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spk07: Good day and thank you for standing by. Welcome to the Charter's first quarter 2022 investor call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I will now hand the conference over to our first speaker today, Stefan Anninger, sir, you may begin.
spk14: Good morning, and welcome to Charter's first 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 and also our 10-Q file 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 Tom Rutledge, Chairman and CEO, Chris Winfrey, our COO, and Jessica Fisher, our CFO. With that, let's turn the call over to Tom.
spk13: Thank you, Stephan. We continue to grow our business by offering superior converged connectivity products. During the quarter, we added 129,000 customer relationships and 185,000 internet customers. Customer relationship churn remains low due to current consumer behavior, while connect activity opportunities also remain low as a result. We continue to see very strong mobile line growth with net additions of 373,000. Over the last year, we've grown our mobile lines by nearly 50%. We now have over 4 million total mobile lines. Financials were also strong in the first quarter. First quarter revenue and EBITDA each grew by 5.4%. And when excluding a one-time payment, free cash flow grew by 9% year over year. As always, we remain focused on our primary goal of driving customer growth and market share, leading to higher free cash flow. We're doing that in a number of ways, including expanding our footprint with good returns on investment, upgrading our network to ensure that we're offering the latest and fastest high-quality connectivity services, and continuing to invest in high-quality customer service. And finally, investing in the mobile business to drive convergence of fixed and mobile connectivity products and earn a higher share of monthly household communications spend by saving customers money. Our rural construction initiative is also progressing as planned, and we've started to work in all 24 of the states where we won Rural Digital Opportunity Fund bids. Our multi-year, multi-billion dollar rural construction project will deliver gigabit high-speed broadband access to more than one million unserved rural customer locations across the country. Through RDOF, we'll add over 100,000 miles of new network infrastructure to our approximately 800,000 existing miles over the next five or so years. And our construction is not limited to RDOF commitments. We continue to build in other rural areas and are pursuing opportunities to receive other broadband stimulus funds. In addition, we regularly expand our network to additional residential SMB and enterprise passing wherever it's economically attractive. Ultimately, our rural construction initiative is not only good for the millions of rural customers that will finally have access to fast and reliable internet, but it's also good for charter and its shareholders. The expansion of our footprint will help us drive additional customer growth by growing customers in unserved and underserved areas. Demand for our customers for greater connectivity speeds and data throughput continue to grow at a very fast pace. During the quarter, internet customers who did not buy traditional video from us used approximately 700 gigabytes per month, more than 35% higher than pre-pandemic levels. Nearly 25% of those customers now use a terabyte or more of data per month. To meet that growing demand, We're both expanding the capacity and reallocating capacity within our network. And the technology to both expand and reallocate plant bandwidth is developing rapidly. Today, we're implementing high splits, or what we prefer to call spectrum splits, which allocate more plant capacity to the upstream. All use our DOCSIS 3.1 infrastructure. In turn, we're able to offer our customers higher symmetrical speeds and multi-gigabit speeds. Additionally, by expanding and reallocating plant capacity, we reduce our network augmentation capital spending, including node split spending going forward. The vast majority of our deployed modems are already spectrum split capable, allowing us to provide faster service to our existing customers without swapping out their CPE. We've been increasing the number of spectrum splits projects in our service areas, and we'll continue to do so. As the technology develops further, we'll shift our strategy dynamically to further expand the capacity of our plant and reallocate bandwidth as necessary to meet customer needs by deploying additional technologies, including DOCSIS 4.0, which will allow us to deliver even greater capacity, offering consumers the fastest and lowest latency connectivity products in a highly capital-efficient way. Driving customer and market share growth and free cash flow. In mobile, we continue to improve and enhance our products in a number of ways, differentiating our offering, helping to drive customer growth, and improving mobile business economics. In April, we began the market rollout of Mobile Speed Boost. Mobile Speed Boost allows Spectrum Mobile customers to receive speeds up to 1 gigabit per second on their Spectrum Mobile service devices when inside their homes, even when their provisioned wireline internet speed is less than a gigabit. The rollout of our first trial of our CVS small cells in full market area continues to progress nicely. In the first quarter, we completed the build-out of our mobile core network for the upcoming trial. We expect the trial to begin in the middle of next year and to offer faster speeds, a better all-mobile experience, all the while saving us costs. Ultimately, with our mobile product, we're offering to consumers a unique and superior fully converged connectivity service package while saving customers hundreds or thousands of dollars per year. And our share of household connectivity spend, including mobile and fixed broadband, is still very low. In fact, we capture well less than 30% of household spend on wireline and mobile connectivity within our footprint. So there's a large opportunity for us to increase market share by saving customers money. And through our latest offering, we can do that, which in turn raises, connects, reduces churn, and drives customer growth. Before turning the call over to Jessica, I wanted to make a few comments about the joint venture with Comcast that we announced earlier this week. Our joint venture will provide video delivered by apps, a competitive app store, on TV applications, and is capable of aggregation, navigation, search and curation, billing, and content security. It will give consumers, new devices, and content providers new opportunities to create customer relationships on a platform designed to help them sell video effectively. Comcast has created excellent IP for this venture, and we have high expectations that we can work together to continue its development and distribution. We have a history of success in our mobile JV operating systems, demonstrated by the fact that between our two respective mobile businesses, We added more mobile lines in the first quarter this year than the rest of the mobile industry added collectively. Now I'll turn the call over to Jessica.
