Charter Communications, Inc.

Hello, and welcome to the Chartered Communications Q3 conference call. We ask that you please hold all questions until the completion of the formal remarks, at which time you'll be given instructions for the question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I'll now pass you over to Stephan Andrew.

Thanks, Operator, and welcome, everyone. The presentation that accompanies this call can be found on our website at ir.charter.com. I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, which we encourage you to read carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements. On today's call, we have Chris Winfrey, our President and CEO, and Jessica Fisher, our CFO. With that, let's turn the call over to Chris.

Thanks, Stephan. During the third quarter, we added 63,000 Internet customers as we continue to benefit from growth in both our existing footprint and new subsidized rural footprint. We also added nearly 600,000 Spectrum mobile lines benefiting from our Spectrum One offering. At the end of the third quarter, we had over 7 million total mobile lines and over 12% of our internet customers now have mobile service. We expect mobile penetration to meaningfully grow over the next several years as the quality and the value of our converged connectivity service gains wider recognition. Revenue is essentially flat year over year with some temporary headwinds within the quarter. and adjusted EBITDA grew at 0.7% year-over-year, moving past the low point last quarter. We expect that upward trend to continue as we realize the benefit of our operating investments. More importantly, we're making significant progress against the multi-year strategic initiatives we outlined late last year. Our footprint expansion initiative remains on track. We expect to add approximately 300,000 new subsidized rural passings in 2023 and to accelerate that pace in 2024. Our penetration gains in subsidized rural passings continues to grow at a better than expected pace. At the 12-month mark, our rural builds are achieving nearly 50% penetrations, faster than our initial expectations. Our execution initiative also continues to progress, and we remain committed to prioritizing the customer experience. We continue to see the benefits of our investments in employee tenure and training, including better employee retention, higher quality service transactions, and better sales yields. Additionally, the increasing digitization of our service platforms for both customers and employees will further reduce transactions, driving higher levels of customer satisfaction and employee satisfaction, driving tenure and quality. And finally, our evolution initiative, which is comprised of our network evolution project, our convergence efforts, and our video product transformation, all of which remain on track. Our network evolution project continues to progress well and will allow us to maintain our fastest Internet and Wi-Fi service claims in front of customers and competitors everywhere we operate. Unlike the telcos, which prioritize the most attractive footprints for upgrades, our multi-gig speed offerings will be available across our entire footprint. Our network evolution is good for the communities we serve, and it's good for Charter. And excluding the benefit of any savings that result from the project, we continue to expect our network evolution to cost a very low $100 per passing. We're very much on target. Whether we finish our network evolution initiative by the end of 2025 or mid-2026 will really depend on the supply chain for distributed access architecture components and managing annual capital spend given the larger customer growth opportunity and construction speed of RDOF, where we're ahead of the build requirements and will end up with more passings than originally expected, state grants, and hopefully bead passings. However, I want to reiterate and be very clear that where state bead rules are not conducive to private investment, we will not participate in those states. Our converged product offering also continues to evolve and succeed. Spectrum One is performing well and offers the fastest connectivity with differentiated features like mobile speed boost and the Spectrum mobile network. Spectrum One also offers significant savings for customers with market-leading pricing at both promotion and retail. Finally, turning to the evolution of our video product, earlier this month we launched our Zumo platform across our entire footprint. This industry-leading video platform allows our customers to access their linear and direct-to-consumer video content with unified search and discovery within one easy-to-use interface. Combined with our Spectrum TV app, the most viewed linear MVPD streaming service in the US, Zumo is now our go-to-market platform for new video sales. In September, we announced an agreement to carry Disney's linear networks and direct-to-consumer services for our customers. This new hybrid distribution model is good for consumers, and we believe a significant step forward for the video ecosystem. For Charter, the agreement adds value to our video packages, and better aligns linear content in DTC apps, which will be included for free in our video products. We also maintain flexibility to offer lower-cost packages. Disney gets broader distribution of its DTC products with ad revenues from our video customers and upgrades subscriptions to ad-free. We'll also sell Disney's DTC apps to our Internet customers, including via Zumo, over time. Together with Disney, we created a glide path to bridge from linear video into new growth with both linear and DTC services. Disney and ESPN were a key first step to repairing the video ecosystem, but our goal is to have a product that is valuable and that we're proud to sell. We plan to modernize all of our distribution agreements upon renewal in a way that works for customers. That means packaging flexibility, value, and not asking customers or us to pay twice for similar DTC and linear programming. If programmers insist on customers paying twice, we just won't carry those channels. but, you know, we'd still be happy to sell their content in an a la carte app, same way as they do. Our goal is to modernize these agreements quietly and seamlessly for our mutual customer base. Our new hybrid distribution model, combined with Zumo's content-forward interface, provides a clear path to solve key customer issues of choice, value, and utility with seamless linear DTC and DSLOD integration and advanced search and discovery functionality. For charter and programmers, this creates a state-of-the-art video marketplace supported by our scaled distribution, sales, and service infrastructure. And we believe a glide path to broader distribution, better economics, and more choice for everyone. Through expansion, network evolution, convergence, video transformation, and investing in quality, we are executing successfully the strategy we laid out last December. Our strategy remains to provide the highest quality products we then price and package in customer-friendly ways to drive higher penetration of our services across our footprint. We then combine that with investments in high-quality service, which also increases our competitiveness to acquire more customers. Ultimately, continued execution of our strategy will drive significant long-term value for shareholders, and we continue to make good progress. Before handing the call over to Jessica, I want to note that earlier this week, we announced Tom Rutledge's plan to retirement and and that Eric Zenterhofer is reassuming the non-executive chairman role at Charter. I'm pleased that Tom will remain as Director Emeritus and grateful to Tom, Eric, and our full board, including two of the most successful cable investors in Liberty Media and Advanced Newhouse, for their work to achieve a smooth CEO transition for Charter. Jessica?

