Charter Communications, Inc.

To all sides on hold, we appreciate your patience and ask that you continue to stand by. Your conference will begin in a few moments. Music Please stand by, your program is about to begin. If you need assistance during your conference today, please press star zero. Hello and welcome to Charter Communications first quarter 2023 investor call. We ask that you please hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I will now turn the call over to Stephan Anninger.

Good morning, and welcome to Charter's second quarter 2023 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the financial information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K and our 10-Q filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. On today's call, we have Chris Winfrey, our President and CEO, Tom Rutledge, our Executive Chairman, and Jessica Fisher, our CFO. With that, let's turn the call over to Chris.

Thanks, Stephan. During the second quarter, we added 77,000 internet customers, and we continue to benefit from our Spectrum One offering and our network expansion initiatives. We also added 648,000 Spectrum mobile lines. At the end of the second quarter, we had over 6.6 million total mobile lines. Over 11% of our internet customers now have mobile service, and we expect mobile penetration to meaningfully grow over the next several years. Spectrum Mobile is the nation's fastest mobile service. We see mobile lines as an extension of our Wi-Fi and seamless connectivity service, and we expect our increasing convergence capabilities will contribute to further Internet growth. We're pleased with the progress of our growth initiatives and our performance in the second quarter, and we maintain EBITDA despite the significant employee investments we made through 2022, which will start generating growth benefits later this year. We remain focused on our three key strategic initiatives, evolution, expansion, and execution, each of which is designed to help us grow our business, and each of which remains very much on plan. Our network evolution plan is progressing well and offers us significant benefits. First, it'll allow us to maintain our fastest internet and Wi-Fi service claims in front of our customers and competitors everywhere we operate. With symmetrical and multi-gig speeds via DOCSIS 4.0, and the ability to provide 25, 50, or even 100 gigabit per second speeds with fiber on demand. This evolution path also creates fallow upstream and downstream capacity for years, driving lower node split capital. And by upgrading the actives and amplifiers and nodes and converting analog optics to digital, we lower our future operating and maintenance expenses, all at a very low cost, much of which is funded from capital and operating cost savings over time. Unlike telco companies who prioritize more attractive footprints for their upgrades, our deployment is across our entire footprint. The cable industry's nearly ubiquitous deployment of a tremendous amount of spectrum to each home will provide the scale platform for software and product developers to create new bandwidth intensive, low latency, high compute services. This uniform deployment of network capabilities is what cable's always done to lead the development of new technologies on our networks at scale. And that unique approach is what has and will maintain our competitiveness into the future. So our network evolution is good for the communities we serve, and it's good for Charter. So far, the execution of this large fiscal upgrade has gone well, and capital costs are coming in on target. Excluding the benefit of any network savings, we continue to expect to spend $100 per passing. Our converged product offering also continues to evolve. Spectrum One is performing well in the marketplace, It offers the fastest connectivity and includes differentiated features like mobile speed boost and spectrum mobile network, each of which run on our advanced Wi-Fi product. Today, over 45% of our internet customers have our advanced Wi-Fi product, and over 75% of our mobile customers now attach to the spectrum mobile network outside of their homes, providing higher speeds with more reliability to customers with lower cost to charters. Spectrum One also offers significant savings for customers, with market-leading pricing at both promotion and retail. We're excited for the upcoming release of the Zumo product, which I believe will be an industry-leading platform for customers to access all of their linear and DTC video content with unified search and discovery. Together with our Spectrum TV app, the most viewed linear MVPD streaming service in the U.S., Zumo will be our go-to-market platform for new video sales. We're currently conducting field trials of the product, and we remain on track for deployment later this year. Our expansion initiative with subsidized rural construction is also on plan. Penetration gains and subsidized rural passings continues to grow at a better pace than planned. Charter is the largest and fastest growing rural provider in the nation. Our scale and reputation as a rural builder positions us well for winning additional state and local funds, and we hope significant BID infrastructure funding. Although the rules and recommendations from NTIA on BID funding differ from successful programs currently deployed by the states in which we operate, we'll work with key stakeholders and government officials to reach a place where the rules are still conducive to private investment. And finally, we remain committed to the execution of our core operating strategy, which prioritizes customer experience and satisfaction, driving faster customer growth. We continue to see the benefits of our investments in training and tenure, including better employee retention, higher quality service transactions, and better sales yields. Additionally, the increasing digitization of our customer service platforms will further reduce transactions. There's been a lot of discussion about what artificial intelligence and machine learning could do to improve products and business models. Charter already uses advanced analytics and machine learning in various stages and forms across sales, service, and network operations. And we expect to continue our investments in AI, machine learning, and digital service in ways that meet customers where and how they want to receive service and continually enhance tools for our sales and service employees to simplify their jobs. Ultimately, AI will improve both customer and employee satisfaction and enhance our operating efficiency by driving fewer physical service transactions, lower cost, and lower churn for years to come. Our operating strategy is focused on running our business for long-term value creation for our shareholders, which includes two of the cable industry's most successful investors. Simply put, our operating strategy is founded on having great products, pricing, and packaging that creates value for customers and is very difficult for competitors to replicate, so that we get more products into each household and drive more penetration across the network, which lowers our cost to serve. And then combine that with investments in high-quality service which also increases our competitiveness to acquire more customers. We have a great team here at Charter, and we're committed to disciplined execution and investment in this operating strategy, which we believe is good for customers, employees, and the communities we serve, and will drive significant long-term value creation for shareholders. With that, I'll turn the call over to Jessica.