spk01: Thanks, Tom. Let's now turn to our customer results on slide five. We grew total residential and SMB customer relationships by 129,000 in the first quarter. Including residential and SMB, we grew our internet customer relationships by 185,000 in the quarter. We continue to see record low combined competitive and move churn, which has reduced our selling opportunities, and very low non-pay churn across our footprint. Similar to the fourth quarter, we saw both lower internet churn and lower internet connects than in the first quarters of 2021, 2020, and 2019. And this was true across our footprint regardless of competing technology. Turning to video, video customers declined by 112,000 in the first quarter. wireline voice declined by 150,000, and we added 373,000 mobile lines. Despite the lower number of selling opportunities from reduced activity levels, we continue to drive mobile growth with our high-quality, attractively priced service. Moving to financial results, starting on slide six, over the last year, we grew total residential customers by 674,000, or 2.3%. Residential revenue per customer relationship increased by 1% year over year, driven by promotional rate step-ups and video rate adjustments that passed through programmer rate increases. These effects were partially offset by the same bundle and mix trends we've seen over the past year, including a higher mix of non-video customers and a higher mix of low-priced video packages within our base. Additionally, this quarter's revenue was negatively impacted by $20 million in adjustments related to Sports Network rebates, which we intend to credit to qualified video consumers. These rebates are also reflected in lower programming expense this quarter, with no impact to adjusted EBITDA. Excluding the impact of Sports Network credit I just mentioned, our residential ARPU grew by 1.2% year-over-year. Also, keep in mind that our residential ARPU does not reflect any mobile revenue or video programming pass-through increases announced late in the first quarter. As slide 6 shows, residential revenue grew by 3.7% year-over-year and by 3.9% year-over-year when excluding the Sports Network credit. Turning to commercial, SMB revenue grew by 4.6% year-over-year, reflecting SMB customer growth of 4.4%. Enterprise revenue was up by 3.7% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 6.5%, and enterprise PSUs grew by 5.2% year-over-year. First quarter advertising revenue grew by 11.5% year-over-year, or by 5.1% excluding political revenue, primarily due to our growing advanced advertising capabilities. Mobile revenue totaled $690 million, with $292 million of that revenue being device revenue. Other revenue increased by 5.2% year-over-year and includes two months of rural construction initiative subsidies totaling $19 million. In total, consolidated first quarter revenue was up 5.4% year-over-year. Moving to operating expenses and EBITDA on slide 7. In the first quarter, total operating expenses grew by $410 million, or 5.4% year-over-year. Programming costs declined by 0.4% year-over-year due to a decline in video customers of 2.1%, a higher mix of lighter video packages, a $20 million benefit related to Sports Network rebates that I mentioned, and $34 million of other favorable jobs favorable adjustments, much of which was not unique year over year. All of that was mostly offset by higher programming rates. Excluding both of the adjustments I just mentioned, programming costs grew by 1.4%. And looking at the full year 2022, we now expect programming costs per video customer to grow in the low to mid single digit percentage range versus mid single digits previously. Regulatory connectivity and produced content declined by 7.4%, primarily driven by lower Lakers RSN costs, lower video CPE sold to customers, and lower regulatory and franchise fees. The decline in Lakers costs was primarily driven by the delayed start to the NBA season in 2020, which drove more Lakers games charges into Q1 of 2021, making for an easier comparison this year. Excluding the RSN costs from both years, regulatory connectivity and produced content declined by 5.6%. And for the full year 2022, we expect regulatory connectivity and produced content expense to decline in the mid single digit percentage range versus 2021, primarily due to lower video CPE sold to customers and lower RSN costs given the abnormal Lakers game scheduled last year. Cost to service customers increased by 5.3% year over year. The increase was primarily driven by higher bad debt given unusually low bad debt in the first quarter of 2021, when bad debt was down $100 million versus the first quarter of 2020, benefiting from government stimulus packages. In fact, payment trends in the first quarter continue to be very good, and excluding bad debt from both years, cost-to-service customers grew by 1.8%, primarily due to a larger customer base, previously planned wage increases to $20 per hour starting wage for hourly field operations and call center employees, and higher health benefit and fuel costs. As the year progresses, prior year bad debt expense