that are more consistent with where we were -- with where we've been previously, which is largely flat.

So, I do think that as we go through the year to -- in line with what we've said, the business continues to become more efficient and we continue to expect to be able to operate it more efficiently and generate from that.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

And I'll just add to two quick things to that, Doug. One is on the cost side, if you think about all the opex and the capex investments that we've talked about, it's really setting us up for a prolonged multiyear period of continuing lower cost to serve for customer relationship, which will benefit our cash flow for years to come.

But the other piece, at the end of this year, which ties back to your first question, we have a wall of good customers who are receiving a promotional rate today that are going to roll to a retail rate at $29.99 and stick. So, you've normally got the cost side that starts to lap the prior-year investments, but you also have the revenue side that starts to kick in, in the fourth quarter of this year, and that just gets better and better as we go.

[Douglas Mitchelson, Analyst at Credit Suisse Group]

Thank you both, and thanks for the rural disclosures as well.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Absolutely.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thanks, Doug.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, Doug. Katie, we'll take our next question, please.

[Operator]

Thank you. Our next question will come from Ben Swinburne with Morgan Stanley. Your line is now open.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Thanks, good morning. I guess, for either of you; just wanted to hear more about it, the kind of process of accelerating those rural build-outs. I think you talked about -- I think it was March relative to the for first quarter. Is this the kind of -- is it as simple -- I mean not simple, but is it better weather, allows for greater to faster construction, just what are the puts and takes of getting that number even higher as we move through the rest of the spring, summer, through the year?

And not to put too fine a point on it, but does the 6-month clock that you guys talk about start when homes are activated? I just want to make sure I got sort of the definitions around activated and marketed to, etc. I just trying to get a sense of the rural rollout for the rest of this year. Thanks.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thanks, Ben. The point you made about the seasonality with winter is right. In my prepared remarks, I mentioned, in March of this -- that it was much higher in terms of the -- already coming out at the back end. The full-year target's 300,000 subs rural builds, and we intend to meet that -- we're on plan to meet that. So, from an internal planning perspective, we're right on where we need to be.

You have to keep in mind that we -- a lot of our build has taken place in places like Ohio, Michigan, Wisconsin, and January and February they're just a little bit harder to get around whether you're growing on poles or whether you're going underground. It's a little harder in that environment. So, nothing that we haven't expected. And already coming out the back-end, we're picking up.

The -- unless there's a more technical turn on that for Jessica, it's from activation that we start the clock this year to 6 months. So, once the plant is constructed and it's opened up for marketing, that's the T minus zero [Phonetic], so to speak.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Got it, okay.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

[Speech Overlap] the way it's being reported in that new trending schedule details, so you're getting those passings and -- sort of in the reporting as the 6-month clock starts.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Yeah. And then just as a follow-up to Doug's question, and I don't like doing the battling earnings calls thing, but since it came up quite specifically last night on the T-Mobile call, these promotional lines, the additional lines you're adding, it sounds like those are lines being used and your expectation is, as those roll to pay, those lines will continue to be lines. I think their argument was, sort of, these are these are not coming from anywhere, they're just being created. I just wanted to get your thoughts on that as you do roll to take and it's obviously a decent piece of your line count. Thanks.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thanks. Look, I always find it strange when somebody tries to do your IR for you, but we had a great quarter. These are great adds. We said what we said and they're going to stick because it's high quality product, it's the fastest in the market and it saves customers a ton of money. So -- and beyond what we've already said -- I think we'll leave it at that, and continue to grow our line counts. And we'll do our own IR, thank you.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Thanks, Chris.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thanks.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

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

[Operator]

Thank you. Our next question will come from John Hodulik with UBS. Your line is now open.

[John Hodulik, Analyst at UBS Group]

Great, thanks. Again, thanks for the rural disclosure. So, it looks like if you did pull out the rural adds. You guys added about 50,000 subs. Just anything you can talk about in the core markets, if you could talk about what you're seeing sort of incrementally from a competitive standpoint.

Again, the fixed wireless guys are talking about bringing on more capacity and expanding into new markets. Has that become more of an issue as they rollout? And then you talked about the deployment of high split infrastructure. Would you expect to see better trend in those markets as you sort of turn on that service and improve the upstream capacity sort of along the way? So, should we expect it to be something of an iterative process or will things get better as the infrastructure gets more competitive? Thanks.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Hey, John. So, the -- in the trending schedule, you'll see that the subsidized role -- customers that were added inside the quarter were 17,000, which means the bulk of our net adds came from our existing footprint. So, we're competing very well across the entire market. That includes both where we have existing -- certainly existing fiber over-builds as well as where there's new fiber over-build, and we're competing more than holding our own in that footprint.

