Charter Communications , Inc. (CHTR) reported mixed results in its latest earnings call, facing customer losses in its internet segment but showing resilience with the addition of new mobile lines and growth in adjusted EBITDA.
The company is addressing the challenges posed by the end of the Affordable Connectivity Program (ACP) and is optimistic about its long-term growth prospects, driven by its strategy to offer competitive bundles and expand its network.
Key Takeaways
- Charter Communications lost 149,000 internet customers in Q2, largely due to the ACP's conclusion.
- Despite internet losses, Charter added 557,000 Spectrum Mobile lines.
- Revenue saw a slight increase, with a 2.6% growth in adjusted EBITDA.
- The company is working to retain former ACP customers with various offers.
- Charter is expanding its rural footprint, adding 36,000 net customers in Q2.
- Residential revenue dipped by 0.6% YoY, while SMB and enterprise revenues grew.
- Charter expects capital expenditures for the full year 2024 to be around $12 billion.
- The company reported $1.2 billion in net income and $1.3 billion in free cash flow for Q2.
Company Outlook
- Charter anticipates increased market activity and selling opportunities over time.
- The company aims to deliver strong EBITDA growth despite competitive pressures.
- Charter is confident in the long-term trajectory of its business.
Bearish Highlights
- The end of the ACP program contributed to significant internet customer losses.
- Video and wireline voice customer segments also experienced declines.
Bullish Highlights
- Charter saw growth in its mobile segment with the addition of new lines.
- The company reported positive adjusted EBITDA for its mobile business for the first time.
- Charter's rural expansion is progressing with 36,000 net customers added in Q2.
Misses
- Residential revenue decreased slightly year-over-year.
- Charter's video customer base continued to decline.
Q&A Highlights
- Charter is focusing on product investments and positioning for future growth.
- The company is optimizing its balance sheet to support business activities.
- Charter's capital allocation strategy includes high ROI organic investments and potential M&A.
- Political advertising is expected to increase in the second half of the year.
Charter Communications is navigating through a period of transition following the end of the ACP, which has affected its internet customer base. However, the company's strategic focus on offering competitive product bundles, expanding its network, and growing its mobile and enterprise services highlights its adaptability and commitment to long-term value creation for shareholders. With a solid financial performance and a clear strategy in place, Charter is poised to manage the current challenges while maintaining a trajectory towards growth.
InvestingPro Insights
Charter Communications, Inc. (CHTR) has demonstrated resilience in its latest earnings report, balancing customer losses in its internet segment with new mobile line additions and EBITDA growth. As the company navigates the post-ACP landscape, several metrics and insights from InvestingPro provide a deeper understanding of its financial health and market position.
InvestingPro Data indicates a Market Cap of approximately $58.32 billion, reflecting the company's substantial size within the Media industry. The P/E Ratio stands at 11.47, which, while indicating a valuation that may be considered high relative to near-term earnings growth, also suggests investor confidence in the company's profitability. Adjusted for the last twelve months as of Q1 2024, the P/E Ratio is slightly lower at 9.93, offering a more attractive valuation perspective.
An InvestingPro Tip highlights that management has been aggressively buying back shares, which could be a signal of the company's belief in its own undervaluation or a strategic move to enhance shareholder value. Another tip to consider is that analysts have revised their earnings downwards for the upcoming period, which may warrant caution for investors looking at the near-term outlook.
For those interested in gaining more insights, there are additional InvestingPro Tips available for Charter Communications, which can be found at https://www.investing.com/pro/CHTR. These tips can provide investors with a more nuanced view of the company's financials, strategy, and market performance. To access these valuable insights, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
In summary, Charter Communications is a prominent player in the Media industry, with a strong return over the last three months and a profitable track record over the last twelve months. The company's strategic initiatives and financial metrics present a mixed picture, with both challenges and opportunities ahead.
Full transcript - Charter Communications Inc (NASDAQ:CHTR) Q2 2024:
Operator: Hello. And welcome to Charter Communications' Second Quarter Investor Call. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll 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: Thanks, operator, and welcome, everyone. The presentation that accompanies this call can be found on our website, ir.charter.com. I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, which we encourage you to read carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements, which 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. On today's call, we have Chris Winfrey, our President and CEO, and Jessica Fischer, our CFO. With that, let's turn the call over to Chris.
