CHTR - Charter Communications

[vince]

CMCSA is cheaper though, although they own content and theme parks as well ( which are fine business, imo)?, so not totally comparable.

 

I added some CHTR as well and a bit more CMCSA. CHTR fall shows how little we know about whatever own, imo.

CMCSA has 40% EBITDA margins on cable compared to CHTR ~37%, so they do have some improvement potential.

 

Spek, just cause the price declined doesnt mean we know little about the position.  It was a fine qtr, 5%rev growth and 7% ebitda growth.  Current fcf is completely meaningless as a valuation tool because of all things Liberty just said.  We already know with confidence what fcf will look like when u derive it from ebitda when operations stabilize.  In addition, the operating metrics looked normal/good/expected so I dont see what the fuss is about, nor do I care as I was able to acquire another meaningfull amount at very good prices. 

[aceskc]

Indulge me guys for a minute...You mention video has lower margins than broadband, digging further along the same lines- as long as they are in the video business, the programming costs will sort of be a sunk cost, whether they have 16k residential PSU's or 15k or 10k.. Given that, they are now earning ~4.3B on 16.4k residential video PSU's in Q1 and ~3.7B on Internet  22.8k PSUs ,  so on an annual basis APRU per video user is $105 vs ARPU per internet user is $65 based on Q1 rates. And the former business is shrinking, while the internet business is growing.

 

Would love to hear your thoughts on why the shirnking video business is irrelevant or the thesis.

[gokou3]

Adding to the above, I am attaching a financial forecast from Aug 2015 for the BHN/TWC transactions.  They are trailing a bit, in particular the capex being higher than foecasted, although this should be transient.  The forecast also didn't include their mobile initiative.  With steady EBITDA growth and tapering of capex after the system integration is complete, the FCF by 2019 will be quite impressive relative to its current EV.

[cmlber]

TTM free cash flow came in at 2.9B. But of course, they are investing to shift the entire base to digital... It doesn't look that cheap if you look at reported FCF, but maybe it is cheap if you are looking at a few years

 

Yeah. If you're buying something to own for the long-term, what matters is the earning power over that period. TTM is an arbitrary period that might or might not be representative.

 

In this case, looking at the fact that three very large companies are being integrated together (and the biggest one was the one most in need of catching up) at the same time as they're moving to all-digital at the same time as they're launching a mobile product, I'd say that there's a lot of noise covering the real earning potential. As the CFO said, these things are not linear and there's going to be ups and downs (he said something like: If you look at the legacy Charter transition after this team took it over, it looks smooth if you are standing back, after it was done, but at the time, quarter to quarter, it wasn't. I think we're seeing the same thing).

 

Rutledge also mentioned that video has very little margins and that even if they're off by a million subs or whatever in their predictions, it's not material.

 

In the past hasn't Rutledge been very critical of CABO's comments on video being an immaterial/unprofitable business?

 

If the video business is declining to zero profitability and this ultimately becomes a broadband business, why not own CABO at a higher EV/EBITDA multiple but in a footprint with no video margin left to shed, only 31% broadband penetration vs 48%, and where the cost to pass a home is substantially higher, i.e., long-run threats from 5G and over-builders is much less?  Your starting yield is lower, but the bulk of the value you're paying for is in the cash flows 10+ years out, what the competition in Jackson County, Mississippi looks like 10+ years out is a lot more predictable than what it looks like in most CHTR markets.

[Liberty]

Adding to the above, I am attaching a financial forecast from Aug 2015 for the BHN/TWC transactions.  They are trailing a bit, in particular the capex being higher than foecasted, although this should be transient.  The forecast also didn't include their mobile initiative.  With steady EBITDA growth and tapering of capex after the system integration is complete, the FCF by 2019 will be quite impressive relative to its current EV.

 

The question on capex is, will the total amount of capex at the end of the transition be higher than originally forecasted (excluding the mobile stuff), or are they just spending it faster than was expected (in the end adding up to about the amount predicted)?

