Ladies and gentlemen, thank you for standing by and welcome to Charter's Second Quarter 2020 Investor call. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Stefan Anninger. Please go ahead, sir.

Good morning and welcome to Charter's Second Quarter 2020 Investor Call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K and also our 10-Q filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis unless otherwise specified. On today's call, we have Tom Rutledge, Chairman and CEO; and Chris Winfrey, our CFO. With that, let's turn the call over to Tom.

Thanks, Stefan. We've remained focused on serving our customers and the communities where we operate through a difficult period of time. These services have enabled remote working, distant learning, telehealth services and family communications in support of the broader economy and the welfare of our communities. In mid-March, as part of our effort to keep Americans connected during the shelter-in-place orders, we pledged to do a number of things. We committed to offer Spectrum Internet for free for 60 days to households with students or educators who did not already have a Spectrum Internet subscription. And through that program, which ended for new subscriptions on June 30, we added 450,000 customers. We also committed to suspend collection activities and not terminate service for residential or small and medium business customers who are experiencing COVID-19-related economic challenges. And through the Keep Americans Connected programs, which also ended on June 30, we helped approximately 700,000 customers who indicated economic hardship due to COVID-19. In addition, we opened our WiFi hotspots across our footprint for public use, opened up our Spectrum News website to ensure people have access to high-quality local news and information, and we rapidly connected and upgraded fiber services to health care providers. We've donated significant airtime to run public service announcements to our full footprint of 16 million video subscribers. And for our employees, we implemented 2 weeks of additional paid sick time for COVID-related illnesses and an additional 15 days of flex time to address other COVID issues. We increased our wages for all hourly field operations and customer service call center employees by $1.50 in April going back to February and committed to raise our minimum wage for hourly workers to at least $20 an hour over the next 2 years. We continued to perform well in…

Thanks, Tom. Now turning to customer results on Slide 5 of our presentation. Including the impact of COVID-19-related customer offers and retention programs, we grew total residential and SMB customer relationships by over 1.8 million over the last 12 months or by 6.3% and by 755,000 in the second quarter. Including residential and SMB, we grew our Internet customers by 850,000 in the quarter and by over 2.1 million or 8.3% over the last 12 months. Video grew by 94,000 in the quarter, better than last year's second quarter decline of 141,000 video customers. The positive performance was driven by churn benefits at a time when consumer demand was high as well as the pull-through effect of our COVID programs. Wireline voice grew by 45,000, also benefiting from the same likely temporary factors as video. Mobile net adds accelerated again to 325,000. Beginning in mid-March, we introduced 3 COVID-19-related offers and programs for our customers. Each of these offers ended on June 30. As we did in our first quarter materials, we had provided an addendum showing the customer counts for each of these 3 COVID-related offers as of the end of the second quarter. The first was our Remote Education Offer, which provided 60 days of free Internet for new Internet customers with students or educators in the household. Over 90% of these customers are on our flagship speed tier or higher. This channel looked very much like traditional acquisition with nearly 50% having subscribed to and paid for additional products along the way. At the end of the first quarter, we reported 119,000 internet customers in the offer, which rolled off either as paying customers or disconnects during Q2. For Q2, net of some small in-quarter roll-off churn, we added 329,000 more Internet customers to the 60-day free…

[Operator Instructions]. And our first question comes from the line of Jonathan Chaplin with New Street.

Two quick ones, if I may, Chris. Firstly, can you give us just a little bit more color on how you think the third quarter in particular but really the rest of the year will unfold as it relates to some of the COVID-related benefits and costs you saw? So specifically, it sounds like there are about 360,000 subs still on various offers. Do you think that will -- could translate into higher churn in 3Q? And then is there any more write-offs for revenues or negative bad debt impacts you anticipate from the initiatives that we've seen so far, not taking into consideration anything that happens with the economy and the macro environment? And then we were interested to see that you guys registered for the RDOF subsidies. You've been growing households at close to or passing it close to 2% recently. If you're successful in those auctions, what could that potentially increase to?

