Earnings Call Transcript - CHTR Q1 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to Charter's First Quarter 2021 Investor Call. Operator provides instructions to participants. I'd now like to hand the conference over to your speaker today, Stefan Anninger. Please go ahead.

Stefan Anninger, Head of Investor Relations

Good morning, and welcome to Charter's first 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 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 Chief Executive Officer; and Chris Winfrey, our Chief Financial Officer. With that, let's turn the call over to Tom.

Tom Rutledge, Chairman and CEO

Thanks, Stefan. We continue to execute well in the first quarter even in an environment with lower consumer move activity. We added over 300,000 customer relationships during the quarter with growth of 5.8% year-over-year. We also added 355,000 Internet customers in the quarter and 2 million over the last year for a year-over-year growth of 7.3%. We added 300,000 mobile lines, and we grew our adjusted EBITDA by 12.5% and our free cash flow by nearly $500 million or 35%. COVID has continued to have an impact on our operations, but as the economy reopens and normal activities resume, we expect more sales opportunities to develop during the second half of the year. And we remain confident in our ability to grow our customers, EBITDA and free cash flow at healthy rates given the investments we've made in our network, which enable us to offer superior products and services. While the last year has focused on our successful operations and execution through the pandemic, May 18 will mark the 5th anniversary of the closing of our transaction to acquire Time Warner Cable and Bright House Networks. Since then, we've added more than 7 million Internet customers, and our annual EBITDA has expanded from $13.6 billion to over $19 billion, and our enterprise value has increased by $100 billion. Since the start of 2016, we've invested over $40 billion in infrastructure and technology. And over the last 5 years, we've extended serviceability to approximately 5 million homes and businesses. We've also committed to extending our network to reach more rural areas. Over the next 6 years, we expect to spend at least $5 billion, offset by $1.2 billion in RDOF subsidies to reach over 1 million unserved consumer locations to gigabit Internet speeds. And we're actively exploring additional opportunities to further expand our rural build potential. Since our transactions closed, we've also enhanced the quality and efficiency of our operations. We've hired thousands of new employees into good jobs by bringing all of our work back to the U.S., and we committed to a minimum wage of $20 per hour to provide the best service possible, which fuels our growth. Since close, we prepared the launch of mobile broadband products at scale, and our customers now have the fastest and least expensive mobile and wireline broadband products available in the market. Importantly, we continue to improve our connectivity products as demand for data in the home continues to grow at a very rapid pace. During the first quarter, we continued to see significant growth in data usage per Internet customer. On average, non-video customers used about 700 gigabytes per month in the first part of the quarter. And for the full quarter, average usage by non-video customers was up nearly 20% year-over-year. Close to 20% of our non-traditional video Internet customers now use a terabyte or more of data per month. The growth in demand for data is and will be driven by a number of factors, including the growth in IP video services, including video conferencing and gaming, also the growing number of IP devices connected to our network, which now totals nearly 450 million devices, and new and emerging products and services that are being developed as we speak, such as e-learning, telemedicine and 4K, virtual reality or holographic formats, for example. We're continuously increasing the capacity in our core and hubs and augmenting our network to improve speed and performance at a pace dictated by customers in the marketplace. We have a cost-effective approach to using DOCSIS 3.1, which we've already deployed, to expand our network capacity to 1.2 GHz, which gives us the ability to offer multi-gigabit speeds in the downstream and at least 1 gigabit per second in the upstream. In addition, we have DOCSIS 4.0 and other emerging technologies to cost efficiently offer multi-gigabit speeds in both the downstream and in the upstream, serving heavy data usage needs of our customers with quality connectivity services. While we have a great network asset, which is fully deployed and has a capitally efficient path to deliver even higher capabilities, our strategy is founded on saving customers' money while providing state-of-the-art products. Mobile and wireline broadband are converging into a single connectivity service package. Our share of household connectivity spend, including mobile and fixed broadband, is low. And we remain very much underpenetrated relative to our long-term opportunity. An average household served by the big three mobile broadband competitors, with two-plus lines of mobile broadband and wireline broadband, spends approximately $200 a month on its telecom services. Today, Charter only generates about $33 per household and $65 per customer of that $200 of combined monthly spend on mobile and wireline broadband service. By choosing Charter as their full-service connectivity provider, customers can save hundreds, even thousands of dollars per year with better product capabilities and service. And so our goal is to do the same with mobile in our service area as we did with wireline voice, where we made Charter the predominant wireline phone carrier by reducing consumer telephone bills by over 70%. Meaning Charter can grow for a long time because we remain underpenetrated and our growth will reduce customer costs. Now I'll turn the call over to Chris.

