Hello, and welcome to Charter Communications Fourth Quarter 2022 Investor Call. [Operator Instructions] Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time.

I will now turn the call over to Stefan Anninger. Sir, please begin.

Stefan Anninger - Head of Investor Relations

Good morning, and welcome to Charter's fourth quarter 2022 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 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 Chris Winfrey, our CEO; Tom Rutledge, our Executive Chairman; and Jessica Fischer, our CFO.

With that, let's turn the call over to Chris.

Christopher Winfrey - President and Chief Executive Officer

Thanks, Stefan. We continued to execute well within a challenging market backdrop in 2022, we remain excited about the industry's future and Charter's in particular. We added over 340,000 Internet customers in 2022 despite the previous pandemic pull-forward and a low activity environment. We also continue to see very strong mobile line growth with full year line and net additions of over 1.7 million. As of the end of 2022, we had 5.3 million total mobile lines. So we're growing mobile lines fast, even in a lower volume environment by saving customers $100s and often $1,000 per year. That growth creates value for Charter and supports broadband growth.

For the full year, we grew our consolidated revenue by 4.5% and our adjusted EBITDA by close to 5%. The planned December management transition with Tom moving to Executive Chairman is also growing very well. And I'm pleased Tom will join us in today's Q&A. In 2023, in the coming years, we remain primarily focused on three broadband initiatives, evolution, expansion and execution. Each of these initiatives is designed to drive customer growth and long-term cash-flow growth.

Starting with evolution. Already in 2023 and over the next three years, we will evolve our network to ubiquitously offer symmetrical in multi-gigabit speeds. We'll deploy these new speed offerings at a much faster pace and a much cheaper cost than our competitors, just a $100 per passing. And we'll maintain our marketing speeds claims. We're also evolving our go-to-market approach with increasing convergence. We recently launched Spectrum One, which combines our Internet, advanced Wi-Fi and mobile products for the fastest seamless connectivity.

During the fourth quarter, we saw continued selling of mobile to our large Internet base and our Spectrum One converged offerings helped drive our strongest quarter yet for mobile lines. The potential for mobile to be a significant driver of new Internet sales is still largely untapped as we educate non-subscribers of the Spectrum One value proposition. With nearly 5.3 million lines created over a four year period, it is clear that our converged customers have meaningfully lower Internet and customer relationship churn. And while some of that churn benefit may be self-selection, mobile drives better churn, and ultimately, acquisition for Charter.

Our second area of focus is the expansion of our footprint. Line extension construction is an important part of our 2023 growth plan and beyond, and offers good growth in returns visibility. We hope to complete our RDOF build ahead of the original commitment, and that faster completion is good for our returns, the communities where we build obviously, and it creates credibility for future subsidized builds and option value for future growth.

As we also mentioned in December, we've been successful in winning a number of other state and local grants in 2022 and expect the same in 2023. And we expect assuming a reasonable regulatory framework to participate in the $42.5 billion BEAT program. The initial results of rural construction initiatives have been very promising. We constructed over 200,000 new rural passings in 2022, and penetration of passings open at least six months is ahead of our expectations at about 40%. Over time, we expect our rural construction initiatives to be a significant contributor to our customer growth, with attractive mid-to-high teen internal rates of return.

And finally, we remain focused on executing on our core operating strategy, all to further improve the customer experience, raise customer satisfaction and drive customer growth. We're doing that in a number of ways, including the continued digitization of our customer service model, and ways that enhance the customer experience. Accelerating our proactive maintenance initiative to address service issues before customers even see an impairment, and investing in training and tenure for our employees to continue to improve our service and sales capabilities.

Longer tenure leads to better execution with higher sales, lower service transactions, lower churn and more products per customer over time. So, we have a large growth opportunity in front of us through network evolution, convergence and continued operational execution and a very unique opportunity to expand our footprint. We have a successful operating model to address the opportunities in front of us. It's the same strategy that we've deployed for years, it's about having the fastest connectivity and products and pricing and packaging that's difficult for customers to replicate.

And putting that all together, so that we provide more product into the household, more penetration across our passings, and then marrying that with high-quality service with fewer service transactions and lower churn, that all drives higher long-term recurring cash flow. We then take that sustainable cash-flow model and put it together with an innovative capital structure and a disciplined approach to ROI-driven capital allocation between organic investment, expansion and/or M&A and buybacks, and they get Charter. So we have a great path in front of us to deliver long-term shareholder value creation, which means delivering for our customers, employees and local communities.

And with that, I'll turn the call over to Jessica.

Jessica Fischer - Chief Financial Officer

Thanks, Chris. Before getting started, I want to remind you that we will be making a couple of changes to our reporting beginning next quarter. First, as we noted in our investor meeting in December, we'll include mobile service revenue and residential and SMB revenue as appropriate. We will no longer report mobile expenses separately, and both of these changes better reflects the converged and integrated nature of our mobile business and our operations and our offer structure.

Second, we will provide additional line extension capital and rural disclosures. And finally, I want to note that while our fourth quarter results contains some modest impacts from Hurricane Ian, the overall impact of the Hurricane on our financials and customer numbers was very small and doesn't warrant separate disclosure.

Let's turn to our customer results on Slide 5. Including residential and SMB, we added a 105,000 Internet customers in the fourth quarter, and added 344,000 over the last 12 months. Video customers declined by 144,000 in the fourth quarter. Wireline voice declined by 233,000, and we added a record 615,000 mobile lines. For the full year, we added 1.7 million mobile lines.