Thanks, Chris. Let's turn to our customer results on slide five. Including residential and SMB, we added 63,000 internet customers in the third quarter. We estimate that approximately 15,000 third-quarter Internet disconnects were driven by the temporary loss of ESPN in September. Video customers declined by 327,000 in the third quarter, with about 100,000 video disconnects driven by the Disney programming dispute. The overall impact to customer relationships was less than we expected, facilitated in part by the wide availability of over-the-top alternatives. The loss of Disney programming occurred both at the beginning of football season and in the midst of a programming cost pass-through and the launch of our new auto-pay discount incentive on internet. Nonetheless, operationally we handled the Disney dispute very well. But our billing and retention call centers were not fully back to normal until early October, so there was lingering customer net ad impact early in the fourth quarter. Turning to mobile, we added 594,000 mobile lines in the third quarter. Wireline voice customers declined by 286,000 in the third quarter. Overall market activity, turn in gross ads, remains well below pre-COVID levels, partly driven by persistently low move rates. We continue to compete well in the portion of our footprint that is overlapped by fiber, but we also continue to see some impact from fixed wireless access competitors in the lower usage and price-sensitive customer segments of our residential and SMB businesses. That product remains slower and less reliable than what we can deliver and will be additionally constrained as consumers demand more and more data. In fact, high data usage customers that switch to fixed wireless have a higher propensity to return to our internet service. Despite our Disney dispute, third quarter residential internet churn was at a new record low for third quarter. Our Spectrum mobile product also continued to perform well in the quarter. The majority of new lines continue to come from existing internet customers, though the percentage of lines coming from new customers has continued to increase. Port ends from other carriers as a portion of our gross additions grew year over year, despite much higher mobile sales. We also continue to see healthy data usage on our Spectrum One promotional lines and remain confident that these lines should perform well as long-term customers. In the third quarter of last year, we launched Spectrum One pilot programs in a handful of markets. The pilot program customers reached their 12-month anniversary during the third quarter of this year, and incremental churn on those lines was small, and even less than we expected. Turning to rural, subsidized rural passings growth accelerated in the third quarter, with 78,000 passings activated, and we continue to expect approximately 300,000 new subsidized rural passings this year. As our RDOF build has progressed, we have identified roughly 300,000 adjacent passings along the way that are not in the census block groups we want, but we will add to our network as we complete the RDOF build. Because of these adjacent passings, we now expect that our RDOF initiative will yield a total of 1.3 million passings to be constructed over a multi-year period. And while labor and equipment costs have both increased, we expect the average net cost per passing of these 1.3 million passings to be similar to our original RDOF net cost per passing estimate. We don't expect any potential B build subject to what Chris mentioned to begin until 2025. Moving to financial results starting on slide six. 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 0.6% year over year, given a higher mix of non-video customers, growth of lower-priced video packages within our base, and $63 million of residential customer credits related to the Disney blackout, partly offset by promotional rate step-ups, rate adjustments, and the accelerated growth of Spectrum Mobile. Excluding Disney-related credits, residential revenue per customer relationship was flat year-over-year. As slide 6 shows, in total, residential revenue declined by 0.3% year-over-year. Excluding Disney-related credits, residential revenue grew by 0.3% year-over-year. Turning to commercial, SMB revenue declined by 0.9% year-over-year, reflecting lower monthly SMB revenue per SMB customer primarily due to a higher mix of lower-priced video packages and a lower number of voice lines per SMB customer. These factors were partly offset by SMB customer growth of 1.3% year-over-year. Enterprise revenue grew by 3.7% year-over-year, driven by enterprise PSU growth of 5.9% year-over-year. Excluding all wholesale revenue, enterprise revenue grew by 5.5%. Third quarter advertising revenue declined by 20.3% or $97 million year-over-year due to less political revenue. Core ad revenue was down 1.8% due to a more challenged advertising market, partly offset by our growing advanced advertising capabilities. Other revenue grew by 28.8% year-over-year, driven by higher mobile device sales. In total, consolidated third quarter revenue was up 0.2% year-over-year. and up 1.5% year-over-year when excluding advertising and the impact of the $68 million in total Disney-related customer credits. Moving to operating expenses and adjusted EBITDA on slide 7, in the third quarter, total operating expenses were approximately flat year-over-year. Programming costs declined by 9.6% year-over-year due to a decline in video customers of 6% year-over-year a higher mix of lighter video packages, and a $61 million benefit related to the temporary loss of Disney programming in early September. These factors were partly offset by higher programming rates. We now expect that for the full year 2023, programming costs per video customer will