Chris Winfrey: Thanks, Stefan. During the second quarter, we lost 149 ,000 internet customers, most of which was driven by the end of the Affordable Connectivity Program. We added over 550,000 Spectrum Mobile lines and close to 2.2 million lines year-over-year. Revenue was up slightly in the quarter, while adjusted EBITDA grew by 2.6%. We put a lot of effort into the ACP program, and it wasn't renewed. Beginning early this year, we've been actively working with customers to preserve their connectivity. Our service and retention teams are handling the volume of calls well, and we've retained the vast majority of ACP customers so far. The real question is customers' ability to pay, not just now, but over time. I expect we'll have a better view of the total ACP impact once we're inside the fourth quarter. The lack of ACP will also drive higher levels of market churn and selling opportunities for connectivity services over time. Turning back to today's results, the second quarter already tends to be a seasonally weak quarter. The loss of ACP impacted both churn and low-income broadband connects, helping drive the Mobile-only broadband category back to pre-pandemic levels. That shift added to an already low level of move activity and overall market connect volume. That said, we performed better than our expectations for Internet in a quarter, and we competed well compared to previous quarters against both wireline overbuild and cell phone Internet, each with expanded footprints. Overall churn remains at low levels, even with the end of the ACP program, and we remain confident in our ability to return to healthy, long-term growth. Our Internet product is faster and more reliable. Our pricing is lower when similarly bundled with mobile. We expect market activity and selling opportunities to pick up over time, and the cell phone companies will face challenges. as a customer bandwidth demands continue to grow. If we take a step back, our success will be premised on our high capacity, fully deployed network and the products it can deliver. We already have a one gigabit network everywhere we operate across 58 million passings. And when our network evolution initiatives complete, we'll have a ubiquitous, symmetrical, multi-gig capable network supporting continued growth in data demand from customers and new applications such as AR, VR and AI. All at an incremental investment of just a $100 per passing. Those wireline network capabilities are combined with mobile capabilities everywhere we operate, creating the nation's first converged network. Uniquely providing seamless connectivity and the fastest mobile service where 87% of traffic is delivered by our own gigabit capable WiFi network. And our converged connectivity product set is poised to get better through speed upgrades and over 43 million access points, which will grow with our own and our partner's ongoing WiFi router and CBRS access point deployment. That converged network is also expanding, covering more passings as we grow our footprint with high ROI construction opportunities in both rural and non-rural areas. As we show on slide 4 of today's investor presentation, we are very well positioned competitively with higher quality products, lower pricing, and the ability to deliver a converged bundle of products. In Internet, data usage continues to grow and demand for faster speeds will grow with it. During the second quarter, roughly 30% of residential internet customers who do not buy traditional video from us, used over a terabyte of data per month, which together with overall usage is increasing. This quarter, we saw the most additions to our gig speed tier ever, an area we can grow. Our mobile offering continues to evolve, driving strong results. Our second quarter mobile line Net Ad performance was better than the first quarter results, even without the incremental benefit of our free mobile retention offer to former ACP customers. And we also had our highest port ends quarter ever. In April, we began offering Anytime Upgrade to new and existing Unlimited Plus customers. Anytime Upgrade allows Unlimited Plus customers to upgrade their phones whenever they want, eliminating traditional wait times, upgrade fees, and condition requirements. And during the second quarter, customers increasingly chose our Unlimited Plus package priced at $40 versus $30. In April, we also launched a new repair and replacement plan for just $5 per month. That price point is very competitive in driving higher take rates. These new affordable value-added services enhance our profitable growth and competitively open access to new customer segments. Along those lines, in May, we launched our new phone balance buyout program. Now when a customer switches to the Spectrum Mobile from another provider and purchases at least three lines, we'll pay off their existing phone balance on ported lines up to $2,500 for five lines. This new program helps multiline mobile customer prospects with device balances and other providers to more easily switch to Spectrum Mobile. And of course, Spectrum One continues to perform well at both Connect and at promotional roll-off, offering the fastest connectivity with differentiated features. Today, approximately 8% of our total passings take our converged offering of internet and mobile. We've remained underpenetrated despite having a differentiated and superior offering with market -leading pricing at promotion and at retail. Finally, turning to video, losses continued in video where we've seen downgrade churn from programmer rate increases, we passed through. The loss of ACP in the second quarter also impacted video downgrades as customers made choices based on affordability. Over the last several years, due to margin pressure from programming increases, we've moved away from selling bundles with traditional discounts. But as we look to better differentiate ourselves in a competitive marketplace, we are considering ways to better leverage our unique capabilities across our full set of products, including video, particularly now that we're adding significant value back into the video product for consumers with hybrid linear DTC bundles, more economical package choices, and with our Xumo Box (NYSE:BOX). In May, we reached a new agreement with Paramount that gives us the ability to offer the ad-supported versions of Paramount's direct-to-consumer services, Paramount Plus and VET Plus, to our traditional cable package customers at no additional cost. We plan to launch the Paramount DTC inclusion offer to our customers around Labor Day. Earlier this month, ViX, the leading Spanish language DTC product from TelevisaUnivision became available to a large number of customers with eligible spectrum video packages at no extra cost. We launched Disney Plus Basic to TV Select customers as a DTC inclusion in January, and will begin to offer Disney Plus Premium to add free version of Disney Plus to customers as a $6 upgrade later this quarter. We also have planned to offer Hulu to our TV Select customers at the incremental retail price for Disney's duo basic bundle $2 in the fourth quarter. So our efforts to deploy a new hybrid DTC linear model first for the industry remain on track and we expect it to be fully deployed next year. Together with Xumo our goal is to deliver utility and value for our customers irrespective of how they want to view content and better and more stable economics for programming partners. But the associated DTCs have to be part of the full package service. Customers can't be forced to pay twice and if the DTC standalone pricing is less expensive at retail, then that's what we really should help programmers sell instead. Fundamentally, we believe that evolving the video business even if it isn't growing helps customer acquisition of retention, still has positive cash flow, it provides us with option value. And over time, we believe a high quality video product gives us the opportunity to reintroduce more value into the converged connectivity relationship. So stepping back, we're executing well on many multiyear transformational programs. We're growing EBITDA despite the loss of ACP and a competitive cycle by driving efficiency without impacting our service and sales capabilities. We remain fully focused on driving growth using our unique set of scaled assets and the highest quality products and services in order to create long-term value for shareholders. With that, I'll turn the call over to Jessica.
