Charter Communications Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Stefan Anninger, Investor Relations
• Christopher Winfrey, President and Chief Executive Officer
• Jessica Fischer, Chief Financial Officer
• Thomas M. Rutledge, Executive Chairman

Analysts

• Benjamin Swinburne, Morgan Stanley
• Philip Cusick, JPMorgan Chase & Co.
• John Hodulik, UBS Group AG
• Jonathan Chaplin, New Street Research
• Brett Feldman, The Goldman Sachs Group, Inc.
• Craig Moffett, MoffettNathanson
• Vijay Jayant, Evercore ISI
• Bryan Kraft, Deutsche Bank Aktiengesellschaft
• Michael Rollins, Smith Barney Citigroup

Presentation

[Operator]

Hello and welcome to Charter Communications First -- Second [Phonetic] 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 is being recorded today. If you have any objections, please disconnect at this time.

I will now turn the call over to Stefan Anninger.

[Stefan Anninger, Investor Relations at Charter Communications]

Good morning and welcome to Charter's second 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 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 second quarter, we added 77,000 Internet customers and we continue to benefit from our Spectrum One offering and our network expansion initiatives. We also added 648,000 Spectrum Mobile lines. At the end of the second quarter, we had over 6.6 million total mobile lines. Over 11% of our Internet customers now have mobile service, and we expect mobile penetration to meaningfully grow over the next several years.

Spectrum Mobile is the nation's fastest mobile service. We see mobile lines as an extension of our WiFi and seamless connectivity service. We expect our increasing convergence capabilities which will contribute to further Internet growth. We're pleased with the progress of our growth initiatives and our performance in the second quarter and we maintain EBITDA despite the significant employee investments we've made through 2022, which will start generating growth benefits later this year.

We remain focused on our three key strategic initiatives evolution, expansion, and execution, each of which is designed to help us grow our business, and each of which remains very much on plan. Our network evolution plan is progressing well and offers us significant benefits. First, it allow us to maintain our fastest Internet and WiFi service claims in front of our customers and competitors everywhere we operate with symmetrical and multi-gig speeds via DOCSIS 4.0, and the ability to provide 25 gigabit, 50 gigabit, or even 100 gigabit per second speeds for fiber on demand. This evolution path also creates follow upstream and downstream capacity for years driving lower nodes support capital and by upgrading the actives and amplifiers and nodes and converting analog optics to digital, we lower our future operating and maintenance expenses, all at a very low-cost, much of which was funded from capital and operating cost-savings over-time.

Unlike telco companies who prioritize more attractive footprints for their upgrades. Our deployment is across our entire footprint. The cable industry's nearly ubiquitous deployment of a tremendous amount of Spectrum to each home will provide the scaled platform for software and product developers to create new bandwidth-intensive, low-latency, high-compute services. This uniform deployment of network capabilities is what cable has always done to lead the development of new technologies and on our networks at scale and that unique approach is what has and will maintain our competitiveness into the future. So our network evolution is good for the communities we serve and it's good for Charter.

So far, the execution of this large physical upgrade has gone well. The capital costs are coming in on target. Excluding the benefit of any network savings, we continue to expect to spend a $100 per passing. 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 Boost and Spectrum Mobile network. Each of which run on our advanced WiFi product.

Today, over 45% of our Internet customers have our advanced WiFi product and over 75% of our mobile customers are now attached to the Spectrum Mobile network outside of their homes, providing higher speeds with more reliability to customers with lower-cost to Charter. Spectrum One also offers significant for customers with market-leading pricing at both promotion and retail.

We're excited for the upcoming release of the Xumo-product, which I believe will be an industry-leading platform for customers to access all of their linear and DTC video content with unified search and discovery. Together with our Spectrum TV app, the most viewed linear MVPD streaming service in the US, Xumo will be our go-to-market platform for new video sales. We're currently conducting field trials with the product and we remain on track for deployment later this year.

Our expansion initiative with subsidized rural construction is also on plan. Penetration gains and subsidized rural passings continues to grow at a better place pace than planned. Charter is the largest and fastest-growing rural provider in the nation. Our scale and reputation as a rural builder positions us well for winning additional state and local funds and we hope significant bead infrastructure funding. Although the rules and recommendations from NTAI on bead funding differ from successful programs currently deployed by the states in which we operate. We'll work with key stakeholders and government officials to reach a place where the rules are still conducive to private investment.

And finally, we remain committed to the execution of our core operating strategy, which prioritizes customer experience and satisfaction driving faster customer growth. We continue to see the benefits of our investments in training and tenure, including better employee retention, higher-quality service transactions, and better sales yields.