decline by approximately 3% year over year. Other costs of revenue increased by 15.2%, primarily driven by higher mobile device sales and other mobile direct costs, partly offset by lower regulatory and franchise fees and lower ad sales costs. Cost to service customers increased by 3.7% year-over-year, driven by previous 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. Those were partly offset by productivity improvements, including from tenure investments, lower service transactions per customer, and lower bad debt. Sales and marketing costs declined by 1.4%, primarily driven by lower labor costs, as we've lapped our prior year employee investments in sales and marketing. Overall, while we certainly had some additional overtime in our call centers, given the Disney dispute, it was not a material expense driver this quarter. Finally, other expenses grew by 2.5%, driven by labor costs. Adjusted EBITDA grew by 0.7% year-over-year in the quarter. Turning to net income on slide 8, we generated $1.3 billion of net income attributable to charter shareholders in the third quarter. up from $1.2 billion last year, driven by higher adjusted EBITDA and lower other operating expense, partly offset by higher interest expense. Turning to slide nine, capital expenditures totaled $3 billion in the third quarter, above last year's third quarter spend of $2.4 billion. The increase was primarily driven by higher spend on upgrade rebuild due to our network evolution initiative. Higher spend-on-line extensions driven by Charter's subsidized rural construction initiative and continued network expansion across residential and commercial greenfield and market fill-in opportunities. And higher CPE driven by the purchase of Zumo devices for our launch earlier this month. For the full year 2023, we now expect capital expenditures to total approximately $11.2 billion. Capital expenditures excluding line extensions should total approximately $7.2 billion, higher than our previous expectation. The increase reflects additional Zumo CPE purchases and an acceleration of network spend related to future high split markets, including inventory accumulation and other preparation activities, like walkout and design and proactive equipment swap-outs of both DTAs and MPEG-2 boxes. As Chris noted, we continue to expect to spend approximately $100 per passing to evolve the network to offer multiple gigabit speeds. There has been no change to our longer-term network evolution CapEx outlook. We also continue to expect 2023 line extension capital expenditures to total approximately $4 billion. We are working through our 2024 operating plan right now, Given the greater subsidized rural passings and construction opportunity we currently see, we may partially fund that opportunity by very modestly slowing our network evolution plan, as Chris mentioned. And as we complete our 2024 plans, we will provide a more detailed outlook on our fourth quarter 2023 call in January. I want to highlight that capital expenditures excluding line extensions and network evolution as a percentage of total revenue have remained consistent since 2021. And following the completion of our network evolution initiative, capital expenditures excluding line extensions as a percentage of revenue should decline to below 2022 level, which has important long-term cash flow implications. As slide 10 shows, we generated $1.1 billion of free cash flow this quarter versus $1.5 billion in the third quarter of last year. The decline was primarily driven by higher capex, mostly driven by our network evolution and expansion initiatives. A couple of brief comments on working capital and cash taxes before turning to the balance sheet. Excluding the impact of mobile devices, we now expect our full year 2023 change in working capital to be negative by a few hundred million dollars, given the timing of capital expenditures and lower than expected accrued programming at year end. On cash taxes, we did have a lower cash tax payment in the third quarter, which is just a timing difference. The full-year cash tax outlook, which I provided during our fourth quarter 2022 call, still stands. We finished the quarter with $97.6 billion in debt principal. Our current run rate annualized cash interest is $5.2 billion. As of the end of the third quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.45 times, and 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 2 million charter shares and charter holdings common units, totaling $854 million at an average price of $421 per share. Our 2023 EBITDA growth has been pressured by significant investments we've made in the future growth of our business. As we move toward 2024, pressure on our EBITDA growth will begin to abate with growing transaction efficiency as we benefit from building employee tenure and easier comps if we have now lapped the impact of those employee investments. Lower transactions in our mobile business, which drive down our per-customer cost of service, And building as we move into next year, revenue growth acceleration from the roll-off of our mobile free line offers and positive impact from political advertising. In addition, faster pacing of our rural build should bring additional positive impact to customer net additions next year. In the longer term, the competitive impact and operational efficiencies from our network evolution will drive a stronger broadband business. Convergence momentum will improve our churn and generate financial growth for both broadband and mobile. And transformational changes to the video business can enhance the value of our product for our connectivity customers. The investments we have been making and will continue to make are set to drive the growth of our business going forward. Operator, we're now ready for Q&A.