normalizes and should drive meaningfully slower growth in cost-to-service expense line during the second half of the year. Marketing expenses grew by 10.1% year-over-year due to higher labor costs driven by previously planned wage increases, and temporarily greater staffing levels as Charter completes the insourcing of its inbound sales and retention call centers with a focus on providing better service to new and existing customers. For the full year 2022, we expect marketing expense to grow in the mid-single-digit percentage range versus 2021, although marketing expense growth is likely to remain at elevated levels in the second quarter. Mobile expense totaled $760 million and were comprised of mobile device costs tied to device revenue, customer acquisition, and service and operating costs. And other expenses increased by 12.5%, primarily driven by a favorable, non-recurring adjustment in the prior year period, making for a challenging comparison this year, and higher labor costs. adjusted EBITDA grew by 5.4% year-over-year in the quarter. A quick note about inflation before moving on to net income. Certain costs of operating our business, such as labor and fuel costs, are currently subject to inflationary pressure. But given our previously planned move to a $20 per hour starting wage and our long-term relationships and contracts for goods and services, we haven't yet seen a significant impact on inflation in our P&L. I would also note that our consumers are experiencing inflationary pressure, but given the availability of subsidies for broadband and our focus on saving customers hundreds of dollars per year by switching to our converged connectivity product, we believe we're well positioned for the changing market. Turning to net income on slide eight, we generated $1.2 billion of net income attributable to charter shareholders in the first quarter versus $800 million last year. The year-over-year increase was driven by a non-recurring litigation settlement charge in other operating expenses for the first quarter of 2021 and higher adjusted EBITDA. Turning to slide nine, capital expenditures totaled $1.9 billion in the first quarter, just above last year's first quarter spend of $1.8 billion. We spent a total of $232 million on our rural construction initiative in the quarter. Most of that spend relates to design, walkout, and make ready, and as expected, has not yet resulted in significant passings growth. And the vast majority of that spend is accounted for in line extension. We spent $74 million on mobile-related CapEx, which is mostly accounted for in support capital and was driven by investments in back office systems. As slide 10 shows, we generated $1.8 billion of consolidated free cash flow this quarter, a decrease of $55 million or 3% year-over-year. Excluding a one-time litigation payment of $220 million made in the first quarter, free cash flow grew by $165 million or 8.9% year-over-year. Please note that in the second quarter, we'll begin making quarterly cash tax payments for fiscal year 2022. These payments are consistent with the cash tax outlook that we provided in our fourth quarter investor call. We finished the quarter with $94.9 billion in debt principal. Our current run rate annualized cash interest is $4.4 billion. As of the end of the first quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.43 times. We intend to stay at or just below the high end of our 4 to 4.5 times target leverage range. During their quarter, we repurchased 6 million charter shares and charter holdings common units, totaling about $3.6 billion, at an average purchase price of $600 per share. And since September of 2016, we've repurchased $60.4 billion, or nearly 42% of charter's equity. Our path to continue to grow our business remains strong, and we will do that by furthering convergence in our connectivity business, allowing us to capture additional share. focusing on expanding our footprint, and by continuing to improve the customer experience and extending customer lives. By executing on those items, we will drive customer and share growth, free cash flow growth, and shareholder value. Operator, we're now ready for Q&A.
spk07: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star, then the number 1. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question will come from Greg Moffitt with Moffitt. Your line is open.
spk10: Hi. Thank you. Well, I have a few questions if I could. First, with respect to broadband, the pace of homes past excluding RDOF decelerated a little bit. I'm wondering if you can just talk about the rate at which you expect homes passed for broadband to grow and how you think about that as a floor for broadband growth rate going forward. And then with respect to the JV that you announced with Comcast, Is there a vision where you take the Flexbox and actually make it your primary video delivery platform where all your video is IP and that you sort of reclaim that capacity? And then finally, one related question, Tom. I can't resist asking if you just want to comment on password sharing and a little bit of an I told you so. Yeah.