 

If they are, there could be nice surprises if capex intensity goes down faster than originally expected over the coming year...

[dwy000]

While Rutledge is well known as one of the best operators, seeing the results come in this quarter reminds me of just how underappreciated Brian Roberts is as an operator at Comcast.  Despite a bigger base, the video losses were lower and the expense control impressive (3% programming cost increase vs 5.6% at Charter).  I also think they are so far ahead of everyone else in terms of getting in front of customer experience - the Xfinity boxes, home security, mobile, integration into content etc.

 

I own both but at these prices I like the long term future of CMCSA better.

 

Now I think the wild card will ultimately be mobile.  These 2 are converging fast and I can see Charter combining with a combined TMob/Sprint at some point in the next 2-3 years.  Not holding out for it but that would leave Comcast, Verizon, AT&T, etc. in tough position to respond.

[Munger_Disciple]

I have just finished listening to the conf call. I think CABO saw the writing on the wall with respect to video business well before Charter & Rutledge (or Comcast for that matter). Rutledge said on the call that the number of video subs (whether they are off by a million or not) didn't matter that much given that there is not much margin in it, basically agreeing with CABO.

 

Having said that, hardly anyone invests in Charter today because they are attracted to the video distribution business. It is all about broadband business: consumer, SMB and enterprise. On this front, Charter is doing quite well. 6.5% EBITDA growth is nothing to sneeze at, especially given the levered equity model of Charter. There is also a silver lining to drop in video customers as the long term CPE Capex needs should go down dramatically as Charter shifts the video subs to app based OTT model which will drive up margins as we see in the case of CABO.

 

I agree with Liberty that current quarter FCF is meaningless until the integration of TWC and Brighthouse is completed.

[Liberty]

While Rutledge is well known as one of the best operators, seeing the results come in this quarter reminds me of just how underappreciated Brian Roberts is as an operator at Comcast.  Despite a bigger base, the video losses were lower and the expense control impressive (3% programming cost increase vs 5.6% at Charter).  I also think they are so far ahead of everyone else in terms of getting in front of customer experience - the Xfinity boxes, home security, mobile, integration into content etc.

 

It's true that Roberts is good, but it's a bit of an apples to oranges (my fingers first wrote: "apples to organs", that works too) at this point, IMO. On the call they mentioned that a lot of what they're doing now is disruptive to the customer and that this can increase transactions and churn temporarily (swapping set top boxes, changing product packages (names, prices, features), consolidating billing systems, having new call centers phasing in, etc).

 

I think that maybe if Roberts was trying to integrate new businesses that were multiples of the size of what he was before, he'd probably be seeing some impact to his operating metrics too.

 

Having said that, hardly anyone invests in Charter today because they are attracted to the video distribution business. It is all about broadband business: consumer, SMB and enterprise.

 

It's not for nothing that Malone called his vehicle Liberty Broadband.

[scorpioncapital]

Wasn't there an offer from SoftBank with Malone saying he wanted 500 a share? Maybe should have taken even 400? Lets hope the team is not committing that bias of being in love with their company to the point of thinking operating is always better than selling out. Still if nothing much has changed, today's discount looks mighty attractive for more open market purchases by SoftBank.

[Liberty]

Wasn't there an offer from SoftBank with Malone saying he wanted 500 a share? Maybe should have taken even 400? Lets hope the team is not committing that bias of being in love with their company to the point of thinking operating is always better than selling out. Still if nothing much has changed, today's discount looks mighty attractive for more open market purchases by SoftBank.

 

Why would he have taken a lower amount, because the price is down right now? That's not how Malone thinks. Over the past decades, he's shown that his ability to be patient and focus on the long-term is quite high.

 

Besides, the offers weren't cash, and I don't think swapping CHTR for a bunch of probably Sprint or Softbank stock would've been that great a deal... You lose control of the strategic direction of the asset and you dilute it with a bunch of other stuff that might not do as well.