Although, our Internet customer growth continued to be positive in the fourth quarter, activity levels remain low. During the quarter, we saw both lower Internet churn and lower Internet connects than in the fourth quarters of 2021, 2020 and 2019. Total churn, voluntary churn and non-pay churn were all lower year-over-year and were at all-time lows for the fourth quarter. Mover churn remains well below pre-pandemic levels, which also reduces our selling opportunities.

Gross additions remained down across the footprint by similar amounts in overbuild and non-overbuild areas, similar to what we've seen in the past few quarters. In terms of competitive impact some of the lower gross additions we see probably relate to DSL conversion going to a new entrant, fixed wireless instead of coming to us. Given the issues with fixed wireless products reliability and scalability. We expect those customers to find their way to us over the long-term. In addition, we've seen a slightly higher pace of fiber overbuild recently. And I would also note that we've seen a small amount of market share return to mobile-only service over the past several quarters, the reversal of some COVID effects. Despite these challenges with lower market activity, our Spectrum One product is working. We remain in the early stages of offering converged packages of products and refinement to our approach continues, but we're very pleased with the results.

Moving to financial results starting on Slide 6. Over the last year, residential customers grew by 0.2% year-over-year. Residential revenue per customer relationship was flat year-over-year, with promotional rate step-ups and rate adjustments, offset by a higher mix of non-video customers and a higher mix of lower-priced video packages within our base. Also keep in mind that our residential revenue and ARPU does not reflect any mobile revenue, although, that will change next quarter when we make the reporting adjustments I discussed a moment ago. In addition, we're allocating a portion of Spectrum One related customer revenue from Internet to mobile revenue under GAAP.

As Slide 6 shows, total residential revenue grew by 0.4% year-over-year. Turning to commercial, SMB revenue grew by 2.4% year-over-year, reflecting SMB customer growth of 3%. Enterprise revenue was up by 4.9% year-over-year and excluding wholesale revenue, enterprise revenue grew by 9.1%. And enterprise PSUs grew by 4.4% year-over-year. Fourth quarter advertising revenue grew by 25% year-over-year, primarily driven by political revenue. Core ad revenue was down by 3% with lower national and local advertising revenue driven by the softening ad market, offset by our growing advanced advertising capabilities.

Mobile revenue totaled $876 million with $401 million of that revenue being device revenue. Other revenue grew by 4.9% year-over-year, mostly driven by higher rural construction initiative subsidies, partly offset by lower processing fees and lower video CPE sold to customers. In total, consolidated fourth quarter revenue was up 3.5% year-over-year and up 4.5% for the full year 2022.

Moving to operating expenses and adjusted EBITDA on Slide 7. In Q4, total operating expenses grew by $359 million or 4.6% year-over-year. Programming costs declined by 3.3% year-over-year due to a decline in video customers year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates. Looking at the full year 2023, we expect programming cost per video customer to be approximately flat year-over-year.

Regulatory, connectivity and produced content declined by 5.3%, primarily driven by lower regulatory and franchise fees and lower video CPE sold to customers. Cost to service customers increased by 5.8% year-over-year, driven by higher labor costs, higher fuel and freight costs and higher bad debt, partly offset by productivity improvements. Excluding bad debt from both years, cost to service customers grew by 4.9% and while bad debt was higher year-over-year, it remained below pre-COVID levels.

As we noted in our December investor meeting, we're making very targeted adjustments to job structure, pay and benefits and career paths inside of our operations teams. In order to build an even higher skilled and more tenured workforce, which drove the higher labor costs. These adjustments will add some pressure year-over-year to cost to service customers expense growth in the first half of this year. But that year-over-year growth should moderate in the second half of 2023.

And we continue to expect additional efficiencies and cost to service customers over time. As a result, the continued digitization of service, productivity improvements and our network evolution investments. Marketing expense grew by 6.9% year-over-year, primarily due to the higher staffing levels I mentioned and wages, which included targeted adjustments in our sales channels.

Mobile expenses totaled $982 million and were comprised of mobile device cost tied to device revenue, customer acquisition and service and operating costs. And other expenses increased by 6.6%, primarily driven by higher labor costs and higher advertising sales expense related to higher political revenue. Adjusted EBITDA grew by 1.9% year-over-year in the quarter and 4.8% for the full year 2022.

Turning to net income on Slide 8. We generated $1.2 billion of net income attributable to Charter's shareholders in the fourth quarter compared to $1.6 billion in the fourth quarter of last year. With higher income tax and interest expense more than offsetting higher adjusted EBITDA.

Turning to Slide 9. Capital expenditures totaled $2.9 billion in the fourth quarter and $9.4 billion for the full year 2022. Our total capex for the year reflects the timing of more accelerated equipment inventory receipts in December than expected. Fourth quarter capital spending of $2.9 billion rose above last year's fourth quarter spend of $2.1 billion, primarily driven by higher line extension spend driven by our rural construction initiative. Capital expenditures excluding line extensions increased from $1.6 billion in last year's fourth quarter to $2 billion this quarter, driven by investment in network evolution, higher customer premise equipment spend on advanced Wi-Fi equipment and timing of spend.

