Charter Communications, Inc. (NASDAQ:CHTR) Q1 2023 Earnings Call Transcript

Charter Communications, Inc. (NASDAQ:CHTR) Q1 2023 Earnings Call Transcript April 28, 2023

Operator: Hello and welcome to the Charter Communications First Quarter 2023 Investor Call. 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 Anniger. Please go ahead.

Stefan Anninger: 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.

Chris Winfrey: 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 will 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 midsized markets. We increased the network capacity to 1.2 gigahertz, which is equivalent to the acquisition of 400 megahertz of spectrum. We also allocated more spectrum for upstream use.

In these markets, we are now capable of delivering 2 x 1 gigabit per second service and we are launching the same CMTS based 1.2 gigahertz high split to an additional 6 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 the deployment of distributed access architecture, allowing us to deliver 5 x 1 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 initiative 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 Boost and spoke to Spectrum Mobile network each of which run on our advanced WiFi product. Today, over 40% of our residential Internet customers have our advanced WiFi product, which just last month, we also launched to the SMB marketplace. Over 70% of our customers or 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 in Verizon and we are a meaningful contributor to active lines on this network and its financials. And 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 pull permit support we need, we can complete our RDOF commitments 2 years ahead of the RDOF deadline.

The pace of penetration gains in subsidized rule 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 are 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 have ever seen. And while investments in our employees generate upfront expense, they ultimately deliver longer tenured employees, which produce 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 project 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 have invested significantly in machine learning and the precursors to AI will further reduce transactions. More to come on that in the 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 are 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 creates value for shareholders. Now, I will turn the call over to Jessica.

Jessica Fischer: Thanks, Chris. Before discussing our first quarter results, I want to remind everyone that starting this quarter, we have 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 7 of the trending schedule we posted this morning.

Now, let’s turn to our customer results on Slide 5. 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 remain low. During the quarter, total churn was slightly higher than last year, but still near record lows and well below pre-pandemic levels. We have seen a small impact from 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 feeds, 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 5 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 6. 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 6 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 22 rate adjustments and face the headwind of strong political advertising revenue in the prior year. Moving to operating expenses and EBITDA on Slide 7, 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 a 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. Cost to 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 frontline employee attrition compared to 2022 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 8, 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 9. 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 initiative and continued network expansion across residential and commercial greenfield and market fill-in opportunities. I would also note that in the first quarter we saw a sequential decline in total CapEx associated with our subsidized rural construction initiative 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 initiative. 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 2025 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 rural 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 the 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 4.47x, and we intend to stay at or just below the high end of our 4 to 4.5x 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 ridge 2-way 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’re now in a position to upgrade it further in both a cost-efficient and time-efficient 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 initiative and to 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.

Q&A Session

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

Doug Mitchelson: 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 ported 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, you’re 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.

Chris Winfrey: 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 Freeline together with Internet and essentially, the other one is if you purchase the line to give the second one for free for an existing customer. Those customers are great customers that have good usage, and they are getting the fastest product in the country from a connectivity standpoint. And when – I’ve said it before, but when the promotional period rolls off, they are going to have not only the fastest connectivity product, but they are going to have the best price in the marketplace as well at $29.99. That includes taxes and fees, contracts. So it’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 are normal lines, and they are not going to be able to replicate the service or pricing that they are getting from us at retailer or promotion anywhere else in the marketplace. So our expectation is that it all sticks.

Jessica Fischer: Yes. I mean, Doug, we understand that there is some false market 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 as phones, and we don’t include wearables in our numbers either. So the lines that we’re putting up are good lines.

Chris Winfrey: One other thing to add to that this is 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 beginning, and we’re excited about what 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 qualitative product and save them a lot of money.

Jessica Fischer: Yes. To your question on margin and what happens in the second half of the year, the increases that you see both in sales and marketing expense and cost to serve right now and 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, in sales and marketing, if you look back at last year, 2Q ‘22 sales and marketing expense was sequentially lower than 1Q, 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 will have lapped our midyear 2022 staffing adjustments. And in Q4, we will lap the Spectrum One-related sales cost increase.

Similarly, on the cost reserve side, I expect year-over-year growth in cost to serve to moderate in the second half of 2023, which I think is 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 and generate growth from them.

Chris Winfrey: And I’d just add 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, if it 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 not only got the cost side that starts to lap the prior year investments, but you also have the revenue side that starts to kick in at the fourth quarter of this year, and that just gets better and better as we go.

Doug Mitchelson: Yes. Thank you both. And thanks for the rural disclosures as well.