Chris Winfrey, Chief Financial Officer

Thanks, Tom. Before getting into the details of the quarter, a few comments regarding our outlook and reporting. On last quarter's conference call, I spent some time walking through the outlook for 2021; that commentary related to our customer and financial growth expectations given the difficult comparability to prior year results due to the effects of COVID in 2020. Those comments were intended to help investors update their models for 2021 and understand the backdrop for what should be a very good 2022. So while I won't repeat everything I said on the last earnings call, our outlook in general has not changed. 2019 remains the better customer growth comparison for 2021, where we expect Internet and customer relationships to be at or above 2019 net additions. And we will 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. Secondly, bundle allocation rules as required by GAAP continue to have a significant impact on our residential Internet, video and voice product revenues. Because of the declining utility of individual product revenues to investors, it's likely that, at some point, we will collapse all residential product revenues into one residential revenue line. Turning to our results on Slide 5. Customer activity levels in the marketplace, specifically move churn and non-pay churn, have still not returned to normal levels, which means, on the one hand, we benefit from the lower operating expense from reduced service transactions and significantly lower bad debt. But it also means there are fewer selling opportunities in the market generally. Those trends are on a slow path to normalization. Despite a lower sales environment, we continue to gain share across our footprint, and we remain the share leader in Internet in all of our markets regardless of competing infrastructure. We grew total residential and SMB customer relationships by over 1.7 million in the last 12 months and by 302,000 in the first quarter. Including residential and SMB, we grew our Internet customers by 355,000 in the quarter and by 2 million or 7.3% over the last 12 months. Video declined by 138,000; wireline voice declined by 88,000; and we added 300,000 higher ARPU mobile lines. In residential Internet, we added a total of 334,000 customers in the quarter, lower than the 398,000 that we gained during a strong first quarter in 2019 for the reasons I mentioned. Our residential video customers declined by 156,000, consistent with the loss of 152,000 we saw in the first quarter of 2019. In wireline voice, we lost 102,000 residential customers in the quarter, also similar to the loss of 120,000 in the first quarter of 2019. Turning to mobile. We added 300,000 mobile lines in the quarter. And as of the end of the quarter, we had 2.7 million mobile lines with a good mix of both Unlimited and By the Gig lines. We continue to be pleased with the results and trajectory of Spectrum Mobile, with less EBITDA loss per line as the business scales to expected stand-alone profitability. Over the last year, we grew total residential customers by 1.6 million or 5.8%. Residential revenue per customer relationship declined by 0.5% year-over-year, given the higher mix of non-video customers, higher mix of Choice, Essentials and Stream customers within our video base, lower pay-per-view and video-on-demand revenue and lower installation revenue given higher self-install rates. Keep in mind that our residential ARPU does not reflect any mobile revenue. As Slide 6 shows, residential revenue grew by 5.8% year-over-year, reflecting customer relationship growth. Turning to commercial. SMB revenue grew by 1.6%, a bit faster than last quarter's growth. Enterprise revenue was up by 2.5% year-over-year, also a bit better than last quarter and grew by 7.2%, excluding wholesale revenue. Enterprise PSUs grew by 2.8% year-over-year. First quarter advertising revenue declined by 5.8% year-over-year due to less political revenue. Our non-political revenue grew by 5.3% year-over-year, primarily due to some COVID impacts late last March and our growing advanced advertising capabilities. Other revenue declined by 2% year-over-year, driven by lower late fees, partly offset by higher RSN revenue. Mobile revenue totaled $492 million with $228 million of that revenue being device revenue. In total, consolidated first quarter revenue was up 6.7% year-over-year. Moving to operating expenses on Slide 7. In the first quarter, total operating expenses grew by $235 million or 3.2% year-over-year. Programming increased 3.3% year-over-year due to higher rates, offset by a higher mix of lighter video packages, such as Choice, Essentials and Stream, and lower pay-per-view expenses year-over-year tied to the lower pay-per-view revenue I mentioned. Regulatory connectivity and produced content grew by 8.9%, driven by more Laker games than normal this quarter, resulting from the delayed start to the NBA season, combined with fewer games in the prior year period when sports leagues played fewer games due to COVID. Excluding those sports rights costs related to our RSNs, this expense line item grew by 2.1% year-over-year. Cost to service customers declined by 2.4% year-over-year compared to 5.8% customer relationship growth. The decline was driven by $100 million in lower bad debt, which continues to benefit from record payment trends similar to 2020, though our expectation remains that bad debt trends should normalize over the course of this year. On the other direction, we saw pressure from outsized hourly wage increases that we put through in March of last year and again in March of this year, which we've discussed previously and relate to our commitment to reach a $20 minimum starting wage in 2022. Excluding bad debt, cost to service customers grew by 3.2% year-over-year, including the minimum starting wage increase and reflecting the 5.8% relationship growth. Marketing and sales expenses declined by 2% year-over-year. Mobile expenses totaled $572 million and were comprised of mobile device cost tied to device revenue, customer acquisition and service and operating costs. Other expenses declined by 5.5%, primarily driven by a non-recurring adjustment to bonuses related to COVID. Adjusted EBITDA grew by 12.5% in the quarter. Excluding mobile and bad debt in both years, our EBITDA growth rate would have been 3.6 percentage points lower. Turning to net income on Slide 8. We generated $807 million of net income attributable to Charter shareholders in the first quarter versus $396 million last year. The year-over-year increase was primarily driven by higher adjusted EBITDA. Turning to Slide 9. Capital expenditures totaled $1.8 billion in the first quarter, an increase of $360 million year-over-year, 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. We also spent more on line extensions due to continued network expansion, including to rural areas. This does not include any yard-off spend, which we will incur and start to disclose later this year. The cost of build-outs tends to be front-loaded with design, make-ready construction before passings are activated. So it will take well into next year before our construction cadence lets any cost-per-passing metric be meaningful. We spent $112 million on mobile-related CapEx this quarter, which is mostly accounted for in support capital and was driven by investments in back-office systems and mobile store build-outs. For the full year 2021, we expect cable capital expenditures, excluding any RDOF investments, to be relatively consistent as a percentage of cable revenue versus 2020. As Slide 10 shows, we generated $1.9 billion of consolidated free cash flow this quarter, an increase of 35% year-over-year. We finished the quarter with $84.3 billion in debt principal, and our current run rate annualized cash interest, pro forma for financing activity completed in April, is $4 billion. As of the end of the first quarter, our net debt to last 12-month adjusted EBITDA was 4.38x, and we intend to stay at or just below the high end of our 4 to 4.5x leverage range. During the quarter, we repurchased 6.3 million Charter shares in Charter Holdings common units, totaling about $4 billion at an average price of $627 per share. Since September of 2016, we've repurchased $43 billion or 34% of Charter's equity at an average price of $408 per share. Turning to taxes on Slide 13. We don't anticipate becoming a meaningful federal cash taxpayer until 2022, and we expect the bulk of our existing NOL to be utilized by the end of this year. Subject to any corporate tax rate changes for the years 2022 to 2024, we expect our federal and state cash taxes to approximate our consolidated EBITDA, less our capital expenditures and less our cash interest expense, multiplied by 23% to 25% with a tax rate in 2022 to be a bit lower than that range given some carryover tax attributes. That estimate includes partnership tax distributions to advance Newhouse, which are captured separately in cash flows from financing in the financial statements. There are multiple factors that impact what I just described, and we're always looking for ways to improve our cash tax profile. Our operating model of growing by saving customers' money, our network capabilities now and in the future and our balance sheet strategy all work together over long periods of time. And we expect our results to reflect a growing infrastructure asset with a lot of ancillary products to layer on top of our core connectivity services with good value and service to our customers to grow cash flow with tax-advantaged levered equity returns. Operator, we're now ready for Q&A.