spk13: Well, yeah, I did tell you so. So, yeah, Craig, you know, the pace of broadband homes passed, I think, is an interesting driver of potential growth, and you're right to point it out. You know, over the last five years or so, we've added about a million passings a year, and that's comprised of new construction of housing developments, plus fill-in, plus... you know, plant expansion into areas where it's economic to serve passings that are contiguous to some of that development. And so that's, you know, that's a driver of future growth. There's really four drivers that drive the future growth of our broadband business, and that's a significant one. Another one is, you know, the household and growth, the growth in households using broadband, which is, you know, today in the mid-'80s, But I think that will continue to increase as digital literacy increases and people continue to want to be part of the connected world. And so I think that moves up to the vacancy rate over time. And we also have then this whole RDOF opportunity, which we've just begun to develop. We've just started to activate. the subsidized plant expansion through RDOF. And we've actually won quite a few bids at the state level. And, you know, there's $42 billion of additional funding that's going to be distributed probably next year for additional expansion into rural areas. And that's an opportunity of growth for us. And then finally, you know, we have the opportunity of, which we expect to realize, the opportunity of increasing our share of market of existing broadband customers. And we can do that by packaging, which we've always done successfully, our products into a value proposition that's better than what the individual component pieces that they're currently buying from various providers. And so the current mobile growth is a key factor in that opportunity. So that's how we expect to grow it. What's going on in the home's past marketplace? I mean, there are construction issues going on right now. There are supply chain issues that are affecting activations of housing developments and that kind of thing. But over the longer term, I think that that pace that we've experienced over the last five years continues. The second part of your question, about the JV and IP? Yeah, the answer is yes. I expect that incrementally most of our customer base will be all IP. And that spectrum will be recaptured and that's currently used over time and there's various ways of compressing that spectrum as you market your way into the IP space. And that that plant capacity that's being realized will be available to increase broadband speeds and or handle broadband capacity that's required as a result of the use of overall data. And lastly, on password sharing, yeah, we knew it's a problem. It's not just a problem for the company that's not controlling their passwords, but it's a problem for everybody in the industry because All that content that's used without anybody paying for it affects the supply and demand of all content, not just the provider that's selling the content, which diminishes the value of content for everybody, which is the point we have been trying to make for years.
spk12: So, next question? We'll take our next question, please. Thanks.
spk07: Your next question will come from Jonathan Chaplin with New Street. Your line is open.
spk03: Hi, morning, guys. Thanks for taking the question. I know traditionally you prefer not to give context around sort of like a forward-looking view of the broadband market. But given that we're just in an environment of heightened uncertainty, I'm wondering if you'd stray from your normal policy and at least give us some more context for what you're seeing in the market generally in terms of the move activity as we came out of 1Q into 2Q competition. Are you seeing an impact now that's more understandable from fixed wireless broadband And has that changed over the course of the quarter going into 2Q? And then, you know, how should we think about seasonality off of the result that you guys just produced in 1Q? Should we think of seasonality through the year as being the normal trend? Thanks.
spk13: Chris, why don't you take that?
