Earnings Call Transcript - CHTR Q2 2021

Operator, Operator

Good day. And thank you for standing by. Welcome to Charter's Second Quarter 2021 Investor Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. (Operator instructions.) Please be advised, today's conference is being recorded. (Operator instructions.) I would now like to hand the conference over to your speaker, Stefan Anninger. Please go ahead.

Stefan Anninger, Head of Investor Relations

Good morning. Welcome to Charter's second quarter 2021 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 these 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.

Tom Rutledge, Chairman and Chief Executive Officer

Thank you, Stefan. Our operating strategy continues to deliver good customer growth and even better financial growth. While second quarter residential customer activity remained lower than normal, residential sales activity is slowly picking up. And because churn continues to be so low, those trends are having a meaningful impact on our net additions and an even larger impact on our financial growth rates. Our Commercial business also saw improvements in the second quarter. Small business sales were up versus the second quarter of 2019, and enterprise sales continue to steadily improve. Advertising also improved with second quarter revenue exceeding second quarter 2019 levels, driven by our advanced advertising products. So our view is the economy is improving, and our business trajectory is normalizing. For the full quarter, we added over 330,000 customer relationships with customer growth of 4.2% year-over-year. We also added 400,000 Internet customers in the quarter and 1.5 million over the last year for year-over-year growth of 5.5%. We added 265,000 mobile lines, and we grew our adjusted EBITDA by 11.8% and our free cash flow by over $2 billion year-over-year. We remain focused on driving customer growth by offering high-quality products and service under an operating strategy which works well in various market conditions. We've spoken significantly about wireless convergence and the capital-efficient nature of our expanding network capabilities and products. A key piece of our strategy also includes treating service as a product itself and giving our customers the flexibility to manage their service and interactions with us whenever and however they want. We are improving the quality and efficiency of our interactions with customers by expanding our customer self-service and self-care capabilities and digitizing and modernizing a number of elements our customer-facing and network operations groups can use. Those efforts improve the customer experience and the quality of our products, while reducing transactions with customers, lowering churn, extending average customer life and reducing costs. We've responded to digital and self-service trends in several ways. Today, over 20% of our residential relationship sales are generated through our online channel, with fully automated provisioning and installation scheduling and zero touch by Charter. And close to 85% of our sales take advantage of our self-installation program, reducing costs and driving higher customer satisfaction. Today, customers also choose their preferred method of interacting with us when they have questions or service issues, including digital chat, phone, online, in-person at one of our stores or via the Spectrum app. Our ability to avoid and manage network impairments has improved significantly over the last several years by using machine learning to pinpoint potential service degradation in real time and often in advance, allowing us to avoid disruption altogether. We're now coupling that information with customers' preferred communications to proactively notify them of maintenance and restoration. Today, over 60% of our customers engage with us exclusively via digital means when they have a service question or issue. Customers that still want to interact with us via phone can do so, and service from our call centers continues to become more efficient, given new tools we're deploying which enhance our ability to properly answer questions and solve first-time customer calls. The fact that our call center workforce is U.S.-based and fully insourced, with employees who have training and career paths here at Charter, enhances that. In aggregate, all of our efforts have reduced total customer transactions, including billing and service calls, repeat service calls, truck rolls and network impairments, all of which improved the quality of our products. We're executing well, yet we remain early in the process of optimizing our services product. So together with our network and product capabilities, we remain confident in our ability to grow our customers' EBITDA and free cash flow for many years to come. That confidence stems from a number of factors, including the demand for our connectivity products, the long-term growth rate and usage on both wireline and wireless networks, our ability to deliver unique fully converged connectivity service packages while saving customers hundreds or even thousands of dollars a year, and the fact that our share of household connectivity spend, including mobile and fixed broadband, is still low. From a passings perspective, we remain under-penetrated relative to our long-term opportunity. Finally, our capital-efficient path to expand network capability and improve the quality of our products in a manner that's more capital efficient than our competitors gives us a structural advantage to compete over the long term. Ultimately, our strategy is founded on the principle of providing superior services at highly competitive prices. Now I'll turn the call over to Chris.