Additionally, the increasing digitization of our customer service platforms will further reduce transactions. There's been a lot of discussion about what artificial intelligence and machine learning to do to improve products and business models. Charter already uses advanced analytics and machine learning in various stages and forms across sales, service, and network operations and we expect to continue our investments in AI, machine learning, and digital service in ways that meet customers where and how they want to receive service and continuously enhance tools for our sales and service employees to simplify their jobs.

Ultimately AI will improve both customer and employee satisfaction and enhance our operating efficiency by driving fewer physical service transactions, lower-cost and lower churn for years to come. Our operating strategy is focused on running our business for long-term value creation for our shareholders which includes two of the cable industry's most successful investors. Simply put, our operating strategy is founded on having great products, pricing, and packaging that creates value for customers and it's very difficult for customers -- for competitors to replicate. So that we get more products into each household and drive more penetration across the network, which lowers our cost-to-serve, and then combines that with investments in high-quality service, which also increases our competitiveness to acquire more customers.

We have a great team here at Charter and we're committed to disciplined execution, and investment in this operating strategy, which we believe is good for customers, employees, and the communities we serve and we will drive significant long-term value creation for shareholders.

With that, I'll turn the call over to Jessica.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thanks, Chris. Let's turn to our customer results on Slide 6. Including residential and SMB, we added 77,000 Internet customers in the second quarter versus 38,000 in the prior year period when excluding last year's Internet disconnects, related to the transition from EBB to ACP. Video customers in the second quarter declined by 200,000, wireline voice declined by 221,000, and we added 648,000 mobile lines. Internet churn remains near-record lows for the second quarter and flat year-over-year and Internet gross additions improved year-over-year.

The year-over-year improvement in Internet net additions was driven by tailwinds from our rural construction initiative, the continued success of our Spectrum One product, better sales yields from higher-tenured employees, and a slower pace of fiber overbuild in our footprint during the quarter. Despite the year-over-year improvement in net adds, overall market activity remains well below pre-COVID levels partly driven by very low move rates.

We also continue to see some impact from fixed wireless access competitors in the price-sensitive customer segments of residential and SMB. As Chris mentioned our Spectrum Mobile products continued to perform well in the quarter. The majority of new lines continue to come from existing Internet customers though the percentage of lines coming from new customers continued to increase and with higher than what we saw in the first quarter.

Portents from other carriers as a portion of our gross additions are essentially the same today as they were prior to the launch of Spectrum One despite much higher mobile sales and with good usage on those promotional lines and unbeatable quality and value at a $30 retail price point, we expect the lines to perform well as long-term customers.

Turning to rural. Subsidized rural passings growth accelerated in the quarter with 68,000 passings activated and we continue to expect approximately 300,000 new subsidized rural passings this year. Additionally, costs are coming in as planned and we have the labor, equipment, and supply necessary to execute our build. We continue to bid on additional subsidies. In addition to DDoS, we've now won over $700 million in state subsidies for over 300,000 passings with a gross build cost of approximately $1.7 billion and a per passing cost to Charter net of subsidies of approximately $3,200. As Chris mentioned, we also look forward to the BEAD bidding process, assuming the right regulatory conditions.

Moving to financial results starting on Slide 7. Over the last year, residential customers grew by 0.2% with new customer growth driven by Internet, partly offset by video-only customer churn. Residential revenue per customer relationship declined by 0.3% year-over-year given the higher mix of non-video customers and growth of lower-priced video packages within our base partly offset by promotional rate step-ups, rate adjustments, and the accelerated growth of Spectrum Mobile. As Slide 7 shows residential revenue declined by 0.3% year-over-year.

Turning to commercial, SMB revenue grew by 0.2% year-over-year reflecting SMB customer growth of 1.7% partly offset by lower monthly SMB revenue per customer primarily due to a higher mix of lower-priced video packages and a lower number of waistlines per SMB customer. Enterprise revenue was up by 3.2% year-over-year, enterprise PSUs grew by 6.2% year-over-year, and excluding all wholesale revenue, enterprise revenue grew by 7.2%. Second quarter advertising revenue declined by 16.5% year-over-year due to less political revenue. Core advertising revenue was down 3.5% year-over-year due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew 28.5% year-over-year, driven by higher mobile device sales. And in total, consolidated second quarter revenue was up 0.5% year-over-year and up 1.1% year-over-year when excluding advertising.

Moving to operating expense and adjusted EBITDA on Slide 8. In the second quarter, total operating expenses grew by $48 million or 0.6% year-over-year. Programming costs declined by 7.8% year-over-year due to a decline in video customers of 5.1% year-over-year, a higher mix of lighter video packages, partly offset by higher programming rates in the second half of 2022 by higher programming rates. In the second half of 2023, we now expect year-over-year growth in programming cost per video customer to be similar to the growth we saw in the first half of 2023.

