Charter Communications, Inc.

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

All right, let's try that again. Thanks, operator, and welcome, everyone. The presentation that accompanies this call can be found on our website, ir.charter.com. I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, and 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, 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 second quarter, we lost 149,000 Internet customers, most of which was driven by the end of the Affordable Connectivity Program. We added over 550,000 Spectrum mobile lines and close to 2.2 million lines year over year. Revenue was up slightly in the quarter, while adjusted EBITDA grew by 2.6%. We put a lot of effort into the ACP program, and it wasn't renewed. Beginning early this year, we've been actively working with customers to preserve their connectivity. Our service and retention teams are handling the volume of calls well, and we've retained the vast majority of ACP customers so far. The real question is customers' ability to pay, not just now, but over time. I expect we'll have a better view of the total ACP impact once we're inside the fourth quarter. The lack of ACP will also drive higher levels of market churn and selling opportunities for connectivity services over time. Turning back to today's results, the second quarter already tends to be a seasonally weak quarter. The loss of ACP impacted both churn and low-income broadband connects, helping drive the mobile-only broadband category back to pre-pandemic levels. That shift added to an already low level of move activity and overall market connect volume. That said, we performed better than our expectations for Internet in the quarter, and we competed well compared to previous quarters against both wireline overbuild and cell phone Internet, each with expanded footprints. Overall churn remains at low levels, even with the end of the ACP program, and we remain confident in our ability to return to healthy long-term growth. Our Internet product is faster and more reliable. Our pricing is lower when similarly bundled with mobile. We expect market activity and selling opportunities to pick up over time, and the cell phone companies will face challenges as the customer bandwidth demands continue to grow. If we take a step back, our success will be premised on our high capacity, fully deployed network and the products it can deliver. We already have a one gigabit network everywhere we operate across 58 million passings. And when our network evolution initiatives complete, we'll have a ubiquitous, symmetrical, multi-gig capable network supporting continued growth in data demand from customers and new applications such as AR, VR, and AI. at an incremental investment of just $100 per passing. Those wireline network capabilities are combined with mobile capabilities everywhere we operate, creating the nation's first converged network, uniquely providing seamless connectivity and the fastest mobile service where 87% of traffic is delivered by our own gigabit-capable Wi-Fi network. And our converged connectivity product set is poised to get better through speed upgrades and over 43 million access points which will grow with our own and our partners' ongoing Wi-Fi router and CBRS access point deployment. That converged network is also expanding, covering more passings as we grow our footprint with high ROI construction opportunities in both rural and non-rural areas. As we show on slide four of today's investor presentation, we are very well positioned competitively with higher quality products, lower pricing, and the ability to deliver a converged bundle of products. In internet, data usage continues to grow, and demand for faster speeds will grow with it. During the second quarter, roughly 30% of residential internet customers who do not buy traditional video from us used over a terabyte of data per month, which together with overall usage is increasing. This quarter, we saw the most additions to our gig speed tier ever, an area we can grow. Our mobile offering continues to evolve, driving strong results. Our second quarter mobile line net ad performance was better than the first quarter results even without the incremental benefit of our free mobile retention offer to former ACP customers. And we also had our highest port ends quarter ever. In April, we began offering Anytime Upgrade to new and existing Unlimited Plus customers. Anytime Upgrade allows Unlimited Plus customers to upgrade their phones whenever they want, eliminating traditional wait times, upgrade fees, and condition requirements. And during the second quarter, customers increasingly chose our Unlimited Plus package priced at $40 versus $30. In April, we also launched a new repair and replacement plan for just $5 per month. That price point is very competitive and driving higher take rates. These new affordable value-added services enhance our profitable growth and competitively open access to new customer segments. Along those lines, in May, we launched our new phone balance buyout program, Now, when a customer switches to the Spectrum Mobile from another provider and purchases at least three lines, we'll pay off their existing phone balance on ported lines up to $2,500 for five lines. This new program helps multi-line mobile customer prospects with device balances at other providers to more easily switch to Spectrum Mobile. And of course, Spectrum One continues to perform well at both Connect and at promotional roll-off, offering the fastest connectivity with differentiated features. Today, approximately 8% of our total passings take our converged offering of internet and mobile. We remain under-penetrated despite having a differentiated and superior offering with market-leading pricing at promotion and at retail. Finally, turning to video, losses continued in video where we have seen downgrade churn from programmer rate increases we passed through. The loss of ACP in the second quarter also impacted video downgrades as customers made choices based on affordability. Over the last several years, due to margin pressure from programming increases, we've moved away from selling bundles with traditional discounts. But as we look to better differentiate ourselves in a competitive marketplace, we are considering ways to better leverage our unique capabilities across our full set of products, including video. Particularly now that we're adding significant value back into the video product for consumers with hybrid linear DTC bundles, more economical package choices, and with our Zumo box. In May, we reached a new agreement with Paramount. That gives us the ability to offer the ad-supported versions of Paramount's direct-to-consumer services, Paramount Plus and BET Plus, to our traditional cable package customers at no additional cost. We plan to launch the Paramount DTC inclusion offer to our customers around Labor Day. Earlier this month, VIX, the leading Spanish-language DTC product from Televisión Unición, became available to a large number of customers with eligible Spectrum video packages at no extra cost. We launched Disney Plus Basic to TV Select customers as a DTAC inclusion in January, and we'll begin to offer Disney Plus Premium, the ad-free version of Disney Plus, to customers as a $6 upgrade later this quarter. We also have planned to offer Hulu to our TV Select customers at the incremental retail price for Disney's Duo Basic bundle, $2, in the fourth quarter. So our efforts to deploy a new hybrid DTC linear model first for the industry remain on track and we expect it to be fully deployed next year. Together with Zumo, our goal is to deliver utility and value for our customers irrespective of how they want to view content and better and more stable economics for programming partners. But the associated DTCs have to be part of the full package service. Customers can't be forced to pay twice. And if the DTC standalone pricing is less expensive at retail, then that's what we really should help programmers sell instead. Fundamentally, we believe that evolving the video business, even if it isn't growing, helps customer acquisition and retention, still has positive cash flow, and provides us with option value. And over time, we believe a high-quality video product gives us the opportunity to reintroduce more value into the converged connectivity relationship. So, stepping back. We're executing well on many multi-year transformational programs. We're growing EBITDA despite the loss of ACP and a competitive cycle by driving efficiency without impacting our service and sales capabilities. We remain fully focused on driving growth using our unique set of scaled assets and the highest quality products and services in order to create long-term value for shareholders. With that, I'll turn the call over to Jessica.