Jessica Fischer: Thanks, Doug.

Tom Rutledge: Thanks, Doug. Katy, we will take our next question, please.

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

Ben Swinburne: Thanks, good morning. I guess for either of you, just wanted to hear more about the kind of process of accelerating those rural build-outs. I think you talked about – I think it was March relative to the full first quarter. Is this the kind of – is it a simple – I mean not simple, but is it better weather allows for greater and faster construction? Just what are the puts and takes of getting that number even higher as we move through the rest of spring, summer through the year? And I think you put too fine of 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, etcetera. So, just trying to get a sense of the rollout for the rest of this year? Thanks.

Chris Winfrey: Thanks, Ben. The point you made about the seasonality with winter is right. In my prepared remarks, I mentioned in March, it was that it was much higher in terms of the already coming out of the back end. The full year target is 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 – if you have to keep in mind that we – a lot of our build is taking place in places like Ohio, Michigan, Wisconsin. In January and February, there is a little bit harder to get around. Whether you’re going 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 is a more technical for Jessica, the – it’s from activation that we start the clock for 0 to 6 months. So once the plant is constructed and it’s opened up for marketing, that’s the T minus zero, so to speak.

Ben Swinburne: Got it. Okay.

Jessica Fischer: The way it’s being reported in the new trending schedule details. So you’re getting those passings in sort of – in the reporting as the 6-month clock starts.

Ben Swinburne: Yes. 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. So I think they are – arguably these are not coming from anywhere. They are just being created. I just wanted to get your thoughts on that as you do roll to pay because it’s obviously a decent piece of your line count? Thanks.

Chris Winfrey: 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 are 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 beyond what we’ve already said, I think we will leave it at that and continue to grow our line counts and we will do our own IR. Thank you.

Ben Swinburne: Thank you, Chris.

Chris Winfrey: Thanks.

Tom Rutledge: Thanks, Ben. Katy, we will 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: Great. Thanks. And again, thanks for the rural disclosure. So it looks like if you pulled 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. Does that become more of an issue as they rollout? And then you talked about this deployment of high split infrastructure. Would you expect to see better trends in those markets as you sort of turn on that service and improve, say, upstream capacity sort of along the way. So should we expect it to be something of an iterative process or where things get better as the infrastructure gets more competitive? Thanks.

Chris Winfrey: Hey, John, so the – in the trending schedule, you’ll see that the subsidized rural 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 overbuild as well as where there is new fiber overbuild, and we’re competing and 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, the non-gigabit overbuild area 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 that are subsidized rebuild, not only do we expect to have continuing improving performance spectrum, one of the legacy footprint but the passings that we’re building from a rural standpoint just continue to get larger and would be 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. But it also signals to competitors that we’re – they are not going to have that marketing clean 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 will 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: Got it. If I could just follow-up or, is the goal is still to have higher adds this year than versus last year? Thank you.

Chris Winfrey: It is our goal to have higher net additions in Internet this year than we did last year.

John Hodulik: Got it.

Tom Rutledge: Thanks, John. Thanks a lot. Katy, will take our next question, please.

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

Phil Cusick: 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.

Chris Winfrey: We won’t step into that rut.

Phil Cusick: Alright. First to follow-up on Jon. 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 has been fewer broadband ads to connect to. But are you also seeing an acceleration in disconnects? And what percent of the base is now on these lower-cost packages? Thank you.

Jessica Fischer: Yes. 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 looked 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 the things look pretty good or at least better than it was previously on that front.

Chris Winfrey: So I’ll take the video. There is a pretty clear correlation to when we’ve taken rate increases either on video or even a more recent increase that we had on the Internet. So there is a downgrade element that takes place at the point of programming pass-through, which we’ve had to do because of where the programmers have been. And 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 Xumo towards the back half of this year.

It’s a very compelling product. It’s very simple. It’s straightforward. It has a tremendous amount of utility towards customers for both their OTT as well as any live video viewing and subscriptions that they have. As I’ve said it before, it’s the platform that I’d like to have on 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.

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

Chris Winfrey: We haven’t gotten through all the reporting definitions yet, but I think the right way to think about it is to the extent the customer takes a video service from Charter, then it would be reported as a video PSU. And to the extent it’s just a platform that we are 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 take that out loud together with Jessica over time. But I think that’s the more natural way it will go.

Jessica Fischer: Yes. And as we get closer to the rollout, we will try to provide some additional information on where we think that, that will land.

Phil Cusick: Thanks again.