Other costs of revenue increased by 15.4% primarily driven by higher mobile device sales, other mobile direct costs, and higher RSN costs driven by more Lakers games, partly offset by lower ad sales costs. Cost to service customers increased by 3.6% year-over-year, driven by adjustments to job structure, pay, and benefits to build a more skilled and longer-tenured workforce, resulting in lower frontline employee attrition compared to 2022 and additional activity to support the accelerated growth of Spectrum Mobile, which was partly offset by productivity improvements, lower service transactions per customer, and lower bad debt.

As we mentioned last quarter, our employee attrition has declined more quickly than we expected given the programs we discussed at our December investor meeting. In response, we lowered our normal hiring in the first half of this year and our overall headcount is now normalizing with increasing overall tenure and quality. Longer-term, we continue to expect to see additional efficiencies and costs to service customers. 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 3.6%, primarily driven by higher staffing across sales channels and the accelerated growth of Spectrum Mobile and other expenses declined by 0.4%, driven by favorability in insurance expense, mostly offset by higher labor costs. Adjusted EBITDA grew by 0.2% year-over-year in the quarter.

Turning to net income on Slide 9, we generated $1.2 billion of net income attributable to Charter shareholders in the second quarter, down from $1.5 billion last year with higher adjusted EBITDA more than offset by additional interest expense.

Turning to Slide 10, capital expenditures totaled $2.8 billion in the second quarter, above last year's second quarter spend of $2.2 billion. The increase was primarily driven by higher spend on line extensions, which totaled $1.1 billion in the second quarter of 2023 compared to $693 million in the second quarter of 2022. The increase in line extension was driven by Charter's subsidized rural construction initiative and continued network expansion across residential and commercial greenfield and market selling opportunity. Second quarter capital expenditures excluding line extensions totaled $1.8 billion compared to $1.5 billion in the second quarter of 2022. We spent more on upgrade rebuild, primarily due to our network evolution initiative, and support capital was higher, primarily due to investments in information technology systems.

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, capital expenditures 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 capital expenditures to reach approximately $4 billion. We continue to expect 2024 and 2025 line extension capex to look similar to our outlook for 2023 at approximately $4 billion per year and our 2024 and 2025 line extensions capital expenditure expectations assume we win funding for or otherwise commit to additional rural spending including BEAM.

As Slide 11 shows we generated $668 million of consolidated free cash flow this quarter versus $1.7 billion in the second quarter of last year. The decline was driven by higher capex, mostly driven by our network expansion and network evolution initiatives, and higher cash taxes as we became a full federal cash taxpayer in 2023. We finished the quarter with $97.8 billion in debt principal. Our current run-rate annualized cash interest is $5.1 billion and as of the end of the second quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47 times. 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 1.1 million Charter shares and Charter Holdings common units totaling about $400 million at an average price of $341 per share. While our goal is to grow the business in the long-term, our focus on execution is driving operating leverage in the business even now, when you take the noise from political ad -- when you take out the noise from political advertising, EBITDA grew by 1.3% year-over-year in the quarter, which means that we are more efficient despite significant mobile growth and a one-time step-up in labor investments and we believe our financials will improve as we move later into the year with additional revenue growth in Internet and mobile that will begin showing in Q4 and lower service cost per customer as we realize the 10-year benefits of our investment in employees and lap last year's labor step-up.

Longer-term, we also expect to see continuing benefits and operating expenses from further digitization, network improvements, and benefits of programs like proactive maintenance. We are well-placed for the future.

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] We will take our first question from Ben Swinburne with Morgan Stanley. Your line is open.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Thanks, good morning. I guess two questions, maybe first, I think you guys will start to lap Spectrum One later this year and it will probably be one of the first indications for all of us externally to sort of see the promotional roll-off activity and sort of the impact on churn, if any. I don't know if you could just maybe talk about what we should be expecting or how you guys are approaching that or what your expectations are as you go through that sort of first wave of promotional roll-off. And then I know we don't typically talk about video on these calls, but you guys have a lot going on there and I'm just wondering if you could spend a minute talking about sort of your strategy with Xumo and also the new sort of our changes you've made and just anything we should be thinking about in terms of the implications of this strategy on your financials whether they are set-top box revenues, we should be thinking about or capital intensity coming down etc, obviously these are kind of big changes to a part of the business that we don't tend to spend a lot of timelines, so I wanted to get your thoughts there. Thank you very much.

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

Sure. Hey, Ben. There's actually a lot in there. The -- so on Spectrum One and we started -- we launched Spectrum One at the beginning of October last year, and so, you'll have the beginning anniversary dates start occurring then and the usage on these is high, and if you think through their comments in Jessica's prepared remarks, these are really good customers and when you put the Internet WiFi and mobile together, you can get that product, you can get that quality and you can get that pricing anywhere else inside the marketplace and even if you just talk about Canada's mobile standalone at $30 at retail pricing that's unmatchable and to have that with the fastest mobile product in the marketplace, I don't see any reason to think that we're going to have difficulty managing through those roll-offs.