We saw a little bit of softness, both in the gross adds and to a lesser extent really on churn, but mostly in gross adds. Interestingly, in the non-gigabit overbuilt areas, because it's the first time that somebody has had an alternative, and so fixed wireless access in that marketplace seems like an interesting alternative until people find out ultimately that the throughput and the capabilities aren't the same as the broadband that we provide.

So, we're competing very well across all markets, just to be very clear. But that's the dynamics that we're seeing inside the legacy footprint. The passings that we're building, there were subsidized rural build, not only do we expect to have continuing improving performance through Spectrum One of the legacy footprints, but the passings that we're building from rural standpoint just continuing to get larger and -- a larger contributor to our growth over time.

On high split, we're enhancing the spectrum availability of our network, which improves contention on the upstream as well as higher both downstream and upstream capabilities, which gives us marketing claims in the marketplace. They have also signals to competitors that they're not going to have that marketing claim with us. And so, the upstream is helpful, but I think it's more at this stage to have a significant marketing claim in the marketplace, and we get a fair amount of network benefits from a quality standpoint in the actual network.

And so, we'll get payback from both of those -- both from competitiveness as well as essentially reduced truck roll and reduced node splits over time as well from what we're doing.

[John Hodulik, Analyst at UBS Group]

Got it. If I could just follow-up quickly, is the goal still to have higher adds this year then versus last year? Thank you.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

It is our goal to have higher net additions in internet this year than we did last year.

[John Hodulik, Analyst at UBS Group]

Thanks, Chris.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, John. Thanks for that. Katie, we'll take our next question, please.

[Operator]

Thank you. Our next question will come from Phil Cusick with JPMorgan. Your line is now open.

[Philip Cusick, Analyst at JP Morgan Cazenove]

Hi, guys. Thank you. Chris, I have to tell you, it's a lot more fun from our side when companies do someone else's IR. So don't be shy.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

We won't step into that rut.

[Philip Cusick, Analyst at JP Morgan Cazenove]

All right. First, a follow-up on John. Jessica, you spoke in March about broadband activity through the quarter. Anything you can add about that and any thoughts you have on sort of typical 2Q seasonality or anything different?

And then in video, I understand a lot of video decline, and has been fewer broadband adds to connect to. But are you also seeing an acceleration and disconnects? And what percent of the base is now on these lower cost packages? Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yeah, so, Phil, talking about going into Q2, Q2 is always a seasonally more difficult quarter. But in terms of trends, we did continue to see what I sort of had said in -- at the end of February and -- that I think that our trends a little better across -- coming in and in March than they had in February, which was better than January. And we continue to see that now with the context of Q2 being kind of what it is. So, I think that we continue to think that things look pretty guidance or at least better than they looked previously on that front.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

So, I'll take the video. There is a pretty clear correlation to when we've taken rate increases, either on video or even the more recent increase that we had on internet. So, there is a downgrade element that takes place at the point of a programming pass-through, which we've had to do because of where the programmers have been. I also think in addition to that, because the point-of-sale discussion with the customer has been focused on internet and mobile, the length of that conversation is a little longer. And I think there are things that we can do to have a better attach rate to a video at the point-of-sale.

Now and certainly in the future, as we think about the rollout of Zoom towards the back half of this year -- it's a very compelling product, it's very simple, it's straightforward and has tremendous amount of utility towards customers for both their OTT as well as any live video tiering and subscriptions that they have. It's -- I've said it before, it's the platform that I'd would like to have on all my -- all of my TVs. And I think it's going to be very attractive to customers and. I think it has the opportunity to really improve our trajectory on video as well in a profitable way.

[Philip Cusick, Analyst at JP Morgan Cazenove]

Will Xumo be reported as a regular video sub or you have a different category for that?

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

We haven't got through all the reporting definitions yet, but I think the right way to think about is, to the extent the customer takes a video service from Charter, then it would read -- reported as a video PSU. And to the extent that it's just a platform that we're distributing that our customers can use as connectivity plus customers, then likely it's just going to be a Xumo unit and it will be an added benefit to our existing connectivity relationship. But I reserve the right to pick that out together with Jessica over time, but I think that's the more natural way to go.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yeah, and as we get closer to a rollout, we'll try to provide some additional information on where we think that, that will land.