Chris Winfrey, Chief Financial Officer

Thanks, Tom. As we discussed last quarter, given the effects of COVID in 2020, 2019 remains the better customer growth comparison for 2021. We'll continue to reference the COVID schedules we've provided last year and included again on slide 17 and 18 of today's presentation to help with the year-over-year financial comparisons. Turning to our results on slide 5. We grew total residential and SMB customer relationships by 1.3 million in the last 12 months and by over 330,000 in the second quarter. Including residential and SMB, we grew our Internet customers by 400,000 in the quarter and by 1.5 million, or 5.5%, over the last 12 months. Video declined by 50,000 in the second quarter, and wireline voice declined by 78,000. In residential Internet, we added a total of 365,000 customers in the quarter, higher than the 221,000 that we gained during the second quarter of 2019. Our residential video customers declined by 63,000, less than the loss of 150,000 we saw in the second quarter of 2019. In wireline voice, we lost 99,000 residential customers in the quarter, also less than the loss of 207,000 in the second quarter of 2019, and that was driven by continued fixed-to-mobile substitution. Turning to mobile, we added 265,000 mobile lines in the quarter. As of the end of the quarter, we had 2.9 million mobile lines. Despite the lower number of selling opportunities from cable sales, we continue to drive mobile growth with our high-quality, attractively priced service rather than using device subsidies. A few things to keep in mind when reviewing this quarter's customer results. First, we estimate that 60,000 of our residential Internet net adds would not have occurred without the Emergency Broadband Benefit program, or EBB, which launched in May. These incremental Internet net adds had little impact on our video and voice net adds. Some of what we estimate as business-as-usual sales also enrolled in the EBB program, as did some of our existing customers. Those customers did not add to our second quarter customer net adds. Our second quarter customer net adds also benefited from certain state-mandated moratoriums on Internet, video and voice disconnects. Internet benefited by about 40,000, with video and voice net additions also benefiting, but to a lesser degree. Some states have recently ended their moratoriums. So similar to our Keep Americans Connected customers last year, we will work with these customers to forgive portions of their bills and provide financing options to customers. And we expect to keep them as customers, same as we did with the Keep Americans Connected program. Looking at the bigger picture, residential customer activity levels in the marketplace, including sales, churn and particularly non-pay churn, are taking a bit longer than we expected to return to normal levels. As a result, our first half 2021 financials have been better than we expected, driven by lower operating expense given lower transactions, and significantly lower bad debt. We continue to expect transaction volume to pick up in the second half of this year, driving more selling opportunities in the market for cable and mobile, and we still expect full-year Internet and customer relationships to be at or above 2019 net additions. So the financial effects that we expected of a higher churn environment and expected higher sales for Charter as a share taker could accrue later in 2021 or even into 2022. Moving to financial results, starting on slide six. Over the last year, we grew total residential customers by 1.2 million or 4.1%. Residential revenue per customer relationship increased by 1.8% year-over-year, given last year's second quarter residential revenue write-down of $76 million for customers in the Keep Americans Connected program, as well as bill credits that we provided last year as part of the remote education offer, which provided two months of free Internet. Those one-time comparison benefits were partly offset by the same bundle and mix trends we've seen over the past year, including a higher mix of non-video customers and a higher mix of Choice, Essentials and Stream customers within our video base. Keep in mind that our residential ARPU does not reflect any mobile revenue. Slide six shows residential revenue grew by 6.8% year-over-year, reflecting customer relationship growth and last year's COVID impacts. Turning to commercial. SMB revenue grew by 6%, and this growth rate reflects COVID-related impacts of $17 million that negatively impacted the second quarter of 2020. Excluding this impact from last year, SMB revenue grew by 4.2%, faster than last quarter's growth. Enterprise revenue was up by 5.1% year-over-year and was also negatively impacted last year by $18 million due