Now that doesn't mean that you'll have to evaluate and make sure that you are poised to handle and address customer questions, but I think it sticks but it will also have quietly in the marketplace, this time last year beginning in late July and through August, we did do some testing. So we will have the opportunity as we go through the course of this quarter to perfect any reactions that we have from customers and small-scale along the way and so I think we're well set up to do that, always have and so I think we're a good position. Could we have a small amount potentially, but I don't think it's going to be material, given the quality and the value that we're providing in and I think we found something that sticks.

I don't know that Spectrum One will be permanently our end-state convergence and seamless connectivity branding and platform it's working well today, but we're going to continue to try things in the marketplace because I think we have a technology and a structure and capability that's none of our competitors can really replicate in the marketplace and I think that product and seamless connectivity will stick and I think the value is very tied to customers.

On video strategy. There hasn't been a fundamental change in our video strategy and we're losing the least amount of video customers to any of our peers or competitors. The reason that we've been able to do that is for two reasons, one is that we have flexibility and we've tried to use that wisely in a way that is valuable to consumers to create products, pricing, and packaging that will stick.

And secondly, I think we have a high-quality video product as you think about our capabilities. If you want Live TV, if you want DVR video-on-demand, if you want expanded basic, which is the majority of what we saw or you want smaller packages, if you want that inside the home, outside the home across multiple devices, Cloud DVR, no set-top box, Roku, Apple TV or on your iPad, all of those things exist and there's not many providers who can provide that front of content and that level of functionality across the marketplace.

The product is good and is designed for the vast majority of people in the marketplace. The issue has been price and the fact that programmers have required us to take and provide content to customers may not necessarily watch or value and at the same time increase the pricing, and so as we've talked about in the past you've priced out a large number customers out of the marketplace through that strategy by the programmers and at the same time they have gone around and sold that same content at a lower price and less secure environment. So they've devalued the same content and that creates a structural problem for the business and we've always thought that if we had the ability to create packages and we had better security in the marketplace of the content that these programmers have then we could sell more video, and that would be good obviously for customers, good for the programmers ultimately and it will be better for us, but that will take a fair amount of leadership in the programming space to be able to get to that environment.

What we found AuraSense which was the part of the question that you asked is that prior to Diamond entering into a restructuring environment, we'd already created the capacity to have significant flexibility with our packages and we've achieved that across the AuraSense for the vast majority of the country and we're rolling out versions of our select expanded basic with and without AuraSense we will be doing that shortly, which does exactly what I just described and it enables us to have a lower-cost video packages for those who are not interested in our AuraSense because we have that flexibility, and I think as a result, we'll sell more video and then if you think about the deal that we just did or announced in ourselves and in AuraSense ourselves with the Dodgers and Lakers, we took our own medicine, we increased the flexibility to an affiliate, and dramatically and at the same time, we announced that we would launch eventually a direct-to-consumer app, but not just in the marketplace, but it will be available to all affiliates including DIRECTV in and putting term customers. We think that's a model, both having flexibility as well as access to the DTC for the affiliates that could have some legs going forward and create packages that are valuable to consumers and actually allow us to sell more video.

Xumo suggests about that really is an extension of what we've been doing already. Two-thirds of our video sales today are without a set-top box meaning, they're going onto Roku, Apple TV Samsung TV, or other platforms and the concept around Xumo was to through a joint venture with Comcast having ownership in an independent entity, which is Xumo that provides better functionality that exists for customers today where they can integrate all of their DTC -- DTC XClass and linear services in a single place with unified search and discovery with a voice remote. And so that will be our platform of choice to deliver to our video subscriptions going forward and ultimately I expect us to provide that to some broadband customers over time as well, and that'll be good for Xumo as an independent platform, but I also think it provides functionality to our connectivity customers as we can provide the level of video services to our customers through our connectivity packages.

So the financial implications of that and this will be an attractively priced box for customers as well as for us. I don't expect any material change to our capital expenditure outlook as a result of that we've already been on a path where the equipment revenue that we've historically had through pump set-top boxes has been on decline. So this kind of continues that path. So I think the sort of financial implications are not that material.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

And that being said, the margin from the video product has been sort of -- has shrunk over time and our position has been that we're not willing to lose money in video.

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

Correct.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

And so we believe the products are valuable for our customers. We're continuing to seek out ways that we can continue to provide those products and the way that people want, but to do it while still generating some financial return. And whether that's in the form of set-top box revenue or in the way that we packaged the product overall. Ultimately, we're continuing to try to defend having margin in that business.