For the full year 2023, we continue to expect capital expenditures excluding line extensions to be between $6.5 billion and $6.8 billion. So excluding line extensions, we expect a small increase year-over-year in capital spend, driven by the acceleration of network evolution spending, and partly offset by declines in other areas. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, capex excluding line extensions as a percentage of revenue should decline to below 2022 levels and continue to decline thereafter.

Turning to line extensions. In 2023, we expect line extension capital expenditures to reach approximately $4 billion. We expect 2024 and 2025 line extension capex to look similar to our outlook for 2023 at approximately $4 billion per year. And our 2024 and 2025 line extension capital expenditure expectations assume we win fundings for or otherwise commit to additional rural spending. We also expect most speed money to begin to be appropriated in the 2024 timeframe with four year build timelines from grant.

At that time, we expect that our RDOF spend will begin to ramp-down. We expect the BEAT program to present a unique and attractive opportunity for us to expand our network with subsidies, generating significant returns that solidly exceed our cost of capital. For our additional subsidized passings, we expect our net rural construction cost per passing to be closer to the roughly $3,000 per passing that we've incurred in our recent subsidized state and local builds then to our RDOF per passing costs.

Our six month penetration of passings and our newly built rural areas continues to be around 40%. And we expect penetrations in these areas to continue to grow. If you use the cost per passing that I mentioned a moment ago, a high broadband penetration assumption, which we think is reasonable. Our current ARPU excluding mobile, a high incremental margin based on low incremental overhead costs. And a reasonable terminal multiple or a perpetuity growth rate, you can clearly see the very attractive IRRs associated with our rural builds.

Turning to Slide 10, we generated $1.1 billion of consolidated free cash flow this quarter versus $2.3 billion in the fourth quarter of last year. The decline was primarily driven by higher capital expenditures, mostly the results of our rural construction initiatives and by higher cash tax payments. For the full year, we generated $6.1 billion of free cash flow versus $8.7 billion in 2021. However, excluding cash taxes, and our rural construction initiative, our full year free cash flow grew by 4%.

We finished the quarter with $97.4 billion in debt principal. Our current run rate annualized cash interest is $5 billion. As of the end of the fourth quarter, our ratio of net debt to last 12 month adjusted EBITDA was 4.47 times. We intend to stay at or just below the high end of our 4 times to 4.5 times target leverage range. During the quarter, we repurchased 3.6 million Charter shares and Charter Holdings common units, totaling about $1.3 billion at an average price of $344 per share. For the full year, we repurchased 23.8 million Charter shares and Charter Holdings common units, totaling approximately $11.7 billion.

We have a proven operating balance sheet and capital allocation model that drives customer and financial growth and shareholder value. We've always prioritized investments that generate long-term growth, and those investments ultimately protect and extend our return of capital to shareholders. We continue to generate significant free cash flow and intend to both invest for long-term growth and simultaneously returned excess capital to shareholders in the form of buybacks.

Operator, we're now ready for Q&A.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question will come from Jonathan Chaplin with New Street. Your line is open.

Jonathan Chaplin - New Street - Analyst

Thanks. Thanks for taking the question. I'm wondering if you could give us a little bit more context around the strength we saw in wireless this quarter. How much of that is coming from selling into your existing base of customers versus new customers that you're bringing in the door? And really what I'm sort of trying to unpack is some way to kind of analyze the pull-through effect that the Spectrum One is having on broadband acquisition, separate from sort of the impact it has on lowering churn. And then you said that the opportunity for sort of driving this converged bundle is really untapped at this stage. Can you remind us of what penetration is of accounts with wireless at the moment? And where you think that could sort of potentially get to in the long-term? Thank you.

Christopher Winfrey - President and Chief Executive Officer

And on the second question, Jonathan, I don't have the exact in front of me, but it's 3 million relationships roughly that have mobile and take the residential base of, what, 28 million. I guess you got to take S&B together so 30. So that gives you a sense there. On the impact of Spectrum One, I think the potential here for acquisition remains the biggest opportunity in terms of driving Internet net adds. Our wireless net additions in the quarter were largely driven by existing Internet upgrades still. So 75%, 80% of the lines came from existing Internet customers upgrading, which means they're paying lines, maybe get the second line for free or the third line paid for the majority of those being paying lines, which means the inverse of that is that new connects are also attaching with mobile as well.

Even new connects - new Internet connects are connected with mobile as well, although we're in a low transaction environment, which means we have lower gross adds. So there's a mathematical opportunity to increase both our Internet net adds and our convergence with even more mobile line adds as the market picks up. But there's the bigger opportunity, which is as we continue to message into the marketplace, the value and the benefits of a converged product, which really across our footprint, we're the only provider who can have those claims and have that better product and have that what we call gig-powered wireless.

I think the real opportunity for Spectrum One convergence and wireless is to have a meaningful impact over time on Internet net additions, but it's early on. And I think because it's a completely new category, it's going to take a little while to educate into the marketplace. And the bulk of our wireless gains today are still coming from existing Internet customer upgrades.

Jonathan Chaplin - New Street - Analyst

Chris, do you have a sense of how many of the broadband adds you might not have got, but for the Spectrum One offer with wireless?

Christopher Winfrey - President and Chief Executive Officer

It's a tricky question because the customers are going in for a sale, and we're attaching global Internet at the same time. So I think the easier way to think about it is to think about our progression between Q3 and Q4 with a few caveats. One is there's always seasonality. Those are decent quarters typically in a year. The second caveat is that when you have a large amount of adds and a large amount of disconnects inside the business, which all of us do, that can create outsized variability and outsized conclusions on your net adds because of small - a very small difference in your gross adds or a small difference in your churn can have an outsized impact on your net adds.