 

If you have something that you think can do well for years to come, you don't rush to sell it unless someone is willing to overpay a lot and with no strings attached to the currency (and taxes won't kill you). You don't get out of a vehicle that you like and control for a quick short term gain, because then you're stuck with a mountain of capital you have to redeploy, or you're stuck with someone else's equity that you have no say over and Malone is scarred by the AT&T debacle.

 

I think if Softbank crosses 5% they have to file, so that'll be interesting to keep an eye on.

[atbed]

Adding to the above, I am attaching a financial forecast from Aug 2015 for the BHN/TWC transactions.  They are trailing a bit, in particular the capex being higher than foecasted, although this should be transient.  The forecast also didn't include their mobile initiative.  With steady EBITDA growth and tapering of capex after the system integration is complete, the FCF by 2019 will be quite impressive relative to its current EV.

 

Hmm thanks for sharing. Very helpful.

[scorpioncapital]

Right ,an investor can sell his or her shares at any price he feels. It hit a high of 400 so I guess if chatter of 500 was going around one could have gotten ahead of the curve. Anyway I see today more an opportunity than a trap until or unless more evidence to the contrary presents itself , mostly in the broadband mobile arena since I agree the other stuff is a legacy sideshow. Also there was an article that cable cos where historically able to (or allowed) to price ahead of inflation by a few points. Don't remember if that study was considering legacy video before broadband became a thing . Broadband is a strong monopoly as long as alternatives or pricing power doesn't slip . As for valuation, I don't think it's particularly below fair value. I know it's not an exact comparison but khc is trading 2 billion below chtr. Fcf for both companies is *roughly* the same plus minus. Debt is almost double at charter. Why ? Perhaps cause we give it semi monopoly status while Kraft is a weaker form of brand franchise in commodity foods. But how sure are we chtr will be a monopoly forever ? Technological disruption I see as the biggest risk since it's unlikely the government will hinder pricing power.

Growth rates may also differ. But given these variables I'd say both stocks are slightly undervalued. ..but one should have take the 350 to 400 gift I think with the thought of maybe buying in later.

[Liberty]

Speaking of pricing power, charter has been taking a lot less price than the other big cablecos. The idea seems to be to try to get as much volume now as possible, go all-digital, in-source support, make the products better and more straightforward, go quad-play, and then once that's done and churn is super low, then they'll probably flex a bit more pricing. Playing the long term game...

[CLM5]

First off, agree with a few others here that the market reaction today was far overblown. Why the market is obsessed with an almost-irrelevant segment of these cable companies, I'll never quite understand.

 

But I'd like to share a thought I was mulling over today.... at what point does Video become relevant again? Now, I have no idea what kind of leverage programming providers have over cable companies besides their content so this may be a moot point, but hear me out here. Given the steady state decline of video subscribers, how much longer can the slew of cable companies continue to operate video segments profitably? Considering even the companies with the largest scale are only seeing break-even margins at this point, I struggle to see how any of the smaller operators are going to stay in business given steady y-o-y subscriber decline and programming cost increase. I think 2 points are extremely relevant here - the first being that consolidation seems likely/necessary for the industry given scale will allow them to operate profitably for a far longer period of time. Pretty much everyone even remotely familiar with cable is aware of the consolidation taking place.

 

The second point, and the one I've been mulling over is, how much longer can the networks continue to be able to increase their programming costs every year? Eventually (and I think we're rapidly approaching this point), there will be no one left willing to pay for the programming costs if they can't do so profitably. Seems to be simple supply and demand in my eyes, unless networks have some other sort of leverage besides their content. When do we reach the point (either through consolidation or the smaller players exiting the market) where there's only 1 or 2 rational players left offering cable video, who can do so at an actual profit because they now have leverage over the networks (i.e. 1 or 2 melting ice cubes that actually generate significant cash)?  Seems to me that this could possibly be the direction that were headed considering I still think there will be a meaningful market for cable TV even 10 or 15 years in the future with the older crowd.