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

But the video platform adds value to our connectivity services and on a standalone basis, we're at or near the point of indifference but we're committed to trying to find a path forward for video because we think it's a good product to think it adds value to customers and if we can have the flexibility to package and the price at the right way, we think it's good for customers and it's good for us and ultimately it's much better for programmers over-time as opposed to having the cord-cutting continues to accelerate at the pace it's going.

[Benjamin Swinburne, Analyst at Morgan Stanley]

Thank you.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks. Operator, we'll take our next question, please.

[Operator]

Thank you. We'll take our next question from Phil Cusick with JPMorgan. Your line is open.

[Philip Cusick, Analyst at JPMorgan Chase & Co.]

Thanks, guys. A couple. Nice margin in the quarter. Jessica, you mentioned headcount. Can you remind us of the expected trending costs in the second half of the year and into 2024, how will this be impacted by rural initiatives, and that headcount sort of normalizing? And then can you talk about the cadence of capex for the balance of the year and into 2024, sort of an all-encompassing that line extensions and regular way business? Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Tupras. Yeah, so first on the expense side. I gave some outlook in the first quarter investor call during the Q&A regarding cost-to-service expense and sales and marketing expense growth. And that really -- that outlook hasn't changed. I think we will have a difficult comp and other expense in Q3 because there were lower corporate costs in the third quarter and 2022. But aside from that, I think what we have said already, it continues to be true about the trajectory on the expense side.

In terms of capital expenditures and timing across the year. Our rural construction initiative now I would say is spending at a more consistent pace than it has been in the history of the business. And so I think you saw it was somewhat more capex loaded into the front half of the year this year relative to our outlook for the entire year than what you would often see in a year. I would expect because that rural build sort of has to continue at a pace over time that you will see that greater level of consistency in capex across the quarters with maybe less back-end loading into Q4 than what you've seen in other -- than what you've seen us do in the past. And I would expect that as well as we continue into next year the pace of the build-on the network evolution and rural activity, we'll just keep our base level of capex in the business that might have been -- that might have had more of a other seasonal trend previously.

[Philip Cusick, Analyst at JPMorgan Chase & Co.]

Thanks, Jessica.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Phil. Shelby, we will take our next question, please.

[Operator]

Thank you. We'll take our next question from John Hodulik, UBS.

[John Hodulik, Analyst at UBS Group]

Great, thanks. Two questions for you. First, could you comment on the recent price increase, I think the $5 increase on the high-speed data. First is that across the whole base. Maybe if you could compare to sort of previous price increases. And do you think it's sort of enough to get the revenue per customer back into the black? So that's sort of number one. And number two, you guys over-indexed to the ACP programs. Is there any way you could size that for us in terms of how large it is within the base, talk about the strategy a little bit, and as we sort of go through that process does that over time potentially become a headwind for you guys in terms of broadband growth? Thanks.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

So the price adjustment may in August is a $5 retail Internet increase for flagged -- flagship and above customers but it's coupled with the new auto pay discount of $5. So customers who are currently on auto-pay or who opt into auto-pay won't see a change in their overall price for Internet. There's a lot going on in ARPU. As we move into Q3, we will fully lap the April the 2022 rate adjustments, which included a pass-through video programming expenses. You'll have that August price adjustments and similar to recent trends, I mean when you talk about there being the reduction in ARPU and on a per customer basis, it's really the headwind from the lighter mix of non-video customers and lower-priced video that's driving that, and that obviously I think continues going forward.

If you move into Q4, you'll start to see the Spectrum One promotional roll-off and sort of continue into the other factors that I talked about, but that'll be partially offset by lapping the November 2022 Internet-only rate adjustment. So I think that we've had fairly consistent growth in ARPU if you look -- if you look at -- if you look at the Internet ARPU growth and I think ultimately our strategy is never to sort of grow the business, just based on price. We aim to have competitive prices and to and to have good penetration because of that on our footprint but that doesn't mean that we're sort of immune to the inflation impact and that where it's appropriate, and we don't take adjustments in the market, which I think is what we've tried to do, but trying to do in a way that's prudent and consistent with our overall strategy.

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

John, I think, Jessica said it that the $5 would not apply to anybody who is already on promotion and only be at retail on it would -- to the extent that somebody is or if it comes on auto-pay that won't pass through. So it's not that material in the end. On ACP, our strategy is to respond to the governmental requests from the White House FCC, and the Congress of using this program and we've been I think the most successful at doing that, providing a way for new customers to get into a broadband or in a low-income space as well as for existing customers to be able to stay in the broadband space through times of affordability issues, meaning coming in and other markets through non-pay churn and we've been very successful doing that at the request of the government and it works very well for those customers. And I do think that there's some questions around it being renewed, it has bipartisan support and so we're hopeful that it will be renewed. I think it's been a very good and successful program. And so it's brought in some new customers particularly early-on through EVP and ACP and we've been able to also have existing customers benefit from today in broadband, through that program to the extent that it went away.