Now as we hopefully return to a higher net add growth rate and that variability declines, but that mass still remains. So from a Q4 perspective, we still have low transaction volume for all the reasons that Jessica mentioned. And we had the other factors that Jessica mentioned, so people should go back to that. But the bridge between 75,000 roughly Internet net adds in Q3, we had a little more rural that was behind us, and Spectrum One was contributing as well. And I think both of those were contributors to the small uptick that we saw in Q4. The bigger issue we face, as we keep on saying, is just the lower transaction volume in the marketplace, means fewer selling opportunities - which means fewer selling opportunities for Spectrum One and at the same time, as we educate the marketplace on the benefits of that converged product.

Jonathan Chaplin - New Street - Analyst

Got it. Thanks, guys.

Christopher Winfrey - President and Chief Executive Officer

Thanks, Jonathan. Chelsea, we'll take our next question, excuse me, question please.

Operator

Yes, sir. Our next question will come from Vijay Jayant with Evercore ISI. Your line is open.

Vijay Jayant - Evercore ISI - Analyst

Hi. Thanks. A couple for Jessica. Just wanted to confirm that the $4 billion of line extension you're calling out for '24, '25, that's sort of the other limit, assuming that you win in B and it could be potentially low? Is that sort of a budgeting sort of expectation just for clarification? And then given the higher sort of capex you have next few years, can you help us think about what it means on taxes? Is there sort of new shield that we can get from the build? Thanks.

Jessica Fischer - Chief Financial Officer

Yes. So the $4 billion, Vijay, I do think that it's kind of a budgeting exercise, but it's our expectation, and it's on the higher end of our expectations. But it all matters how much we win and subsidized builds. And so it really is a matter of sort of what's available and what makes sense from an ROI perspective for us to spend and to try to get additional passings and generate additional returns. But I think the $4 billion is where we think that we will be based on our expectation of what will happen right now. So that's probably the way to think about that.

On the cash tax, our cash tax liability is always dependent on a number of different variables. We're a full cash taxpayer now. We've previously given guidance on taxes. If you look back, I think, at what we said in Q4 of 2021, and there's more capex in the plan now, which generally should reduce that liability. But because you don't have 100% deductibility, you don't get 100% credit for that anymore. As a result, I would look back at that guidance. And we might be slightly above the percentages that we gave there, maybe 1% or 2% higher, but you can generally sort of look back to that to think about how to estimate cash tax.

Christopher Winfrey - President and Chief Executive Officer

So Vijay, on the rural build, clearly, we've disclosed what we've won so far on the state grants that primarily come out of ARPA and NTIA funds. The bid process is still in process. And so the rules have not been fully clarified. They need to be right in order for it to make sense for us to invest, and we think they will. But then once the maps are clarified, contested, then there will be brands given out to the states in terms of how the funds are distributed.

And then the states will have their own process in terms of how they allocate that. So in some sense, our outlook here is really dependent on the rules that get set, the timing of the allocation to the state and then how the states distribute. And so we're trying to do our best to provide some outlook based on the best view that we have today. But a lot of that's not entirely in our hands, and we're going to do the best we can. And we'll continue to provide updates along the way to the extent that we have better information.

Vijay Jayant - Evercore ISI - Analyst

Thanks so much.

Christopher Winfrey - President and Chief Executive Officer

Thanks, Vijay. Chelsea, we'll take our next question, please.

Operator

Yes, sir. Our next question will come from Craig Moffett with SVB MoffettNathanson. [Phonetic] Your line is open.

Craig Moffett - SVB MoffettNathanson - Analyst

Hi, thank you. Two questions, if I could. First, let's drill down on margins a little bit. I think it's hard for all of us to sort of make sense of the wireless margins given how fast the subscriber base is growing and therefore, how high customer acquisition costs might be. How should we think about - particularly since we're not going to see it reported separately anymore, how should we think about the margin trajectory for wireless and therefore, the margin trajectory for the business overall as you go forward? And then just one more operating question. Can you just talk about the decision in your upgrade of your physical plant to not go all the way to symmetrical speeds, but to keep your downstream speeds higher than your upstream speeds?

Christopher Winfrey - President and Chief Executive Officer

Sure.

Jessica Fischer - Chief Financial Officer

So Craig, on the margins question, I would tell you, first off, we wouldn't be willing to do the Spectrum One offer if we didn't have some space in margin. And - so our margins in that business, if you exclude the subscriber acquisition costs, continue to be quite good. And they're getting better over time because we continue to drive down some of those business expenses on a per customer basis, things like the operating cost, what does it take to run billing and customer care.

And actually, the reason that we're pushing those into our broader reporting is that we continue to integrate the business into our broader business. And so a lot of that activity we're dealing with a customer as one customer. And when you have a sales call, you're selling mobile and cable on the same call. When you have somebody call in with a question, you have agents who we'll be capable of dealing with both things. But I think the overall trajectory, we make margin on the customers today. We have offers in the mix that we're using to drive both mobile and broadband activity, but they work well for that. And I think we should think about them as being related to both that mobile and broadband activity.