to COVID credits. Excluding this impact from last year, enterprise revenue grew by 2% and by 5.8% when additionally excluding wholesale revenue. Enterprise PSUs grew by 3.7% year-over-year. Advertising revenue increased by 65% year-over-year, primarily due to COVID impact last year. When compared to the second quarter of 2019, advertising revenue grew by 4%, primarily due to our growing advanced advertising capabilities, partly offset by lower local ad revenue. Mobile revenue totaled $519 million, with $214 million of that revenue being device revenue. In total, second quarter revenue was up 9.5% year-over-year. Moving to operating expenses on slide seven. In the second quarter, total operating expenses grew by $575 million or 8% year-over-year. Similar to revenue, the year-over-year operating expense growth rate is elevated due to 2020 COVID effects. Programming increased 3.6% year-over-year due to higher rates, offset by a higher mix of lighter video packages, such as Choice, Essentials and Stream. Regulatory, connectivity and produced content grew by 36.9%, driven by more Lakers games than normal this quarter given the delayed start to the NBA season combined with no Lakers or Dodger games expensed in the prior year due to COVID-19. Excluding sports rights costs related to our RSNs, this expense line item grew by 3.2% year-over-year. Cost to service customers declined by 1.2% year-over-year compared to 4.2% customer relationship growth. The decline was driven by lower transaction costs and lower bad debt, partly driven by government stimulus packages. Excluding bad debt, cost to service customers was flat year-over-year despite a higher number of customers and outsized hourly wage increases that we implemented earlier this year. Marketing expenses grew by 3.1% year-over-year, driven by second quarter 2020 COVID impacts, including lower media placement rates in 2020 and a payroll tax credit. Mobile devices totaled $586 million and were comprised of mobile device cost tied to device revenue, customer acquisition and service and operating cost. Other expenses grew by 13.5%, driven primarily by higher corporate costs and advertising sales expense given the strength of ad sales this quarter, combined with the weakness in the ad market in the prior year. Adjusted EBITDA grew by 11.8% in the quarter. Turning to net income on slide eight. We generated $1 billion of net income attributable to Charter shareholders in the second quarter versus $766 million last year. The year-over-year increase was driven by higher adjusted EBITDA. Turning to slide nine. Capital expenditures totaled $1.9 billion in the second quarter, in line with last year's second quarter capital spend, driven by higher scalable infrastructure spend, primarily related to augmentation of our network capacity at our normal pace for customer growth and usage with incremental spending to reclaim the network headroom we maintained prior to COVID. This was offset by lower spend on modems, routers and self-installation kits given the elevated sales volume in the second quarter of last year. We spent $124 million on mobile-related CapEx this quarter, mostly accounted for in support capital and driven by investments in back-office systems and mobile store build-outs. For the full year 2021, we continue to expect cable capital expenditures, excluding the RDOF investments, to be relatively consistent as a percentage of cable revenue versus 2020. Slide 10 shows we generated nearly $2.1 billion of consolidated free cash flow this quarter, an increase of 10.8% year-over-year. We finished the quarter with $87.5 billion in debt principal. Our current run rate annualized cash interest, pro forma for financing activity completed in July, is $4.0 billion. As of the end of the second quarter, our net debt to last 12-month adjusted EBITDA was 4.38 times. We intend to stay at or just below the high end of our 4 to 4.5 times leverage range. In June, we converted Advance/Newhouse's preferred partnership units, which had a face value of $2.5 billion and paid a 6% coupon. They were converted into 9.3 million common partnership units, which means we no longer pay $150 million in preferred dividends per year. During the quarter, we repurchased 6.1 million Charter shares and Charter Holdings common units, totaling about $4 billion at an average price of $656 per share. Since September of 2016, we've repurchased $47 billion or 36% of Charter's equity at an average price of $421 per share. So we have a successful operating model and growth-oriented investment approach which, when coupled with the unique balance sheet structure and improving capital allocation strategy, has and will produce cash flow growth and shareholder value for years to come. Operator, we're now ready for Q&A.