Thanks, Chris. Let's turn to our customer results on slide six. Including residential and SMB, we added 77,000 Internet customers in the second quarter versus 38,000 in the prior year period when excluding last year's Internet disconnects related to the transition from EBB to ACP. Video customers in the second quarter declined by 200,000. Wireline voice declined by 221,000. And we added 648,000 mobile lines. Internet churn remained near record lows for a second quarter and flat year-over-year, and Internet gross additions improved year-over-year. The year-over-year improvement in Internet net additions was driven by tailwinds from our rural construction initiative, the continued success of our Spectrum One product, better sales yields from higher tenured employees, and a slower pace of fiber overbuild in our footprint during the quarter. Despite the year-over-year improvement in net ads, overall market activity remains well below pre-COVID level, partly driven by very low move rates. We also continue to see some impact from fixed wireless access competitors in the price-sensitive customer segments of residential and SMB. As Chris mentioned, our Spectrum mobile products continue to perform well in the quarter. The majority of new lines continued to come from existing Internet customers, though the percentage of lines coming from new customers continued to increase and was higher than what we saw in the first quarter. Port-ins from other carriers, as a portion of our gross additions, are essentially the same today as they were prior to the launch of Spectrum One, despite much higher mobile sales. And with good usage on those promotional lines and unbeatable quality and value at a $30 retail price point, we expect the lines to perform well as long-term customers. Turning to rural, subsidized rural passings growth accelerated in the quarter with 68,000 passings activated, and we continue to expect approximately 300,000 new subsidized rural passings this year. Additionally, costs are coming in as planned, and we have the labor, equipment, and supply necessary to execute our build. We continue to bid on additional subsidies, In addition to RDOF, we've now won over $700 million in state subsidies for over 300,000 passings, with a gross billed cost of approximately $1.7 billion, and a per-passing cost to charter net of subsidies of approximately $3,200. As Chris mentioned, we also look forward to the BID bidding process, assuming the right regulatory conditions. Moving to financial results starting on slide seven, over the last year, residential customers grew by 0.2%, with new customer growth driven by internet partly offset by video-only customer churn. Residential revenue per customer relationship declined by 0.3% year over year, given a higher mix of non-video customers and growth of lower-priced video packages within our base, partly offset by promotional rate step-ups, rate adjustments, and the accelerated growth of Spectrum Mobile. As slide 7 shows, residential revenue declined by 0.3% year-over-year. Turning to commercial, SMB revenue grew by 0.2% year-over-year, reflecting SMB customer growth of 1.7%, partly offset by lower monthly SMB revenue per customer, primarily due to a higher mix of lower-priced video packages and a lower number of voice lines per SMB customer. Enterprise revenue was up by 3.2% year-over-year. Enterprise PSUs grew by 6.2% year-over-year, and excluding all wholesale revenue, enterprise revenue grew by 7.2%. Second quarter advertising revenue declined by 16.5% year-over-year due to less political revenue. Core advertising revenue was down 3.5% year-over-year due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew 28.5% year-over-year, driven by higher mobile device sales. And in total, consolidated second quarter revenue was up 0.5% year-over-year, and up 1.1% year-over-year when excluding advertising. Moving to operating expense and adjusted EBITDA on slide eight, in the second quarter, total operating expenses grew by $48 million, or 0.6% year-over-year. Programming costs declined by 7.8% year-over-year due to a decline in video customers of 5.1% year-over-year, a higher mix of lighter video packages, partly offset by higher programming rates. In the second half of 2023, we now expect year-over-year growth in programming costs per video customer to be similar to the growth we saw in the first half of 2023. Other costs of revenue increased by 15.4%, primarily driven by higher mobile device sales, other mobile direct costs, and higher RSN costs driven by more Lakers games, partly offset by lower ad sales costs. Cost to service customers increased by 3.6% year-over-year, driven by adjustments to job structure, pay, and benefits to