Operator, Operator

Operator provides instructions to participants. Our first question comes from the line of Doug Mitchelson with Credit Suisse. Go ahead please. Your line is open.

Doug Mitchelson, Analyst (Credit Suisse)

Thanks so much. Good morning. One for Tom. One for Chris. Tom, I feel like you threw down the gauntlet a bit on fixed wireline convergence — including the entire mobile market in your target market of $200 a home of telecom spending. Does your commentary suggest a more aggressive posture regarding wireless marketing? You already have a pretty healthy growth pace of lines already. And when you look out 5 or 10 years, if that's where the market is headed, I know you've been asked and answered in the past, but wouldn't that suggest at some point need owner's economics on the wireless side to match up with what you have on the wireline side? And then, Chris, can you talk about the returns investors should expect on the $5 billion of build-out CapEx or the $3.8 billion net CapEx spend over the next 5 years? Thank you both.

Tom Rutledge, Chairman and CEO

Sure. So Doug, yes, I think that our opportunity over a multiyear period is significant. And I think that we have an opportunity — when you look at the penetration of those mobile products, we have an opportunity to continue to grow rapidly. And so we are moving to make sure that happens in terms of the way we position and sell our products and in terms of their both product attributes and the price that we charge. My purpose of that exposition on how much telecom spend there is, is just to show that there's lots of runway in front of us and a significant market opportunity there for us to create value for Charter while, at the same time, creating value for consumers. In terms of convergence, we already are moving toward convergence in many ways. And we have owner's economics in many ways. And we also have a good relationship as an MVNO. The owner's economics we get are in the CBRS spectrum that we purchased and its deployment in the Wi-Fi network that we've deployed and the traffic that we carry over it. And there's continued opportunities to take advantage of that in the near-term and the long-term to create additional value for our customers and for the company's cost structure.