Operator, Operator

(Operator instructions.) Our first question comes from the line of Craig Moffett with MoffettNathanson.

Craig Moffett, Analyst, MoffettNathanson

Hi. Thank you. I'm going to — instead of talking about broadband, which everybody wants to talk about, I want to ask about your other two big revenue drivers, wireless and business services. First, with business services, I think you said last quarter the repricing is now largely over for the Time Warner Cable customers. Can you just talk a little bit about what you're seeing in business services? It looks like with particularly weak results from Verizon and AT&T that share gains may have meaningfully accelerated now in the wake of COVID. And then with CBRS and wireless, I wonder if you could just talk about how much traffic you think you can offload from the MVNO agreement. And what kind of timeline do you think you'll be before you'll start to see those traffic reductions on your own network?

Chris Winfrey, Chief Financial Officer

So maybe I'll start with business and then I'll let Tom cover wireless. On the business services segment, you have to really distinguish between SMB and enterprise. So I'll start with what we're seeing in SMB and then with enterprise. For SMB, as businesses recover, new businesses open and the share flow opportunity for us is growing, and you see us returning to higher growth rates. At the same time, most of the repricing in the SMB space at the legacy TWC base is behind us with the exception of the voice product. So it's largely behind. What you're seeing is accelerating net add growth accompanied by less price pressure, which is resulting in accelerating sequential revenue growth in SMB. We're steadily marching down a path to continue to go higher on both. I think the runway for us on SMB continues to be very long, even though we have a meaningful percentage participation in that marketplace. On the enterprise side, we're lower penetrated, and our value-added opportunity is due to our significant amount of deployed fiber throughout our footprint to be able to drive connectivity services, as well as software-defined network overlay products, including SD-WAN and Unified Communications. Our opportunity there is not only to provide more fiber connectivity, but to establish ourselves in the marketplace for these additional services and increase the stickiness of our fiber connectivity with additional products, and we're early on in that. That marketplace had really slowed down significantly during COVID. Our selling activity is back and above 2019 levels, despite the fact that certain key markets of ours, L.A. and New York City, are not back to where they were. So despite that, we're above where we were in 2019, both in units as well as our revenue takeout on selling. What you're not seeing is the full impact of that yet inside of our revenue for enterprise because those sales have long times to installation and therefore revenue conversion into billing. Our outlook on that is pretty strong. It's going to continue slowly but continually get better and better in the enterprise space. We're optimistic about both SMB and enterprise and think we can be a share taker there for many years to come.

Tom Rutledge, Chairman and Chief Executive Officer

Craig, with regard to CBRS and offload, we have our first infrastructure project that we're building that will use CBRS that won't be active until early next year. I don't anticipate any meaningful national offload until the beginning of 2023. That said, it is a long-term opportunity and we're a nascent player in the mobile space, just beginning our acceleration. We're incentivized to move significant amounts of traffic onto our own network, and we already do through our Wi-Fi network, which we can also optimize for traffic flow going forward. We can do the same with CBRS and potentially other parties as well. So we have an opportunity to continuously lower our cost going forward and to — even if we were not using CBRS — we have an opportunity just through our volume of activity to continuously move down the price curve. We're optimistic about our ability to grow our mobile business and at the same time take costs out of our mobile business as it grows. There are a variety of tools, including CBRS, that allow us to do that. But I would say that, without giving you an exact number, it would be material.

Craig Moffett, Analyst, MoffettNathanson

Fine. That's helpful. Thank you.

Stefan Anninger, Head of Investor Relations

Kavita, we'll take our next question, please?

Operator, Operator

The next question comes from the line of Jonathan Chaplin with New Street.

Jonathan Chaplin, Analyst, New Street

Thank you. Chris, I'm wondering if you can give us an update on when you think you'll switch from splitting nodes to potentially adding capacity to the plant with maybe an upgrade to 1.2 gigahertz with a high split. And if that happens later this year, is that contained within the CapEx envelope that you've guided to for the year? Thank you.

Chris Winfrey, Chief Financial Officer

So I'll start off and let Tom add into it. One, we haven't announced a definitive plan as of yet to if and when we're moving into a high-split territory. It's not going to be like you're going to flip the switch nationally; you'll start off market-by-market. And it's not going to be heavy inside of this year in any event. So I don't think it's going to have any material impact to our CapEx this year. As you look out over a 5- to 6-year period, really what you would be doing is using high-split to replace augmentation that you'd be doing otherwise to increase the capacity of our network. When you look at it over a 5- to 6-year time period, it would be at very low, if any, incremental cost. There may be pockets in that 5- to 6-year window where you'd be doing effectively capital pull-forward, and you might see some lumpiness in capital expenditures. But we're going to do what's right. If we can move fast and get additional augmentation and capacity, we'd do it. But I don't see a material impact this year and over a 5- to 6-year period. I don't think it changes the trajectory of our investment cycle. It gives us additional capabilities, additional speeds at a lower cost than what we'd otherwise incur.

Tom Rutledge, Chairman and Chief Executive Officer

The only thing I would add is the one thing it does is it gives you the ability to sell symmetrical data speeds at over a gig, and you can do that without really spending much incremental capital. At the moment, we really don't need that from a market-facing perspective or from product-use perspective. There's a perception issue in the market, but in terms of product use, there's none. So we don't need it yet from a marketing perspective. It's not the only tool in our toolbox. We have other technologies, including DOCSIS 4.0 and Full-Duplex, which we can use selectively and efficiently wherever augmentation or product definitions require. But the main thing to keep in mind is that the pathway we have to continuously upgrade our network capabilities is very efficient from a capital perspective and flexible.