[Philip Cusick, Analyst at JP Morgan Cazenove]

Thanks again.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thanks, Phil.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

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

[Operator]

Thank you. Our next question will come from Peter Supino with Wolfe Research. Your line is now open.

[Peter Supino, Analyst at Wolfe Research]

Good morning. Thank you. On the subject of your truly gaudy mobile results, could you discuss the evolution of device promotions as part of your mobile strategy and whether we should be modeling use of cash for device promotions in the future?

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Sure. I think the device business, that's not why we got into mobile. And we got into mobile to provide the fastest connectivity service and to save customers money on their monthly overall connectivity service into a convergence, a product that doesn't really exist anywhere but Charter cable generally today.

So, never say never, but we don't see a need and we don't have any plans to be aggressively into the subsidy business from a device standpoint. We don't need to because we provide significant value to the best feeds, plus product and best amount of savings already with what we're -- our go-to-market strategy today.

[Peter Supino, Analyst at Wolfe Research]

Thanks, Chris.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, Peter. Katie, we'll take our next question, please.

[Operator]

Thank you. Our next question will come from Jonathan Chaplin with New Street. Your line is now open.

[Jonathan Chaplin, Analyst at New Street Research]

Thanks guys, two questions. The early work that we've done on BEAD suggests the return to those markets could be phenomenal, potentially double what you guys may be seeing in RDOF markets if the full subsidy is awarded. I'm wondering if you can help size what the opportunity could be. I think you've got like roughly 20% of the RDOF opportunity. Could it be something of that magnitude of the BEAD opportunity?

And then, as we total up broadband adds in the industry, it looks like there's been a bit of a slowdown for the overall industry this quarter. I'm wondering if you've got any context for what might be driving that. Is it just a pull-forward of growth from COVID, from the sort of period of higher growth during COVID, or is there something else going on? Thanks.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

So I'll start, first thing, the RDOF returns that we have are extremely attractive and then -- and we're really pleased with what we're doing, both on RDOF as well as the other state grants that were coming out of some of the ARPO and other COVID funds, and that's been highly successful.

On BEAD, it's really too early to tell. We've been very successful where we've gone into different subsidy, RFPs, simply because we're aggressive and because we are the most experienced role builder in the entire country. So, when we go tell a local, state or federal government that we're going to build and we're going to build within a certain timeline, we have probably the most -- not probably, we have the most credibility, because we're the largest rural provider today.

We're the largest builder and we've won awards for success and quality of what we do. And we have the ability not just to bring broadband into these rural communities, but we have the ability to save customers significant amounts of money on the already high mobile bills as well as bringing video into these places. So, it's not just a single-play internet. It brings us a whole suite of connectivity services that save customers money. We've been successful and so -- both economically as well as from a quality standpoint, our success rate is high and our credibility is very good. But in terms of what we win indeed, it's -- certainly it's factored into some of our outlook on capex, but time will tell how successful we can really be on that front. But I am bullish. I think we're going to do well.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

You know, the thing that I would add to that is that it, Jonathan, we have a very disciplined practice now in how we bid for these offerings. And so we're very comfortable with our ability to price the passings, with our ability to then bid for an appropriate amount of subsidy against that and then to go on the back end and execute against building the path, things in a way that's cost effective and that generates the returns that we set out for.

So, there is a hypothetical math exercise that you can do to try to get to what we would win, but what I would be clear about is what we win we will win at good returns and we'll execute it on the back-end and bring those returns back into the Company.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Yeah, we have great visibility to our cost. We have supply and labor, equipment all lined up and we know what it costs in each of these different markets already so that our experience to date is really going to bode well for giving us confidence in what we bid on.

On the overall broadband market, I do think that there continues to be the headwind of all the COVID volume that was pulled forward in the broadband market and in combination of just a lower transaction, lower moving environment. And then -- and so, I think the entire market is still suffering from that just a little bit, as well as a small swing back into wireless substitution. So, we're going to see some of that as well.

Housing starts also have been down. So, that clearly contributes into this as well and all of which I think is temporary in nature. The difficulty there, I think if you hear from the entire industry is, when is it going to come back to normal and none of us really have a crystal ball, but I think if I listen to what others are saying or -- including our peers, well, there is no reason to think that we don't get back into normalized market environment. It's just become very difficult to predict exactly when that happens.

In the meantime, we compete well. We're growing both legacy markets as well as in -- obviously in our new-build area. And through a combination of market normalization as well as a very large pipeline of unserved rural passings that we're constructing, the opportunity for growth in internet as well as in mobile, so it's very good for us.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, Jonathan.