Jessica Fischer: Thanks, Chris. Let's turn to our customer results on slide 6. Including residential and SMB, we lost 149,000 Internet customers in the second quarter. While in Mobile, we added 557,000 mobile lines. Video customers declined by 408,000 and wireline voice customers declined by 280,000. As Chris mentioned, our second quarter Internet losses were primarily driven by the end of the ACP program. ACP program connects ended in early February. In May, the program's original $30 subsidy was reduced to $14. And in June, that subsidy was reduced to zero. We estimate that the end of the program's impact on our second quarter internet gross additions and churn drove over 100,000 of our 149,000 internet losses in the quarter. And from a financial perspective, there was an approximately $30 million headwind to second quarter revenue from onetime non-recurring ACP related items in the quarter. In addition, similar to the end of the Keep Americans Connected program in June 2020, many of our ACP customers had past due balances that had been fully reserved for accounting purposes. We took steps to eliminate a portion of those back balances for certain customers and put a portion of their remaining balances on payment plans. For certain customers with a low likelihood to pay post ACP, we have been recognizing revenue on a cash basis, resulting in slightly less revenue and less bad debt in the second quarter than we would have otherwise had. So far, we are performing well with ACP retention, but the largest driver of Internet customer losses associated with the end of the ACP program will be in non-pay disconnects, and they will occur in the third and fourth quarters, likely weighted to the third. We continue to do everything we can to preserve connectivity for former ACP subsidy recipients. We have a number of products and offers to assist those that have lost their ACP subsidy, including our Spectrum Internet Assist program, our Internet 100 products, and we've been offering all of our ACP customers a free mobile line for one year. And we continue to market offers targeted at low income customers, a segment that we have historically served well. Turning to rural, we ended the quarter with 582,000 subsidized rural passings. We grew those passings by 89,000 in the second quarter and by 345,000 over the last 12 months. We had 36,000 net customer additions in our subsidized rural footprint in the quarter. We continue to expect to activate approximately 450,000 new subsidized rural passings in 2023, about 50% more than 2023. We also continue to expect our RDOF build to be completed by the end of 2026, two years ahead of schedule. Moving to second quarter financial results starting on slide 7. Over the last year, Residential customers declined by 1.3%. Residential revenue per customer relationship grew by 0.4% year-over-year, given promotional rate step-ups, rate adjustments, and the growth of Spectrum Mobile, partly offset by a higher mix of non-video customers, growth of lower-priced video packages within our base, and some internet ARPU compression related to retention offers extended to customers that previously received an ACP subsidy. As slide 7 shows, in total, Residential revenue declined by 0.6% year-over-year. Turning to commercial, SMB revenue grew by 0.6% year-over-year, reflecting SMB customer growth of 0.2% year-over-year and higher monthly SMB revenue per SMB customer, primarily due to rate adjustment. Enterprise revenue grew 4.5% year-over-year, driven by enterprise PSU growth of 6.1% year-over-year. And when excluding all wholesale revenue, enterprise grew by 5.9%. Second quarter advertising revenue grew by 3.3% year-over-year, given political revenue growth. Core ad revenue was down about 2% year-over-year. Other revenue grew by 6% year-over-year, primarily driven by higher mobile device sales. And in total, consolidated second quarter revenue was up 0.2% year-over-year and 0.1% year-over-year when excluding advertising revenue. Moving to operating expenses and adjusted EBITDA on slide 8, in the second quarter, total operating expenses declined by 1.4% year-over-year. Programming costs declined by 9.8% year-over-year due to a 9.5% decline in video customers year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates. Other costs of revenue increased by 12.6%, primarily driven by mobile service direct costs and higher mobile device sales. Cost-to-service customers declined 4.2% year-over-year given productivity from our 10-year investments, including lower labor costs and lower bad debt expense, as we saw some favorability and our mobile bad debt as a portion of revenue due to an improved customer tenure and credit profile. And, as I mentioned earlier, a portion of our uncollectible billings offset revenue in the quarter. Sales and marketing costs grew by 1.9% as we remain focused on driving customer acquisition. Finally, other expense grew by 4.7%, mostly driven by an insurance expense benefit from the prior year quarter. Adjusted EBITDA grew by 2.6% year-over-year in the quarter, and when excluding advertising, EBITDA grew by 2.4% year-over-year. While we don't manage the business at a single product line P&L level, we continue to compute allocations internally, and this quarter, for the first time, our standalone mobile adjusted EBITDA was positive, even when including the headwind of subscriber acquisition costs and without the benefit of GAAP revenue allocation to mobile revenue. Our mobile profitability this quarter marks a significant milestone. It shows that we're on the path to establishing a mobile business that is very profitable. Overall, our goal is to deliver solid EBITDA growth, and we believe we can continue to do that even as we make significant investments in the business and face a challenging competitive environment and the end of the ACP program. Our expense management process is working with growing realization of impacts in the second quarter. We continue to expect accelerating EBITDA growth in the back half of the year, given our expense management initiatives, Spectrum 1 promotional roll-off, and political advertising revenue. Turning to net income on slide 9, we generated $1.2 billion of net income attributable to Charter shareholders in the second quarter, in line with last year, as higher adjusted EBITDA was mostly offset by higher other operating expense, primarily due to restructuring and severance