Thanks, Chris. Let's turn to our customer results on slide six. Including residential and SMB, we lost 149,000 internet customers in the second quarter. While in mobile, we added 557,000 mobile lines. Video customers declined by 408,000, and wireline voice customers declined by 280,000. As Chris mentioned, our second quarter internet losses were primarily driven by the end of the ACP program. ACP program connects ended in early February. In May, the program's original $30 subsidy was reduced to $14, and in June, that subsidy was reduced to zero. We estimate that the end of the program's impact on our second quarter internet gross additions and churn drove over 100,000 of our 149,000 internet losses in the quarter. And from a financial perspective, there was an approximately $30 million headwind to second quarter revenue from one-time non-recurring ACP-related items in the quarter. In addition, similar to the end of the Keep Americans Connected program in June 2020, many of our ACP customers had past due balances that had been fully reserved for accounting purposes. We took steps to eliminate a portion of those back balances for certain customers and put a portion of the remaining balances on payment plans. For certain customers with a low likelihood to pay post-ACP, we have been recognizing revenue on a cash basis. resulting in slightly less revenue and less bad debt in the second quarter than we would have otherwise had. So far, we're performing well with ACP retention, but the largest driver of Internet customer losses associated with the end of the ACP program will be in non-pay disconnects, and they will occur in the third and fourth quarters, likely weighted to the third. We continue to do everything we can to preserve connectivity for former ACP subsidy recipients, We have a number of products and offers to assist those that have lost their ACP subsidy, including our Spectrum Internet Assist Program, our Internet 100 product, and we've been offering all of our ACP customers a free mobile line for one year. And we continue to market offers targeted at low-income customers, a segment that we have historically served well. Turning to rural, we ended the quarter with 582,000 subsidized rural passings. We grew those passings by 89,000 in the second quarter and by 345,000 over the last 12 months. We had 36,000 net customer additions in our subsidized rural footprint in the quarter. We continue to expect to activate approximately 450,000 new subsidized rural passings in 2024, about 50% more than in 2023. We also continue to expect our RDOF build to be completed by the end of 2026. two years ahead of schedule. Moving to second quarter financial results, starting on slide seven. Over the last year, residential customers declined by 1.3%. Residential revenue per customer relationship grew by 0.4% year over year, given promotional rate step-ups, rate adjustments, and the growth of Spectrum Mobile. Partly offset by a higher mix of non-video customers, growth of lower-priced video packages within our base, and some internet ARPU compression, related to retention offers extended to customers that previously received an ACP subsidy. As slide 7 shows, in total, residential revenue declined by 0.6% year-over-year. Turning to commercial, SMB revenue grew by 0.6% year-over-year, reflecting SMB customer growth of 0.2% year-over-year and higher monthly SMB revenue per SMB customer, primarily due to rate adjustments. Enterprise revenue grew 4.5% year-over-year, driven by enterprise PSU growth of 6.1% year-over-year. And when excluding all wholesale revenue, enterprise grew by 5.9%. Second quarter advertising revenue grew by 3.3% year-over-year, given political revenue growth. Core ad revenue was down about 2% year-over-year. Other revenue grew by 6% year-over-year, primarily driven by higher mobile device sales. And in total, consolidated second quarter revenue was up 0.2% year-over-year and 0.1% year-over-year when excluding advertising revenue. Moving to operating expenses and adjusted EBITDA on slide 8, in the second quarter, total operating expenses declined by 1.4% year-over-year. Programming costs declined by 9.8% year-over-year due to a 9.5% decline in video customers year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates. Other costs of revenue increased by 12.6%, primarily driven by mobile service direct costs and higher mobile device sales. Cost-to-service customers declined 4.2% year-over-year. given productivity from our 10-year investments, including lower labor costs and lower bad debt expense, as we saw some favorability in our mobile bad debt as a portion of revenue due to an improved customer tenure and credit profile. And, as I mentioned earlier, a portion of our uncollectible billings offset revenue in the quarter. Sales and marketing costs grew by 1.9% as we remained focused on driving customer acquisition. Finally, other expense grew by 4.7%, mostly driven by an insurance expense benefit from the prior year