Jonathan Chaplin, Analyst, New Street

Great. Thank you.

Stefan Anninger, Head of Investor Relations

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

Operator, Operator

The next question comes from the line of Michael Rollins with Citi.

Michael Rollins, Analyst, Citi

Thanks. Good morning. Curious if you could talk a bit more about what you're seeing in the broadband market and your performance in terms of just overall market expansion versus market share. And then separately, on the video side, can you share what you find is contributing to the better trend line of video losses? And how you see that going forward? Thanks.

Tom Rutledge, Chairman and Chief Executive Officer

Michael, I think the broadband market continues to expand, both through housing growth, population growth and adoption. The big issue in general adoption is more of a digital literacy issue than it is a cost issue. It's continuing to improve in terms of market adoption because of the way people can use the tools on the Internet today, at any level and at any age. I think you have a continuous march of broadband adoption right up to occupied housing over the next five years. You have that and then our ability to provide a superior service with a capital-efficient ability to continuously upgrade that service. With a full range of products, including mobile and video, we think we can continue to take share as a result of our ability to offer high-quality, low-cost products available to consumers across the marketplace. With regard to video, why are our numbers relatively better? We're selling more packages that allow us to tailor video to customer needs. It's a difficult business because, in general, video is very expensive. Our cost to provide video to customers is very high and continuously going up, and so people are being priced out of the market. We've put lower-priced packages into the market. The new direct-to-consumer products are churning at higher levels. Our products are also in that re-adoption process that occurs as a result of churn. To some extent, we think our video business is stabilizing, but the fundamental trends haven't stopped: prices are being continuously passed through to consumers and there's real pressure on the total cost of the bundle. The reason we're relatively better is that we've been moderate with our pricing and we've created new packages that cost less.

Michael Rollins, Analyst, Citi

Thank you.

Stefan Anninger, Head of Investor Relations

Kavita, we'll take our next question, please?

Operator, Operator

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

Ben Swinburne, Analyst, Morgan Stanley

Hey. Good morning, guys. Two questions. I'm wondering if you could talk a little bit about wireless sell-in. I don't know if you'd be willing to give us a number on percentage of new customers or connects that are taking wireless or any trends you're seeing or your ambitions long term? It would seem like that business is really starting to get a lot of momentum. And I was wondering if all your sales channels are turned on and just sort of how to think about the potential acceleration of that business — if you could share would be helpful. And then probably for Chris. Chris, just as we think about the third quarter broadband net adds, do we need to think about anything as it relates to either the EBB number you called out or the New York order, like definitely we need to factor in, in our thought process for third quarter? Any thoughts would be appreciated.

Chris Winfrey, Chief Financial Officer

Sure. I'll take a crack at both and then Tom may want to add additional color. On wireless sell-in, we're not going to give you the percentage of selling for obvious competitive reasons, but I can provide some color. We're essentially selling through all of our channels. It is a focus to make sure that on every conversation inside our selling channels we're bringing up how we can save customers money if they take mobile with us. Our sales success rate, our compliance for that conversation taking place and the sales success rate is going up. What happened inside Q2 and also inside Q1 is we just had fewer selling opportunities, but our success rate in selling is improving steadily across all of those channels, which includes retention as well. So in all our sales channels, and we're using it as a retention tool as well — customers call in and want to save money; this is a great way to save hundreds and even thousands of dollars a year for a customer by taking our mobile product. It's working well and we have a lot of confidence that it will continue to increase. As soon as the market flow opens back up in terms of selling opportunities, I think we're well positioned. On Q3 broadband, I don't expect EBB to have any negative impact on us in Q3. The customers that were protected from the state mandate perspective were already reflected in our Q2 results; it was small, but we've written off a portion of their balances. We're working with those customers and we've been successful in keeping those customers, similar to the Keep Americans Connected programs. I don't expect any major impact there. A couple of items to keep in mind about the coming quarters: Q2 2019 wasn't our strongest quarter, so we've outpaced that this quarter versus 2019. Q3 2019 was better than Q2 2019, so I'd caution against over-interpreting quarter-to-quarter comparisons to 2019. There will be a moment where market churn picks up and sales pick up, and there's always a timing question of whether everything flows through in one quarter. As a share taker over time, we expect higher sales and higher net adds, but the market churn rate has to pick up. Don't pay too much attention to any particular quarter; our growth rate is good, it's going to continue to be good, and we tend to look over longer periods of time.