But we expect the margins to continue to grow. I think we gave some numbers in the presentation in December, and you can kind of see the trajectory that we're on there. I think that margin expansion continues when you think about the broader product.

Christopher Winfrey - President and Chief Executive Officer

I'll comment a little bit on the network question. And the - so your question was whether the choice to not upgrade to symmetrical. Just as a reminder for everybody, the first 15% of the upgrade is going to be with DOCSIS 3.1 high split using integrated CMTS. That will give us 2 - up to 2/1 15% footprint. So if we can make that 1/1, we could make that somewhere in between and make it symmetrical. But - so we have the capabilities. It's just based on our assessment of where the market value is. 5/1 and the 50% of the footprint. And then what we think is a base case is 10/1, using 1.8 gigahertz DOCSIS 4.0 RPD and 35% of the footprint.

Now - the reason we're choosing that you can mix and match where you allocate your bandwidth based on what you think the customer demand, the marketing claims and the actual product and device capabilities are. So we have flexibility to make, for example, you can make a symmetrical speed of product out there, depending on where you set the split. And those options remain available to us.

It's our view right now that the upstream demand today is much more of a marketing campaign as opposed to any real product demand. And we want to lead in those marketing claims, which is why we're doing what we're doing. We also have from a marketing claims perspective from a symmetrical that what we'll be deploying here allows a fiber drop in the - as a remote OLT inside of the node. So that gives us marketing claims across the entire footprint for 25 symmetrical and over time, 50 or 100-gig symmetrical.

Hard to imagine what, when and how that would ever be needed, but it gives us the opportunity to do that and market it at least in these communities to have that type of speed, not different from what we do with enterprise already today. So we have a lot of flexibility. That's what I think we really like about this plan. We can go fast. We can do it at a low cost. We can reset the up and downstream, and we can pivot where we need to go at a very attractive price. We can do it at a faster pace and a cheaper cost than all of our competitors and be out in front of any potential overbuild with a better product for the long-term.

Thomas Rutledge - Executive Chairman

So - And Craig, this is Tom. I just want to add one thought to you the margin. The gross margin of the mobile business is actually a high-margin business. And it's improving with penetration, and it improves both at the gross level and the operating level. And relative to video, which is a low-margin business and declining, but has an impact on - as the revenues decline in video has an impact on margin in a positive way, even more dramatically is the impact of the increased revenues that are coming in from mobile and the high margins associated with them. So the overall margin in the business is improving going forward.

Craig Moffett - SVB MoffettNathanson - Analyst

Thank you. That's helpful.

Christopher Winfrey - President and Chief Executive Officer

Thanks, Craig. We'll take our next question, please.

Operator

All right. Our next question will come from Phil Cusick with JPMorgan. Your line is open.

Phil Cusick - JPMorgan - Analyst

Hi, guys. Thank you. I wonder if, Chris - two, if I can. One, Chris, can you just talk about the broadband market? Is penetration in your legacy footprint growing? And talk about the - what you mentioned was incremental fiber competition and how that sort of evolves over time? And then second, Jessica, you gave a ton of detail on costs, and I appreciate it. Can you just quantify a little bit for us that increase in cost of service in the first half as well as the programming cost commentary, a lot of people wondering how are some programming numbers are flat in '23? Thanks very much.

Christopher Winfrey - President and Chief Executive Officer

So Phil, let me parse the market a little bit in the broadband market. Clearly, in areas where we don't have a gig overlap, we are growing and continue to grow despite a low transaction volume marketplace. And despite some of the rollback to post-pandemic rollback to mobile-only that Jessica described. I don't think it will go all the way back, but we're all seeing a little bit of that taking place. So growing in that space. Typically in a gig overlap area, you have newly minted overbuild and you have existing overbuilt and existing overbuild we're growing and newly minted. You have a small setback upfront because you have just have a new competitor in the marketplace. And to the extent you have a higher amount of that, that mix impacts where you're going.

In the fourth quarter, based on all the passings analysis that we look at, we actually grew despite that higher fiber overbuild inside of our footprint in the fourth quarter, we actually grew in that space despite the mix contribution of additional overbuild. So I think that's positive. And so that's - it's small. And as you can tell through the net add numbers. But I think it's promising for the future, and that's even prior to having the benefit of additional marketing claims through the network evolution as well as having clearly the wind behind our sales over time of additional network expansion and the promise of having a fundamentally different and better product than any of our competitors can have through a converged offering that has gig powered wireless.

So those initiatives, they won't happen inside of Q1 or Q2, but they'll continue to steadily increase and improve our position and ability to grow. The biggest one would be, if we can get market volume coming back, that would actually be the biggest contributor of growth more than any of the things that I just mentioned. I'd note as a tangential and somebody will ask it, and so I'll comment on it. We have not - as we've talked about, we've not seen any demonstrable impact on our churn as it relates to fixed wireless access. And we think it could have had some impact on our gross adds, particularly on ads that we would have pulled from DSL.

But when some pricing actions were taken in December, we saw for the first time a very limited impact on our voluntary term, but not where you would have expected it. It's actually in our non-gig overlap and in our MDU footprint where you have higher churn to customers, higher tendency to move around, higher tendency to non-pay. And so it was a - maybe it's just a blip, but there's two linings to that. One is that, for the first time, we saw a small amount of churn related to that. And the flip side is those customers tend to be very mobile, if you will. And I think given the experience of that product even more so are used for the return of them coming back to a proper broadband product with or without convergence. So anyway, that's just food for thought around that. I hope that answers the question.