quarter. Adjusted EBITDA grew by 2.6% year-over-year in the quarter. And when excluding advertising, EBITDA grew by 2.4% year-over-year. While we don't manage the business at a single product line P&L level, we continue to compute allocations internally. And this quarter, for the first time, Our standalone mobile adjusted EBITDA was positive, even when including the headwind of subscriber acquisition costs and without the benefit of gap revenue allocation to mobile revenue. Our mobile profitability this quarter marks a significant milestone. It shows that we're on the path to establishing a mobile business that is very profitable. Overall, our goal is to deliver solid EBITDA growth, and we believe we can continue to do that even as we make significant investments in the business. and face a challenging competitive environment and the end of the ACP program. Our expense management process is working with growing realization of impacts in the second quarter. We continue to expect accelerating EBITDA growth in the back half of the year, given our expense management initiatives, Spectrum One promotional roll-off, and political advertising revenue. Turning to net income on slide nine, we generated $1.2 billion of net income attributable to charter shareholders in the second quarter. in line with last year, as higher adjusted EBITDA was mostly offset by higher other operating expense, primarily due to restructuring and severance costs and net amounts of litigation settlements. Turning to slide 10, capital expenditures totaled $2.85 billion in the second quarter, in line with last year's second quarter spend. Line extension spend totaled $1.1 billion, $37 million higher than last year. driven by our subsidized rural construction initiative and continued network expansion across residential and commercial green sales and market fill-in opportunities. Second quarter capital expenditures, excluding line extensions, totaled $1.7 billion, which was similar to the prior year period. For the full year 2024, we now expect capital expenditures to total approximately $12 billion, down from between $12.2 and $12.4 billion previously. Our reduced outlook for 2024 capital spending reflects lower internet and video customer net additions, including the impact of the end of the ACP program, which drives lower CPE costs. We're also actively managing vendor rates and construction materials to make our capital expenditures more efficient. We still expect line extension spend of approximately $4.5 billion and network evolution spend of approximately $1.6 billion. Turning to free cash flow on slide 11, free cash flow in the second quarter totaled $1.3 billion, an increase of approximately $630 million compared to last year's second quarter. The year-over-year increase was primarily driven by higher adjusted EBITDA, lower cash taxes due to timing, and a favorable change in working capital. On that front, we've been managing the balance sheet to provide us better overall cash flow and increased flexibility. Over the last several quarters, we sold our Towers portfolio, which generated almost $400 million in proceeds. We launched our EIP securitization program in the second quarter, which backs a new $1.25 billion credit facility at favorable interest rates. And we've been working with our vendor base to extend our payment terms, utilizing a supply chain financing tool to support our working capital favorability. We will continue to identify and capitalize on balance sheet opportunities to help fund our unique one-time capital investments. We finished the quarter with $96.5 billion in debt principal. Our current run rate annualized cash interest is $5.1 billion, and we repurchased 1.5 million charter shares and charter holdings common units, totaling $404 million at an average price of $271 per share. Given our long-dated and 86% fixed-rate debt structure, our sensitivity to higher rates is relatively low. If we refinanced all of our debt due in 2025 and 2026 at current rates, the impact to our run rate interest expense would be less than $60 million. As of the end of the second quarter, our ratio of net debt to last 12 months adjusted EBITDA moved down to 4.32 times. We expect to continue to move closer to the middle of our four to four and a half times target leverage range through the end of this year. And we remain fully committed to maintaining our split-rated debt structure, including access to the investment grade market, given the significant benefits that it offers to all of our capital providers. We continue to be confident in the long-term trajectory of the business. We have the best products at the best prices in our industry, and we remain under-penetrated relative to our long-term potential. That, combined with the investments that we're making in the business and our expense savings initiative, will continue to drive strong EBITDA growth and value creation for many years to come. And with that, I'll turn it over to the operator for Q&A.