build a more skilled and longer-tenured workforce, resulting in lower frontline employee attrition compared to 2022. and additional activity to support the accelerated growth of Spectrum Mobile, which is partly offset by productivity improvements, lower service transactions per customer, and lower bad debt. As we mentioned last quarter, our employee attrition has declined more quickly than we expected given the programs we discussed at our December investor meeting. In response, we lowered our normal hiring in the first half of this year, and our overall headcount is now normalizing with increasing overall tenure and quality. Longer term, we continue to expect to see additional efficiencies in cost-to-service customers as a result of our continuing lower service transactions, service tenure and digital service investments, proactive maintenance, and network evolution investments. Sales and marketing costs grew by 3.6%, primarily driven by higher staffing across sales channels and the accelerated growth of Spectrum Mobile. and other expenses declined by 0.4%, driven by favorability and insurance expense, mostly offset by higher labor costs. Adjusted EBITDA grew by 0.2% year-over-year in the quarter. Turning to net income, on slide 9, we generated $1.2 billion of net income attributable to charter shareholders in the second quarter, down from $1.5 billion last year, with higher adjusted EBITDA more than offset by additional interest expense. Turning to slide 10, capital expenditures totaled $2.8 billion in the second quarter, above last year's second quarter spend of $2.2 billion. The increase was primarily driven by higher spend on line extensions, which totaled $1.1 billion in the second quarter of 2023, compared to $693 million in the second quarter of 2022. The increase in line extension was driven by Charter's subsidized rural construction initiative, and continued network expansion across residential and commercial greenfield and market fill-in opportunity. Second quarter capital expenditures excluding line extensions totaled $1.8 billion compared to $1.5 billion in the second quarter of 2022. We spent more on upgrade rebuild, primarily due to our network evolution initiative, and support capital was higher, primarily due to investments in information technology systems. For the full year, we continue to expect capital expenditures excluding line extensions to be between $6.5 and $6.8 billion. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, capital expenditures excluding line extensions as a percentage of revenue should decline to below 2022 levels and continue to decline thereafter. And we expect 2023 line extension capital expenditures to reach approximately $4 billion. We continue to expect 2024 and 2025 line extension capex to look similar to our outlook for 2023 at approximately $4 billion per year. And our 2024 and 2025 line extension capital expenditure expectations assume we win funding for or otherwise commit to additional rural spending, including beans. As slide 11 shows, we generated $668 million of consolidated free cash flow this quarter versus $1.7 billion in the second quarter of last year. The decline was driven by higher capex, mostly driven by our network expansion and network evolution initiatives, and higher cash taxes as we became a full federal cash taxpayer in 2023. We finished the quarter with $97.8 billion in debt principal. Our current run rate annualized cash interest is $5.1 billion. And as of the end of the second quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47 times. We intend to stay at or just below the high end of our 4 to 4.5 times target leverage range. During the quarter, we repurchased 1.1 million charter shares in Charter Holdings Common Units, totaling about $400 million. at an average price of $341 per share. While our goal is to grow the business in the long term, our focus on execution is driving operating leverage in the business even now. When you take out the noise from political advertising, EBITDA grew by 1.3% year over year in the quarter, which means that we were more efficient despite significant mobile growth and a one-time step up in labor investments. And we believe our financials will improve as we move later into the year, with additional revenue growth in Internet and mobile that will begin showing in Q4, and lower service costs per customer as we realize the 10-year benefits of our investment in employees and lap last year's labor step-up. Longer term, we also expect to see continuing benefits in operating expenses from further digitization, network improvements, and benefits of programs like proactive maintenance. We're well poised for the future. Operator, we're now ready for Q&A.