At this time, if you'd like to ask a question, please press star five on your touch tone phone. You may remove yourself from the queue at any time by pressing star five. Again, that is star five to ask a question. We will pause for a moment to allow the questions to queue. Thank you. Our first question will come from Jonathan Chaplin with New Street Research. Your line is now open.

Thanks. Two quick questions. Starting with broadband, it looks like you're the progress in the new markets, the rural markets that you're pushing into is great. The 12-month penetration there is accelerating, which is fantastic. But it seems like the core markets are progressing a little bit more slowly than you expected. And I'm wondering, Chris, if you can give us some context for what was different from what you maybe expected in the core markets as a function of just slower pull-through from Spectrum 1 or greater pressures from fixed wireless broadband or something else. And then I'm wondering, you know, sort of taking a step back, whether you can give us a view of what you think the video business ultimately looks like five years down the line. It's sort of, I can imagine an environment, a world where you're collecting a platform fee that's lower ARPU but very high margin from a large number of your customers and it becomes a much more valuable business for you than the sort of a distribution business that you have today. But would love to get your thoughts on how that business evolves and when we sort of hit the point where it starts to become a growth driver for you as opposed to a drag on growth. Thanks.

Sure. There's a lot in what you just asked. Broadband. So as you mentioned, our subsidized rural construction is going very well. It's pacing well. We're getting faster penetrations than we anticipated, probably are used for higher terminal penetration. As Jessica mentioned, as we get into next year, not only do we have the accelerated pace of construction that we get into Q4 and then into next year, but also the tailwind of the construction that we've already completed. So it was a standalone investment. Transparency around that is actually pretty high. The core markets, you know, I think similar to what you've heard probably from others both in the second quarter as well as third quarter, the back-to-school dynamics both at disconnect in Q2 and at reconnect at Q3 has not gotten back to where it was several years ago. Some of that could tie into the low end of the market, you know, where you have some incremental fixed wireless access. I think, you know, importantly for us, we're competing well in fiber markets. And as it relates to fixed wireless access, where you have a lower quality, lower throughput, lower capacity product, that's really not even lower priced when you combine mobile and internet together. But on the increment, it appears to be that way. We feel pretty good about that space, just given the amount of bandwidth usage that increases over time and the natural capacity constraints that we've all spoken about in the past. So I think some combination of that, as well as Jessica mentioned, we had a a relatively modest but small impact on the Disney programming dispute, which drove an additional 15,000 units. But just if you step back, for all the reasons that we know, the broadband market's been temporarily stunted for growth. But we are growing in both our existing footprint as well as in the rural subsidized footprint as well. And we're providing that so people can evaluate where both pieces are. In terms of video five years from now, I think there'll still be a traditional video business that exists, and then I'll talk a little bit about where it could evolve to, but a traditional video business that exists, hopefully with additional value in it with DTCs bundled in in a way that increases the stickiness of the linear business, which is to the benefit of ourselves and programmers. We can do that through these, you know, renovated agreements with the programmers and the combination of Zumo that creates utility for customers to find content in an easier way and have a deeper library and availability of that content. I do think, as you mentioned, and as I mentioned in the prepared remarks, we have an opportunity to evolve to a state-of-the-art video marketplace where we can provide that type of traditional linear integrated and DTC and SVOD product for customers who can afford it. It's a valuable, when you get that, it's a very valuable product and it's something that we'd be proud of. And for those customers who are going to be coming more in and out of the video market with different packages because of affordability that's been driven by the programmers and because of the availability of DTCs a la carte, that Zumo for us can provide a really good marketplace to sell those products, again, for the benefit of the programmers as well. and gives customers options wherever they want to go. And to your point, not only do we have the traditional video business delivered by Spectrum, but we also have the ability to monetize from an advertising revenue perspective the platform through our equity investment in the 50-50 joint venture of Zumo. So nobody's sitting here forecasting that traditional linear video is going to grow. But I do think it still remains very important to our connectivity relationships. I think we have a strategic advantage in the marketplace because of our capabilities as a broadband provider with a scaled video platform with the programming relationships that we have and the ability to package together a hybrid model that creates value for customers and is also a distribution engine for these DTC apps either on a standalone or bundled basis for customers and programmers in the future. You know, if I step back from a video perspective, again, I'm not forecasting growth, but the past 15 years, there's been very little to be optimistic about, either from a customer perspective because of what the programmers have done or for ourselves as a distributor. And for the first time, I see a path where we can create value for customers and create utility, and that ultimately will enhance the value of the connectivity services that we provide through our seamless connectivity in Spectrum One, which we're beginning to market now as part of Zumo.