Many of these customers were existing broadband customers and both for new and existing customers, PlusYou for new and existing customers. We have programs, we've always had programs like Spectrum Internet Assist and low-income programs that we can accommodate and dealing with that at the back end. I'm hopeful, that's not the case and then it gets renewed because I do think it's a successful program.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, John.

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

Thank you.

[Stefan Anninger, Investor Relations at Charter Communications]

We will take our next question, Shelby, please.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thank you. We'll take our next question from Jonathan Chaplin with New Street. Your line is open.

[Jonathan Chaplin, Analyst at New Street Research]

Great, thanks, guys. I'm wondering if you can just stick with the ARPU you incur for a second, it looks like ARPU in 2Q was a little bit lower than we expected. Maybe you didn't get the -- as much of a benefit from the November price increase. As we thought you would or again, as Jessica said, there's a lot going on in ARPU, maybe, it's a function of how the bundled discount for Spectrum One is allocated across the different products, if you can give us some sort of. Some insights into drivers of ARPU in 2Q. That would be -- that'd be really helpful. And then, Jessica I think you mentioned during the call, during your prepared remarks, the benefit that you're seeing in broadband from Spectrum One, but I just missed the comment. If you can give us some more context on the pull-through effect you're seeing and how you think that progresses the longer that Spectrum One is in the market that would be really helpful as well. Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Thanks. Jonathan, on the ARPU point. We did continue, I guess in the year-over-year you have the offsetting impact of having lapped last year's rate adjustments and this is with -- with what you talked about, which is that you had price adjustments that we made earlier in the year offset by some gap allocation of the discount related to the Spectrum One offer. I think you have all the components, right and that is the sum of what -- of what's happening in ARPU in this quarter. That is significant.

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

I think there is also a fallacy and trying to oversimplify it too. There is a tremendous amount of activity that's taken place in the course of the year, in the course of the quarter with acquisition, retention, bundle allocations, rate increases in the past, rate increases in the more current period. There is a very complicated model that goes there. The end is 2.5%, I think ARPU growth in Internet year-over-year despite some of the allocation differences and given the fact that we're growing and taking share in both parts of our footprint. I think that we're really pleased with that mix and that outcome and if we can accelerate, particularly the growth as we get through the later part of this year, I think we'd be very happy with that.

[Thomas M. Rutledge, Executive Chairman at Charter Communications]

Prior to that, I think your second question, Jonathan is Spectrum One and pull-through. The point that was being made is that a higher portion of our mobile is coming from new customer connects through Spectrum One and that is very promising. It's still the majority of our mobile and extra coming through existing customers but the portion of which is coming through new connects is increasing which means that it is having an effect in the marketplace. The real key for us is to be able to educate customers about what seamless connectivity is, what gigabit wireless can provide. It's an essence in a new category and that takes time to resonate, which is why I said Spectrum One is our first iteration of convergence and seamless connectivity and it's going well, and I think that bodes well for the Internet and I think it bodes well for mobile and it bodes well for convergence for us over time.

[Jonathan Chaplin, Analyst at New Street Research]

And Chris, do you expect that percentage to continue to increase as a sort of building momentum in terms of the benefit it has for broadband subs, do you think?

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

Yes. But I also expect the level of attach rate to our existing Internet customers to increase to because it's resonating, not just for new customers but for existing customers and so you have to have benefits all around.

[Jonathan Chaplin, Analyst at New Street Research]

Great, thanks, guys.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Jonathan. Operator, we'll take our next question, please.

[Operator]

Thank you. We'll take our next question from Brett Feldman with Goldman Sachs. Your line is open.

[Brett Feldman, Analyst at The Goldman Sachs Group]

Yeah, two questions. Thanks. One of the topics that has been a lot of in this earnings season is that seasonality in the broadband business appears to be much more muted than we've seen previously. I'm curious for your take on it, and how you're thinking about the significance of seasonal dynamics as you look into the remainder of the year. And then, Jessica, you noted that cash taxes were up a lot year-on-year as you've transitioned to being a full cash taxpayer. I was hoping you could maybe give us some insight as to how to think about the way cash taxes are likely to trend over the course of any given year. I think historically 2Q tends to be a high watermark, but I'm not sure if there are nuances in terms of what we should be expecting for Charter. Thank you.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Got it. So, on the seasonality side market activity including move activity continues to be quite low, and because of that, it's really difficult to predict what we might see in terms of seasonality going forward. We really think that the drivers inside of this Q2 are sort of other factors, which includes tailwinds from our rural construction initiative, the continued success of Spectrum One, the performance of the sales force particularly higher sales yields and the slower pace of fiber overbuild that we saw. And so I would -- I would think more about those and sort of less about the seasonal patterns as you try to interpret what happens -- what happened with our Q2 results.