Chris Winfrey, Chief Financial Officer

On the RDOF spend, Doug, the way we think about that $5 billion just in Phase 1 of RDOF, we think there may be more opportunities over time either through federal programs or through what we call white space areas that might be a product of the additional rural investing that we make that open up new opportunities. But when you think about this in terms of project financing, these construction projects have a much higher cost per passing than what we've typically built, and they have a longer payback. But as a result of them being as expensive as they are, we have real high confidence in our ability to penetrate these markets with a broadband service that's needed and desired. And so what that means is, together with low-risk assumptions on ARPU, you can have pretty high confidence in terms of what the financial model is going to look like both from a cost and revenue perspective over time. So I think I've mentioned in the past that we'd expect the payback — the cash-from-cash payback for these type of projects to be double digits in terms of years, so over 10 years. But the IRR can be mid-teens. And so we think those are attractive investments with a low risk in terms of our ability to achieve those types of returns. What we haven't factored into any of that is what does that open for additional building opportunities on the edge of those networks as well as some of these rural communities by having broadband can actually have more fill-in or become more suburban-like, which could open up opportunities, which aren't built into our model. We think it's consistent to build this way as part of our strategy, and we think it's the right thing to do for the extended communities that we serve. And we think it's attractive for shareholders as a way to continue to grow our broadband footprint over time. So another alternative way to think about it is when you think about those types of economics, it's actually not that different from cable M&A at a point in time where there just hasn't been unfortunately as much cable M&A that we would have liked to have done.

Doug Mitchelson, Analyst (Credit Suisse)

Great. Thank you.

Stefan Anninger, Head of Investor Relations

James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Ben Swinburne with Morgan Stanley. Go ahead please. Your line is open.

Ben Swinburne, Analyst (Morgan Stanley)

Thanks. Good morning. Tom, I was wondering if we could get your perspective. This came up on yesterday's Comcast call on sort of the consumer demand and opportunity for Charter to offer symmetric products and sort of the need for the network to offer symmetric service and kind of how you get there. You touched on 3.1 and 4.0 in your prepared remarks. But if you could give us a little sense of the past and timeline in your mind and I guess the cost, whether it would move capital intensity around enough that we would notice. And then I was just wondering, Chris, this sort of subdued activity level we're seeing, which is helping bad debt but hurting gross adds, I know it's impossible to know, but could this end up sort of lasting through the year? I mean it seems like even though we're seeing vaccinations ramp back up, the consumer — we're seeing this across a lot of companies. This churn is at like record lows, so like unusually low levels. I'm just wondering if you are seeing any signs that things are normalizing? Or if that's just an expectation you have? Thank you guys.

Tom Rutledge, Chairman and CEO

So Ben, the issue of capacity and where it's needed and how it's used is a complicated discussion. But basically, our view is that if you think about the way networks are used, and I said people are using 700 gigs a month in the presentation today and a lot of our customers are using over a terabyte per month, most of that is television being delivered through IP to households. And the actual upstream usage is quite sufficient for all the current uses that we have. So we don't have an immediate need to expand the capacity of the plant. And the plant is actually used in a very asymmetric way by the products that are currently on it. And we don't see that changing in the near term. But we do have the capability from a technical perspective to upgrade our network based on changing market dynamics, however they may develop in terms of how products develop. We don't see an immediate need to do that, but we do think our network from a competitive point of view is well positioned from a capital intensity perspective to make those upgrade costs at much lower cost than alternative means. And so we think that we're positioned to grow in the marketplace in a very efficient way and serve products that we need to serve up based on the way the market develops. But today, we should continue to operate our network with more capacity downstream than upstream.

Chris Winfrey, Chief Financial Officer

Ben, on the lower level of activity, it's true. It's normalizing slightly slower than what we would have expected or hoped for. Like I said in the prepared remarks, the benefit is that we have really significant EBITDA growth as a result of last year's subscriber growth and this quarter's subscriber growth, compounded by the lower level of activity in the marketplace, which is driving down transaction costs and churn and bad debt, which produces an outsized temporary financial result. Our preference would be to put a little bit of pressure on those financial results by increasing our sales and marketing through commissions and through normalizing the market through a higher level of move activity, which opens up additional selling opportunities for us as a share taker. It's a share-taker year. We'd like to be on the offensive and to acquire customers and save some money. And that opportunity is what contributes to net adds and what contributes to short-term financial pressure to have a higher long-term EBITDA and free cash flow. We have seen the market slowly coming back. And so it is moving in the right direction. It's just not moving as fast as some of us would like. That includes move churn — slightly — not as much on non-pay because of all this subsidy that’s out there today, which is a different topic. I think it's going to start getting back to normal here pretty quickly. A lot of us who have been in the office every day through the pandemic are just noting this morning that the pickup in traffic even in the New York and Connecticut area is pretty symbolic in terms of traffic. It's going to normalize, and we think that will start to — it will continue to take place across the rest of the country. And so we're optimistic about our ability to sell and net add through the rest of the year.

Ben Swinburne, Analyst (Morgan Stanley)

Thank you.

Stefan Anninger, Head of Investor Relations

James, we will take our next question please.