costs and net amounts of litigation settlements. Turning to slide 10, capital expenditures totaled $2.85 billion in the second quarter, in line with last year's second quarter spend. Line extension spend totaled $1.1 billion, $37 million higher than last year, driven by our subsidized rural construction initiative and continued network expansion across residential and commercial green sales and market fill-in opportunity. Second quarter capital expenditures, excluding line extensions, totaled $1.7 billion, which was similar to the prior year period. For the full year 2024, we now expect capital expenditures to total approximately $12 billion, down from between $12.2 billion and $12.4 billion previously. Our reduced outlook for 2024 capital spending reflects lower internet and video customer net additions, including the impact of the end of the ACP program, which drives lower CPE costs. We're also actively managing vendor rates and construction materials to make our capital expenditures more efficient. We still expect line extension spend of approximately $4.5 billion, and network evolution spend of approximately $1.6 billion. Turning to free cash flow on slide 11, free cash flow in the second quarter totaled $1.3 billion, an increase of approximately $630 million compared to last year's second quarter. The year-over-year increase was primarily driven by higher adjusted EBITDA, lower cash taxes due to timing, and a favorable change in working capital. On that front, we've been managing the balance sheet to provide us better overall cash flow and increased flexibility. Over the last several quarters, we sold our towers portfolio, which generated almost $400 million in proceeds. We launched our EIP securitization program in the second quarter, which backs a new $1.25 billion credit facility at favorable interest rates. And we've been working with our vendor base to extend our payment terms, utilizing a supply chain financing tool to support our working capital favorability. We will continue to identify and capitalize on balance sheet opportunities to help fund our unique one-time capital investments. We finished the quarter with $96.5 billion in debt principle. Our current rent rate annualized cash interest is $5.1 billion, and we repurchased $1.5 million Charter shares and Charter Holdings common units, totaling $404 million at an average price of $271 per share. Given our long dated and 86% fixed rate debt structure, our sensitivity to higher rates is relatively low. If we refinanced all of our debt due in 2025 and 2026 at current rates, the impact to our rent rate interest expense would be less than $60 million. As of the end of the second quarter, our ratio of net debt to last 12 months adjusted EBITDA moved down to 4.32x. We expect to continue to move closer to the middle of our 4x to 4.5x target leverage range through the end of this year. And we remain fully committed to maintaining our split rated debt structure, including access to the investment grade market, given the significant benefits that it offers to all of our capital providers. We continue to be confident in the long-term trajectory of the business. We have the best products at the best prices in our industry, and we remain under penetrated relative to our long-term potential. That combined with the investments that we're making in the business and our expense savings initiative will continue to drive strong EBITDA growth and value creation for many years to come. And with that, I'll turn it over to the operator for Q&A.
Operator: [Operator Instructions] Our first question will come from Craig Moffett with MoffettNathanson.
Craig Moffett: Hi. Thank you. Perhaps no surprise. I'd like to drill down a little bit more on the ACP impacts. A couple of questions. First, to what extent are you seeing ACP showing up in reduced gross editions that is just lower market activity because new customers can't sign up for or ACP customers who are moving can't continue to sign up for the program even before you start to see non-pay disconnects. And then second, what impact is it having on ARPU? You reported 1.7% broadband ARPU the same as last quarter. Had it not been for ACP, could you just tell us what that would have been as you're starting to now lap some of the Spectrum 1 discounts that were included in the numbers in the past?
Chris Winfrey: Sure. Hey, Craig. I'll take the first one. Jessica can take the second. For ACP, we estimated the impact was well over 100,000 inside the quarter to net editions loss. And for us to say that means that we have a high level of confidence probably higher than that. So half of which was from voluntary churn and the other half was coming from reduced gross editions, as you mentioned, from low income segments that had been connecting at a higher rate at a much lower rate once ACP disappeared. Of course, we saw some of that impact already inside of Q1. And we saw the same inside of Q2. So that's the drivers inside there, about half and half. And it's really the combination of those when I mentioned that we saw a reversion to the pre-pandemic mobile only broadband category where you've seen that category increase, which is taking out volume from the marketplace in terms of a source of acquisition. It's temporary. It's one time in nature. And so as we've spoken about before, it's really about just managing through that one-time impact and trying to make sure that we're doing all the right things for preserving that base, and keeping them connected, which we're doing, but also making sure that we're making the right investments and the right moves for the business as usual underlying growth trajectory. Jessica on the ARPU.
Jessica Fischer: Yes. So Internet ARPU increased 1.7% year-over-year in the quarter. If you adjusted, Craig, for the $30 million in one-time ACP related items that I mentioned and for the impact of the mobile revenue allocation, that ARPU growth would have been 2.7%. I didn't incorporate the cash basis accounting impact that I mentioned earlier. It's small, and unless those customers do end up paying at a rate that's higher than our expectation, I think it recurs in revenue going forward. But so I think you would have been, but for those two items, that's a 2.7%
Stefan Anninger: Thanks Craig. Operator, we will take our next question, please.
Operator: Our next question comes from the line of Sebastiano Petti with JP Morgan (NYSE:JPM).
