Charter Communications, Inc. (NASDAQ:CHTR) Q4 2022 Earnings Call Transcript
Charter Communications, Inc. (NASDAQ:CHTR) Q4 2022 Earnings Call Transcript January 27, 2023
Operator: Hello, and welcome to Charter Communications' Fourth Quarter 2022 Investor Call. I will now turn the call over to Stefan Anninger. Sir, please begin.
Stefan Anninger: Good morning, and welcome to Charter's fourth quarter 2022 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 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 CEO; Tom Rutledge, our Executive Chairman; and Jessica Fischer, our CFO. With that, let's turn the call over to Chris.
Christopher Winfrey: Thanks, Stefan. We continued to execute well within a challenging market backdrop in 2022, and we remain excited about the industry's future and Charter's in particular. We added over 340,000 Internet customers in 2022 despite the previous pandemic pull forward and a low activity environment. We also continued to see very strong mobile line growth, with full year line in net additions of over 1.7 million. As of the end of 2022, we had 5.3 million total mobile lines. So we're growing mobile lines fast even in a low volume environment by saving customers hundreds and often thousands of dollars per year. That growth creates value for Charter and supports broadband growth. For the full year, we grew our consolidated revenue by 4.5% and our adjusted EBITDA by close to 5%.
The planned December management transition with Tom moving to Executive Chairman is also going very well, and I'm pleased Tom will join us in today's Q&A. In 2023, in the coming years, we remain primarily focused on three broadband initiatives: evolution, expansion and execution. Each of these initiatives is designed to drive customer growth and long-term cash flow growth. Starting with evolution. Already in 2023 and over the next three years, we will evolve our network to ubiquitously offer symmetrical and multi-gigabit speeds. We'll deploy these new speed offerings at a much faster pace and at a much cheaper cost than our competitors, just $100 per passing. And we'll maintain our marketing speed claims. We're also evolving our go-to-market approach with increasing convergence.
We recently launched Spectrum One, which combines our Internet, advanced WiFi and mobile products for the fastest seamless connectivity. During the fourth quarter, we saw continued sell-in of mobile to our large Internet base, and our Spectrum One converged offering helped drive our strongest quarter yet for mobile lines. The potential for mobile to be a significant driver of new Internet sales is still largely untapped as we educate nonsubscribers of the Spectrum One value proposition. With nearly 5.3 million lines created over a four-year period, it is clear that our converged customers have meaningfully lower Internet and customer relationship churn. And while some of that churn benefit may be self-selection, mobile drives better churn and ultimately, acquisitions for Charter.
Our second area of focus is the expansion of our footprint. Line extension construction is an important part of our 2023 growth plan and beyond and offers good growth and returns to visibility. We hope to complete our RDOF build ahead of the original commitment, and that faster completion is good for our returns, the communities where we build, obviously, and it creates credibility for future subsidized builds and option value for future growth. As we also mentioned in December, we've been successful in winning a number of other state and local grants in 2022 and expect the same in 2023. And we expect, assuming a reasonable regulatory framework, to participate in the $42.5 billion BEAD program. The initial results of our rural construction initiative have been very promising.
We constructed over 200,000 new rural passings in 2022, and penetration of passings open at least six months is ahead of our expectations at about 40%. Over time, we expect our rural construction initiative to be a significant contributor to our customer growth with attractive mid- to high-teen internal rates of return. And finally, we remain focused on executing on our core operating strategy, all to further improve customer experience, raise customer satisfaction and drive customer growth. We're doing that in a number of ways, including the continued digitization of our customer service model in ways that enhance the customer experience, accelerating our proactive maintenance initiative to address service issues before customers even see an impairment and investing in training and tenure for our employees to continue to improve our service and sales capabilities.
Longer tenure leads to better execution with higher sales, lower service transactions, lower churn and more products per customer over time. So we have a large growth opportunity in front of us through network evolution, convergence and continued operational execution and a very unique opportunity to expand our footprint. We have a successful operating model to address the opportunities in front of us. It's the same strategy that we've deployed for years. It's about having the fastest connectivity and products and pricing and packaging that's difficult for customers to replicate, and putting that all together so that we provide more product into the household, more penetration across our passings and then marrying that with high-quality service with fewer service transactions and lower churn.
That all drives higher long-term recurring cash flow. We then take that sustainable cash flow model and put it together with an innovative capital structure and a disciplined approach to ROI-driven capital allocation between organic investment expansion and/or M&A and buybacks, and you get Charter. So we have a great path in front of us to deliver long-term shareholder value creation, which means delivering for our customers, employees and local communities. With that, I'll turn the call over to Jessica.