Thank you. At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Again, that is star 1 to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Ben Swinburne with Morgan Stanley. Your line is open.

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

Sure. Uh, Hey Ben, uh, there's actually a lot in there. Um, the, uh, So on Spectrum One, we launched Spectrum One at the beginning of October last year, and so you'll have the beginning anniversary date start occurring then. The usage on these is high, and if you think through the comments and Jessica's prepared remarks, these are really good customers. And when you put the internet, Wi-Fi, and mobile together, you can't get that product, you can't get that quality, and you can't get that pricing anywhere else inside the marketplace. And even if you just took a look at it as mobile standalone, at $30 at retail pricing, that's unmatchable. And to have that with the fastest mobile product in the marketplace, I don't see any reason to think that we're going to have difficulty managing through those roll-offs. Now, that doesn't mean that you'll have to evaluate and make sure that you're poised to handle and address customer questions, but I think it sticks. We'll also have... you know, quietly in the marketplace this time last year, beginning in late July and through August, we did do some testing. So we'll have the opportunity as we go through the course of this quarter to perfect any reactions that we have from customers in small scale along the way. And so I think we're well set up to do that, always have. And so I think we're in good position. Could we have a small amount of turn potentially, but I don't think it's going to be material given the quality and the value that we're providing in, and I think we've found something that sticks. I don't know that Spectrum One will be permanently our end-state convergence and seamless connectivity branding and platform. It's working well today, but we're going to continue to try things in the marketplace because I think we have a technology and a structure and capability that none of our competitors can really replicate in the marketplace, and I think that product and seamless connectivity will stick, and I think the value is very high to customers. On video strategy, there hasn't been a fundamental change in our video strategy. We're losing the least amount of video customers of any of our peers or competitors. The reason that we've been able to do that is for two reasons. One is that we have flexibility and we've tried to use that wisely in a way that is valuable to consumers to create products, pricing, and packaging that'll stick. And secondly, I think we have a high-quality video product. If you think about our capabilities, if you want live TV, if you want DVR video on demand, if you want expanded basic, which is the majority of what we sell, or you want smaller packages, if you want that inside the home, outside the home, across multiple devices, cloud DVR, no set-top box, Roku, Apple TV, or on your iPod, all of those things exist. And there's not many providers who can provide that breadth of content and that level of functionality across the marketplace. The product is good and is designed for the vast majority of people in the marketplace. The issue has been price. And the fact that programmers have required us to take and provide content that customers may not necessarily watch or value and at the same time increase the pricing. And so You know, as we've talked about in the past, you've priced out a large number of customers out of the marketplace through that strategy by the programmers. And at the same time, they've gone around and sold that same content at a lower price in a less secure environment. So they've devalued the same content and that creates a structural problem for the business. We've always thought that if we had the ability to create packages and we had better security in the marketplace of the content that these programmers have that we could sell more video, and that would be good, obviously, for customers. It'd be good for the programmers, ultimately, and it'd be better for us. But that'll take a fair amount of leadership in the programming space to be able to get to that environment. What we found in the RSNs, which was part of the question that you asked, is that prior to Diamond entering into a restructuring environment, we'd already created the capacity to have significant flexibility with our packages. And we've achieved that across the RSN space for the vast majority of the country, and we're rolling out versions of our Select Expanded Basic with and without RSNs. We'll be doing that shortly, which does exactly what I just described, and it enables us to have lower cost video packages for those who are not interested in RSNs because we have that flexibility. And I think as a result, we'll sell more video. And then if you think about the deal that we just did or announced in RSN ourselves with the Dodgers and Lakers, we took our own medicine. We increased the flexibility to an affiliate dramatically. And at the same time, we announced that we would launch eventually a direct-to-consumer app But not just in the marketplace, but it'll be available to all affiliates, including DirecTV and including to our own customers. We think that's a model, both having flexibility as well as access to the DTC for the affiliates that could have some legs going forward and create packages that are valuable to consumers and actually allow us to sell more video. Zumo. since you asked about that, really is an extension of what we've been doing already. Two-thirds of our video sales today are without a set-top box, meaning they're going on to Roku, Apple TV, Samsung TV, or other platforms. And the concept around Zumo was to, through a joint venture with Comcast, have an ownership in an independent entity, which is Zumo, that provides better functionality than exists for customers today, where they can integrate all of their DTC, SVOD, and linear services in a single place with unified search and discovery with a voice remote. And so that will be our platform of choice to deliver to our video subscriptions going forward. And ultimately, I expect us to provide that to some broadband customers over time as well. And that'll be good for Zumo as an independent platform, but I also think it provides functionality to our connectivity customers and we can provide the level of video services to our customers through our connectivity packages. So the financial implications of that, this will be an attractively priced box for customers as well as for us. I don't expect any material change to our capital expenditure outlook as a result of that. We've already been on a path where the equipment revenue that we've historically had through QAM set-top boxes has been on decline. So this kind of continues that path. So I think the the financial implications are not that material.