Sebastiano Petti: Hi, thanks for taking the question. I think, Chris, in the prepared remarks, you said you competed well against fixed wireless and fiber, even though their footprints are expanding. Given the prevalence of what we're seeing in terms of open access and other host cell provider getting into the mix and increasing the fiber availability, have you seen a demonstrable change in the fiber deployments year-to-date as you think about that insurgent or non-incumbent fiber bill to some extent? And again, just trying to think about that increase in open access and wholesaler, how does it change, if at all, how you're thinking about the competitive environment on a go-forward basis in terms of other converged players or options moving into your footprint?
Chris Winfrey: Sure. Look, the competitive fiber overbuild has maintained a relatively steady pace. If anything, it's slightly lower than what it had been. And so we don't see any dramatic change there. When I talked about maintaining our competitiveness means having a similar impact, despite the fact that you have an expanding footprint. So you could, if I was being bullish, I would argue that that's an improvement, and as opposed to just staying steady. And so we're competing well, both in the wireline overbuild space, which is more permanent, as well as the cell phone internet space as well. In terms of some of the experiments that you're seeing as it relates to wholesale access and whatnot, it's still a fiber overbuild at the end of the day. And there's still economics that need to be deployed. And those economics are, in my mind, are not very good. They haven't been for decades of the economics of an overbuilder on an existing footprint. So I don't think it, A, dramatically changes the outputs that they can provide because the economics aren't any different, and B, it's really small. What you're talking about that's been done is just a very small percentage of the U.S. footprint. So the ability to project products both from a sales and marketing and service perspective really is impacted by the ubiquitous nature of the technology that you have and the ability to provide those products in the marketplace. And so from our perspective, when we look at it and say, what's unique about us is we have a gigabit network deployed everywhere we operate. In addition to that, we're upgrading that wireline network to have symmetrical and multi-gig speeds everywhere, not just in redline pockets, but everywhere that we operate, and then you combine that with our WiFi and CBRS capabilities and a very strategic relationship that we have with a great partner in Verizon (NYSE:VZ), it gives us the ability to provide seamless connectivity, converged broadband everywhere you go inside of our footprint, and that's unique. The only other operator who has those type of capabilities really is Comcast (NASDAQ:CMCSA). And so I think that's the real strategic advantage for us, and it's not because we have that capability in 2%, 3%, or 5% of our footprint. We have it everywhere we operate, and it allows us to be loud in the marketplace, talk about not only the product advantages of having that seamless connectivity, but the ability to save customers hundreds and thousands of dollars really with a better product. And so I don't see anything that's really changed. Other than some of these joint ventures announcements that you've seen, if you really sit back and think about it from both a strategy and from a valuation perspective, I think it's flattering. It tells you the strategic asset that we have. And so if you take a look at the slide that we have on page 4 of the deck today, you think about everything that I said and our capabilities, and then you think about where others are trying to go, many of the MNOs, I do think that's flattering both from a strategic, from an operating and from evaluation perspective of what we have and what we're capable of doing. It has people's attention.
Sebastiano Petti: And if I could ask a quick follow-up on wireless, it sounds, I think you noted that even excluding the retention offer for the ACP subscribers, mobile lines would have been up. I mean, can you help us think about what you're seeing in terms of just the contract buyout and some of the other offers you have in the market, and does your maybe go-to-market need to evolve at all as we think about obviously fears or concerns about what an upgrade cycle might mean from the Apple (NASDAQ:AAPL) iPhone in the back half of the year. Thank you.
Chris Winfrey: Sure. Well, mobile wasn't just up. What I was saying is it was up quarter-over-quarter. We had a very good first quarter. It was clearly up even more this quarter. And if you excluded the benefit of the ACP mobile only, mobile retention offers, we still would have been better than a very strong first quarter. That reflects just the general momentum that we have, but also, we have evolved the product. And so we've rolled out the Anytime Upgrade Program, which is unique in the market. We have even though it sounds small, it's attractive to customers, service, and repair function that's, I think, competitive. And now with the phone balance buyout program, which is also pretty unique in the marketplace. And all of those rolled out sequentially during the course of the quarter and have continued to improve our selling capabilities along the way. I think that positions us well in any market. We've not been, I think, where you were going, we've not been, we don't intend to be in the business of subsidizing phones. But we do have really good programs that make it attractive for customers to not only come in to be a customer spectrum mobile, but also to stay with us because we have the ability through the Anytime Upgrade Program to really at a low competitive cost, keep them current with their models of phones now and in the future. And stating the obvious, the biggest advantage here beyond just the devices really is the ability to provide a higher quality, faster mobile service, seamless connectivity, and to be able to save them hundreds or thousands of dollars a year. I mean, if you think about our pricing at $30 for unlimited and $40 for unlimited plus on one line and each incremental line, it's really competitive. It's very good. So we're happy with where we are with the product. We will continue to evolve it. I think some of those feature sets that will evolve really include things like mobile speed boost, which ties to the capabilities that we have with WiFi and wireline, and the ability to have spectrum mobile as an SSID. So those of you in the New York and LA markets, for example, what you'll notice is as you travel outside of your home with Spectrum Mobile, an auto-authenticated attachment to Spectrum Mobile SSID, which boosts your speed wherever you go, and it increases your access and your reliability, which is the nature of seamless connectivity.
Stefan Anninger: Thanks, Sebastiano. Operator, we'll take our next question, please.
Operator: Our next question comes from the line of Jonathan Chaplin with New Street Research.