Jessica Fischer: Thanks, Chris. Before getting started, I want to remind you that we will be making a couple of changes to our reporting beginning next quarter. First, as we noted in our investor meeting in December, we'll include mobile service revenue in residential and SMB revenue as appropriate. We will no longer report mobile expenses separately, and both of these changes better reflect the converged and integrated nature of our mobile business and our operations and our offer structure. Second, we will provide additional line extension capital and rural disclosures. And finally, I want to note that while our fourth quarter results contain some modest impacts from Hurricane Ian, the overall impact of the hurricane on our financials and customer numbers was very small and doesn't warrant separate disclosure.
Photo by Memento Media on Unsplash
Let's turn to our customer results on Slide 5. Including residential and SMB, we added 105,000 Internet customers in the fourth quarter and added 344,000 over the last 12 months. Video customers declined by 144,000 in the fourth quarter. Wireline voice declined by 233,000 and we added a record 615,000 mobile lines. For the full year, we added 1.7 million mobile lines. Although our Internet customer growth continued to be positive in the fourth quarter, activity levels remain low. During the quarter, we saw both lower Internet churn and lower Internet connects than in the fourth quarters of 2021, 2020 and 2019. Total churn, voluntary churn and non-plate churn were all lower year-over-year, and we're at all-time lows for the fourth quarter. Move return remains well below pre-pandemic levels, which also reduces our selling opportunity.
Gross additions remain down across the footprint by similar amounts in overbuild and non-overbuild areas, similar to what we've seen in the past few quarters. In terms of competitive impact, some of the lower gross additions we see probably relate to DSL conversion going to a new entrant, fixed wireless, instead of coming to us. But given the issues with fixed wireless, product reliability and scalability, we expect those customers to find their way to us over the long term. In addition, we've seen a slightly higher pace of fiber overbuild recently. And I would also note that we've seen a small amount of market share return to mobile-only service over the past several quarters, the reversal of some COVID effects. Despite these challenges with lower market activity, our Spectrum One product is working.
We remain in the early stages of offering converged packages of products and refinement to our approach continues, but we're very pleased with the results. Moving to financial results, starting on Slide 6. Over the last year, residential customers grew by 0.2% year-over-year. Residential revenue per customer relationship was flat year-over-year, with promotional rate step-ups and rate adjustments, offset by a higher mix of non-video customers and a higher mix of lower-priced video packages within our base. Also keep in mind that our residential revenue and ARPU does not reflect any mobile revenue, although that will change next quarter when we make the reporting adjustments I discussed a moment ago. In addition, we're allocating a portion of Spectrum One-related customer revenue from Internet to mobile revenue under GAAP.
As Slide 6 shows, total residential revenue grew by 0.4% year-over-year. Turning to commercial. SMB revenue grew by 2.4% year-over-year, reflecting SMB customer growth of 3%. Enterprise revenue was up by 4.9% year-over-year. And excluding wholesale revenue, enterprise revenue grew by 9.1%, and enterprise PSUs grew by 4.4% year-over-year. Fourth quarter advertising revenue grew by 25% year-over-year, primarily driven by political revenue. Core ad revenue was down by 3%, with lower national and local advertising revenue, driven by the softening ad market, offset by our growing advanced advertising capabilities. Mobile revenue totaled $876 million, with $401 million of that revenue being device revenue. Other revenue grew by 4.9% year-over-year, mostly driven by higher rural construction initiatives subsidies, partly offset by lower processing fees and lower video CPE sold to customers.
In total, consolidated fourth quarter revenue was up 3.5% year-over-year and up 4.5% for the full year 2022. Moving to operating expenses and adjusted EBITDA on Slide 7. In Q4, total operating expenses grew by $359 million or 4.6% year-over-year. Programming costs declined by 3.3% year-over-year due to a decline in video customers year-over-year, and a higher mix of lighter video packages, partly offset by higher programming rates. Looking at the full year 2023, we expect programming cost per video customer to be approximately flat year-over-year. Regulatory connectivity and produced content declined by 5.3%, primarily driven by lower regulatory and franchise fees and lower video CPE sold to customers. Cost to service customers increased by 5.8% year-over-year, driven by higher labor costs, higher fuel and freight costs and higher bad debt, partly offset by productivity improvements.