That being said, the margin from the video product has shrunk over time. Our position has been that we're not willing to lose money in video. We believe the product's valuable for our customers. We're continuing to seek out ways that we can continue to provide those products in the way that people want, but to do it while still generating some financial return. And whether that's in the form of set-top box revenue or in the way that we package the product overall, ultimately we're continuing to try to defend having margin in that business.

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

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

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

Thanks, guys. A couple. Nice margins of the quarter. Jessica, you mentioned headcount. Can you remind us of the expected trend in cost in the second half of the year and into 2024? How will those be impacted by rural initiatives and that headcount sort of normalizing? And then can you talk about the cadence of CapEx for the balance of the year and into 2024? So all encompassing that line extensions and regular way business. Thank you.

Yeah. So first on the expense side, you know, I gave some outlook in the first quarter investor call during the Q&A regarding cost to service expense and sales and marketing expense growth. And that really, that outlook hasn't changed. I think we'll have a difficult comp in other expense in Q3 because there were lower corporate costs in the third quarter in 2022. But aside from that, I think what we have said already continues to be true about the trajectory on the expense side. In terms of capital expenditures and timing across the year, our rural construction initiative now I would say is spending at a more consistent pace than has been the history of the business. And so I think you saw there was somewhat more CapEx loaded into the front half of the year this year relative to our outlook for the entire year than what you would often see in a year. I would expect because that rural build sort of has to continue at a pace over time that you will see that greater level of consistency in CapEx across the quarters with maybe less back-end loading into Q4 than what you've seen us do in the past. And I would expect that as well as we continue sort of into next year. The pace of the build on the network evolution and the rural activity will just keep a base level of CapEx in the business that might have been that might have had more of a seasonal trend previously.

Thanks, Jessica.

Thanks, Phil. Shelby, we'll take our next question, please.

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

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

So the price adjustment in August is a $5 retail internet increase for flagship and above customers. But it's coupled with a new auto pay discount of $5. So customers who are currently on auto pay or who opt into auto pay are won't see a change in their overall price for Internet. There's a lot going on in ARPU. If we move into Q3, we'll fully lap the April 2022 rate adjustment, which included pass-through video programming expenses. You'll have that August price adjustment. And similar to recent trends, I mean, when you talk about the reduction in ARPU on a per-customer basis, it's really... the headwind from the lighter mix of non-video customers and lower-priced video tiers that's driving that, and that obviously, I think, continues going forward. If you move into Q4, you'll start to see the Spectrum 1 promotional roll-off and have sort of the continuance of the other factors that I talked about, but that'll be partially offset by lapping the November 2022 internet-only rate adjustment. I think that we've had fairly consistent growth in ARPU if you look at the internet ARPU growth. And I think ultimately our strategy is never to sort of grow the business just based on price. We aim to have competitive prices and to have good penetration because of that on our footprint. But that doesn't mean that we're sort of immune to the inflation impacts and that where it's appropriate, we don't take adjustments in the market, which I think is what we've tried to do, but tried to do in a way that's prudent and consistent with our overall strategy.