spk11: Hey, Jonathan. We expected a question along these lines, and I have some thoughts. We expected the market to return to normal actually last year, including seasonality, so difficult to say. But as Jessica mentioned, transaction volume in the market, it remains low, particularly mover churn, which is a key source of net subscriber acquisition for us. There are some facts that put our lower year-over-year growth in context. Our churn rates of all kinds and across all footprint types remains at record lows. The pace of gigabit overlap increases within our footprint so far has remained consistent with the past few years, despite commentary about acceleration. So we have competition everywhere we operate. We always have. And our largest wireline competitor had negative residential wireline net additions in the quarter while we continue to grow. So, you know, compared to last year's first quarter with already low market activity, our gross addition rate in the first quarter of this year was lower in both overbuild and our non-overbuild footprint by the same amount. Together with record low churn, this illustrates the biggest driver remains lower selling opportunities from overall market activity and churn. Jonathan, there are additional factors which could also contribute to lower gross addition rates. First, lower household growth rates. Tom just talked about, which we, along with others, have seen. There's still a lingering pull-forward effect from the shift to our higher-quality broadband during the pandemic. It comes from DSL, VDSL, and mobile-only customers, which accelerated the conversion rates of that same base, which we would have seen today. Finally, the mix-related impact of a small increase in more competitive overlap on gross addition rates would be the smallest contributor and really no different than what we've seen in the prior years. We do not see, you know, I know it's a question, we don't see direct impacts from fixed wireless access in our churn or our gross additions. So does that mean, you know, could fixed wireless access be converting DSL and mobile-only customers that would normally come to us? You know, it's possible, and it would be hard to see at low volume across our entire footprint, but we would see that as a potential parking lot for conversion to our faster, more reliable, and more ubiquitously marketed and deployed broadband offerings. So we take all competition seriously and it's not new for us, but I don't believe fixed wireless access is having any material impact on us today when compared to the factors I mentioned. So overall activity levels remain low and we will trial different tactics to stimulate more competitive churn, but market activity and move return will return. And when it does, we expect our internet net addition rate to normalize. Our already very strong mobile line growth should get even better. with higher attach and upgrade rates to the fastest, and really the only real converged internet product in our footprint that also saves customers significant money. As Tom mentioned, our various construction initiatives should provide a larger recurring footprint expansion for customer acquisition as we get to the end of this year. So I don't have a guidance or an outlook, but I think those are the biggest drivers of what we're seeing today, and hopefully that's helpful to the question you asked. That's really helpful. I appreciate it, Chris.
spk14: Thanks, Jonathan. Peter, we'll take our next question, please.
spk07: Your next question will come from Brett Feldman with Goldman Sachs. Your line is open.
spk04: Thanks for taking the question. You've obviously continued to show great traction with the wireless net ads, even as your selling opportunity against customer gross ads has gone down. It looks like The recent adjustments you've made to pricing and packaging is resonating with the base. You're still going to market differently than the big three. They increasingly are looking at things like handset promos. They pack a lot of value into their higher tiers, whether it's tethering or true unlimited or video. So I guess I'm just wondering, how are you thinking about whether it makes sense to start going after the wireless consumer who values those things and the assessment you're doing as to whether the additional costs you incur would ultimately be worth it, and does that math start to change if you were at the point where you actually were putting a more significant amount of their macro traffic onto a CBRS network? Thank you.
spk13: Yeah, well, I think the, you know, Brett, the answer to your question is, We will use those tactics that make economic sense to us to drive our business and to drive our relationship growth in this mobile broadband space. And as I said in my comments, we have very good growth. And we have greater growth than the rest of the mobile industry currently. So we're on track and doing the right things currently from a marketing perspective, and we think we can accelerate that growth. So there are various tactics that you see people who sell wireless do, and they're all related to trying to create a value proposition for customers, and some of them cost more than others. You know, fundamentally, we think that our CBRS and our Wi-Fi offload technology continue to allow us to have low-cost mobile products with high capacity available to our customers, which gives us the ability to sell those products at value propositions for consumers, which ultimately is what we think drives our ability to drive market share. So I don't put any marketing tactic on the side and say we won't do it or won't Because we're not doing it today, we won't do it in the future. But our fundamental strategy is to use our network effectively and provide a high-quality, best-in-class service, better than anyone else, in fact, right now, in terms of speed capability, and sell that for a lower price. And we think that that value is what consumers will ultimately recognize. How we package that up in various marketing tactics, I think is open to what is successful. And we constantly experiment with marketing tactics to see what resonates best. But we think the core concept is the driver of our opportunity.
spk11: Fred, a good example of that. We have a premium plus $10 package in our mobile. So even that at $39.99, so our standard is $29.99 when you take two mobiles or more But at $39.99, the premium package, the take-up on it is very low. And the reason it's very low is for the reason that Tom just mentioned. Already, they get the fastest mobile product in the country through the standard limited offer that we have at $29.99. And because our network works better together with Wi-Fi, and you've got 85% offload with the nation's fastest broadband, and therefore the nation's fastest mobile, there really hasn't been much of a need or a desire, even at that attractive price point, to take what you would call a premium product. Thank you.
spk14: Peter, we'll take our next question, please.
spk07: Your next question will come from Phil Cusick with J.P. Morgan.
spk02: Hi, guys. Thanks. A couple if I can. First, I think, Tom, you said the mobile network trial is now in mid-23. Is that right and is that delayed? And what does that mean for CapEx this year, for mobile CapEx?
spk13: No, it's mid this year. If I said that, I didn't mean it.
spk02: It's mid-22. All right, that makes sense. Maybe I misheard. And then second of all, have you started to book RDOF revenue, and how quickly should we see that revenue come in from here?