Jessica Fischer - Chief Financial Officer

So on your other two questions, in cost to serve, quarter-over-quarter growth in Q4 was 5.8%. I would expect Q1 to look more like - to look a bit like that. And then for it to sort of the year-over-year growth to decrease across the year until you're more in line with the sort of growth trajectory that we've seen before, which is really largely flat. For programming per sub cost, the reason that they remain flat year-over-year that, that's our expectation, really has to do with customer mix and whether customers are taking sort of packages that have larger channel sets or more premiums or whether they continue to be priced out of those packages and come into some skinnier packages where the programming cost per sub is less. So it's a mix issue, certainly not an issue that programmers are no longer raising rates.

Phil Cusick - JPMorgan - Analyst

We used to talk about them. Thank you.

Christopher Winfrey - President and Chief Executive Officer

Go ahead. We thought you were done.

Phil Cusick - JPMorgan - Analyst

Sorry. No, I was just going to ask, do you have some room on - we used to talk about the sort of small video package mix and how that might peak out at some point? Is that an issue anymore? Or can you kind of put people wherever you want in terms of packages?

Christopher Winfrey - President and Chief Executive Officer

Maybe we'll ham and egg this between Tom and myself. But I want to go into talking about what we have headroom, and we have the ability to still create packages that create value for consumers. Our philosophy has always been to give the customers what they want. And typically, they want more programming and try to do that the best price we can. And so - also based on their capacity of their wallet. And so having some of these packages actually allows us to sell more video product, which is to the benefit of the programmers. And that's - you can see it in the results that we have still losses, but it's a lot lower than losses than other people in the marketplace. And that's a result of our ability to drive video based on what the consumer wants and what they can pay, and sometimes those are in conflict.

So I think the - that model has worked. It will continue to work. But I also think it already for - as we look to the video space in the future, programmers need to see what we're doing and say, given where we are and given what they're doing themselves with direct-to-consumer and OTC effectively unbundling themselves. But if we had that package flexibility further than we do today, I think we could actually solve some of the problem that exists in the video space and grow for the benefit of programmers, but it's difficult for them to get their heads around that.

Thomas Rutledge - Executive Chairman

It is. So I guess I'm the hammer of the egg, I'm not sure what you want. We still have limitations on what we can do contractually, but we've been moving those limitations as we renew contracts. But the industry is structurally in a bad place from a video perspective, and you've got a really high-priced fat package with everything in it.

And there are a lot of content companies whose pricing is a lot less and it separated out from that package can create a lot of value for consumers. But Obviously, it's a different model. It requires different selling. And so we've been trying within those limitations to do what Chris said, which is to have the best product we can. But I would say that it's not a solved situation in terms of the way the marketplace is structured. And it's still structured in a way that continues to make video an expensive product for most consumers.

Christopher Winfrey - President and Chief Executive Officer

I think Zumo could help. That's the design - Zumo will help a lot with that. If you take the very best of the Comcast platform, including the voice remote and pair that up in our footprint with Spectrum TV app and live video with all the different packages that we have that can be tailored to consumers appetite as well as their budget and combined with what they're probably already paying through SVOD, DTC, etc., in a single platform that allows them to consumed the video product in a single place with unified search, discovery, voice remote, both live as well as all the other content they have. I think that's pretty powerful. And to the extent that we're able to continue to change the requirements that Tom talked about in our programming agreements, I think we can sell more.

Phil Cusick - JPMorgan - Analyst

That's helpful. Thanks.

Christopher Winfrey - President and Chief Executive Officer

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

Operator

Yes, sir. Our next question will come from Kutgun Maral with RBC Capital Markets. Your line is open.

Kutgun Maral - RBC Capital Markets - Analyst

Good morning, and thanks for taking the questions. I just wanted to follow-up on the programming cost discussion, and then I had a quick housekeeping item on mobile, if I can. So on programming costs, the guide for it to be flat year-over-year is quite remarkable in many ways. Jessica, I know you just characterized it as a mix issue. I wanted to see if you're seeing an acceleration in subs taking these lighter packages or court shaving overall. And relatedly, you've been very vocal about the tensions with programmers for many years now. Is there anything else to call out in terms of Charter maybe taking a harder line with programmers and recent renegotiations, whether it's in terms of pricing or even carriage of certain networks overall?

Or maybe again, we shouldn't read into it, and it's purely just a consumer mix shift issue. And quickly, just a housekeeping question on wireless, as we all try to better understand the industry-wide postpaid phone trends, any chance you could help size how much of your 5.3 million mobile lines are phone versus tablets? Thanks.

Christopher Winfrey - President and Chief Executive Officer

I don't have it in front of me that split on the 5.3%, but the vast, vast majority, we're in the connectivity business, and so we're selling mobile service. And to the extent that a customer wants additional devices, of course, we have that and we make it available. But our view here is driving Internet both acquisition as well as Internet churn and to drive profitability, but having an overall higher ARPU and you get that through selling the mobile service combined with the broadband service. Maybe you start with programming and jump…

Jessica Fischer - Chief Financial Officer

Yes. To clarify on the guidance, it's programming cost per sub that is flat year-over-year. And the mix shift is not that that's significantly different from what we have seen previously. The base is smaller. And so as the base - the mix of incoming customers does differ from the base, but the mix shift isn't - it's not that substantially different.