Jonathan Chaplin: Thanks, guys. Two questions. One just on broadband market growth for Chris, and then one on free cash flow for Jessica. Chris, could you give us a little bit more context around the ACP impact from lower gross ads in 1Q? I think you said it was sort of roughly the same as in 2Q, so maybe it was 50,000, but what I'm trying to get to is an understanding of what's going on with underlying growth. It looks like it actually improved for you a little bit sequentially, and so either broadband market growth in aggregate isn't getting any worse, maybe it's getting a little better, or you're just doing better on market share relative to your competitors. And we'd love to understand that a little bit better. And then Jessica, it sounded like from your discussion of working capital that this isn't a timing impact in 2Q. You've changed how you manage working capital, and so you should expect to be able to sort of retain this benefit to free cash flow as we go through the year. I just wanted to confirm that. And then do you have to get all the way back to 4.2x to 4.25x leverage before you would accelerate share repurchases again? Thanks.
Chris Winfrey: So Jonathan, there's I think a few derivatives inside of your question. And so let me try to give you what you're looking for in the way that we think about it. And inside of the first quarter, we had performed better relative to prior quarters and prior year on competitive switching. And so that was in the marketplace, so available subscriber ads and disconnects. But we saw, as you highlighted as well, once everybody had reported, we saw a significant reduction in the first quarter of this year in the available gross ads, a significant drop year-over-year and that was due to housing starts, rental vacancies, but also the removal of ACP for new connects, all of which driving your version to mobile-only back to pre-pandemic levels. That broadband market growth rate overall we still saw is significantly reduced for all those factors inside of Q1 but a dramatic drop, and so that put our performance in relative light given the overall market backdrop, a lot of which was one time in nature. In Q2, and while it's early because we don't have all the data, I think our evidence shows that for the first time and due to, again, all of the one-time factors and most dramatically the loss of ACP, the broadband market actually shrunk as a one-time event. And so if you put our performance and then our statements about relative competition in context with that, and I think we're doing pretty well. And that was the nature of the comments that I provided in the prepared remarks. I do think that, as I mentioned, moves will come back. It's hard to predict exactly when, but moves will come back, housing starts will return, apartment rental rates will go back up, and most importantly, the most dramatic effect is once you flush out the ACP impact between Q2 and Q3 predominantly, then you'll be able to get back into a much more normalized environment. And I think the product investments that we're making and the attractiveness of the value that we provide puts us in great position for when that volume returns, and we're doing everything we can in the meantime to preserve all the ACP customers doing really well, but at the same time making sure that we're ready to come out in a good light on the back end once the volume does pick back up.
Jessica Fischer: On the free cash flow side, Jonathan, so I think we had previously talked about working capital for the year, coming back to being in a place that was relatively flat. As I said, we're working on the balance sheet and trying to make sure we can extract appropriate cash from the balance sheet to support what we're doing across the business. I think that we'll probably do better than that sort of flat working capital expectation, but I'm not prepared to say by exactly how much. The variability in working capital has a lot to do with exactly how expense timing and capital timing lands over the course of the year, and so while I think that we'll get good benefits out of just the balance sheet management side, I'm not going to take up the total thoughts that we've had on working capital today. On your other question, sort of how do we think about, I think it was sort of a one and then the other. Do you have to get all the way back to the middle of your range before you accelerate buybacks? I'm in the same place that I was last quarter, which is that I think that we can continue to do buybacks over the course of the rest of the year and still do what we have said that we would do from a leverage perspective. And I don't think of it as do you have to do one and then the other. I'm pretty confident in the trajectory of the business for the second half of the year. And so, I think that we can have sort of good pacing on buybacks and meet what we've said about leverage at the same time. That being said, the capital allocation strategy hasn't changed. We still go after high ROI, organic investment first. We still look then at whether there's a creative M&A opportunity is next. And those come before sort of this balance sheet management and share buybacks that happens as the last set of priorities there. And so, we haven't given a guide around where we think that we'll go in terms of total buybacks. It's because we want to make sure that we maintain that flexibility to do what we think is most important for the business, which is to make the right investments to drive growth of the business going forward.
Stefan Anninger: Operator, we'll take our next question, please.
Operator: Our next question will come from Ben Swinburne with Morgan Stanley (NYSE:MS).
Benjamin Swinburne: Thanks. Good morning. Chris, I believe you guys took some cost action. I don't know if there were headcount reductions this year at Charter, but I know you guys have had a cost plan you've been working on. I'm wondering if you could just talk about what you guys are doing and how you're approaching that. And I think you had suggested you guys weren't going to touch any sort of customer-facing resources. So just give us a sense of where you are on that and your philosophy as you look through the rest of the year and how we might think about that impacting the financials. And then maybe for Jessica, I don't know if you have any visibility at this point into Q3, ACP impact from that 100,000, but if you do, I'd love to hear it. And try to understand the decline in bad debt. I know you touched on it in your prepared remarks. I don't know if that tells us something about your third quarter ACP expectation, or if you still expect cost of service to be flat for the year, we just want a little more color around those trends. Thank you both.