John, I think Jessica said it, but the $5 would not apply to anybody who's already on promotion and only be at retail and it would To the extent that somebody is or becomes on auto pay, that won't pass through. So it's not that material in the end. On ACP, our strategy is to respond to the governmental request from the White House, FCC, and Congress of using this program. And we've been, I think, the most successful at doing that. of providing a way for new customers to get into broadband or in a low-income space, as well as for existing customers to be able to stay in the broadband space through times of affordability issues, meaning coming in and out of the market through non-pay churn. We've been very successful doing that at the request of the government, and it's worked very well for those customers. I do think that there's some questions around it being renewed. It has bipartisan support, and so we're hopeful that it will be renewed. I think it's been a very good and successful program. And so it's brought in some new customers, particularly early on through EBB and ACP, and we've been able to also have existing customers benefit from staying in broadband through that program. To the extent that it went away, many of these customers were existing broadband customers, both for new and existing customers. Bless you. For new and existing customers, we have programs. We've always had programs like Spectrum Internet Assist and low-income programs that we can accommodate in dealing with that at the back end. I'm hopeful that's not the case and that it gets renewed because I do think it's a successful program.

Thanks, John. Thank you. We'll take our next question, Shelby, please.

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

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

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

I think there's also a fallacy in trying to oversimplify it too. There's a tremendous amount of activity that's taking place in the course of a year, in the course of a quarter with acquisition, retention, bundle allocations, rate increases in the past, rate increases in the more current period. You know, there's a very complicated model that goes there. In the end, it was two and a half percent, I think, ARPU growth in internet year over year, despite some of the allocation differences. And given the fact that we're growing and taking share in both in all parts of our footprint, I think we're really pleased with that mix and that outcome, and if we can accelerate particularly the growth as we get through later part of this year, I think we'd be very happy with that. Tied to that, your second question, Jonathan, was Spectrum One and pull through. The point that was being made is that a higher portion of our mobile is coming from new customer connects through Spectrum One, and that is very promising. Still, the majority of our mobile connects are coming through existing customers, but the portion of which is coming through new connects is increasing, which means that it's having an effect in the marketplace. The real key for us is to be able to educate customers about what seamless connectivity is, what gigabit wireless can provide. It's, in essence, a new category, and that takes time to resonate, which is why I said in section one, is our first iteration of convergence and seamless connectivity and it's going well. And I think that bodes well for internet and I think it bodes well for mobile and it bodes well for convergence for us over time.

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

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

Great.

Thanks, guys.

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

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

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

Got it. On the seasonality side, you know, market activity, including move activity, continues to be quite low. And because of that, it's really difficult to predict what we might see in terms of seasonality going forward. We really think that the drivers inside of this Q2 are sort of other factors, which include tailwinds from our rural construction initiative, the continued success of Spectrum 1, the performance of the sales force, particularly higher sales yields and the slower pace of fiber overbuild that we saw. And so I would think more about those and sort of less about the seasonal patterns as you try to interpret what happened with our Q2 results. Your second question was cash taxes. Thank you. On cash taxes, there are two payments inside of Q2. Q2 is the natural high watermark for the cash tax payments, and I think you should anticipate that our total cash taxes are consistent with the guidance that we've previously given and that those remaining payments are spread between Q3 and Q4. You don't have that same phenomenon of the two cash tax payments in any other quarter.

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

Thank you. We'll take our next question from Greg Moffitt with Moffitt & Newthamson.

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

Sure. So, look, I'd start by saying that any time you have your competitors that continue to talk about you on their earnings call, I take that as a compliment. The second thing I would say is clearly some of their data, they're not really good at producing it. It's not accurate. The third thing I would say is that in Jessica's prepared remarks, she mentioned the level of port activity is at or better than it was even prior to the Spectrum One launch. So we feel very good that these are not only good and high-quality customers, the majority of which are broadband customers today. So they resemble the marketplace, and the product is very attractive. It's selling in very well, and it's going to stick very well. We look forward to seeing that develop over the next few quarters. On the mobile margin, you had done some work. And at your conference, I mentioned that if we thought your work was wrong, we would have let you know. And so that hasn't changed. And that was based off of some of Verizon's disclosure as opposed to ours. Right now, we have a significant amount of customer acquisition. And so we have the cost of acquiring those customers and we have the cost of operating those customers. And we don't always have the full revenue attached to those customers just yet. And that'll start to occur beginning in October and just grow from there. So the overall profitability of the mobile product, if it were a standalone product, which it's not, is good. It's very good. But it's also at the same time, I want to be careful not to be dragged into it. It's never how we thought about that product. It's really an extension of our broadband product and seamless connectivity and a broadband product that none of our competitors can deploy ubiquitously across their footprint. So you've got to think about the broader profitability. But if it were a standalone product, the profitability is good and our expectations have continued to move in that direction.