spk01: Yeah, we did start booking RDOF revenue in Q1, so they're two months in for the total of $19 million. And the run rate on the RDOF booking will be at that, so it gets booked in over the 10-year period that we receive the funds. So we'll have it at that, you know, just over $9 million a month from now until 10 years from now.
spk02: Great. Thanks very much, guys.
spk14: Peter, we'll take our next question, please.
spk07: Your next question will come from Jessica Reeve-Ehrlich with BOFA Securities.
spk08: Okay. Thank you. I have two questions. A follow-up on the Comcast GP question. I think the press release said that you guys are investing $900 million. Over what time period is that? And how do you expect to monetize the offer? I think it starts next year. Is it mostly advertising or revenue splits? And then your margins on the cable side are over 42%. Where do you think peak cable margins will be? Okay.
spk13: Well, the opportunity, Jessica, is to create advertising revenue and to create transaction revenue on the product. So those are the money drivers, and that requires obviously having a full set of content opportunities and using your IP and your – marketing skills in a digital space to drive consumer activity and viewing. And so that's the opportunity from the platform from a monetization perspective. You know, our capital commitment, you know, we haven't disclosed that, but it's, you know, in the grand scheme of things from a development point of view, it's relatively minor, especially when you consider the CPE
spk01: business that we've always been in where we've actually had to buy CPE and this in in many cases will be a retail product so and lastly the last one was a question on margins and where we think yeah margins ultimately could go I mean it's hard to comment on margins in the context of our business because your mix of video product makes such a difference And ultimately, we're trying to sell the right mix of products to the consumer that drives the most cash flow per customer, which doesn't necessarily drive the most margin on a financial statement presentation sort of basis. So I would say on that one, it's hard to speculate on where exactly margins would go as a percentage But ultimately, we think that what we're doing by capturing additional share in the mobile market, using that and capturing additional share in the broadband market, which drives the most cash flow off of our assets and in our other services as well, we think that that's the right thing to do to drive cash flow for the business and to continue to grow regardless of what the margin line ultimately shows.
spk13: We don't manage the margins. We manage to return on investment. And so we try to generate as much cash on each asset that we deploy as we can. And it has really nothing to do with margins when you have a mix of products with different kinds of margins in them. And so it's only in a static environment that a margin – you know, a relative margin has any value as an analysis tool from our point of view.
spk11: You know, you can have a really high margin by not growing at all. Exactly. That hasn't always worked out for people.
spk08: Okay. Thank you.
spk14: Thanks, Jessica. Peter, we'll take our next question, please.
spk07: And your next question will come from Doug Mitchelson with Credit Suisse.
spk06: Oh, thanks so much. I think a few more questions around broadband, if you don't mind. The first is, how many DSL customers are left in your footprint, and what do you think the broadband penetration is overall in your footprint? How much is left to go from just more folks getting broadband? And a couple follow-ups.
spk11: Hey, Doug, this is Chris. Look, for competitive reasons, I don't want to go deep into, you know, the – the remaining broadband penetration. People have statistics. They know what's out there. There's still a sizable opportunity for us to grow the market, which Tom talked about. And in terms of DSL, it's declining, but there's still a decent base. You really need to think about not just DSL, but really the VDSL. That's really the new DSL. I talked a little bit about to the extent that fixed wireless access is building up potentially in the areas that we're moving into from a rural perspective. you know, that's in the future DSL pile or parking lot of subscribers that we can go acquire. So it's DSL today, it's VDSL, and it's inferior broadband product relationships that are getting created today that provides that fuel for growth for us in the future from a next standpoint.
spk06: And Chris, you mentioned, I think, relative to gross additions, no difference in competitive fiber footprints versus non-competitive fiber footprints. Is it the same for churn as well? I just wanted to confirm that sort of year-over-year churn changes are no different in the two footprints?
spk11: Yes, we see churn down in both types of footprints at a similar amount, and we see almost, well, not almost, the exact same reduction in gross addition rate in both overbuilt and non-overbuilt footprint, which really, you know, completely validates that this isn't a competitive phenomenon that you see in the marketplace. This is a market activity, a low mover churn environment, And we're stimulating in a lot of different ways. And some of that will have some success. But the bigger driver will just be when the market starts to normalize. So yes, you understood it correctly.
spk13: But another part of your question was, what's the overall broadband penetration? And if you take all those smaller speed, slow speed products, it's in the mid 80s. And as I said earlier, I think that goes up. toward the vacancy rate.