Why don't I start with the last one first? We're in a quiet period as it relates to the RDOF, and so we won't be commenting any further than what we've already said in the 8-K. The first one, and I'll give a shot at it here and then Tom may want to chime in as well, is the programs that we had in place have wrapped up as of June 30. And as I mentioned in the prepared remarks, the customers that we created through the end of the first quarter and the second quarter on the Remote Education Offer, so all those net -- all those gross additions that came through, 90% of them are still with us, and the vast majority of them are paying and 50% of whom altogether had actually taken additional products from us and were paying along the way. So I don't have a crystal ball. But so far, they look every bit as good as regular-way acquisitions. They're not a low-tier package from us. Over 90% of them are in the flagship product. And then while there's risk attached to any of that because of the programs we've put, so far we don't see it. We're just putting it out there that we're watching it and so far it looks very good on the Remote Education Offer.

I would just add that from a profile perspective, they look just like our regular customer base, and they are like our customer base. And the 50% that bought video or voice from us or mobile went through the normal credit check process that all customers go through. So they very much are behaving like all customers that we create. And I look at that offer in a lot of ways as a conventional promotional offer with a broadband benefit associated with it for 2 months, but it brought in new -- real new customers that subscribe and look like existing customers.

Yes. And then the other program was Keep Americans Connected. At the peak, we had 200,000 customers who had gone beyond the point where we normally would have disconnected the customer. We've written off the balance for anybody who had an extended balance. So that was the $85 million that I mentioned. So by the time we got to July, all of those customers were in good standing partly because some of them had been paying along the way and partly because we wrote off. Now those that were written off revenue, as we sit here today, and we looked at those that cycled through the June billing cycle, they're paying and they're paying at a very good rate. And so if we had to sit here today, we'd say it looks very much like regular customer and customer churn. The caveat that we've put out there is obviously, there's a fair amount of stimulus that's been in -- a federal economic stimulus that's been in the environment, and we don't know what that's going to look like. We don't know how COVID is going to continue to develop. And nonpay will develop going forward, as it normally would with how the economy goes and how stimulus goes along with it.

And the way I would describe the macroeconomic risk factors going forward is that they apply to the entire business just like they apply to the customers that we had created in this quarter, and we don't see a big difference in the customer base that we created in the quarter and the average customer base.

The final question that you asked, Jonathan, was do we see any more revenue write-off or exceptional bad debt later this year. No, none attached to any of these programs. To the extent that what we just talked about if the economy is difficult and there isn't stimulus, would we expect a higher nonpay rate in that environment which would result in bad debt? Yes, but that would be the same for any business. And that'd be the same for us in any environment where you have the economy which is more difficult.

Our next question comes from the line of Phil Cusick with JPMorgan.

First, Chris, can you dig into the video strength? Well, I assume the inflection was pull-through from customers coming in on some kind of promotion for broadband and taking that video as well. With that program done, should we assume video trends return to normal going forward? And then second, Tom, your contract expires next year. Can you give us an idea? Do you plan to keep running the company after that? Or give us any update on how you and the Board think about succession planning?

Sure. All right, well, I'm going to answer both of your questions. So video is a -- the secular trends for video haven't changed. What happened is that we've always said that we thought it was possible to grow video if our overall relationship growth was high enough because there still are a -- the ratio of video customers to overall customers, it is continuing to decline, but it's -- if you grow fast enough -- if you grow faster than that rate of decline, then you create video growth. And that's really what's happened here. Nothing has changed the secular trend, although there probably was a little less downgrading during the period because so many people were stuck in front of screens at home. But I don't think the overall trend has changed. What really just happened is we accelerated our growth rate overall in customer relationships. And as a result of that -- and the shift in share, some of the video -- we grew faster than the rate of video decline, and it's that simple. In the past, we said we thought that we're -- that satellite would decline and that we could grow fast enough to have small video growth. Overall, growth declined faster than I thought it would over the last several years, but it's still -- I would say that, that trend has not changed. All that changed was we grew our overall relationships faster. And with regard to me, I intend to continue to be here, and the Board would like me to stay.