Excluding bad debt from both years, cost to service customers grew by 4.9%. And while bad debt was higher year-over-year, it remained below pre-COVID level. As we noted in our December investor meeting, we're making very targeted adjustments to job structure, pay and benefits and career paths inside of our operations teams in order to build an even higher skilled and more tenured workforce, which drove the higher labor costs. These adjustments will add some pressure year-over-year to cost to service customers expense growth in the first half of this year. But that year-over-year growth should moderate in the second half of 2023. And we continue to expect additional efficiencies in cost to service customers over time as a result of the continued digitization of service, productivity improvements and our network evolution investment.
Marketing expense grew by 6.9% year-over-year, primarily due to the higher staffing levels I mentioned and wages, which included targeted adjustments in our sales channels. Mobile expenses totaled $982 million and were comprised of mobile device costs tied to device revenue, customer acquisition and service and operating costs. And other expenses increased by 6.6%, primarily driven by higher labor costs and higher advertising sales expense related to higher political revenue. Adjusted EBITDA grew by 1.9% year-over-year in the quarter and 4.8% for the full year 2022. Turning to net income on Slide 8, we generated $1.2 billion of net income attributable to Charter shareholders in the fourth quarter compared to $1.6 billion in the fourth quarter of last year, with higher income tax and interest expense more than offsetting higher adjusted EBITDA.
Turning to Slide 9. Capital expenditures totaled $2.9 billion in the fourth quarter and $9.4 billion for the full year 2022. Our total CapEx for the year reflects the timing of more accelerated equipment inventory receipts in December than expected. Fourth quarter capital spending of $2.9 billion rose above last year's fourth quarter spend of $2.1 billion, primarily driven by higher line extension spend driven by our rural construction initiative. Capital expenditures, excluding line extensions, increased from $1.6 billion in last year's fourth quarter to $2 billion this quarter, driven by investment in network evolution, higher customer premise equipment spend on advanced WiFi equipment and timing of spend. For the full year 2023, we continue to expect capital expenditures, excluding line extensions, to be between $6.5 billion and $6.8 billion.
So excluding line extensions, we expect a small increase year-over-year in capital spend driven by the acceleration of network evolution spending and partly offset by declines in other areas. 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 level and continue to decline thereafter. Turning to line extensions. In 2023, we expect line extension capital expenditures to reach approximately $4 billion. We 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 we win funding for or otherwise commit to additional rural spending.
We also expect most BEAD money to begin to be appropriated in the 2024 timeframe with four-year build timelines from grants. At that time, we expect that our RDOF spend will begin to ramp down. We expect the BEAD program to present a unique and attractive opportunity for us to expand our network with subsidies, generating significant returns that solidly exceed our cost of capital. For our additional subsidized passings, we expect our net rural construction cost per passing to be closer to the roughly $3,000 per passing that we've incurred in our recent subsidized state and local builds than to our RDOF per passing costs. Our six-month penetration of passings in our newly built rural areas continues to be around 40%, and we expect penetrations in these areas to continue to grow.
If you use the cost per passing that I mentioned a moment ago, a high broadband penetration assumption, which we think is reasonable, our current ARPU, excluding mobile, a high incremental margin based on low incremental overhead costs and a reasonable terminal multiple or perpetuity growth rate, you can clearly see the very attractive IRRs associated with our rural builds. Turning to Slide 10. We generated $1.1 billion of consolidated free cash flow this quarter versus $2.3 billion in the fourth quarter of last year. The decline was primarily driven by higher capital expenditures, mostly the result of our rural construction initiatives and by higher cash tax payments. For the full year, we generated $6.1 billion of free cash flow versus $8.7 billion in 2021.
However, excluding cash taxes and our rural construction initiative, our full year free cash flow grew by 4%. We finished the quarter with $97.4 billion in debt principal. Our current run rate annualized cash interest is $5 billion. As of the end of the fourth quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47x. We intend to stay at or just below the high end of our 4x to 4.5x target leverage range. During the quarter, we repurchased 3.6 million Charter shares and Charter Holdings common units totaling about $1.3 billion at an average price of $344 per share. For the full year, we repurchased 23.8 million Charter shares and Charter Holdings common units totaling approximately $11.7 billion. We have a proven operating balance sheet and capital allocation model that drives customer and financial growth and shareholder value.
We've always prioritized investments that generate long-term growth, and those investments ultimately protect and extend our return of capital to shareholders. We continue to generate significant free cash flow and intend to both invest for long-term growth and simultaneously returned excess capital to shareholders in the form of buybacks. Operator, we're now ready for Q&A.
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