Operator, Operator

Next question comes from the line of Brett Feldman with Goldman Sachs. Go ahead please. Your line is open.

Brett Feldman, Analyst (Goldman Sachs)

Thanks. I'm going to kind of stick with a similar theme. I appreciate that moves creates a lot of jump balls for the company, but you only serve half the households in your footprint. The vast majority of those you don't serve, I think, are poorly served, and that's probably becoming increasingly apparent to them. Does the math on marketing dollars become more favorable, meaning looking to potentially force the issue a bit as opposed to just waiting for a natural shift in volumes in the market? And then also, I'm curious how significant is an assumption that bad debt sort of reverts to normalized levels in terms of thinking about the margin profile of the company this year? And the reason I ask is it would seem like all the things going on in the background are favorable to bad debt, whether it's an expectation that the economy is going to continue to recover and also just the government continuing to show a prioritization and making sure that people not only have access to good broadband but are able to sustain that access, including through additional subsidy programs. It all just seems to be moving in your favor from a bad debt standpoint. Thanks.

Chris Winfrey, Chief Financial Officer

So, two separate topics. One — and I am not sure if Tom would differ — but we feel we are pretty aggressive on the sales and marketing side. And to the extent that we could be more aggressive, and we thought that it would have the ability to add more subscribers, we would do it. And so we are always looking for that, and we are not afraid to spend if we think we can drive customer acquisition. Some of the difficulties are that you are digging out customers and they are inert. And so you have to keep coming back and back and back. And as attractive as our products are and as much as we can save customers’ money, it takes a while to prime the market, and it’s disruptive to swap out one, if not all, of your services in the household. Despite the economics that we can provide and the better quality speeds and service, it just takes a little bit of time. But we are always looking for ways to be more aggressive. And as Tom mentioned, I think mobile, because of the additional outsized amount of dollars that we can save customers, is a really interesting tool, together with the combined benefits of products that we can provide that most cannot.

Tom Rutledge, Chairman and CEO

I agree with that.

Chris Winfrey, Chief Financial Officer

And bad debt. And look, there is a bull case that the market could start to move and our selling opportunities could increase, which would drive higher commissions and transaction costs to acquire and provision and install these customers. And the bull case would be at the same time, we have that because the level of subsidy that is out in the marketplace and might continue that our bad debt could remain low, and it could actually open up portions of the market from an affordability standpoint that could drive more sales. And so we could end up with the best of both worlds, maybe, but that’s not something that we are betting on. It’s an environment we have never really seen before. And that’s not factored into any of the outlook or forward-looking statements that were provided. I don’t think we want to depend on third parties to drive our growth. And it may be the case that that’s how it turns out. But right now, we are focused on just selling more cable and minimizing the churn to the extent that we can — things that are in our control.

Tom Rutledge, Chairman and CEO

What I would say is that we are in an unusual climate, and it's still unusual. And when it normalizes, which I expect it to normalize, our cost structure will revert to what it was historically, and that includes higher bad debt. And as a result of that, growth could accelerate, but growth also can create cost — well, when you are comparing it to someone who isn’t growing. And so that has an impact on margins. But the overall trajectory of our business, notwithstanding the current circumstances, which are really unprecedented, the fundamental cost to serve our customers continues to come down because of our digitization of the sales and marketing and service infrastructure of the company and our ability to do self-service and self-installation. And the relative ease of delivery going forward creates long-term advantages and the cost of CPE continues to come down on a relative basis. So, we have long-run trends, which are favorable to our cost structure. We have short-term trends which are favorable to our cost structure which I expect to go away.

Brett Feldman, Analyst (Goldman Sachs)

Thank you.

Stefan Anninger, Head of Investor Relations

James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Craig Moffett with MoffettNathanson. Go ahead please. Your line is open.

Craig Moffett, Analyst (MoffettNathanson)

Hi. Two questions, if I could. Chris, I want to push you to just return to what you were just talking about of stimulus. And just given the size of the stimulus with about 4x as much stimulus in dollars, about $20 billion as the annual growth rate of the entire U.S. broadband market. How do we think about quantifying that? I know you said it’s not in your numbers, but can you just talk about what you as a company have done to prepare in terms of applications and what have you for the EBPP and the E-Rate? And what impact do you think that might have on your business? And then a second somewhat unrelated question, just if you could talk about the Business Services segment perhaps, and that’s still growing significantly more slowly than residential. Are you more or less through the re-pricing of the TWC customers now, so that we can expect that to return to being a growth driver rather than, just mathematically today, being a growth drag?