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

Our next question will come from Craig Moffitt with Moffitt Nathanson. You may unmute and ask your question.

Hi, thank you. I wonder maybe for Jessica if we could drill down a little bit on the ARPU impacts of Spectrum 1 and how we should expect as you start to see the first cohorts roll off. How should we expect ARPU to track for both broadband and for wireless, I guess, over the next, not just the next quarter or so, but maybe a little bit longer term as you start to roll off those cohorts?

Sure. Thanks, Kang. So I'm going to start on the wireless side, and then I'll come back and hit the internet side. On the wireless side, our rate of net additions It's been not perfectly steady but fairly steady over the last four quarters now with Spectrum 1 in place. And so as you lap and have the roll-off of those free lines that were in the fourth quarter of last year and you create new free lines in the fourth quarter of this year, what I would say is that the impact that the free lines have on overall ARPU, it ceases to become a pressure on ARPU. And as the free lines of the portion make up a smaller and smaller percentage of the total lines, over time, because the base is growing underneath them and the number of free lines sort of stabilizes, I think that you do have a little bit of remaining or you could have a little bit of positive pressure on ARPU. The other side of that, we do still have some legacy pricing in the mix that has to roll off. So probably on wireless, more stabilized next year. If you think about what the impact is that it's having on Internet, so Internet ARPU growth, if you sort of look at it at a product ARPU level, gap growth in the year-over-year was 2.6%. Without the Spectrum One mobile allocation in there, it would have been 3.7%. So you have about a 1.1% difference in product line ARPU growth that relates to that allocation from the free line. As those free lines start to roll off, I think actually the dynamic is the same. The total free lines in the system become sort of steady in the year over year, so that mobile allocation becomes steady. as you get into Q4. So there is the potential then that what you see from a gap reporting perspective is better ARPU growth on the sort of Internet component, but it's related to just not having the building of that gap allocation inside of the Internet product.

That's helpful. Thank you. Thanks, Craig. Luke, we'll take our next question, please.

Our next question comes from Ben Swenberg with Morgan Stanley. You may ask your question.

Thank you. Good morning, everyone. I'm hoping you could spend a little more time talking about the CapEx outlook and the strategy around sort of three buckets, the digital evolution, the line extensions, and then Zumo, or I guess video. It sounds like we should continue to assume about $5.5 billion for the network evolution spend, but it sounds like the timing of that may have moved, maybe less for this year, but less next couple years, and then more maybe in 26. I just want to see if you can help us there. Is there a change in the $4 billion a year of line extensions from the higher RDOF opportunity that you talked about? And then... I don't think you've been spending much at all, I would guess, on video CPE given recycling of set tops, etc. Can you fill us in a little bit on the Zumo plan? I'm trying to think about whether you're going to be slowly moving your video sub-base over time to a whole new equipment fleet, so to speak, and trying to understand what that might look like from a CapEx point of view. I know that's a lot, but you guys give us a lot to chew on. but I'd ask for some help.