Ben Swinburne, Analyst, Morgan Stanley

Got it. Thanks, Chris.

Stefan Anninger, Head of Investor Relations

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

Operator, Operator

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

Doug Mitchelson, Analyst, Credit Suisse

Thanks so much. First question, one clarification. Did you say that CapEx this year would be, I think, stable including RDOF or excluding RDOF, because I think the press release said excluding RDOF?

Chris Winfrey, Chief Financial Officer

Excluding RDOF.

Doug Mitchelson, Analyst, Credit Suisse

Okay. For some reason, I thought I heard including, which would have been a surprise. I'm just — a question on wireless on the go-to-market strategy and the position and look, you've been pretty clear on not offering phone subsidies, which obviously is somewhat self-limiting for subscriber growth. Are you already leveraging all of your marketing channels for wireless? Is the elbow grease put into driving gross additions something that we could consider relatively stable over time — as we see scale forward it's partly selling opportunities and partly churn on a growing subscriber base, and that's how we run the subscriber model? Or should we think of this as more of a financial decision as the economics of the business improve either through scale or learnings and operating smarter or offload on CBRS and Wi-Fi? As the economics improve, should we assume that you'll spend more on marketing and ultimately consider phone subsidies? Just trying to understand that top-of-funnel approach over the next bunch of years for wireless. Thanks.

Tom Rutledge, Chairman and Chief Executive Officer

Doug, we haven't fully deployed all of our channels. We have a store strategy that's multi-year and that's still rolling out. We expect to largely complete it by the end of this year, but a substantial portion of our stores are not done. Even the channels that we wanted to deploy are not fully rolled out. We have a variety of tools to grow our market share, and I would not preclude any of the tools that others have used. Fundamentally, we haven't changed our pricing since we launched the product, and we have the ability to move the needle in terms of the amount of mobile customers that we create as part of our broadband strategy. We set up a strategy based on activity levels. Those activity levels are lower than we thought because churn is lower than we thought. There are more ways to get into the market than we are using.

Chris Winfrey, Chief Financial Officer

And to add since you asked whether financial decisions are driving how aggressive we are: the answer is no. We have a lot of confidence and we know what the economics are — they're very good. Over time, it's not a short-term financially driven decision in terms of how we deploy those channels.

Doug Mitchelson, Analyst, Credit Suisse

Great. Very helpful. Thank you.

Stefan Anninger, Head of Investor Relations

Thanks, Doug. Kavita, we'll take our next question, please?

Operator, Operator

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

Phil Cusick, Analyst, JPMorgan

Hey, guys. A couple of follow-ups. Maybe expand on the comment about business trajectory normalizing. Was that improving through the second quarter or since? And is your own churn starting to pick up as well? And then on mobile CapEx, as store spending comes to an end, do you expect mobile spend from those traditional uses to fall? And how could your strand mount spend come in relative to that in maybe 2022 or 2023? Thanks.

Chris Winfrey, Chief Financial Officer

Look, I don't ever want to go down the heavy path of intra-quarter trajectory. SMB has been steadily improving each quarter. You can see it in our results. Enterprise, clearly, as more businesses become occupied, which is still relatively low, the selling opportunity for us increases and the willingness for customers to make decisions on their IT network, including our services, increases. A lot of that's really been moving with COVID and office occupancy as people are making decisions, and that's going to continue to improve. Enterprise selling opportunities should continue to get better. On the cost side, I would say that when churn returns into the marketplace, that will give us better selling opportunities, which should ultimately lead to net adds. Some of that will be timing driven, as we discussed. It will increase our sales commissions, increase the number of installations we do, which has OpEx and to a lesser extent CapEx, and it will increase the number of newer-tenured customers who tend to call more frequently at the beginning. Operating cost in a higher transaction and higher churn environment will move up. In some sense that's what we're hoping for: we'll have OpEx pressure because our sales will be accelerating and our net adds higher, and that wasn't the environment in the first half. We'll continue to explain as it takes place. The other item in the cost category is bad debt, which moves with non-pay and churn. CapEx is less impacted. From a volume standpoint you'll have a little more CPE purchases and a little more capitalized install, but it doesn't move as rapidly as OpEx. On share repurchase, we've been targeting a leverage to be at the mid to high end of our target leverage range, so buybacks are informed by that target leverage as opposed to trying to be opportunistic daily. We have a good long-term view on the value of Charter and buybacks are much more informed by where we expect leverage to be at the end of the year.