 

Or is it possible that this isn't a realistic outcome? Will cable providers continue to just provide cable video at breakeven, and eventually negative, margins simply to bundle it with their internet and provide a better value package? Is this something that anyone has heard cable management talk about? While I generally don't pay much attention to video because it currently represents almost none of the market cap of cable companies, this seems like it could represent a decent upside to 1 or 2 video companies, which would most likely be any one of comcast, charter, dish, or at&t.

[wabuffo]

Why the market is obsessed with an almost-irrelevant segment of these cable companies, I'll never quite understand.

 

Because video is only break-even on a fully allocated cost basis (but still profit accretive on a marginal cost basis), and these cablco's are heavily leveraged - that's why.  Why do you think Rutledge & Co. was defending video until today.

 

Do you really think the total company EBITDA is going to stay the same if all of the video revenues (and programming costs) go to zero?  Sure some fixed costs can be cut, but I don't think all of them can.  You can argue that cableco's will recover the remaining residual fixed costs via pricing on the internet portion - but that trip from A to B can only be made to happen slowly.  If it is forced to happen quickly - I guarantee you no one has modelled that scenario.

 

Look - I'm a CHTR shareholder and a Rutledge fan.  But I don't like the changing narrative about video from a CEO who is supposed to be a details-oriented operator with a strong command of the numbers.  That's a bit of a red-flag.

 

wabuffo

[maybe4less]

Indulge me guys for a minute...You mention video has lower margins than broadband, digging further along the same lines- as long as they are in the video business, the programming costs will sort of be a sunk cost, whether they have 16k residential PSU's or 15k or 10k.. Given that, they are now earning ~4.3B on 16.4k residential video PSU's in Q1 and ~3.7B on Internet  22.8k PSUs ,  so on an annual basis APRU per video user is $105 vs ARPU per internet user is $65 based on Q1 rates. And the former business is shrinking, while the internet business is growing.

 

Would love to hear your thoughts on why the shirnking video business is irrelevant or the thesis.

 

Because programming costs are generally not sunk or fixed costs. Charter generally pays the content companies on a per sub basis.

[CLM5]

Why the market is obsessed with an almost-irrelevant segment of these cable companies, I'll never quite understand.

 

Because video is only break-even on a fully allocated cost basis (but still profit accretive on a marginal cost basis), and these cablco's are heavily leveraged - that's why.  Why do you think Rutledge & Co. was defending video until today.

 

Do you really think the total company EBITDA is going to stay the same if all of the video revenues (and programming costs) go to zero?  Sure some fixed costs can be cut, but I don't think all of them can.  You can argue that cableco's will recover the remaining residual fixed costs via pricing on the internet portion - but that trip from A to B can only be made to happen slowly.  If it is forced to happen quickly - I guarantee you no one has modelled that scenario.

 

wabuffo

 

Do you really think the total company EBITDA is going to stay the same if all of the video revenues (and programming costs) go to zero?

 

This is a fair point. However, in this context, I think it's rather irrelevant as well. If the video segment went to 0 tomorrow, then sure... it would probably take years to right their cost structure, and they may never hit the margins of their broadband business. But that reality isn't even near the horizon. Cable TV will be around for many years into the future. We're talking about a quarter where Charter lost 122k subscribers and still has 16.4million video subscribers remaining. At that quarterly rate, it would still be another ~35 years before their video segment is a zero. Still relevant?

 

Edit: Rereading that made is come across as sassy. That's not the way I meant it. I think on average, Charter has been losing and will probably continue to lose 3-400k video subscribers annually. That doesn't worry me. If that number we're creeping up towards the millions, then maybe I would be worried... but they have plenty of time to fix their cost structure while the video segment slowly melts. In the meantime, their broadband segment (which generates significant cash) is growing faster than their video segment (which is slim margin) is shrinking. I fail to see the worry here. I think there may be worry in other areas of broadband, but I don't think this is the area to worry about.