Chris Winfrey: Hey, Ben. So there's kind of three parts to that, which is, I'll start with the second one you had, is the Q3 ACP. I'll handle that. And Jessica can comment on bad debt and then cost reductions. Jessica can go through and I can tag team there a bit. But from a Q3 ACP outlook, we're not going to be providing any customer net additions guidance today, but for sure there's going to be, as we both mentioned, I think Jessica and I, that there'll be more non-pay disconnect in the third quarter. But there are a lot of other moving parts and we're competing well. I think that maybe the interesting tidbit here is maybe talking a little bit more about recent trends. June was oddly the best loss of the second quarter. And internet net ads trends in July have been similar to what we saw in June. Sounds great. But the reality is the ACP related non-pay disconnect activity hasn't started yet. And we'll know really more about sustainable payment trends than nothing to be scared of today, but sustainable payment trends really through August with the non-pay beginning then and trailing into a little bit into Q4. So when you step back, I know you know this, but ultimately this ACP transitions are onetime event. And so we're very focused on really isolating the ACP impact internally and evaluating not only obviously our performance on retaining those customers because we want to keep them connected. We think it's very valuable and we can, but also what's the underlying trend absent the ACP impact to make sure that we're getting better every day. So Jessica on the ACP does bad debt piece.
Jessica Fischer: Yes. So if you think about what happened in bad debt in the year-over-year, Ben, there's a few things going on. One really with tenure and credit profile in our mobile customer base that's been improving, particularly for customers that have EIP plans with us. And on the ACP front, we took a lot of bad debt along the way, particularly for customers who entered the ACP program and they had outstanding unpaid balances. And so those have really been reserved throughout the ACP program. I mentioned it in the remarks but there also is a portion of the ACP customer base where we have a very low expectation of payment for them and so instead of taking their revenue into revenue and then taking bad debt expenses and offset, we actually didn't recognize revenue for those customers. So when you see that it means that bad debt expense, I think absent that you might have had -- you would have had more bad debt expense if we had put that back in the other direction. And then the last point I mean we did have overall lower resi revenue in 2Q in the year-over-year and some mixed changes and so with other things being equal that also drives a little bit of downward pressure on bad debt. All of that is to say I wouldn't read anything sort of into what is it that you think about Q3 and looking at what happened with bad debt in the year-over-year, I think there are a number of factors going on there. As you think about then what's happening on the overall cost reduction side which I think was your other question. The expense management process is pretty extensive. While we're not doing anything that will impact our sales or service capabilities, we have things that are big things that are small some short some medium some long-term opportunities all across the business. We've made progress with some vendor cost reductions with reduced spend around discretionary categories like real estate and third-party services, some reductions to overhead expenses and implementing some tools to increase our efficiency and actually I think the benefits from those came a little faster into 2Q than what we had anticipated, but we're already realizing the benefits of some of the changes will continue to build on additional opportunities over time. As you look at the rest of the year, I think we had given some thoughts on our outlook for expenses. We had expected programming costs per video customer to grow in the 1% to 2% range year-over-year. I now expect that to be flattish year-over-year. We previously had said that we expected costs to serve to be flat with 2023. I now expect that to decline by 1% to 2% inclusive of bad debt expense. And in sales to marketing, I think we had said 2% to 3% growth. And at this point, I would expect us to be in the low end of that range, if not a bit below. I also, as an aside, just want to clarify something I said earlier. My comments on working capital. I want to be clear that the comments on working capital are on cable working capital. Mobile continues to have the detriment of the EIP notes. And so those will continue to be a drag, though the securitization plan that we did in the quarter does help that.
Chris Winfrey: And on the cost if you just take one a different layer of look, the, so Jessica's right, we're doing lots on vendor savings, overheads, organizational effectiveness lower growth environment, all that's true, but just want to make sure everybody understands that the key focus for us in terms of real permanent lasting and accelerating cost reduction is just to be a better service operator. So continue to invest in our frontline, have better tools, process and systems to make the investments that we've made in tenure. And we see that, and so we are having real results from some of the one time and permanent cost reductions, but we're also probably having bigger success on reducing the amount of service calls, reducing our truck roles, increasing the quality of the service that we provide, that's where the money's at. And then when you think about operating leverage, which is a term that you've used before the best way to have a better operating leverage is to have more customers and to have more products per household and have higher revenue. And that way you can, together, being a better service operator and having higher penetration of your products, you actually lower your cost to serve per customer, you lower your cost of capital per customer as well and you become a better cash flow operator. So all of those things still hold true. And it's why, when we talk about expense management, that we talk about really not doing anything that would impact sales or service, because that's the true efficiency opportunity and that's the opportunity to deliver long-term free cash flow and our views on that and our frontline hasn't changed at all.
Stefan Anninger: Thanks, Ben. Operator, we'll take our next question, please.
Operator: Our next question will come from Jessica Reif Ehrlich with Bank of America (NYSE:BAC) Securities.
Jessica Ehrlich: Question on video, I guess, can you talk about the take-up of direct-to-consumer in these hybrid linear offers? And you've mentioned a couple that are coming, Paramount Plus and Hulu, is there anything else on the horizon? And then secondly, you mentioned political advertising should pick up in the second half. Given the current political environment, can you give us some color and expectations and if that's increasing?