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

Thank you. Thanks, Craig.

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

We'll take our next question from Vijay Jain with Epicor. Your line is open.

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

Let me, you know, Jessica answered this before, and so let me just add, I guess, some additional color to it. The Of course, we still had college disconnects and we had snowbirds effect as well coming out of Florida. It's just the level of activity is a bit more muted compared to what it was pre-COVID. And what we've seen over the past couple of years is the visibility for us, and it appears for everybody, has been a lot less around seasonals in Q2 and Q3 than it was pre-pandemic. So I think we want to be careful about how far we get ahead of our skis and letting people look out to Q3 and say that there'll be the pre-pandemic pop. I think the point that Jessica was trying to make is seasonality aside, the underlying trends are very good through Spectrum One, through the rural construction build, our competitiveness, and I'll come back to that, the fiber overbuild that's at a slower pace. But even in the areas that have fiber, which is in some sense a larger amount of fiber than it had been in the past, we're performing better in those markets. than we did even just a year ago. And so we feel good about seasonality aside, the underlying trends. And I guess since we're on it, it's what everybody wants to hear. If we haven't said it already, our goal is still to have higher net ads this year than it was last year. And so instead of focusing on quarters, we'd like to focus on just the overall trajectory and the long-term trend, and it's good.

Thanks, D.J., Thanks, CJ. Thanks. Shelby, we'll take our next question, please.

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

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

Hey, Brian. It was in the materials. The subsidized rural construction is 26,000 internet net ads inside the quarter. On CBRS, we are at a full commercial launch inside of a market today, and it is going well. And on that basis, and making sure that the handover times, which are working very well right now, can continue to perform like that at scale, then we'll set next year the basis for a broader CVRS rollout. I don't want to spook people either. We're going to be very focused on deploying that CVRS where there's a high and fast ROI. We have a number of other accretive projects that are going on right now through network evolution and expansion. And so we're very cognizant of the overall CapEx bill, but we're going to build that in a measured way across our footprint, fully deploy the CVRS and the markets that we've acquired over time. And But we're going to do it in a way that's very targeted and generates fast returns. Your third question was around portfolio spectrum. Can't imagine why you're asking that, but being sarcastic. We have a very strategic, good, perpetual MVNO relationship with Verizon. And the economics, as everybody knows, are very good. That means, and combine that with what we were just talking about before, the ability through better and better Wi-Fi and through CVRS over time to have the vast majority of the traffic continue and increasingly be over our network with faster speeds means that we have the ability to at least the macro cell towers at an attractive rate and not be in the business directly of having to Continue to build those towers densify those towers and acquire additional spectrum I think it's a capital light model that really works well for us And I think it's a model that as you can see has worked very well for Verizon our partner as well So I think it's symbiotic and and I would never say never, you know We'll always take a look at things as they come up But we haven't felt the need to be in the macro cell tower construction densification and spectrum acquisition business at scale.

Okay, great. Thank you, Chris.

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

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

Thanks, and good morning. I was just curious to follow up on just the mobile discussion with a couple questions on some of the segments. One of the comments is that 11% of Internet customers are taking mobile, which would infer almost two lines per account. Just curious if you're starting to see more of a shift to multi-line and family plan adoption of your mobile services, and if there's a significant opportunity to take up the number of lines per account over time. And then on the SMB side, are there some opportunities to accelerate the mobile gains there where they've been running at about $15,000 to $20,000 per quarter? Thanks.

So, Michael, you're right. The opportunity for us to continue to increase the lines per customer is high. As you know, certain customers have multiple lines inside the household that are on different EIP plans and timelines, and so our success has been using the high value and high speeds that we have in the mobile product to acquire as many lines up front in the household, and then over time, the opportunities to upgrade those other lines that are on different cascading EIP timelines. So that's working well, and the opportunity is to continue to grow, not just penetration of broadband customers, but to add new seamless connectivity customers through Spectrum One, but also to increase the number of lines per household which, as you know, increases the stickiness of the product over time. It increases the overvalue that we provide because of the significant savings. The second question you asked is on SMB, and I think we're doing a good job there, but I think we can continue to do even better over time, and I think it's still early days in the SMB space, but we can add value there the same way that we do in residential and attack the space.

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

That concludes today's teleconference. Thank you for your participation.