The next question comes from the line of Doug Mitchelson with Crédit Suisse.

So a question for Chris. You used plain English and I know you're specific with your comments, but I'm still going to ask for a clarification on the comments on offensive opportunities being reviewed in 2Q, and I think you said in this order: purchase someone else's shares versus purchasing our own. So should we read that as the company's reviewing and interested in M&A at a higher level than previously? And then Tom in his prepared remarks mentioned investing in the networks. Is that emphasis on investing in the networks suggesting a different outlook for CapEx than previously stated? Or is that just within the profile that you've previously set?

And thanks, Doug. So there's really -- since Tom and I both have been here, there's no change in our prioritization of cash flow. We've always said the most attractive way to deploy your excess free cash flow is to invest in further growth opportunities inside the business. The second would be to acquire other companies which have a better rate of return than buying back your own stock. And the third would be to buy back your own stock. And the reason for that order is because it's -- if you can get the first 2 that I mentioned going, it actually enhances the quality and the return of the buybacks that you do, too. Our views on that haven't changed, so I was just reiterating that's how we think about it. And I don't think in Tom's comments we were trying to foreshadow any type of major capital increase. We just said that our philosophy has always been to invest in our networks. We've done so. It's -- you can see the benefit of having gotten in front of capacity needs well in advance and put us in a position to add this amount of subscribers. And there's no major change that we're signaling there other than we intend to continue to invest very, very well inside of our networks.

Yes. I wasn't saying that we were changing our profile investment strategy. I was merely commenting that we've been investing in capacity upgrades, and those capacity upgrades have served us well, and they serve the whole communications infrastructure of the country well. And you have a very competitive facilities-based market in the United States, and it results in very high-quality products, and it will result in future high-quality products.

Our next question comes from the line of Brett Feldman with Goldman Sachs.

When we look at the success you had in the first half of the year with your broadband subscriber growth, one of the reasons is you identified a demographic, which is students and teachers, where it seems like you may have been particularly underpenetrated and you came up with this promo that was really made for the moment, and it worked. You still have very low broadband penetration relative to what I think you believe it's ultimately going to be, and so I'm wondering whether you think there's an opportunity on the heels of the REO program to come up with other promos that are uniquely appealing to other demographics where maybe that gap is a bit wider. And then just on the wireless. Obviously, the net adds there were very strong. I'm wondering if that's because there was a very high attach rate with the broadband ad that you had and, as a result, if broadband ads are going to be more moderate in the back half, we should also have the same outlook for more moderate wireless ads.

Well, to your implication, yes, if we could find ways to segment promotional activity that will result in faster growth, we will take advantage of those opportunities. And one of the reasons we were able to be successful with the promotion that we just did was our ability to not only do the promotion but to execute it and to actually install it in a very short order of time in a way that was convenient for customers using self-installation. And so yes, there's continued opportunity for acceleration. But that was a particularly successful result. And we will continue to explore opportunities going forward to accelerate growth from a marketing perspective, but we feel pretty good about our ability to continually grow and to continually -- and to -- and accelerate that growth, and nothing that has happened to date has dissuaded us from that perspective.

And nothing to -- not to diminish our own prowess either, but if you think about the demographics of who has somebody in their household who can claim to be a student or claim to be an educator, it's a pretty broad segment of the population. It was just a very attractive offer that was out at a point in time where people needed it, and it was a good opportunity to create new...

It was not the majority of our sales by any means.

No. But it's still created a new market and drove additional share shift.

It was a nice -- and it fit the moment.