At this time, if you'd like to ask a question, please press star 5 on your touch-tone phone. You may remove yourself from the queue at any time by pressing star 5. Again, that is star 5 to ask a question.

We will pause for a moment to allow the questions to queue. Thank you.

Our first question will come from Craig Moffitt with Moffitt & Nathanson. Your line is now open. Please go ahead.

Hi. Thank you. Perhaps no surprise, I'd like to drill down a little bit more on the ACP impact. A couple of questions. To what extent are you seeing ACP showing up in reduced gross additions, that is just lower market activity because new customers can't sign up for or ACP customers who are moving can't continue to sign up for the program even before you start to see non-pay disconnects? And then second, what impact is it having on ARPU, you reported 1.7% broadband ARPU, the same as last quarter. Had it not been for ACP, could you tell us what that would have been as you're starting to now lap some of the Spectrum One discounts that were included in the numbers in the past?

Sure. Hey, Craig. I'll take the first one. Jessica will take the second. For ACP, we estimated the impact was well over $100,000 inside the quarter to net additions loss. And for us to say that means that we have a high level of confidence, probably higher than that. So, you know, half of which was from voluntary churn and the other half was coming from reduced gross additions, as you mentioned, from low-income segments that had been connecting at a higher rate at a much lower rate once ACP disappeared. Of course, we saw some of that impact already inside of Q1. And we saw the same inside of Q2. So that's the drivers inside there, about half and half. And it's really the combination of those when I mentioned that we saw a reversion to the pre-pandemic mobile-only broadband category, where you've seen that category increase, which is taking out volume from the marketplace in terms of a source of acquisition. It's temporary. It's one time in nature. And so as we've spoken about before, It's really about just managing through that one-time impact and trying to make sure that we're doing all the right things for preserving that base and keeping them connected, which we're doing, but also making sure that we're making the right investments and the right moves for the business-as-usual underlying growth trajectory. Jessica, on ARPU?

Yeah, so Internet ARPU increased 1.7% year-over-year in the quarter. If you adjusted, Craig, for the $30 million in one-time ACP-related items that I mentioned... and for the impact of the mobile revenue allocation, that ARPU growth would have been 2.7%. I didn't incorporate the cash basis accounting impact that I mentioned earlier. It's small, and unless those customers do end up paying at a rate that's higher than our expectation, I think it recurs in revenue going forward. So I think you would have been, but for those two items, up at 2.7%. Thank you. Thanks, Craig.

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

Our next question comes from the line of Sebastiano Petty with JPMorgan. Your line is now open. Please go ahead.

Hi, thanks for taking the question. I think, Chris, in the prepared remarks, you said you competed well against fixed wireless and fiber, even though their footprints are expanding. Given the prevalence of what we're seeing in terms of open access and other wholesale provider getting into the mix and increasing the fiber availability, have you seen a demonstrable change in the fiber deployments year to date as you think about that insurgent or non-incumbent fiber bill to some extent? And again, just trying to think about that increase in open access and wholesalers, How does it change, if at all, how you're thinking about the competitive environment on a go-forward basis in terms of other converged players or options moving into your footprint?

Sure. Look, the competitive fiber over build has maintained a relatively steady pace. If anything, it's slightly lower than what it had been. And so we don't see any dramatic change there. When I talked about maintaining our competitiveness, means having a similar impact despite the fact that you have an expanding footprint. So you could, if I was being bullish, I would argue that that's an improvement as opposed to just staying steady. And so we're competing well both in the wireline overbuilt space, which is more permanent, as well as the cell phone internet space as well. In terms of some of the experiments that you're seeing as it relates to you know, wholesale access and whatnot, it's still a fiber overbuild at the end of the day. And there's still economics that need to be deployed. And those economics are, you know, in my mind are not very good. They haven't been for decades of the economics of an overbuilder for on an existing footprint. So I don't think it age dramatically changes, you know, the outputs that they can provide because the economics aren't any different. And B, it's really small. What you're talking about that's been done is just a very small percentage of the US footprint. And so the ability to project products, both from a sales and marketing and service perspective, really is impacted by the ubiquitous nature of the technology that you have and the ability to provide those products in the marketplace. And so from our perspective, when we look at it and say, What's unique about us is we have a gigabit network deployed everywhere we operate. In addition to that, we're upgrading that wireline network to have symmetrical and multi-gig speeds everywhere, not just in red line pockets, but everywhere that we operate. And then you combine that with our Wi-Fi and CVRS capabilities and a very strategic relationship that we have with a great partner in Verizon. It gives us the ability to provide seamless connectivity, converged connectivity, broadband everywhere you go inside of our footprint, and that's unique. The only other operator who has those type of capabilities really is Comcast. And so I think that's the real strategic advantage for us, and it's not because we have that capability in 2%, 3%, or 5% of our footprint. We have it everywhere we operate, and it allows us to be loud in the marketplace, talk about not only the product advantages of having that seamless connectivity, but the ability to save customers hundreds and thousands of dollars really with a better product. And so I don't see anything that's really changed other than some of these joint ventures, announcements that you've seen. If you really sit back and think about it from both a strategy and from a valuation perspective, I think it's flattering. It tells you the strategic asset that we have. And so if you take a look at the slide that we have on page four of the deck today, You think about everything that I said and our capabilities, and then you think about where others are trying to go. Many of the MNOs, I do think that's flattering, both from a strategic, from an operating, and from a valuation perspective of what we have and what we're capable of doing. It has people's attention.