Tom Rutledge, Chairman and CEO

So Craig, on the stimulus, a lot of that money is undifferentiated in the States and has broadband in front of it in the nomenclature, but it can go anywhere. And so yes, we are out, through our business sales services groups, trying to orient that money both to line extension and to products for schools and municipalities. And we have a full suite of products to sell. But how that money gets allocated and how it gets spent in the States is difficult to say. And I think it will vary by location. So it’s a huge opportunity, as you pointed out, and it’s massive. And our sense is that the States don’t know how to spend it all. And so they are — we will see what happens, but there is an opportunity there.

Chris Winfrey, Chief Financial Officer

And as it relates to business services growth, there are really two separate categories here: SMB and enterprise. The re-pricing of the TWC base is essentially through for SMB. We have had some pressure recently through seasonality programs that we have offered to SMB customers through COVID that is winding down as well as the re-pricing being through. If you take a look at the unit growth on SMB, I think you can pretty quickly see a path for us to get revenue growth in SMB more closely aligned to the unit growth rate or the customer relationship growth rate. So, I think the outlook on SMB from a revenue standpoint is positive. The same applies for enterprise. Enterprise is a slightly different set of circumstances. The retail revenue growth rate, like SMB, has been accelerating. And it’s up sequentially, the same as SMB. It’s now at 7.2% for the retail portion of revenue for enterprise. And it’s being held back slightly by wholesale, particularly cell tower backhaul, where that’s becoming a lesser and lesser portion of the overall revenue mix in enterprise. And the more strategic piece for us is retail in any event. The enterprise business is selling more, is doing extremely well, both certainly compared to last year, but also compared to 2019. And that’s despite the fact that these are complex fiber products where today, less than 25% of the time, we are meeting our customers’ CIOs in the office. So that’s a difficult sell to make when you are not in person to have a complex fiber sale, whether it’s for fiber Internet access, Ethernet, unified communications, SD-WAN, and yet our sales are increasing and accelerating despite the fact that we can’t be on location to make those sales. So, I am optimistic about the enterprise retail side and what that’s going to do for the overall revenue growth rate, not only for enterprise, but when you look at commercial combined together with SMB, which is also improving.

Craig Moffett, Analyst (MoffettNathanson)

Thanks Chris.

Stefan Anninger, Head of Investor Relations

Thanks Craig. James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Peter Supino with Bernstein. Go ahead please. Your line is open.

Peter Supino, Analyst (Bernstein)

Hi. I wanted to ask about the mobile business. Do you expect to use device subsidies any more aggressively in the future? I know your unit economics have historically made that challenging and also have the sense that they are getting better. So, any thoughts on that strategy for the long run would be great? Thanks.

Tom Rutledge, Chairman and CEO

We — so far, we haven't done that much of that, and we like the way we are marketing it currently.

Chris Winfrey, Chief Financial Officer

It’s not a great business in of itself.

Tom Rutledge, Chairman and CEO

We will create customers if we can retain those customers and whatever works, but we are doing well without it.

Stefan Anninger, Head of Investor Relations

Thanks Peter. James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Phil Cusick with JPMorgan. Go ahead please. Your line is open.

Phil Cusick, Analyst (JPMorgan)

Hi, guys. A couple of sort of follow-ups. On broadband, Chris, can you talk about the drivers of seasonality in customer growth in a typical second quarter? And any differences we might see this year because of the pandemic? And do you think that could be offset somewhat by increasing win opportunities in EBPP? And then second, on CapEx, higher or at least stable, not stable to lower in the core cable business. What's changing there? Do you see more opportunities? Is that a function of mobile? What's happening? Thanks.

Chris Winfrey, Chief Financial Officer

On broadband, I don't see the broader seasonality differences that have always existed in Q2 with disconnects in Q3 with reconnects. A lot of that’s college and back-to-school driven as well as the move season of people repositioning homes. On one end I think it will be normal; on the other hand you could argue that things really do get back to fully normalized levels to maybe a pent-up demand for that type of activity. So, I don't know. The two factors you mentioned which could, around the edges, have an impact slightly, although I don’t think it changes the overall curve, would be to the extent that subsidies and stimulus continued to drive down non-pay. At the same time, we had an acceleration of move churn, which is a lot more selling opportunities, maybe that could have a positive impact. And the other one that you pointed out was the EBPP program, which could have similar type of benefits both on the non-pay as well as on the activation side. But I don't think that fundamentally, the overall trend of Q2 compared to Q1 or Q3 or Q4 is going to be that much different. On CapEx, we slightly tweaked what we said from an outlook perspective. And it ties back to what I talked about with Ben in terms of the market normalizing, but just at a slightly slower pace. But as that market has been — remains slow to normalize, data usage remains high. And so that has an impact on the amount of headroom we planned for in terms of capacity and network augmentation. Now it's very much possible our core cable capital intensity declines this year. But given the uncertainty, we updated the outlook slightly to say relatively "consistent" with last year. But I want to be clear, there is no change to our long-term outlook for core cable capital intensity to decline.

Phil Cusick, Analyst (JPMorgan)

Thanks. Chris, do you think that with mobile wireless broadband coming on, does that give you any pause on your assumption for a strong second half or is that sort of built in already?