Tom Rutledge, Chairman and Chief Executive Officer

I would add that recovery in move activity is slower than we thought. While we're performing well, it's not what we expected, so we're a little surprised at how slow move activity has rebounded. Everything is moving and increasing and returning to normal, but it's not there yet; it's still an unusual marketplace.

Phil Cusick, Analyst, JPMorgan

That’s helpful. Thanks, guys.

Stefan Anninger, Head of Investor Relations

Thanks, Phil. Kavita, next question, please?

Operator, Operator

Your next question comes from the line of John Hodulik with UBS.

John Hodulik, Analyst, UBS

Great. Thanks, guys. During the quarter, you signed a new affiliate agreement with Viacom. It seems like the wording has changed a bit. Anything you can tell us about, maybe not a specific deal, but affiliate deals in general? Are you getting more flexibility as you move to more direct-to-consumer participation, because there are obviously fewer blackouts and the negotiations seem to be going better? And then going back a couple of years, you guys talked about 500 basis points or so of visibility on margin improvement. In the prepared remarks you talked about digitalization efforts that should keep that trend going. Any change in your visibility for margin improvement from the roughly 39% levels as you look out over the next couple of years? Thanks.

Tom Rutledge, Chairman and Chief Executive Officer

John, with regard to Viacom, it was a modern agreement that recognized the video business is changing and it addressed both our legacy relationship and our new direct-to-consumer relationship with Viacom. They were receptive in the discussion and we were as well. It's different than prior agreements because they have direct-to-consumer products and those were integral to the discussion. It's consistent with our view that we'd like to be part of the marketplace and to enhance our video and customer relationships by managing transactions for them. So it did that.

Chris Winfrey, Chief Financial Officer

On margin, you know us well enough that we don't think about the business in percentage margin terms — it doesn't drive how we do investment planning or operating plans. But will we continue to get more efficient? Yes. We have a long runway to reduce trouble calls and service calls per customer relationship. The bigger driver for consolidated margin is much more about revenue mix. We're adding mobile in, which has positive EBITDA on the increment but a lower structural percentage margin. We use video and mobile to drive higher attach rates for broadband, which is higher-margin, and to drive higher retention of broadband. We're looking to create the most value in the household to drive the most products and get the most EBITDA and cash flow per household. You could have a low-revenue business with a high percentage margin and have a 'percentage margin' victory lap, but you could have lower EBITDA and lower cash flow per household, and that's not our approach. So I won't give specific guidance on margin trends, other than it will be more a function of mix — lower video losses, continued growth in mobile and Internet pushing in different directions — but focus on free cash flow and free cash flow per share.

John Hodulik, Analyst, UBS

Okay. Thanks, Chris.

Stefan Anninger, Head of Investor Relations

Thanks, John. Kavita, we'll take our next question, please?

Operator, Operator

Your next question comes from the line of Steven Cahall with Wells Fargo.

Steven Cahall, Analyst, Wells Fargo

Thanks. Could you maybe talk about costs a little bit, both in the P&L and in CapEx in the back half of the year? You mentioned some of the labor cost increases, and I know labor is also a big piece of CapEx, especially with a strong selling environment. Just how should we think about cost growth in the back half of the year? And then on share repurchase, you're annualizing to a pretty big share repurchase here. I know you don't guide on it, I'm just curious what informed your thinking on share repurchases in the first half of the year and if there's anything that's shifting as we move into the back half of the year? Thanks.

Chris Winfrey, Chief Financial Officer

The cost commentary: as churn returns, transaction volume should pick up, driving more selling opportunities and increasing selling-related OpEx — commissions, installation costs and call volume from newer customers. That's what we would expect in a higher churn and higher transaction environment. Bad debt will also trend with non-pay and churn. CapEx moves less rapidly; you'll see some more CPE purchases and capitalized install but it's less volatile. On share repurchase, we target leverage at the mid-to-high end of our range, and buybacks are driven by that target leverage rather than daily opportunism. We have a long-term view on the value of Charter and buybacks are informed primarily by our leverage target and where we expect to be at year-end.