If I could ask a quick follow-up on wireless, I think you noted that even excluding the retention offer for the ACP subscribers, mobile lines would have been up. I mean, can you help us think about what you're seeing in terms of just the contract buyout and some of the other offers you have in the market? And does your maybe go-to-market need to evolve at all as we think about fears or concerns about what an upgrade cycle might mean from the Apple iPhone the back half of the year? Thank you.

Sure. Well, you know, mobile wasn't just up. What I was saying is it was up quarter over quarter. We had a very good first quarter It was clearly up even more this quarter, and if you excluded the benefit of the ACP mobile retention offers, we still would have been better than a very strong first quarter. That reflects just the general momentum that we have, but also we have evolved the product, and so we've rolled out the Anytime Upgrade Program, which is unique in the market. Even though it sounds small, it's attractive to customers, a service and repair function that's, I think, competitive, And now with the phone balance buyout program, which is also pretty unique in the marketplace, all of those rolled out sequentially during the course of the quarter and have continued to improve our selling capabilities along the way. I think that positions us well in any market. We've not been, I think where you were going, we've not been and we don't intend to be in the business of subsidizing phones. But we do have really good programs that make it attractive for customers to not only come in to be a customer with Spectrum Mobile, but also to stay with us because we have the ability through the Anytime Upgrade program to really, at a low competitive cost, keep them current with their models of phones now and in the future. And stating the obvious, the biggest advantage here beyond just the devices really is the ability to provide a higher quality, faster mobile service, seamless connectivity, and and to be able to save them hundreds or thousands of dollars a year. I mean, if you think about our pricing at $30 for unlimited and $40 for unlimited plus, on one line and each incremental line, it's really competitive. It's very good. So we're happy with where we are with the product. We will continue to evolve it. I think some of those feature sets that will evolve really include things like mobile speed boost, which ties to the capabilities that we have with Wi-Fi and wireline. and the ability to have Spectrum Mobile as an SSID. So those of you in the New York and L.A. markets, for example, what you'll notice is as you travel outside of your home with Spectrum Mobile, an auto-authenticated attachment to Spectrum Mobile SSID, which boosts your speed wherever you go, and it increases your access and your reliability, which is the nature of seamless connectivity.

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

Our next question comes from the line of Jonathan Chaplin with New Street Research. Your line is now open. Please go ahead.

Thanks, guys. Two questions. One just on broadband market growth for Chris and then one on free cash flow for Jessica. Chris, could you give us a little bit more context around the ACP impact from lower gross ads in 1Q? I think you said it was sort of roughly the same as in 2Q, so maybe it was $50,000. But what I'm trying to get to is an understanding of what's going on with underlying growth it looks like it actually improves for you a little bit sequentially and so either broadband market growth in aggregate isn't getting any worse maybe it's getting a little better or you're just doing better on on market share relative to your competitors and would love to understand that a little bit better and then jessica it sounded like from your discussion of working capital that this isn't a timing impact in 2Q. You've changed how you manage working capital and so you should expect to be able to sort of retain this benefit to free cash flow as we go through the year. I just wanted to confirm that. And then do you have to get all the way back to 4.2, four and a quarter times leverage before you would accelerate share repurchases again? Thanks.