It was our fault then. It's true. Why don't I take two of those being network evolution or start off with two of those, network evolution, video CPE, and let Jessica take expansion and any gaps that I missed on the first two. On network evolution, I mentioned that we could potentially slow down by, you know, call it six months. And then the counter to that obviously is, wait a second, I thought this is improving your competitive standpoint. It is. But I would flag that we're competing. One, it's not that material of a time difference. And two, we're competing well against fiber today. And our goal remains to have superior speed claims across everywhere we operate in our footprint. That being said, we've always said that we'll accelerate investments wherever we can and And the trade-off to that is we also recognize there is value in showing some discipline to shareholders in terms of the overall envelope of capital. And these rural investments, which continue to expand both in terms of size and our capabilities deploy quickly, they produce immediate gains. So when you step back and think about trying to balance both our traditional approach, which is, you know, if there's capital returns, capital that can be deployed that has greater ROI, go as fast as you can, at the same time balancing investor expectations and show, you know, discipline there in terms of the overall envelope. A six-month timeline, it's not going to make that much difference long-term. There is an additional benefit operationally, which is that an extended timeline allows some of our DAA or distributed access architecture suppliers to catch up with the latest technology at full scale so that we can deploy the most advanced gear as part of this wave of high split and DOCSIS, eventually DOCSIS 4.0 implementation. So that's my thoughts on network evolution. Jessica can come back in a second and clean up on that if I missed something. On video CPE, we have over time spent less on video CPE because we've been able to recycle WorldBox. At the initial beginning of deployment for Zumo, we needed to get a starting state inventory of Zumo boxes, and that's captured in capital. On the increment, we will be deploying more new boxes than we have in the past. because we're essentially using Zumo as our go-to-market deployment for video CPE, and that's going very well right now. Now, the boxes are less expensive than what traditional boxes have been over the past, and we expect the cost of those boxes to continue to decline significantly. So you'll have a combination of volume, which will be determined by our success, and a lower price point over time, as well as a lower need to build up inventory through all of our channels and throughout the country. So there's a step up there, but long-term, I don't expect it to be that material.

Yeah, so maybe I'll try to help you with some numbers around network evolution and rural. I'm going to caveat it that we're still working through our operating plan for next year, so I'm not going to give a 2024 guide. But just to help you frame the issue... If you think about where our run rate for rural passings will be in Q4 to reach our 300,000, you have to have 110,000 passings in Q4, which we're actually pretty confident that we will meet. If you take that run rate and push it into four quarters of next year, we would build 440,000 passings, which is 140,000 more rural passings than what we built this year. We've told you before, and it's true, that Passing's timing isn't perfectly aligned with spend, so it's not a perfect guide. But if you put that at the net cost per passing, the $3,800 that we've talked about for RDOF, it would put the run rate next year on the order of $500 million higher than where we are inside of this year. assuming that all of the other components of line extensions remain the same, which there is a little variability there, but I think it's a good way to think about the issue overall. I think you have to couple that on the other side with an understanding that network evolution spend, sort of like our rural construction, is front-loaded. There's a lot of costly preparation and inventory building work that needs to be done before you make it into the field to actually do the high-slit. or to replace equipment. We expect that we're going to spend a little over a billion dollars this year in 2023 on high splint, which leaves a substantial amount of spend in the project and a large portion of which, if we continued at our current pace, would hit inside of next year. So adjusting the timing of high splint won't be enough probably to fully offset the additional line extension spend. But it can help, and as Chris said, we are looking at it sort of in the context of a total package to say what's an appropriate amount of capital expense load to put against the business given where we sit. No, you're right. I want to say one more thing about it, though. So as we think about all of this investment that we're making in rural areas, I think we need to drive additional visibility around the value that's related to having unique one-time capital investments like that. We're taking a look at a lot of different ways we could think about that. We considered a JV, but the returns are so strong I don't think we want to share them. We've considered a tracking stock. I think structurally it's complicated. But it does sort of do what I'm thinking about and kind of trying to create focus on the spending on rural as really acquiring passings more like M&A instead of thinking about it the way that you would think about CapEx. Absent doing one of those things, I am looking at additional disclosures to create more transparency. And so I think you should look for us to be trying to bring some of those disclosures early next year. And the other way that you can think about it with what's already been built, which I think is easier to sort of wrap your mind around as to what value has been created, Jonathan at New Street actually laid out a nice way to think about sort of what's the value of a rural passing once it's built. His number came in around $9,000, and I'm not going to argue with him because I think it's a good space to think about it. We've built 315,000 rural passings so far. At $9,000 per passing, it's around $2.8 billion. Our average net cost per passing on the subsidized rural bill is around $3,800. So you can assume something like $1.6 billion of capital has been spent against those completed passings. And what that means is that we've created value, the current value of the passings at 2.8 versus the 1.6 that we've spent we've already created value of $1.2 billion related to the building of those passings. And as we continue to accelerate the pace of the build, the pace at which we add that value to our business will increase. So we are looking at additional transparency there and trying to help as we sort of think about what our total capital spend might look like for next year, also making sure that we pair it with good disclosure and help from a valuation perspective so that you can see the value that those are adding to the business as we get them built.