Chris Winfrey: Sure. On the first one, Jessica, the DTC take-up is going very well. The first one, I know a lot of people think about Disney deals in September, but we launched I think late in January on Disney Plus Basic and it's going well and it's growing every month. We're adding some additional features into it, which will be helpful to even further accelerate the monthly growth that we see. That includes, as I mentioned, in the prepared remarks, the addition of the Disney Plus Premium as an incremental add-on. That will be coming soon, as well as the Disney Duo Basic bundle of plus $2 for Hulu. So that allows you to have a comprehensive package the same way that exists inside of retail and that's helpful, it was always the design. But there's complexity in terms of implementing all of this, also because some of the authentication principles that vary between different operators in terms of credentials and TV everywhere and whatnot. But it's going well and accelerating, ESPN Plus, I didn't mention that on the call, it's also having very good take-up, it's high value into our RSN packages, it's a small portion of the base, but the penetration is going well. And Paramount Plus will launch soon and ViX we just launched and we've always had Max and so that has existed already within the TV everywhere authenticated universe and our expectation is over the next year or so that we'll have a fully baked set of products which really what we're working towards and the more scale we get there the more effective it's going to be. We're not sitting here saying that we're going to arrest completely the loss of video but I think what we are saying is to the extent we're going to put video on our broadband bill, it better have value and if it doesn't have value to the customer then we'd rather they just go take that through the direct-to-consumer applications and we need to be proud of what we're putting on the bill and that's not where the MVPD space has been in a long time as we see a path to being able to be proud of what we're putting on the broadband bill as a video product that it may be expensive but it has a significant amount of value and using that to drive the converge connectivity relationships. So while it may not be growing it's still really important and I think it can be very valuable to our converge connectivity relationships. In terms of what's up next, we're not going to go give a programming renewal schedule but we're optimistic that this has been adopted both from an understanding that the DTCs really do need to be included as part of the full video package. And that's actually better for programmers because of reduced churn and upsell opportunities into the ad-free versions of these products as well. And that look, at the end of the day, if a customer can go out and get the same product at a cheaper price in the marketplace, I think they should. I don't think we should ask them to pay more through us. And so those are some of the core principles that we've had. I'm not committing, but those are some of the bigger ones. And political advertising it's always, as you know, it's always a jump ball as to exactly where it's going to go. And it's evaluated on a state-by-state basis. And so you can't really say that it's an -- it's the same nationally everywhere. So it depends on some of the swing states. Admittedly the events of the past week have jumbled what you thought that might look like. And certainly when you take a look at fundraising and the volatility in what could be swing states, it looks like political advertising net-net nationally is going to be higher than what it probably would have been just a 10 days ago. But it doesn't mean it happens necessarily in the right states for us. And so we're keeping an eye on that. And it's nice when it happens, but it's one time in nature. And so that's why we always try to talk about our results with and without the impacts of political advertising. Because what is this year's windfall will be next year's headwind. And we want to make sure everybody's focused on the right thing, which is the underlying growth profile of the subscription business. Which includes the core advertising, which continues to do well with or without political advertising.
Stefan Anninger: Thanks, Jessica. Operator, we'll take our last question, please.
Operator: Our final question will come from the line of Peter Cipino with Wolfe Research.
Peter Cipino: Thanks and good morning. I have an ACP question that looks beyond the third quarter. Arguably, ACP has been history's greatest retention program for broadband operators and you took good advantage of it. Looking beyond the wave of involuntary disconnects in Q3 and not to say 2025, does that retention benefit go away? I mean, certainly it does. And then what needs to step up in its place or should we expect a slightly higher underlying churn rate attributable to those four or five million former ACP subs who go from having essentially no churn to maybe having a normal churn rate?
Chris Winfrey: Sure. Well, look, once upon a time there wasn't an ACP, but it's been a long time. When you think about, we had the, during the pandemic we had the, we were a big participant in the remote education offer, the Keep Americans Connected, the EBB, which evolved and became the Emergency Broadband Benefit, which evolved and became the ACP. And we've been a significant participant in all of those, as has the industry. I think we all have a lot to be proud of for stepping up and really driving those programs, but they didn't exist before. And broadband is a really important product. And from a charter perspective, we have ways to continue to address that marketplace. Before I go there, you asked about the market level activity. I do think that in an environment where ACP or an equivalent doesn't exist, that by definition you have more customers coming in and out of broadband based on affordability. That's rise up transaction volume, both from a non-pay disconnect, as well as from a gross ad sales perspective. When you have better products and better price, that can work towards your advantage. So it's not all bad from our perspective. And but we also have the ability to, at acquisition and for retention, offer unique products. Our Internet 100 is attractively priced. It's not for everybody, but it's affordable. We also, and you can pair that together with Spectrum One, so the ability to have a free mobile line for the first year, and then that line rolls to $30 after a year. If you think about a typical one-line environment or even in a typical two-line environment, the average cost of a line is over $60. And so even at retail rate of $30, we've built in a savings of $30 per month through taking mobile together with our attractively priced, high-powered broadband product. And that's as much, if not more, than the ACP benefit, which means that if you take our products, we can effectively -- we have the built -in ACP savings available to you when you really take full advantage of our product set. And so that is a product and a combination that didn't fully exist prior to all of these programs. And I think we can, by having a wider availability for low income population of these broadband offers, which we have together with our Spectrum 1 offer combined, I think we can save customers as much if not more than they were they're getting through ACP relative to the past. So I think we're in good position to be able to address the base. But the market activity, for sure, is going to be higher than what has been the past couple of years.
Stefan Anninger: Thanks, Peter. And that concludes our call. We'll see you next quarter.
Chris Winfrey: Thanks, everyone.
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