spk06: Great, thank you. And the last question I wanted to get to, and I appreciate you taking all the questions. Competitors have a variety of pricing and go-to-market strategies for broadband and mobile, and you actually have, I think, a difference yourself in how you would bill a broadband customer and how you might bill a wireless customer. I think wireless, no contracts and no taxes or fees. How are you thinking about evolving your pricing strategies, if at all, either in response to competitors or because you're finding more optimal ways to serve your customers?
spk13: Like I was speaking about marketing earlier, that's a form of price. We have lots of opportunity to mix and match various tactics to create value for customers. perceived value, but fundamental value is where we're really trying to drive our product, which is having superior products at lower prices than our competitors by doing smart investments and good technologies that allow us to have a lower cost structure and have a lower cost per bit, so to speak, available to consumers. both in the mobile space and in the broadband space and in the video space to the extent it's a separate business. And we can mix and match those value propositions a variety of ways depending on what we need to do to move customer perceptions about where the true value is in the product set. All right. Understood. Thank you all.
spk14: Thanks, Doug. Peter, we'll take our next question, please.
spk07: Your next question will come from Vijay Jayant with Evercore.
spk12: Thanks. I had one sort of a big question about the video business. Obviously, your video losses seem to buck the trend relative to some of your peers. Can you just talk about how much flex is left on these lower-tier offers that you can still put out to customers and any changes to sort of carriage minimums as you renegotiate programming deals? And then just for Jessica, you know, you call it a lot of, you know, trends on the cost side. I just wanted to ask some questions on them. On bad debt, are we back to the pre-pandemic levels? And then just on CapEx, obviously you talked about corks for cable. Should we assume art of CapEx sort of trend similar to this quarter in the low 200s quarter? Just for modeling purposes, thanks.
spk13: Jessica, do you want to answer the bad debt question?
spk01: Yeah, so if I start on the expense items, Vijay, the bad debt, we're not back to pre-pandemic levels. I don't expect us actually to go all the way back to pre-pandemic levels. The subsidies for broadband that are available in the market have eased the impact on consumers of sort of what happens in the economy and just made it easier to pay for services overall. And they were targeted, obviously, at those consumers who were more prone to go non-pay in the first place. So non-pay churn overall continues to be at near record lows. And I think that right now we haven't seen yet sort of moves back toward pre-pandemic levels. On the RDOF side, you know, I think that it's been – In the Rural Construction Initiative overall, I wouldn't expect it to sort of trend at a very steady level over time. There will be opportunities that we have to accelerate spend at points in time, and as we have those opportunities, because we think that continuing the build is important, we likely will take them. I think we've accelerated right now some of the kind of spend that I talked about happening in this quarter, the design and make-ready type expenses. We're trying to pull those forward so that we can be ready to deploy as quickly as possible, sort of, and to deploy more going into next year. That's not a change in guide sort of on where we think we're going for overall, but I think, as I said, when we talked about the billion dollars that we hoped to spend for the year, we could spend more or we could spend less than that, and it's all based on what we're able to do. We're going as fast as we can.
spk13: And with regard to video, why we're somewhat of an outlier, you know, we try hard, for one thing, and again, we try to put value where we can for the consumer and think that there's still opportunity in video. And one of the things that we've had success doing with is the creation of additional packaging and the mix of video products that we actually sell to consumers. And we're continuously improving the rights structures around what we're able to sell. And it's been difficult because of the way historically video has been packaged in this very fat, expensive bundle that's driven by sports rights costs. And we've been able to get some of the content out of that ecosystem and put into tiers, and we're successfully selling those. And I think over time, we'll be able to build a very nice video business.
spk12: Great. Thanks so much.
spk14: Thanks, Vijay. Peter, we'll take our next question, please.
spk07: And your next question will come from Ben Swinburne with Morgan Stanley.
spk09: Thanks. Good morning. Tom and Chris, I had a couple of related questions around competition and broadband. I'm not telling you anything you don't know. I think investor sentiment on cable is probably as poor as it's been since maybe the mid-2000s when you were getting overbuilt by BIOS and U-verse, particularly at Cablevision. Tom, do you see corollaries today to that period when you were running Cablevision and Verizon was building its network across half the footprint and how you compete and sort of navigate that overbuild? And then one thing that's happening, I'm sure you guys are aware, there's a lot of sort of tier two fiber overbuilds happening around the country. I'm sure there's some in your footprint. They're not massive, but a lot of private equity funded builds. We usually don't see cable companies acquire infrastructure assets in their footprint, at least in the U.S. I'd just be curious if you think that's long-term what happens here or not, for reasons that might be obvious, because it would seem that there's a lot of capacity being built now on the wireline side, and there'll need to be some rationalization, at least in some geographies long-term. Thanks for the thoughts.