Chris Winfrey: Thanks Phil.

Stefan Anninger: Thanks Phil. Katy, we will 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: 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?

Chris Winfrey: Sure. I think the device business and 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 and to bring convergence, a product that doesn’t really exist anywhere, but Charter and 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, best fees, the best product and the best amount of savings already with what we are – our go-to-market strategy today.

Peter Supino: Thanks Chris.

Stefan Anninger: Thanks Peter. Katy, we will take our next question.

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

Jonathan Chaplin: Thanks guys. Two questions. The early work that we have done on suggests the returns in those markets could be phenomenal, potentially double what you guys may be seeing in RDOF markets if the full subsidy is awarded. I am wondering if you can help size what the opportunity could be. I think you 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 ads in the industry, it looks like there has been a bit of a slowdown for the overall industry this quarter. I am wondering if you have 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.

Chris Winfrey: So, I would start first saying the RDOF returns that we have are extremely attractive. And then that we are really pleased with what we are doing, both on RDOF as well as the other state brands that were coming out of some of the ARPA and other COVID funds. And that’s been highly successful. On BEAD, it’s really too early to tell. We have been very successful where we have gone into different subsidy, RFPs simply because we are aggressive and because we are the most experienced rural builder in the entire country. So, when we go tell a Local, State or Federal government that we are going to build, and we are going to build within a certain timeline, we have probably the most – not probably, we have the most credibility because we are the largest rural provider.

Today, we the largest rural builder and we have won awards for the success and the 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 their already high mobile builds as well as bring video into these places. So, it’s not just a single play Internet. We bring a whole suite of connectivity services that save customers money. We have 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 in BEAD, 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 are going to do well.

Jessica Fischer: The thing that I would add to that is that, Jonathan, we have a very disciplined sort of practice now and how we bid for these offerings. And so we are 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 passings 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 will execute it on the back end and bring those returns back into the company.

Chris Winfrey: Yes. 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, 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 so I think the entire market is still suffering from that as a little bit as well as a small swing back into wireless substitution. So, we are seeing some of that as well. Housing starts also been down, so that clearly contributes into this as well, and all of which I think is temporary in nature.

The difficulty that 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, we all – there is no reason to think that we don’t get back into the normalized market environment. It’s just become very difficult to predict exactly when that happens. In the meantime, we compete well. We are growing both in legacy markets as well as obviously in our new build area. And through a combination of market normalization as well as a very large pipeline of un-served rural passings that we are constructing, the opportunity for growth in Internet as well as in mobile is very good for us.

Stefan Anninger: Thanks Jonathan. Katy, we will take our next question.

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

Craig Moffett: Hi. Thank you. I wonder if you could talk a little bit about wireless margins, Jessica. You shared one more quarter of wireless results. And I think it’s – while 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 it going forward would be very helpful? Thank you.

Jessica Fischer: Yes. So Craig, I think back in December, we actually gave where we are in terms of margin in the business exclude – 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 work that you have been doing trying to use some of the financial information available out there to back into costs. Obviously, I am 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 someone else for that matter. It’s important, though, to step back and think about, we don’t run the wireless business just for margin in the wireless business.

We run our entire business to generate the most cash flow on – 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 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 will 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 are really confident in our ability to continue to have a 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.

Chris Winfrey: Craig, on the traffic offload, I mentioned in the prepared remarks that we have now deployed spectrum mobile network to all capable devices, which is our advanced WiFi service, and that’s in 40% of our residential customers. We have now begun to launch that advanced WiFi service and Spectrum Mobile network to SMB 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 special local network really over the course of the past four months or five 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 are already live in one large market. It’s going very well. So, whereas I think we had publicly said that we had 15% of our usage was 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 through advanced WiFi 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: Thank you.

Stefan Anninger: Thanks Craig. Katy, we will 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 Ehrlich: 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 are 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.

Chris Winfrey: 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 had the corollaries to mobile. But on Xumo, back half of this year, we haven’t announced a month the progress of the Xumo team, it’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: 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.

Chris Winfrey: 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 is 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. And 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 the space.

Jessica Ehrlich: Thank you.

Stefan Anninger: 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: 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?

Chris Winfrey: 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. And 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 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: Thanks.

Stefan Anninger: Thanks Michael. Back to you Katy.

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

Stefan Anninger: Thanks everyone and we will see you next quarter.

Chris Winfrey: Thank you.

Jessica Fischer: Thanks.

Operator: Thank you, ladies and gentlemen. This concludes today’s event. You may now disconnect.