The other question was whether the wireless adds that we created in the second quarter were also tied similar to video or voice as a function of the broadband growth. And would that indicate that the second half of this year, wireless net adds could be less if we had less broadband growth?

Oh, I think no.

I don't either.

The way we look at the mobile growth opportunity, it's really a function of activity levels and how often we get a chance to communicate with our customers about mobile and what the rate of that attach rate is. And that continues to improve. And it's a relatively new business for us, and we are continuing to improve our tactics at that business and we're continuing to get improvement every week in terms of our results. And so we have high expectations for continued growth in that area.

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Chris, I don't know if you can give us color now, maybe some uncertainty, but do you expect any benefit or a shift in -- or a year-over-year impact on the sports rights front in the third quarter around the Dodgers and Lakers? You mentioned it was delayed, but I do think there have been games that have been canceled. So just curious if we should be thinking about that. And then maybe for Tom. Are you thinking about accelerating your sort of network evolution over time? I know you talked about not changing your CapEx profile in general. But scalable infrastructure, I noticed, ticked up. You talked about getting ahead of contention. I think you mentioned 10G. The business is throwing off tons of free cash flow. I'm just wondering if -- do you think about where you want the network to be wired and wireless over time? Are you thinking about trying to bring that forward just to take advantage of all the opportunities the company has?

Yes. It was -- sort of in broad terms, yes, we want to continue to take advantage of the technological opportunity that the network provides us and the cost-efficient way to upgrade the network on a relative basis to what we think our competitors can do. And so to the extent that demand exists for new products or that demand can be created for new products and drive revenue associated with those new products, we want to upgrade our network to take advantage of that. And at the moment, we have a lot of capacity. And so I don't see, at the moment, our profile changing. But as a general notion, we think that with relatively efficient capital investments, we can continue to upgrade our network through time. And 10G is a reflection and a description of that opportunity. It's a cost-efficient upgrade platform that allows us to get to very high capacity, low latency on a relative basis more efficiently than anyone else.

Ben, on your first question, the delayed Dodgers and Lakers costs from the first and the second quarter, they've been pushed out to varying degrees depending on the RSN and the sport and the adjusted season. But the biggest driver for the first half of this year is the P&L recognition of the Dodgers where we've paid the cash, but the expense for unplayed games will be amortized over the remaining life of the contract. So it's unlikely there'll be a large catch-up in the back half of this year. Now to the extent that there are programming rebates, those are very complex. And in most cases, we're not going to know for some time if we'll receive any rebates or credits back from the leagues. The same applies to programming networks on the programming cost side. But what we have said is to the extent that we do receive any rebates or credits for canceled games or programming -- on the programming expense line, so between rights and programming extra cost due to the COVID-19 pandemic, we'll pass those along to the customers. So I don't see a material EBITDA impact, although it could put an offsetting revenue credit and expense credit to the extent it materializes.

Our next question comes from the line of Craig Moffett with MoffettNathanson.

Two quick questions, if I could. First, I'll go back to the question about footprint expansion, maybe not in the context of the RDOF auction but just in general. Can you share with us how much of the broadband growth came from the 2.2% footprint expansion that you're seeing now year-over-year? And absent any benefit from the RDOF auction, how fast do you think that footprint expansion could go? And then just second, could you update us on the path to profitability for the wireless business and your current view of how profitable that business can be with the current contract and then how much traffic you think you might be able to offload onto your own facilities in a way to reduce those monthly variable costs?

Well, we're in a quiet period with regard to RDOF, Craig, but -- and also, our 2% passings growth rate includes new construction as well, meaning new home creation. And the bulk of that is that at this point in time. So...

And maybe just to add on to it, those are -- homes passed are including what you count as marketable. So the extent that you're picking up additional homes maybe without even construction, we're building about 500,000, 600,000 a year. And so that's what you should think about as being added from a construction standpoint. It's not a material driver to our overall net adds inside of the quarter, and it hasn't been -- but as it builds up over time, it's obviously a cumulative effect as you start to penetrate those vintages of construction. But what we've done over the past year hasn't been a big driver for our broadband net add growth. But if you do enough of it over a prolonged period of time, it's snowballs.