So, Jonathan, there's, I think, a few derivatives inside of your question, so let me try to give you what you're looking for in the way that we think about it. Inside of the first quarter, you know, we had performed better relative to prior quarters and prior year on competitive switching, and so that was in the marketplace, so available subscriber ads and disconnects. But we saw, as you highlighted as well, once everybody had reported, we saw a significant reduction in the first quarter of this year in the available gross ads, a significant drop year over year, and that was due to housing starts, rental vacancies, but also the removal of ACP for new connects, all of which driving aversion to mobile-only back to pre-pandemic levels. That broadband gap market growth rate overall we still saw is significantly reduced for all those factors inside of Q1, but a dramatic drop. And so that put our performance in relative light given the market overall backdrop, a lot of which was one time in nature. In Q2, while it's early because we don't have all the data, I think our evidence shows that for the first time And due to, again, all of the one-time factors and most dramatically the loss of ACP, the broadband market actually shrunk as a one-time event. And so if you put our performance and then our statements about relative competition in context with that, I think we're doing pretty well. And that was the nature of the comments that I provided in the prepared remarks. I do think that, as I mentioned, moves will come back. It's hard to predict exactly when, but moves will come back. Housing starts will return. apartment rental rates will go back up. And most importantly, the most dramatic effect is once you flush out the ACP impact between Q2 and Q3 predominantly, then you'll be able to get back into a much more normalized environment. And I think the product investments that we're making and the attractiveness of the value that we provide puts us in great position for when that volume returns. And we're doing everything we can in the meantime to preserve all the ACP customers. We're doing really well. But at the same time, making sure that we're ready to – to come out in a good light on the back end once the volume does pick back up.

On the free cash flow side, Jonathan, so I think we had previously talked about working capital for the year coming back to being in a place that was relatively flat. As I said, we're working on the balance sheet and trying to make sure we can extract appropriate cash from the balance sheet to support what we're doing across the business. I think that we'll probably do better than that sort of flat working capital expectation, but I'm not prepared to say by exactly how much. The variability in working capital has a lot to do with exactly how expense timing and capital timing lands over the course of the year. And so, while I think that we'll get good benefits out of just the balance sheet management side, I'm not going to take up the total thoughts that we've had on working capital today. On your other question, sort of how do we think about, I think it was sort of a one and then the other. Do you have to get all the way back to the middle of your range before you accelerate buybacks? You know, I'm in the same place that I was last quarter, which is that I think that we can continue to do buybacks over the course of the rest of the year and still do what we have said that we would do from a leverage perspective and continue I don't think of it as you have to do one and then the other. I'm pretty confident in the trajectory of the business for the second half of the year. And so I think that we can have good pacing on buybacks and meet what we've said about leverage at the same time. That being said, the capital allocation strategy hasn't changed. We still go after high ROI organic investment first, We still look then at whether there's a creative M&A opportunity is next, and those come before sort of this balance sheet management and share buybacks that happens as the last set of priorities there. And so we haven't given a guide around where we think that we'll go in terms of total buybacks. It's because we want to make sure that we maintain that flexibility to do what we think is most important for the business, which is to make the right investments to drive growth of the business going forward.

Great. Thanks, Jonathan. Thanks, Jonathan.

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

Our next question will come from Ben Swinburne with Morgan Stanley. Your line is now open. Please go ahead.

Thanks. Good morning. Chris, I believe you guys took some cost action. I don't know if there were headcount reductions this year at Charter, but I know you guys have had a cost plan you've been working on. I'm wondering if you could just talk about what you guys are doing and how you're approaching that. And I think you had suggested you guys weren't going to touch any sort of customer-facing resources. So just give us a sense of where you are on that and your philosophy as you look through the rest of the year and how we might think about that impacting the financials. And then maybe for Jessica, I don't know if you have any visibility at this point into Q3 ACP impact from that $100,000. But if you do, I'd love to hear it. And trying to understand the decline in bad debt. I know you touched on it in your prepared remarks. I don't know if that tells us something about your third quarter ACP expectation or if you still expect cost of service to be flat for the year. We just want a little more color around those trends. Thank you both.

Hey, Ben. So there's kind of three parts to that, which is I'll start with the second one you had is the Q3 ACP. I'll handle that. And Jessica can comment on bad debt and then cost reductions. Jessica can go through and I can tag team there a bit. But from a Q3 ACP outlook, we're not going to be providing any customer net additions guidance today. But For sure, there's going to be, as we both mentioned, I think Jessica and I, that there'll be more non-paid disconnect in the third quarter, but there are a lot of other moving parts, and we're competing well. I think that maybe the interesting tidbit here is maybe talk a little bit more about recent trends. June was, oddly, the best loss of the second quarter, and internet net ads trends in July have been similar to what we saw in June. Sounds great, but... the reality is the ACP-related non-pay disconnect activity hasn't started yet. And we'll know really more about sustainable payment trends, nothing to be scared of today, but sustainable payment trends really through August with the non-pay beginning then and trailing into a little bit into Q4. So when you step back, I know you know this, but ultimately this ACP transition is a one-time event. So we're very focused on really isolating the ACP impact internally and evaluating not only, obviously, our performance on retaining those customers because we want to keep them connected. We think it's very valuable, and we can, but also what's the underlying trend absent the ACP impact to make sure that we're getting better every day. So Jessica on the ACP, the bad debt piece.