Christopher Winfrey - President and Chief Executive Officer

In terms of position with programmers, Tom mentioned the margin issue that exists inside of video. And we've talked about the availability of that content really almost anywhere, in some cases, in many cases, for free because of piracy. We've been a long proponent Tom has been around the problems related to that. So I guess it's fair to say I don't know about harder line. It's just more indifferent about carriage of certain content at a higher increasing price when it's available all across the market at cheaper rates or even for free.

And so that's not a harder line, that's just a reality of where we're at. The two biggest issues inside of - the content category continued to be retrans, which is over-the-air content, which we're forced to pass on as a significant cost to our customers. and the development of sports and the other channels are important and put into what I was just describing, but those are the two biggest drivers of cost increases to consumer.

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

Operator

All right. Our next question will come from Doug Mitchelson with Credit Suisse. Your line is open.

Douglas Mitchelson - Credit Suisse - Analyst

Thanks so much. I think at the Analyst Day, it was suggested that broadband net adds would be better in 2023 than 2022, and that 2023 would have EBITDA growth. And so I'm just wondering, I think, Chris, on the broadband net add side, kind of what gives you confidence that 2023 could be better than 2022? And then I guess, jump all, but maybe for Jessica, on EBITDA, do I remember that right? The expectation is EBITDA growth in 2023? And I know you guys are in a fan of guidance, but any - what are the swing factors that can impact that? And any thoughts on cadence if you're willing to offer would be helpful.

And then sorry, just - I'll ask it all at once. Chris, I'm just curious as a follow-up. You said the pricing action, it was maybe just a blip that it was like the first time. But you've - when you've had pricing actions in the past, you've had churn, right? So I wasn't sure what was - what you saw for the first time when you mentioned a blip in churn?

Christopher Winfrey - President and Chief Executive Officer

Yes. The 2023 broadband net adds, I said our goal is to have higher broadband net adds this year, and I think we will. The biggest variable that's out there is what's taking place in terms of market transaction volume, and that's the only one that gives me angst because it's the one you can't control. But we have a lot of things going in our favor. The - starting with a lot of these initiatives that I've talked about. So clearly, with a bigger base of rural passings behind us and constructed increasing during the course of the year, I think the early - small but early success of Spectrum One in driving Internet is only going to grow as that product takes hold.

And I think the investments that we've made in our personnel, not to get too much into the weeds, but that labor cost increase that Jessica talked about, there are some pretty big actions that we took - that were targeted. They were not peanut butter wage increases. They were targeted to drive an ROI, which means having longer-tenured employees who result in the sales force having better yields, selling better. And in the service infrastructure by having a longer tenure, they tend to do a better and faster job in addressing customer issues and avoid repeats, which not only reduces transactions, but reduces customer churn over time.

And those benefits, because of where the labor market was for everybody last year, in order to get tenured investors the passage of time, but we've seen the lowest attrition rates at the back end of Q4 that I've seen in a very, very long time, if ever, in our service and sales functions. And I think that's going to - that's a function of both the market as well as the investments that we've made. But ultimately, those investments collectively tie into both gross adds as well as to lower churn. And I'll go back to where I started, which is the biggest driver for us and the biggest uncertainty is market volume. But all else equal, that's our goal is to increase net adds this year.

Jessica Fischer - Chief Financial Officer

On the EBITDA side, as you said, we don't give EBITDA guidance, but certainly, we do expect growth in 2023. I think I drive it out of a few things. We have continued to have customer growth. I think we've talked about - on the rate side, we have taken some small rate actions recently. And then we continue to believe that we have - we continue to expect REITs to be good across those customers. So driving revenue growth.

I would remind you that we lapped last year's rate increases in April. So to your comment around timing, the second quarter is probably the space in which that's most challenged. But - and then as Chris said, we've made these investments in tenure. We expect to gain better efficiencies both out of the 10 year initiative, out of the continued digitization of the process that we have. We continue to improve in our operational efficiency, which drives sort of relative costs out of the business. And so I think we're pretty confident in generating that EBITDA growth year-over-year.

Christopher Winfrey - President and Chief Executive Officer

So, you mentioned pricing action and maybe there was some confusion there, but I'll start with what we've done. We - our philosophy hasn't changed. We're focused on trying to provide competitive products at the best price in the market and best packaging so that we can grow faster. But given what's happened in the video space, we continue to pass through rate increases for the programming increases that we've seen. And if you look back to the middle of last year, you can see it pretty dramatic, given where the economy was and if you're on people's mind, we did a pass-through in the middle of the year. You saw a big downgrade in video and voice.

We've done some additional pass-through as well as a small increase on Internet lower than our competitors to maintain our competitiveness. And we did that for Internet-only inside of Q4, and we wanted to wait until you could combine that from a service experience, not to have the bill change twice for customers. So bundled Internet customers is just taking place at the beginning of bundled video with Internet customers taking place at the beginning of this year. The reaction there has been pretty muted. It's very low call volume, and given where the rest of the market has been and what we're doing is still maintaining our competitiveness. I'm not seeing a big uptick in turn related to the price actions that we passed-through.

Douglas Mitchelson - Credit Suisse - Analyst

Okay. Great. Thank you all. That's very helpful.

Christopher Winfrey - President and Chief Executive Officer

Thanks, Doug. We'll take our next question, please.