Your second question was.

[Brett Feldman, Analyst at The Goldman Sachs Group]

Cash tax.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Cash taxes. Thank you. On cash taxes, there are two payments inside of Q2 and so Q2 is the natural high watermark for the cash tax payments and I think you should anticipate that our total cash taxes are consistent with the guidance that we've previously given and that those payments are -- those remaining payments are spread between Q3 and Q4. There's -- you don't have that same phenomenon of the two cash tax payments in any other quarter.

[Brett Feldman, Analyst at The Goldman Sachs Group]

Yes, thank you.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Brad. Operator, we'll take our next question, please.

[Operator]

Thank you. We'll take our next question from Craig Moffett with MoffettNathanson.

[Craig Moffett, Analyst at MoffettNathanson]

Hi, thank you. I'm sure you guys have heard T-Mobile's discussion of your wireless net-adds that they tend to be more non-imports than would be the industry norm and I wonder if you could just talk about the kind of customers you're acquiring, whether they are coming from prepaid predominantly, whether a lot of them are new to wireless, meaning kind of younger kids. Anything that you can do that could share some insight into where your subscribers are coming from? And then obviously, always my favorite topic, anything that you can discuss, particularly now that you are not reporting wireless profitability anymore. Anything you can discuss about margins and the trajectory toward profitability from that business?

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

Sure. So look, I'd start by saying that anytime you have your competitors that continue to talk about you on their earnings call, I take that as a complement. The second thing, I would say is, clearly some of their data, they're not really good at producing and that's not accurate. The third thing I'd say is that in Jessica's prepared remarks, she mentioned, the level of port activity is at or better than it was even prior to the Spectrum One launch. So we feel very good that these are, I don't think good and high-quality customers. The majority of which are broadband customers today. So -- and so they resemble the marketplace and the product is very attractive, it's selling in very well and it's going to stick very well in and we look forward to seeing that develop over the next few quarters.

On the mobile margin. You have done some work and at your conference, I mentioned that if we thought your work was strong we would let you know, so that hasn't changed and that was based off of some of Horizon's disclosure as opposed to ours. Right now we have a significant amount of customer acquisition. And so we have the cost of acquiring those customers and we have the cost of operating those customers. We don't always have the full revenue attached to those customers just yet and that will start to occur beginning in October and just grow from there. So the overall profitability of the mobile product if it were a standalone product, which is not is good, very good and but it's not, it's also at the same time, we want to be careful not to be dragged into it, it's never how we thought about that product, it's really an extension of our broadband product and seamless connectivity and a broadband product that none of our competitors can deploy ubiquitously across their footprint and so you've got to think about the broader profitability. But if it were a standalone product the profitability is good and our expectations are continuing to move in that direction.

[Jessica Fischer, Chief Financial Officer at Charter Communications]

Yeah, the other thing, I would point out at our December Investor Day, we showed the progress that we had made in profitability excluding customer acquisition costs and I pointed out than that, some of that progress was made because of -- well that progress was not sort of dependent on what you were paying in MVNO costs that on our side, we had work to do and that we were still doing and driving down the cost-to-serve our mobile customers and that actually has been very successful through the first part of this year and I think in terms of what we're thinking about and cost-to-serve per mobile customer that actually is coming down in a way that we expected it to and I think as we continue to scale up the mobile business, have longer-tenured customers there as well as to improve our service activity that will continue to gain efficiency on the expense side for our internal expenses and drive additional profitability to the business that way as well.

[Craig Moffett, Analyst at MoffettNathanson]

Thank you.

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

Thanks, Craig.

[Stefan Anninger, Investor Relations at Charter Communications]

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

[Operator]

We'll take our next question from Vijay Jayant with Evercore. Your line is open.

[Vijay Jayant, Analyst at Evercore ISI]

Thanks. I just wanted to talk about seasonality, obviously, Chris is sort of suggesting, we didn't see the same sort of seasonal impact in 2Q in terms of college and our snowbirds and so forth. So can you help us think about, is that really changed? And does that mean that 3Q and 4Q that we see sort of reversed may not be as pronounced? Thank you.

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

Let me, Jessica answered this before and so let me just add, I guess some additional color to it. The -- of course, we still had college disconnects and we had snowbirds effect as well coming out of Florida. It's just the level of activity is a bit more muted compared to what it was pre-COVID and what we've seen over the past couple of years is the visibility for us and it appears for everybody. It's been a lot less around seasonals in Q2 and Q3 than it was pre-pandemic and so I think we want to be careful about how far we get ahead of our skis in letting people look out to Q3 and say that there'll be the pre-pandemic path.