So, Ben, you got probably more than you asked for, but as Jessica was talking, I stepped back. If you step it up one level from that, I think it's important just to reiterate that this company has a very strong focus on long-term capital allocation long-term shareholder value creation, but we also understand the value of shareholder confidence along the way. And so we're going to go outside of our comfort zone here before we finish our operating plan, try to provide some of that additional disclosure and transparency and make sure that we've got the full buy-in of our shareholders along the way and demonstrate what we've always been, I think, as really good allocators at Catholic.

Appreciate it. Thank you so much.

Thanks, Ben.

Luke, we'll take our next question, please.

Our next question will come from Vijay Jayant with Evercore. Your line is now open.

Thanks, too, if I could. Jessica, you previously talked about certain cost items, you know, cost to serve and sales and marketing sort of exiting this year, you know, close to zero. Obviously, cost to service is elevated in the quarter. Can you just talk about where we are on, you know, on the cost cycle, given your, you should be comping against some of your labor cost increases and sort of what it sort of means sort of into 2024. And then, you know, Chris, you sort of mentioned, I think, about two quarters in a row about the B process and, you know, the state process and how that may sort of play out and you may not participate kind of thing. Can you sort of talk about Really, what are the issues there? And if that is the case, are we still too optimistic on your line extension spend over the next few years, which I think is about $4 billion a year?

Yeah. So, Vijay, first on the cost items, I don't have any change in my expectation relative to cost to serve and sales and marketing exiting the year at close to zero. And I think we've talked in our remarks, and it is our expectation that as the tenure in those areas matures, and as we, because now as of the end of Q3, we've really lapped the one-time increase related to the investments that we made on the employee side.

For sales and marketing.

Well, as of the end of the quarter, I think you also lapped in cost to serve for the most part.

Yep.

And so the rate of increase, I say that, so we should expect to be more efficient across those areas going forward, whether that's sort of an every quarter mix. I'm not going to be specific about where we'll be inside of next year in the quarters, but I do think our overall expectation is that from this point we drive efficiency in those spaces.

Vijay, on bead, you talked about pipeline. The bead's always been very difficult to forecast exactly what it'll be because there's state allocations now, but how much of that's near our footprint? We're working through all of that. It's going to take a long time for that. But in the meantime, RDOF and the state grants, they're going well, and there's a very large pipeline, as we've talked about, absent bead. I think it's fair to say that we were somewhat disappointed in the eventual guidelines that came out from NTIA. And all I'm trying to say without getting too much into detail, NTIA states are all aware of the issues that we have. But to be clear, the states that adopt the NTIA's proposed guidelines on things such as internet tiers, dictating internet tiers, dictating pricing, labor practices, those just won't be attractive states for us to bid in. And so what we will do is we'll focus our investments on the states that allow us to retain flexibility to run the business, properly respond to market demand, and ultimately earn a healthy return. So that's our focus. And so it's very difficult to forecast what, if any, beat investments will occur at this stage. And it's going to take us some time, I think, to figure that out, as well as everybody else, for that matter. So we're not unique.

And as we've said all along in rural, we've been extremely disciplined from a financial perspective and looking at the specific passings that we're bidding on to make sure that we're comfortable that they will generate financial returns. And all things factor into that, including the limitations that you have under the regulatory environment.

Thanks, PJ. Thank you. Luke, we'll take our next question, please.

Our next question will come from Philip Cusick with JP Morgan. You may unmute and ask a question.

Thank you. I guess a couple of follow-ups. Jessica, I heard your comment on October customer addition drag. Do you think it's still a reasonable goal for 2023 to add more broadband subs year over year? And if not, do you think 4Q of last year is a reasonable proxy for this year? I know you love guidance. And then second question, As I'm thinking about your cost commentary as well as maybe some revenue pickup, what is the outlook for EBITDA acceleration from here? We've talked about EBITDA accelerating in the back half, but I'm also thinking about what your Disney content costs are going to do for the fourth quarter. Just how should we think about that from here? Thank you.