[Jonathan Chaplin, Analyst at New Street Research]

Thanks, Chris.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Katie, we'll take our next question, please.

[Operator]

Thank you. Our next question will come from Craig Moffett with MoffettNathanson. Your line is now open.

[Craig Moffett, Analyst at MoffettNathanson]

Hi, thank you. I wonder if you could talk a little bit about wireless margins, Jessica. The -- you shared one more quarter of wireless results and I think it's -- well, I sort of get that the remarkable pace of subscriber growth means customer acquisition cost is very high. It also leaves -- it leaves sort of to the imagination how the business will actually scale over time.

So, anything you could share with us about underlying wireless margins or customer lifetime values of wireless subscribers, and in particular what traffic you might offload and how that might affect that it going forward would be very helpful. Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yes, so -- thank you. I think back in December we actually gave where we are in terms of margin in the business -- income in the business excluding customer acquisition costs. And we showed there that if we run it as a -- if we ran it as a standalone business, which we don't, but that we would make good margins in the business.

We certainly have read the work that you've been doing trying to use some of the financial information available out there to back into costs. Obviously, I'm not going to comment on exactly what those were. But you might have heard from us if we thought that you were materially incorrect on them, or from some someone else for that matter.

It's important so to step back and think about, we don't run them wireless business just for margin in the wireless business. We run our entire business to generate the most cash flow on a -- the most cash flow per passing that we can across the network. And that means that you have to have more customers, which means you have to price at a value, and it means that, that you have to generate more money per customer, and we believe in doing that by adding services to the customer, which we do by adding wireless to our current broadband, video and voice customer base.

And we also are seeing that there is benefits to having those products bundled together, not just in the form of driving better pricing for our customers, which we'll do, but in the form of reducing churn. And ultimately, we think also increasing what we can do in terms of customer acquisition across both the broadband and the wireless product as they become sort of a converged connectivity experience.

So, we're really confident in our ability to continue to have financial benefit from the wireless business going forward because of the value that it adds to what we can provide to the customer and the resulting increased cash flow that we get on a customer-by-customer basis when those customers take more products from us, including the wireless product.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Craig, on the traffic offload, I mentioned in the prepared remarks that we've now deployed Spectrum Mobile Network to all capable devices, which is our advanced Wi-Fi service and that's in 40% of our residential customers. We've now begun to launch that advanced Wi-Fi service and Spectrum mobile network to S&P as well. So, up until this point, the vast majority of the traffic offload has been inside of an existing customer's household and hasn't given the ability for them to do significant amounts of offload outside the household and especially mobile network really over the course of the past 4 months or 5 months is accelerating that ability to have traffic offload. And that's prior to us fully deploying CBRS, which we intend to do.

And we're already live in one large market. It's going very well. So -- whereas I think we have publicly said that we had 50% percent of our usage risk through the lease of the 5G MVNO network, that's now decreasing already pretty quickly. And so, the 85% that was on our network before is now moving up to 87% just in a matter of months. And that will continue to increase over time as we deploy more Spectrum Mobile Network to advance Wi-Fi as well as CBRS over time.

And so, it's attractive today and it will continue to be more attractive. And the profitability and the cash flow today is really tied up in the subscriber acquisition cost.

[Craig Moffett, Analyst at MoffettNathanson]

Great, thanks, Craig.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Katie, we'll take our next question, please.

[Operator]

Thank you. Our next question will come from Jessica Ehrlich with Bank of America. Your line is now open.

[Jessica Reif Ehrlich, Analyst at Bank of America Merrill Lynch]

Thank you. Two questions, one on mobile pricing longer term. I mean, do you think this is similar to broadband when you guys entered the market decades ago at a significant discount to telecom and then grew it over time as your share grew? So just kind of how you're thinking about it longer term.

And then second on Xumo, can you remind us what the timing of the rollout is? But also on advertising, can you compare it to linear, like how are you thinking about it in terms of inventory load, CPMs, I mean, it seems like you will have a lot more data?

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

So, I will take the -- you may need to come -- circle back and remind us what your question was on the broadband. I wasn't sure I completely followed it. I think it was at the corollaries to mobile. But on Xumo, back half of this year, we haven't announced a month. The progress of the Xumo team, that's going very well. The product looks great. And so, we expect to be deployed -- fully deployed as Charter at the end of this year.