It's good returns on investment capital spending over time. And it's -- the activity levels in the second quarter were similar to what they were planned for and what they were in the first quarter. So construction didn't actually slow down. And I'm talking about new home construction in the quarter.

Craig, the profitability of wireless, our views on it hasn't changed. We're not dependent on any additional offload above and beyond the WiFi that we already utilize. And even under that rather limited model, our expectation continues to be that our breakeven, if you had no additional subscriber acquisition, so no marketing and sales cost, no cost of provisioning new customers, that the break-even point would be around 2 million lines. That's a bit of a fictitious or academic scenario because we're always going to be selling it, we're always going to be marketing. But that gives you a sense of where the business, absent growth, would break even.

We're rapidly approaching.

Which we're rapidly approaching. So the economics of wireless are good. But like any start-up subscription business, it costs money to get going and you acquire customers, and they have a positive payback on every single one of them that we acquire. And so our views on the profitability hasn't changed. To the extent that we're able to improve the economics along the way, which we've talked about extensively in the past, that would make that even better, but we don't rely a ton on that.

And our next question comes from the line of Bryan Kraft with Deutsche Bank.

I had one Tom and one for Chris. Tom, Charter recently requested the FCC waive 2 of the conditions related to the approval of the Time Warner Cable deal on data caps and paid peering. What's the motivation behind that request? And if it was granted, how would that impact the business in the future? And then, Chris, I was wondering if you could just give us some updated color on how you're thinking about working capital usage for 2020.

So Bryan, when we did the agreement with the FCC, it had -- it was a 7-year agreement. So those provisions go away automatically in 7 years, but there was a caveat in our agreement that allowed us to terminate it after 5 years if the marketplace indicated that those conditions were no longer relevant. And I would just describe our goal there as housekeeping, and -- because it's -- because the market didn't require those conditions and in my view never did, we wanted to get -- we wanted to put ourselves from an opportunity perspective on the same even playing field as all of our competitors. But we don't have any change in business strategy or marketing strategy or product strategy as a result of that request.

And Bryan, on the working capital, if you think about the past 2 years, meaning 2018 and 2019, there were some pretty unique items that were taking place, whether it was the wind down of all-digital or last year we hinted a -- the big billing standardization project, which -- both of which had impacts on working capital. We haven't had anything like that. That's been abnormal this year. We do have large springs inside the quarter due to seasonality. You saw that inside of Q2 where we had a positive contribution to working capital. Last year, we had a negative one that was driven by that billing standardization which we talked about then. To give you an order of magnitude, there are days when we collect $300 million of cash in 1 day of collections. And so it's going to move around a little bit both inside of a quarter and for a full year based on the timing of your programming payments, the timing of your collections. And so I don't want to hoist ourselves here on our own petard and give a working capital forecast other than to say there's no major change this year that could cause us -- should cause us to be abnormal. And whether it's positive or negative by a few hundred million, it's not going to be a material driver to our free cash flow this year is my current expectation.

Our next question comes from the line of Mike McCormack with Guggenheim Partners.

Chris, maybe just a quick comment on the customers that are, I guess, at risk. When you look at the consumer versus the SMB piece of it, is there a different behavior or are there different behaviors between those 2 cohorts? And then maybe one for Tom, on the programming cost side. We're seeing in the last 12 months about 6.5 million subs come out of the video ecosystem. How does that change your thought process going forward, I guess, maybe in your own content strategy. And obviously, any thoughts about pushing back against the programmers? And then if you don't mind, just one last on Enterprise. Is that Enterprise weakness just delayed decision-making? Or are you actually seeing customer disconnects?

Okay. The last question, it's delayed decision-making.