Yeah, so if you think about what happened in bad debt in the year over year, Ben, there's a few things going on. One really was tenure and credit profile in our mobile customer base that's been improving, particularly for customers that have EIP plans with us. And on the ACP front, we took a lot of bad debt along the way, particularly for customers who entered the ACP program and they had outstanding unpaid balances. And so those have really been reserved throughout the ACP program. I mentioned it in the remarks, but there also is a portion of the ACP customer base where we have a very low expectation of payment for them. And so instead of taking their revenue into revenue and then taking bad debt expense as an offset, we actually didn't recognize revenue for those customers. So when you see that, it means that bad debt expense, I think, absent that revenue, you would have had more bad debt expense if we had put that back in the other direction. And then the last point, we did have overall lower resi revenue in 2Q in the year over year and some mixed changes. And so with other things being equal, that also drives a little bit of downward pressure on bad debt. All of that is to say I wouldn't read anything sort of into – What is it that you think about Q3 and looking at what happened with bad debt in the year over year? I think there are a number of factors going on there. As you think about then what's happening on the overall cost reduction side, which I think was your other question, the expense management process is pretty extensive. While we're not doing anything that will impact our sales or service capabilities, we have things that are big, things that are small, some short, some medium, some long-term opportunities all across the business. We've made progress with some vendor cost reductions, with reduced spend around discretionary categories like real estate and third-party services, some reductions to overhead expenses, and implementing some tools to increase our efficiency. And actually, I think the benefits from those came a little faster into 2Q than what we had anticipated. But we're already realizing the benefits of some of the changes. We'll continue to build on additional opportunities over time. As you look at the rest of the year, I think we had given some thoughts on our outlook for expenses. We had expected programming costs per video customer to grow in the 1% to 2% range year over year. I now expect that to be flattish year over year. We previously had said that we expected cost to serve to be flat with 2023. I now expect that to decline by 1% to 2% inclusive of that debt expense. And in sales to marketing, I think we had said 2% to 3% growth. And at this point, I would expect us to be in the low end of that range, if not a bit below. I also, as an aside, just want to clarify something I said earlier. My comments on working capital... I want to be clear that the comments on working capital are on cable working capital. Mobile continues to have the detriment of the EIP notes, and so those will continue to be a drag, though the securitization plan that we did in the quarter does help that.

Ben, on the cost, you can just take a different layer of look. So Jessica's right. We're doing lots on vendor savings, overheads, organizational effectiveness in a lower growth environment. All that's true. But just want to make sure everybody understands that the key focus for us in terms of real permanent, lasting, and accelerating cost reduction is just to be a better service operator. So continuing to invest in our front line, to have better tools, process, and systems to make the investments that we've made in tenure. And we see that. So we are having real results from some of the one-time and permanent cost reductions, but we're also probably having bigger success on reducing the amount of service calls, reducing our truck rolls, increasing the quality of the service that we provide. That's where the money's at. And then when you think about operating leverage, which is a term that you've used before, the best way to have a better operating leverage is to have more customers and to have more products per household and have higher revenue And that way you can, together, being a better service operator and having higher penetration of your products, you actually lower your cost to serve per customer. You lower your cost of capital per customer as well, and you become a better cash flow operator. So all of those things still hold true, and it's why when we talk about expense management that we talk about you know, really not doing anything that would impact sales or service because that's the true efficiency opportunity and that's the opportunity to deliver long-term pre-cash flow. And our views on that and our front line hasn't changed at all.

Thanks.

Very helpful.

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

Our next question will come from Jessica Reeve-Ehrlich with Bank of America Securities. Your line is now open. Please go ahead.

Question on video, I guess. Can you talk about the take-up of direct-to-consumer in these hybrid linear offers? And you've mentioned a couple that are coming, Paramount Plus and Hulu. Is there anything else on the horizon? And then secondly, you mentioned political advertising should pick up in the second half. Given the current political environment, can you give us some color on expectations and if that's increasing?

Sure. On the first one, Jessica, the DTC take-up is going very well. The first one, I know a lot of people think about the Disney deal was in September, but we launched, I think, late in January on Disney Plus Basic, and it's going well, and it's growing every month. We're adding some additional features into it, which will be helpful to even further accelerate the monthly growth that we see. That includes, as I mentioned in the prepared remarks, the addition of the Disney Plus Premium as an incremental add-on. That will be coming soon, as well as the Disney Duo basic bundle of plus $2 for Hulu. So that allows you to have a comprehensive package the same way that exists inside of retail, and that's helpful. It was always the design. But there's complexity in terms of implementing all of this, also because some of the authentication principles that vary between different operators in terms of credentials and TV everywhere and whatnot. But it's going well. And it's accelerating, you know, ESPN Plus. You know, I didn't mention that on the call. It's also having very good take-up. It's, you know, high value into our RSN packages. It's a small portion of the base, but the penetration is going well. Paramount Plus will launch soon. And VIX, we just launched. And we've always had MAX, you know, and so that has existed already within the TV Everywhere authenticated universe. And our expectation is over the, you know, next year or so that we'll have you know, a fully baked set of product, which is really what we're working towards. And the more scale we get there, the more effective it's going to be. You know, we're not sitting here saying that we're going to arrest completely the loss of video. But I think what we are saying is to the extent we're going to put video on our broadband bill, it better have value. And if it doesn't have value to the customer, then we'd rather they just go take that through the direct-to-consumer applications. And we need to be proud of what we're putting on the bill.