Chris Winfrey, Chief Financial Officer

We are always concerned about competition, and we are watching for it. On the increment, and I think there will be added pressure. We think it’s a real product for certain areas of a customer base. And so it’s something we are keeping an eye on. And we have our own mobile broadband together with our fixed line broadband converged — we think that competes well, and it requires us to continue to invest in that space.

Tom Rutledge, Chairman and CEO

And we will be on that spectrum as well.

Chris Winfrey, Chief Financial Officer

Correct. From a C-band perspective, that will be something we participate through the MVNO and then we have our own CBRS, which you are aware of as well.

Stefan Anninger, Head of Investor Relations

Thanks Phil. James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Michael Rollins with Citi. Go ahead please. Your line is open.

Michael Rollins, Analyst (Citi)

Thanks. First, can you share your mix of broadband customers between entry level versus higher level tiers? And how you are looking at the ARPU opportunities and take to migrate customers to higher performance levels? And then secondly, just from your comments earlier, can you share what the fair average rate of estimated passings growth can be for Charter if you think about it on a 3-year to 5-year horizon, and you could share that with or without RDOF? Thanks.

Tom Rutledge, Chairman and CEO

In terms of the broadband customer base, most of our customer base is on entry level package, meaning 200 megabits. So, our basic strategy has been to have a very rich broadband product as our base product. And we have continuously taken that up. And so in terms of opportunities to sell up, we have a lot of it. We haven't done much of that really. We do it. And obviously, we satisfy the market, but the bulk of our customer base is at the entry-level speed, which is quite high. On the passings growth, if you take out the RDOF and think about what's going to look like, our footprint pretty much looks like the United States from a statistical perspective. And so if you look at housing starts and you have an opinion on that, that will probably mirror our passings growth.

Chris Winfrey, Chief Financial Officer

I agree. That will be the variability driver. Just to put in context of what’s going on today, we are building about — we are constructing about 600,000 passings a year, much of which is rural extensions proactive on our part already before RDOF. The remainder of what you see of our passings growth is fill-in and other types of what we call brownfield opportunities.

Tom Rutledge, Chairman and CEO

Well, new developments.

Chris Winfrey, Chief Financial Officer

Yes, certainly. That will all depend on the overall housing starts growth. And then during the period of RDOF, there is an additional over 1 million homes that we will construct in these rural areas to address RDOF on top of whatever the organic growth rate is, which a big driver is the housing starts, as Tom mentioned.

Stefan Anninger, Head of Investor Relations

Thanks Mike. Operator, we will take our next question.

Operator, Operator

Our next question comes from the line of Jessica Reif Ehrlich with Bank of America. Go ahead please. Your line is open.

Jessica Reif Ehrlich, Analyst (Bank of America)

Thank you. I have a question with, I guess, a two-parter on video, which hasn't come up at all. Are there any plans to offer a product similar to Comcast's Flex? Can you maybe talk about the pros and cons from a Charter perspective? And then is there any difference in how you are approaching programmers that are now offering direct-to-consumer services that mirror or encompass a lot of the content they have on their pay TV channels?

Tom Rutledge, Chairman and CEO

Jessica, the video business is under a lot of challenge, and it’s going through a transformation. We have over 10 million customers now who receive our service through an application as opposed to a set-top box. We have direct-to-consumer relationships, and we have new relationships with programmers developing that allow us to sell traditional content and bundles. We have different kinds of bundles: some are traditional cable TV packages, some are over-the-top packages and some are direct-to-consumer, where we are representing direct-to-consumer relationships and really essentially acting in a consignment kind of mode. So, we have every business model you can imagine going on simultaneously, which I think over the long term creates opportunity for us. Right now, it’s quite disruptive.

Chris Winfrey, Chief Financial Officer

And on approach to programmers — it hasn’t changed because of the way that they are selling content direct-to-consumer. But it is going to affect the value of content. If content comes out of bundled packages and goes direct-to-consumer, its value in the bundle goes down.

Stefan Anninger, Head of Investor Relations

Thanks Jessica. James, we will take our next question please.

Operator, Operator

Our next question comes from the line of Jonathan Chaplin with New Street. Go ahead please. Your line is open.

Jonathan Chaplin, Analyst (New Street)

Thanks, guys. Two unrelated questions. First, Tom, I thought the message on the magnitude of investment you have put into building a future-proof network at the beginning of the call is pretty powerful, both in terms of what you have invested over the course of the last 5 years and what you will invest over the course of next 5 years. I am wondering what you would be able to share from the conversations you have been having with the administration around their ambitions for $100 billion in infrastructure investment in broadband. Wondering how specifically you guys see the opportunity to benefit from that if it were to come to pass? And where you see potential threats? And then separately, I just looked back at where voice penetration of broadband customers peaked, and it peaked at 50%. And that probably understates your market share because it peaked at the end of ‘15 when the market was already declining. I am wondering if you can remind us where market share of wired voice peaked for you guys. And is that basically where you are setting your expectation for mobile penetration to go over time?