Yes. People in large enterprise, they're not in the office. And to the extent their IT people are, it hasn't been the time where they're most aggressively looking to save money and change providers and move to Spectrum. We're still making a fair amount of sales, and it's picking up every month, just getting back to a more normalized environment. But it's been depressed, and it's going to be probably until businesses -- enterprise businesses get back to normal operations. Maybe I'll take...

There's opportunity there...

Yes, there is.

In creating new products and services for enterprise that -- and enterprise will use their telecommunications infrastructure in a different way, potentially going forward. So I think in the long run, there's more opportunity.

Yes.

The question on the thought process around programming and whether or not the whole sort of ecosystem argues for a more aggressive stance or not, I think, is the implication of your question. I think that's coming. And at some point, somebody oversteps the bounds of reason and there'll be some sort of breakage that will occur.

You had also asked about the difference between at-risk customers for nonpay as it relates to residential and SMB. On the residential side, we -- as I mentioned, we have a product that's in high demand, that's highly competitive. It's attractively priced. It's attractively packaged. And because of the way that we do all of that and operate, we don't -- there's going to be high demand for it. It's just a question of people's ability to pay. And there's some uncertainty around where does the economy go. And even if the economy is bad in an environment where you have a significant amount of stimulus, we tend to get paid very quickly in that environment because of the value of the product that we provide. So that's really how we think about the residential environment, is the economy and the level of stimulus. SMB, it's really a question of whether they're open for business or not and how -- if they're not open for business, how long can they sustain from their own liquidity perspective of not being in business. And that's the uncertainty that we face on that front. Otherwise, the quality of our products and our ability to go gain market share in an environment where people are looking for faster products at better prices, you would argue that -- if the share flow could actually increase in the SMB space for us along the way.

Yes. And Chris used -- sorry, Chris said that our SMB continues to accelerate over last year. And that's not just a function that businesses are back and working, but it's also a share shift function. And we're underpenetrated in SMB, and so our upside there is bigger than it is in residential from a market share perspective and we have the best products.

And Chris, those percentages that you laid out as far as those that are paying, is that a residential-only number that you were referring to?

I'm trying to remember which because I gave a lot of percentages today. So I gave the...

I figured like 50% are paying something.

No. That was residential in SMB. But the vast, vast majority of those unit -- if you take a look at the addendum we provided, the vast majority of those customers were in the residential space, and so it's heavily weighted towards residential. But it was both. It was both. And so 60% of customers have been making some payment, including partial payments, half of which -- or about 30% of the total base had been making full payment, and that included -- those stats included both residential and SMB.

And our last question comes from the line of Tim Nollen with Macquarie.

I'd like to come back to the video numbers. I just wanted to ask if you think your numbers are helped somewhat by what appears to be a bit more of a skinny bundle strategy that you offer rather than offering some more OTT services, OTT bundles as some of your competitors are doing.

The answer is yes. Yes, we have a range of video products, including a traditional bundle. And to some extent, in the long run, the skinny packages have limits in terms of what we can penetrate with because of the way the contract language works, our programming deals and the minimums that are required in the -- the minimum distribution required in a big bundle. So there's a challenge for us in balancing all of that that so far we've been successful in dealing with. But the answer is yes, and the challenges in video have not gone away.

And do you think you might be looking at offering some OTT types of one-offs or bundles within your video offering? Or is that something you're going to stay away from?

You mean -- I'm not sure I fully understand your question. But you mean are we willing to do additional packaging?

Yes. I'm not talking about skinny bundles in terms of traditional linear or skinny bundles, but things like offering an OTT service or offering an OTT bundle from a network rather than a skinny linear bundle.

Oh, Yes. Yes, absolutely. And I think you'll see us selling more and more packages of OTT product that we don't necessarily own but more on a consignment basis or on a -- potentially even a packaging basis.

Thanks, Tim.

Thanks, Tim.

Operator, that completes our call.

Thank you, everyone.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.