Yeah. Phil, let me take the customer one.

Our goal has been to increase net ads for Internet year over year. I think given some of what we've seen just in early October for the reasons that we talked about before, I think it would require a very successful November and December, so I think we're going to be hard-pressed to hit that. I think the underlying trends in the business we've talked about and where that sets us up for 2024, and so we're really optimistic about that. But I think it would require a very healthy November and December in order to achieve what was our original goal.

On the EBITDA side, so thinking about what the components are as you go into Q4 and next year. In Q4, you do still have an advertising headwind, and actually it's the most significant advertising headwind of the year because of political advertising. But as you go into next year, then that turns around where you're back in a political year and you have the benefit of political advertising. As I said earlier, we've sort of lapped the last of our 2022 labor adjustments as of the end of Q3. So I think the trajectory from a cost perspective on cost to serve and sales and marketing is you have easier comps and you have growing efficiencies sort of going into next year. In the fourth quarter, we'll start gaining revenue from the mobile free line roll-off. It's relatively small inside of Q4, but the impact builds as you go through next year. So we expect to have a good tailwind from that. And then, you know, we continue to expect to have just overall efficiency from our 10-year investments across the business. So as we said, you know, I think that we – We recognize that EBITDA was challenged in 2023 by both the investments that we were making, doing it in a nonpolitical year. But as we get into Q4 and going into next year, our expectation is that we've pushed through most of that headwind and that we'll be in a better position.

Thanks very much. Thanks, Phil. Luke, we'll take our next question, please.

Our next question will come from Stephen Cahal. With Wells Fargo, your line is now open.

Thank you. So you said that some of your initial Spectrum One roll to pay results were a little better than expected. Could you just expand on the tools you're employing to drive those retention rates and what kind of targets you might have in mind for the Spectrum One mobile roll to pay as we think about how that retention could look going forward? And is it right to assume that it's about 300,000 lines per quarter that are up for grabs. And then additionally, we've received a lot of questions on the ACP program and what it means for charter. Could you maybe just help us frame how you see that exposure? Do you think you require any contingency plans in case there's any changes to the political outlook for that? And is there a lot of overlap between ACP customers and Spectrum One customers, or is that quite a different customer set? Thank you very much.

I'll do my best to answer as much of that as I can. The mobile retention, we're not having to do much of anything at all simply because these lines are being actively used. They have similar porting rates to what we have elsewhere. They also have similar, you know, nearly similar device purchase rates. So they're real customers. They're looking very much like any other existing customer. When they roll, They go from a $0 price point for the first line. Many of them are paying for a second line. But they go from a first line at $0 to a $30. And that product is the fastest mobile product in the country. And it's providing it at the lowest rate relative to that speed. So at $30, you can't replicate that mobile product anywhere else in the country that's producing that speed. And an all-in, when you think about it from a convergence standpoint, It's a product that has a structural advantage that's difficult for anyone else to replicate. So we do have some small tactics around the edge that we can do to retain customers under different circumstances, but that's not being heavily used at this point simply because it's sticking. On ACP, for the benefit of the broader audience, that's the Affordable Connectivity Program. You know, this program, federal program, it's brought internet connectivity to customers who really wouldn't have access to broadband otherwise. And it's also allowed existing customers who would have been coming in and out of the broadband marketplace, you know, really given affordability issues to remain connected consistently. So I think we think, you know, it's been a really effective program. We're proud to be the largest ACP provider in the country. Just this week, I understand the White House has asked Congress to authorize more money for ACP earlier. And I hope that Congress will fund it before running out next year. Now, you asked the question what happens to the extent it's not funded. Just as I mentioned, most of these customers that receive ACP support today were Internet customers before the program was founded. We have low-income broadband programs that existed before ACP began. And because of the value we provide and that connectivity, I do think that we'll continue to retain these customers. We have ways, whether moving them into the lower speed products that we have to be able to save them money, or more importantly, if you think about the mobile build that the vast majority of these customers have inside their home, we can save them hundreds or even thousands of dollars every year, even though ACP disappeared simply by moving them over to our mobile. So we have a lot of tools available to us for these customers to make sure that they stay. My hope is that we don't need to go down that path. My hope is that we can still save them that money by getting them onto Spectrum Mobile and Spectrum One.

But I'm hopeful that the program, which has been very successful, gets successfully renewed. And that concludes our call. Thanks very much, everybody. Thank you all. Appreciate it. Thanks.