Steven Cahall, Analyst, Wells Fargo

Thank you.

Stefan Anninger, Head of Investor Relations

Thanks, Steven. Kavita, we'll take our next question, please?

Operator, Operator

The next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities.

Jessica Reif Ehrlich, Analyst, Bank of America Securities

Thank you. Two separate questions. On Comcast's Flex and Altice also announcing streaming hardware, are you planning on introducing anything similar for your customer base? If you are, would you build it or potentially license Flex from Comcast? And then separately, you've called out advanced advertising as a driver and you've been an industry leader in this area. Can you give us some color on current initiatives and where you see it going?

Tom Rutledge, Chairman and Chief Executive Officer

Jessica, regarding an IP box or similar solution, we have multiple approaches. One is our app-based user interface where customers bring their own hardware and use our apps to get MVPD service. We also have the existing set-top box deployed to our customer base which includes an IP platform. We're beginning to put apps such as Netflix and YouTube onto our existing set-top box. We continue to engage with Comcast in discussions about their Flex technology and what it might be capable of doing for us.

Chris Winfrey, Chief Financial Officer

I'll take the advertising question. We've enhanced our ability to sell long-tail inventory and monetize previously unused impressions through a tool called Audience App. Because we have aggregated, anonymized set-top box data across our customer base, we can present targeted audiences to advertisers and sell inventory in ways Nielsen did not enable previously. We can sell on a zone basis, on split-avail basis, addressable, and we can monetize impressions across traditional set-top box viewing and IP-based viewing through the Spectrum TV app on Apple TV, Roku, Samsung TV, iOS and Android. This allows us to monetize impressions in a way that is impression-based and verifiable for buyers. We've been investing in addressability, split avails, and attribution — the ability to show advertisers what exactly their spend drove in terms of sales. We offer a full set of advertising capabilities that are super local when needed, addressable when needed, and we sell both set-top box impressions and digital impressions. Despite local advertising not being fully recovered relative to 2019 — auto for example — our overall ad sales are up versus 2019, primarily due to these capabilities and monetizing inventory that wasn't previously monetized.

Tom Rutledge, Chairman and Chief Executive Officer

At higher CPMs.

Chris Winfrey, Chief Financial Officer

I think you asked if we could license that across the industry. We're always open to revenue opportunities.

Jessica Reif Ehrlich, Analyst, Bank of America Securities

Thanks.

Stefan Anninger, Head of Investor Relations

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

Operator, Operator

Your last question will come from the line of Bryan Kraft with Deutsche Bank.

Bryan Kraft, Analyst, Deutsche Bank

Hi, good morning. Wanted to ask a couple, if I could. Following up on the last question, can you talk about how the agreements you're reaching with programmers to carry their streaming services provide you with ad inventory that you can monetize in the future as you gain scale? And secondly, can you comment on any incremental competitive fiber-to-the-home expansion in your footprint or fixed wireless? Is there anything observable there or is it business as usual?

Tom Rutledge, Chairman and Chief Executive Officer

On competition, we continue to see a similar marketplace in terms of competitive overbuilds. We're continuing to do well everywhere we operate and we are the share leader everywhere we operate competitively speaking. Regarding programmers, yes, depending on the model there is an opportunity for advertising sales in the app and at multiple levels and transaction opportunities in creating new subscriptions. Short answer: yes.

Bryan Kraft, Analyst, Deutsche Bank

Tom, as you build some of these revenue streams now as the apps are available through your current set-top box infrastructure, as you shift to your next generation whether it's Flex or something else, do you see those opportunities ending significantly or changing?

Tom Rutledge, Chairman and Chief Executive Officer

I do see an opportunity to have a better advertising business than historically. It works better for advertisers, it has attribution, and we have a large, skilled sales force in our markets. So yes, I think it's an opportunity to create increased revenue.

Bryan Kraft, Analyst, Deutsche Bank

Okay. Thank you.

Stefan Anninger, Head of Investor Relations

Thanks, Bryan. And thanks to everyone. We will see you next quarter.

Chris Winfrey, Chief Financial Officer

Thank you very much.

Tom Rutledge, Chairman and Chief Executive Officer

Thank you.

Operator, Operator

Thank you, ladies and gentlemen. That concludes today's conference call. You may now disconnect.