And that's not where

The MVPD space has been in a long time. We see a path to being able to be proud of what we're putting on the broadband bill as a video product. It may be expensive, but it has a significant amount of value. And using that to drive the converged connectivity relationship. So while it may not be growing, it's still really important, and I think it can be very valuable to our converged connectivity relationships. In terms of what's up next, we're not going to give a programming renewal schedule, but we're optimistic that this has been adopted both from an understanding that the DTCs really do need to be included as part of the full video package, and that's actually better for programmers because of reduced churn and upsell opportunities into the ad-free versions of these products as well, and that, look, the At the end of the day, if a customer can go out and get the same product at a cheaper price in the marketplace, I think they should. I don't think we should ask them to pay more through us. And so those are some of the core principles that we've had amongst many. But those are some of the bigger ones. You know, political advertising, you know, it's always, as you know, it's always a jump ball as to exactly where it's going to go. And it's evaluated on a state-by-state basis. And so you can't really say that it's a It's the same nationally everywhere, so it depends on some of the swing states. Admittedly, the events of the past week have jumbled what you thought that might look like. And certainly, when you take a look at fundraising and the volatility in what could be swing states, it looks like political advertising nationally is going to be higher than what it probably would have been just 10 days ago. But that doesn't mean it happens necessarily in the right states. for us and so we're keeping an eye on that and you know it's nice when it happens but it's one time in nature and so that's why we always try to talk about our results with and without the impacts of political advertising because what is you know this year's windfall will be you know next year's headwind and we want to make sure everybody's focused on the right thing which is the underlying growth profile of the subscription business.

Thank you. Which includes

which includes the core advertising, which continues to do well with or without political advertising.

Thanks, Jessica. Operator, we'll take our last question, please.

Our final question will come from the line of Peter Cipino with Wolf Research. Your line is now open. Please go ahead.

Thanks, and good morning. I have an ACP question that looks beyond the third quarter. Arguably, ACP has been history's greatest retention program for broadband operators, and you took good advantage of it. Looking beyond the wave of involuntary disconnects in Q3 and out to, say, 2025, does that retention benefit go away? I mean, certainly it does, and then what needs to step up in its place, or should we expect a slightly higher underlying churn rate attributable to those 4 or 5 million former ACP subs who go from having essentially no churn to maybe having a normal churn rate?

Sure. Well, look, once upon a time, there wasn't an ACP, but it's been a long time. When you think about, we had the, during the pandemic, we had the, we were a big participant in the remote education offer to keep Americans connected, the EBB, which evolved and became the emergency broadband benefit, which evolved and became the ACP. And we've been a significant participant in, All of those, as has the industry. I think we all have a lot to be proud of for stepping up and really driving those programs. But they didn't exist before. And broadband is a really important product. And from a charter perspective, we have ways to continue to address that marketplace. Before I go there, you asked about the market level activity. I do think that in an environment where ACP or an equivalent doesn't exist, that by definition you have more customers coming in and out of broadband based on affordability. That drives up transaction volume both from a non-pay disconnect as well as from a gross ad sales perspective. When you have better products and better price, that can work towards your advantage, so it's not all bad from our perspective. But we also have the ability to, at acquisition and for retention, offer unique products. Our Internet 100 is attractively priced. It's not for everybody, but it's affordable. And you can pair that together with Spectrum One, so the ability to have a free mobile line for the first year, and then that line rolls to $30 after a year. If you think about a typical one-line environment or even in a typical two-line environment, the average cost of a line is over $60. And so even at retail rate of $30, we've built in a savings of $30 per month through taking mobile together with our attractively priced high-powered broadband product. And that's as much, if not more, than the ACP benefit, which means that if you take our products, we have the built-in ACP savings available to you when you really take full advantage of our product set. And so that is... product and a combination that didn't fully exist prior to all of these programs. And I think we can, by having a wider availability for low-income population of these broadband offers, which we have together with our Spectrum One offer combined, I think we can save customers as much, if not more, than they're whether getting through ACP relative to the past. So I think we're in good position to be able to address the base, but the market activity you know, for sure is going to be higher than what it's been the last couple of years. Thanks, Chris. Thank you very much.

Thanks, Peter. And that concludes our call. We'll see you next quarter.

Thanks, everyone.