Tom Rutledge, Chairman and CEO

Well, my hope is to have all the share over time. And so we have significant ambition. It will take a long, long time to get that. But if you do — I don't have the wireline share off the top of my head, but it’s significant. In terms of how we are communicating with regard to broadband build-out and subsidy and infrastructure subsidies, our view is that the job one is to get the unserved areas of the country served and that subsidies should be directed to do that. And we are willing to help and invest and to make that happen. The private capital that’s been deployed in the United States in the communications networks, the capital that just got spent on spectrum by the wireless companies and us and Comcast and the CBRS auction and the capital that’s gone into and continues to go into the communications infrastructure in the country is good and held us in good stead in through the pandemic when we were able to operate networks at high capacity instantaneously, unlike Western Europe and other places where communication services and entertainment services were actually down. So, we think there is a good model there and an opportunity to serve the unserved, and we would like to help and be part of it.

Stefan Anninger, Head of Investor Relations

Thanks Jonathan. James, we will take our next question please.

Operator, Operator

Our next question will come from the line of Bryan Kraft with Deutsche Bank. Go ahead please. Your line is open.

Bryan Kraft, Analyst (Deutsche Bank)

Hi, good morning. I am going to go off the beat and pass a little bit here. Can you talk about how you are thinking about the future of your Los Angeles RSNs, given the pressures on pay TV bundle volumes that you just talked about against your fixed rates and production costs? What’s the right long-term model for the business? And also under your rights agreements, could you actually bundle it as an app with broadband outside of a bundled service? Thanks.

Tom Rutledge, Chairman and CEO

Well, luckily, it's not a material part of our business. It's difficult, and it's expensive and the prices continue to go up. It’s hard to say how we could monetize it effectively over the long run.

Stefan Anninger, Head of Investor Relations

Thanks Bryan. Operator, we will take our last question please.

Operator, Operator

And our last question comes from the line of Vijay Jayant with Evercore. Go ahead please. Your line is open.

Vijay Jayant, Analyst (Evercore)

Thanks. I have got two. Chris, given where you are on your wireless subscriber growth, I think you are sort of like 10% behind Comcast, and they are sort of break-even from a profitability standpoint. Is that something we can extrapolate looking out quarter to quarter that it’s no longer going to be sort of a headwind on EBITDA growth? Is there any reason the economics change? And for Tom, your comments, even last quarter and this quarter, talked about obviously healthy broadband growth this year. But interestingly, you talked about acceleration in 2022. Can you sort of talk about what gives you the confidence on that? Is that RDOF contributions or just sort of natural on the core base? Thanks.

Chris Winfrey, Chief Financial Officer

So on the wireless EBITDA, and our goal is — it's going to sound bad, but our goal isn't to drive short-term EBITDA profitability. Our goal is to drive as much growth as we can because we know what the underlying profitability is and what it does for the overall business. So, I don't think we are going to be forecasting EBITDA breakeven on a consolidated wireless business basis, which isn't even how we look at the business because we think about it combined. That being said, we have essentially the same economics as Comcast, and so the model is very similar. But we are focused on really driving as much subscriber acquisition as we can. The business itself, absent any subscriber acquisition costs — so absent any marketing and sales — already cleared profitability absent growth cost at the 2 million lines mark. So, we are well into that territory. So really, what you are looking at in terms of an EBITDA drag right now is really about new subscriber acquisition. And that's something, if we have the opportunity to push through, we are going to go do that. And so I don't want to give necessarily guidance or an outlook on that. But the trend continues to improve despite the fact that we have a very strong net addition rate on wireless lines.

Tom Rutledge, Chairman and CEO

If I understand your question, it was why do we have confidence that broadband growth will accelerate and why 2022 will be better than 2021? I think that our basic view is that if you go back over the last few years we have been on a growth track and that growth track has been accelerating, and we had a very anomalous situation in 2020 that carries into 2021. And if you just trend out that long-term line, it gets back on that line in 2022. And that's really what we are saying. It's that simple.

Chris Winfrey, Chief Financial Officer

I don't think RDOF is going to be a significant contributor in 2022, just given the limited number of activated passings that will be there. So, I don't think about that as a material driver. I think about just the momentum and the ability to use mobile, which we have treated as an attribute to the broadband product as a way to continue to drive growth and to continue to improve retention on the broadband side.

Vijay Jayant, Analyst (Evercore)

Okay. Thank you.

Stefan Anninger, Head of Investor Relations

Thanks Vijay and thanks to everyone for listening. James, I will pass it back to you.

Operator, Operator

This does conclude today’s conference call. We thank you for your participation. You may now disconnect.