I think the point that Jessica was trying to make is seasonality aside, the underlying trends are very good through Spectrum One, through the rural construction build, our competitiveness and I'll come back to the fiber overbuild, that's at a slower pace, but even in the areas that have fiber, which is in some sense a larger amount of fiber than it had been in the past, we're performing better in those markets than we did even just a year ago. And so we feel good about seasonality aside, the underlying trends and I guess, since we're on it, it's what everybody wants to hear, if we haven't said it already, our goal is still to have higher net-adds this year than it was last year. And so, instead of focusing on quarters, we'd like to focus on just the overall trajectory and the long-term trend and it's good.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Vijay.

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

Thanks, Vijay.

[Vijay Jayant, Analyst at Evercore ISI]

Thanks. Shelby, we will take our next question, please.

[Operator]

Thank you. We'll take our next question from Bryan Kraft with Deutsche Bank. Your line is open.

[Bryan Kraft, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, good morning. I had two questions if I could. First and I apologize if you said this and I missed it, but I was wondering if you could talk about the contribution to broadband net-adds from the rural line extensions and RDOF. And then secondly, would you mind just giving us an update on your CBRS efforts? And also as part of that wanted to ask a hypothetical question, yes, a portfolio of fallow spectrum from low-band through mid and high-band were available either through auction or acquisition. Is that something at this point that Charter would consider either alone or with a partner or is the current course still the much preferred strategy? Thank you.

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

Hey Brian. It was in the materials, the subsidized rural construction is 26,000 Internet net-adds inside the quarter. On CBRS, we are at a full commercial launch inside of our market today and it is going well and on that basis, and making sure that the handover times which are working very well right now, can continue to perform like that at scale, then we'll set the next year are the basis for our broader CBRS rollout. I don't want to spook people either, we're going to be very focused on deploying that CBRS where there's a high and fast ROI. We have a number of other accretive projects that are going on right now through network evolution and expansion and so we're very cognizant of the year for our capex still but we're going to build that in a measured way across our footprint, fully deploy the CBRS in the markets that we've acquired over time. So we're going to do it in a way that's very targeted to generate faster returns.

And your third question was around portfolio, Spectrum can't imagine why you're asking that, but being sarcastic. We have a -- we have a very strategic good perpetual MVNO relationship with Verizon and the economics as everybody knows are very good and that means and combine that with what we were just talking about before the ability through better and better WiFi and through CBRS over-time to have the vast majority of the traffic continue and increasingly be overall network with faster speeds means that we have the ability to lease the macro cell towers at an attractive rate and not be into business directly of having to continue to build those towers, densify those towers and acquire additional spectrum. I think it's a capital-light model that really works well for us and I think it's a model that as you can see has worked very well for Verizon, our partner as well so I think it's symbiotic and I would never say never. We will always take a look at things as they come up. But we haven't felt the need to be in the macro cell tower, construction, densification, and spectrum acquisition business at scale.

[Bryan Kraft, Analyst at Deutsche Bank Aktiengesellschaft]

Yes, great, thank you, Chris.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Bryan. We'll take our last question from Michael Rollins. Go ahead, operator. Sorry.

[Operator]

Thank you. We'll take our next question from Michael Rollins with Citi. Your line is open.

[Michael Rollins, Analyst at Smith Barney Citigroup]

Thanks and good morning. I was just curious to follow-up on just the mobile discussion with a couple of questions on some of the segments. So one of the comments is that 11% of Internet customers are taking mobile which would infer almost two lines per account. Just curious if you're starting to see more of a shift to multi-line and family plan adoption of your mobile services and if there is a significant opportunity to take up the number of lines per account over time.

And then on the SMB side, are there some opportunities to accelerate the mobile gains there? They've been running at about 15,000 to 20,000 per quarter. Thanks.

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

So, Michael, you're right, the opportunity for us to continue to increase the lines per customer is high. And as you know, certain customers have multiple lines inside the household that are on different EIP plans and timelines and so our success has been using the high-value and high speeds that we have in the mobile product tech buyers many lines upfront in the household. And then over time the opportunities to upgrade those other lines that are on different cascading EIP timelines. And so that's working well and the opportunity is to continue to grow not just penetration of mobile cost of broadband customers but to add new seamless connectivity customers through Spectrum One, but also to increase the number of lines per household which is you know create increases the stickiness of the product over time, it increases the value that we provide because of the significant savings.

The second question you asked is on SMB and I think we're doing a good job there, but I think we can continue to do even better over time and I think it's still early days in the SMB space, but we can add value there in the same way that we do in residential and then attack the space.

[Michael Rollins, Analyst at Smith Barney Citigroup]

Thanks.

[Stefan Anninger, Investor Relations at Charter Communications]

Thanks, Michael. That concludes our call. Operator, back to you.

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

Thank you very much.

[Operator]

[Operator Closing Remarks]