Operator

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

Benjamin Swinburne - Morgan Stanley - Analyst

Thanks, good morning. A few questions on the rural build. Jessica, thanks for all that detail at the beginning on the sort of non-artoff pieces. I think you talked about $3,000 of passing net. So I guess a couple of things. Should we think about that as 5,000 gross? And do you guys have visibility into the timing of when you'll receive those subsidies and also sort of the accounting treatment revenue versus capex, so we can think about trying to give you those benefits as we layer on the spending?

And then I don't know if you're willing to tell us what you think you'll build in '23. I'm guessing, no, but we can make our own assumptions. If we think you're going to build to, say, 500,000 rural passings in '23, is there any way to help us think about how many of those you'll sell into over the course of the year? I assume at this point, you guys are getting better at turning this stuff on and getting to market. So any help on the time line and lag from what you've learned so far would be helpful.

Jessica Fischer - Chief Financial Officer

Yes. So I'm going to start at the bottom of the list then. We expect to build around 300,000 subsidized rural passings in 2023, which are mostly are off and they're incremental to the normal business as usual pace of build. What I would do with those is we've given you information on how much penetration we get of those passings, the 40% at six months. We continue to grow after we hit that 40% at six months, but you can time them in that way. Our pace coming into the end of the year within the 15,000 to 20,000 passings per month range, and I would expect - we're starting the year at that pace and we're going to end at a faster pace to get to that total 300,000 number.

The $3,000 per passing, so just to be clear, I think what I said was that we would be closer to the $3,000 that we've been in the more recent subsidized builds than to our RDOF amount. So we totally prescriptive around $3,000 exactly. But that is a net number. Our expectation on state subsidized and on the bid build is that those programs are likely to be structured in a way where the expenses count - where the subsidies are accounted for as a capital offset and not as revenue.

So we're going at it with net numbers. Gross build costs, I think, are a lot harder. And so we understand quite a bit now about what we need to about what we want in terms of driving economics and also sort of had some experience in bidding these passings and are seeing what's happening in the marketplace. But what you win impacts a lot about what those gross build costs are and they could be in a pretty wide range. So I don't have a number on that side.

Christopher Winfrey - President and Chief Executive Officer

Just in terms of how we look at it, Ben, if you go back to the presentation that we used in December, I threw up an unnamed market with a footprint overlap. So you could take a look at how our strategy evolves between, I think, the colors were gray, gold and blue. Between our existing footprint, RDOF and the way that state grants and now bead and other grants will be in.

And so we can make the gross cost of our bill lower as a result of the strategy in terms of how we approach the market and how we put these together. And so we can have a lower gross cost and therefore lower net cost than our competitors because of the existing footprint that we have, the existing RDOF footprint that we're building. And I think that makes us not only a better economic participant, but a better and more reliable, trustworthy builder for the states in the build because we're the largest rural builder today.

We've been successful at it. We're moving at a fast pace. We can get broadband to their constituents at a faster pace at a competitive price, with great products, Internet and mobile, and most of these bidders aren't going to have mobile, and they're not going to have a converged product, and that's something that we can bring to these communities.

Benjamin Swinburne - Morgan Stanley - Analyst

That's very helpful. Can I just ask a clarification from your comment. I think you guys talked about non-pay churn, all forms of churn at record lows in Q4, including non-pay. But I think you also mentioned bad debt was coming back up. Just any comment on sort of the consumer, the low-end consumer. Some of your competitors have talked about non-pay churn normalizing. Was - it didn't sound like we're seeing that, but I wanted to hear your thoughts?

Christopher Winfrey - President and Chief Executive Officer

I think, I'll let Jessica comment. It's still dramatically - well, it's still much lower than it was pre-pandemic, and the churn is low. Bad debt has been slowly building back up. It's nowhere near back to where it was, but it has an impact on a year-over-year basis. In January, we typically don't talk to intra-quarter, we don't like to. But we're starting to see, and that may be the bridge between what some of our peers and competitors are saying. It's not dramatic, but we have seen a step up both in non-pay as well as bad debt. And I think that just reflects the overall economy.

In some sense, you look at that and the upfront impact of that is negative. You don't like it. On the other hand, it's one of the indicators that the market is starting to normalize in terms of transaction volumes, you have a delay from when the bad news comes in and when the selling opportunity arises. So it's a double-edged sword.

Jessica Fischer - Chief Financial Officer

Yes. The other piece I would remind you we've talked about before, we're a big participant in ACP and a big proponent of that program. I think for our customers that are more prone to non-pay. We have - we've endeavored to make sure that they recognize that, that program is available to them and to be part of the solution they're making Internet affordable for them. It has two impacts. One is that those customers don't churn as much as before. The other impact, though, is that on some of those customers that convert into the ACP program. We might be carrying a balance related to those customers that then ends up sort of flushing through in our bad debt computation. So while bad debt is higher on a numerical value basis, it's not necessarily connecting into a non-pay churn where we've converted the customer to being an ACP customer.

Benjamin Swinburne - Morgan Stanley - Analyst

I see. Thank you very much.

Stefan Anninger - Head of Investor Relations

Thanks, Ben. Operator, that concludes our call.

Christopher Winfrey - President and Chief Executive Officer

Thank you, everyone.

Operator

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CHARTER COMMUNICATIONS INC

Q4 2022

Earnings Transcript

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