The advertising business will come through several places. One is live video where you can think of that as connected TV CPMs. We have that today. We have the largest spectrum. We have the largest app delivery of essentially a virtual MVPD of anybody in the country because of the way that our app is used. And so, we monetize through higher CPMs of connected TV spots today that will be amplified through the Xumo platform.

And then in addition to that, Xumo will have its share similar to any other connected TV platform of advertising and subscription revenue. And some of those advertising spots will be conveyed to the affiliate, which in this case would be us. And so, we expect to participate, both as an equity holder in Xumo and its advertising revenue model as well as a way to amplify our own existing advertising revenue streams that we have today.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

On the longer-term question on mobile pricing and sort of where we go there, I think the most important thing to -- for us to worry about right now is that we are trying to take share in that market and to take share, we are priced to take share and while we are doing that, we are still able to make good margins on that product. And so, I don't think that there is some sort of long-term pricing game to think about right now. Our -- what we are really thinking about is what we do to take share in the market to provide mobile service to more of our customers, the fastest and best priced in the industry, and to use that to generate cash flow for the business.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Longer term, if you think about it, there is two ways to think about it, just to pontificate. One is, is mobile really a product or is it just an attribute of our connectivity service. And over time, is their ability to create an entirely new category of seamless connectivity. Today, mobile lines are sold at an individual level and broadband sold at a household level. Today, they are sitting on two separate bills. And I am not sure that either of those need to be true in the future. It could be a single product that none of our competitors have, and none of our competitors have a path to replicate. So, that's one way of thinking about it.

Another is, instead of thinking about it as broadband is to think about it as a corollary, to think about it what we did in the telephone space, the wireline telephone space, where we used it as a significant way to -- for a prolonged period of time to save customers a significant amount of money and drive connectivity and other products that we had by saving the money through an over-the-top product where we had a better mouse trap. And we didn't have a bunch of high-priced legacy revenue that we had to worry about. We could be aggressive in the marketplace. I think those notions, they go hand-in-hand.

We have talked about Spectrum One and how that may evolve over time in terms of we may try different ways to go to market that could include pricing, packaging, billing to really create potentially a brand new category in this space.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thank you.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, Jessica. Operator, we will take our last question please.

[Operator]

Thank you. Our last question will come from Michael Rollins with Citi. Your line is now open.

[Michael Rollins, Analyst at Smith Barney Citigroup]

Thanks, and good morning. Two topics; first, I was curious if you could share more details on the activity you are seeing in the business segment, any changes in behavior of your customers since the beginning of the year? And if this macro backdrop is having any specific impact for Charter, positive or negative, on how it's been performing?

And then just one other on the ACP, just curious how many ACP subscribers that Charter currently has and how this program is contributing to the broadband performance? Thanks.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Hi, Michael, I will take those. In the business, it's different between SMB and enterprise. Honestly, SMB is a little bit soft right now. We are still growing. You can see that in our numbers. But the SMB space has been a little soft. I don't think we are alone in seeing that. I also think that fixed wireless access may be selling cheap, low-quality residential products into a lower portion of the SMB space. It's -- we see some evidence of that. I think that's temporary.

As it relates to enterprise, we are doing very well in enterprise, the retail side. Clearly, we have ongoing cell tower backhaul revenue pressure. But in the retail space for enterprise, whether it's fiber Internet access, Ethernet, our managed services, our UCaaS services, we are actually doing very well. It takes a while to activate sales, but I think we had our best sales quarter ever in Q1 pre-activation. So, the enterprise space is doing well and I expect the retail piece to continue to grow well and to actually to accelerate.

On ACP, we are not going to get into specific numbers other than to say -- it's a big program for the government. It's important to the government. And we have been very active in deploying ACP at their request. It's been very successful. The vast majority of the customers we have were already existing customers who are now benefiting from that benefit. And we are, we believe, the largest ACP participant. And we are hopeful that the government continues to renew that program over time because we think it's a good program and it's been important, and it's a good benefit in the marketplace.

[Michael Rollins, Analyst at Smith Barney Citigroup]

Thanks.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, Michael. Back to you, Katie.

[Operator]

Thank you. There are no further questions at this time. I now turn the call back over to Stefan Anninger for any closing remarks.

[Stefan Anninger, Vice President, Investor Relations at Charter Communications]

Thanks, everyone, and we will see you next quarter.

[Christopher Winfrey, President and Chief Executive Officer at Charter Communications]

Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thanks.

[Operator]

[Operator Closing Remarks]