spk13: All right. Well, in terms of sentiment, yes, there have been periods in my business career in cable where sentiment has gone up and down and my sentiment remains the same. And I think it's a great business and I think we have great opportunity to take and to continue to grow the business successfully. And so when everybody's euphoric, it's probably odd. And when everybody's pessimistic, it's odd. And I'm unchanged. And my experiences with Cablevision and other assets. I managed Time Warner assets as well prior to that, and I've managed competition. My first job as a general manager in 1980 was in Overbuilt, actually. And so I have lots of experience with it and lots of success in growing our businesses in that environment. So there's nothing unusual about what's going on now. And actually, from a competitive environment. It's pretty much unchanged, the pace of what's been going on, you know, notwithstanding that there are some small builds going on elsewhere with private equity, as you say, and that, you know, LEC expansion has continued, but it hasn't gone up in pace. So, you know, and we do quite well, regardless of whether we're in a physical competition with a wireline builder or whether we're in competition with satellites or whether we're in competition with a fixed wireless asset, we're pretty comfortable that, you know, we can continue to drive a value proposition and continue to grow our customer relationships. So my sentiment's unchanged. And, you know, are there opportunities for us to buy some infrastructure companies that would help us make our network better because they happen to be in the right place?
spk11: There probably is. Yeah, I'd add to that, you know, Ben, you've seen it as well in Iran for a while. The history of these tertiary overbuilders is pretty, you know, pretty demonstrated as well. My experience is they all start out with a rosy story and they get a lot of capital going in and the early penetrations because there's something new in environment start to look good and As long as you can sell fast enough, you can do okay as a return. But the history is that they all go bankrupt, and they end up having to be recapitalized. And so I think there's that repeat that takes place every so often in the marketplace. And so you see some of that. And our job is just put our head down, be competitive like we always have, and go dig out customers and continue to develop product pricing and packaging that people can't replicate. Yeah. Like Tom, I'm about as optimistic as you could be about where the business continues to go.
spk09: Great.
spk13: I was optimistic last year, and I was optimistic the year before that. I still am.
spk09: We're out of consensus now, Tom. Thanks, Ben. Thank you.
spk14: Thanks, Ben. Peter, we'll take our last question, please.
spk07: Your last question will come from Michael Rollins with Siri. Your line is open.
spk05: Thanks and good morning. Just to follow up on a couple of things. First, just curious if you could share more of a timetable on the pace of broadband network upgrades for certain percentages of your coverage footprint when you think of the opportunity to increase upload speeds as well as to expand download speeds. And then secondly, as you consider A number of factors, rate environment, stock price, the company's view of forward growth. Under what circumstances would you revise the current capital allocation plan and take net debt leverage targets higher or lower? Thanks.
spk01: I guess I'll start on the leverage target question. You know, if I think about where we are right now, rates have obviously increased versus where they've been in the recent past. In historical context, I think that rates are still quite low. And so maybe not a little bit, but in line with where we'd expect them to be. From a growth perspective, as you just heard from Tom and Chris, I think we continue to be quite optimistic about our growth opportunity. And on the sentiment side, you know, our stock is trading at a multiple to free cash flow even that's just in pretty low compared to where we've been. And so I think that we're happy with where we're sitting, targeting the high end of our four to four and a half times leverage ratio. We obviously continue to evaluate over time. It would be hard to sort of break out what scenario exactly would cause us to move off of that space. But I think that we're happy with where we are and we'll continue to target at that level.
spk13: And in terms of the pace of upgrades, We're actually doing multiple upgrades in various parts of the country right now, and we're pacing ourselves in such a way that we're learning how to do it really effectively. The interesting thing about our capacity to do these upgrades is that they're quite simple electronic upgrades. They're relatively inexpensive, and we can do them rapidly across as much of our footprint as we need. do and we're just actually putting ourselves in a position right now so that we can execute at the pace we need to execute given where the demand for that kind of capacity will exist and we haven't really forecasted that publicly in terms of how fast we're going to do that.
spk14: Thanks Mike and Peter we're going to pass it back to you. That concludes our call. Thank you very much.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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