[Munger_Disciple]

Why the market is obsessed with an almost-irrelevant segment of these cable companies, I'll never quite understand.

 

Because video is only break-even on a fully allocated cost basis (but still profit accretive on a marginal cost basis), and these cablco's are heavily leveraged - that's why.  Why do you think Rutledge & Co. was defending video until today.

 

Do you really think the total company EBITDA is going to stay the same if all of the video revenues (and programming costs) go to zero?  Sure some fixed costs can be cut, but I don't think all of them can.  You can argue that cableco's will recover the remaining residual fixed costs via pricing on the internet portion - but that trip from A to B can only be made to happen slowly.  If it is forced to happen quickly - I guarantee you no one has modelled that scenario.

 

Look - I'm a CHTR shareholder and a Rutledge fan.  But I don't like the changing narrative about video from a CEO who is supposed to be a details-oriented operator with a strong command of the numbers.  That's a bit of a red-flag.

 

wabuffo

 

Cable One (CABO) claims that there is very little margin in traditional video subs even on an incremental basis. They say that there are significant number of variable costs in addition to per-sub content costs to handle a video customer: customer service, truck rolls, DVR costs, etc. Perhaps some of this is due the fact that CABO has a much smaller scale than Comcast or Charter. The fundamental problem with video is that (US) content is too expensive as it grew much faster than inflation for many years and customers have had it. OTT provided an outlet for this with password sharing.

 

I agree with you about Rutledge however. He should have seen this coming much sooner.

[dwy000]

At the end of the day, content is expensive to produce (as Netflix will attest to) and needs to be paid for as long as people want to watch something other than cat videos.  Cable vs OTT is just the delivery mechanism and from that perspective I like cable's position vis-à-vis access to content.  For any content provider, the cablecos offer immediate scale and convenience for users.  For the customer, having 5-6 different OTT providers and having to pay multiple bills, having to go into the app and out of it to watch different things, plus the access to local content - it's easier and cheaper to have one provider and cable has the scale to price it cheaper than any other consolidator.

 

Even as a breakeven business, that's probably a money loser for other OTT consolidators who don't have the same scale buying power.  But some point you get right back to the cable bundle and their willingness to break it up (already happening).

 

Frankly, the cable cos could just crank up the price of naked broadband by $20/month and offer a bundled package cheaper than a customer could get naked broadband plus OTT services.

[Gamecock-YT]

Why the market is obsessed with an almost-irrelevant segment of these cable companies, I'll never quite understand.

 

Because video is only break-even on a fully allocated cost basis (but still profit accretive on a marginal cost basis), and these cablco's are heavily leveraged - that's why.  Why do you think Rutledge & Co. was defending video until today.

 

Do you really think the total company EBITDA is going to stay the same if all of the video revenues (and programming costs) go to zero?  Sure some fixed costs can be cut, but I don't think all of them can.  You can argue that cableco's will recover the remaining residual fixed costs via pricing on the internet portion - but that trip from A to B can only be made to happen slowly.  If it is forced to happen quickly - I guarantee you no one has modelled that scenario.

 

Look - I'm a CHTR shareholder and a Rutledge fan.  But I don't like the changing narrative about video from a CEO who is supposed to be a details-oriented operator with a strong command of the numbers.  That's a bit of a red-flag.

 

wabuffo

 

Cable One (CABO) claims that there is very little margin in traditional video subs even on an incremental basis. They say that there are significant number of variable costs in addition to per-sub content costs to handle a video customer: customer service, truck rolls, DVR costs, etc. Perhaps some of this is due the fact that CABO has a much smaller scale than Comcast or Charter. The fundamental problem with video is that (US) content is too expensive as it grew much faster than inflation for many years and customers have had it. OTT provided an outlet for this with password sharing.

 

I agree with you about Rutledge however. He should have seen this coming much sooner.

 

This was GCI's theory on video as well.

[cameronfen]

I dont really get it.  If video is bad and merging with mobile is good, why not switch to LILAK? Significantly lower percentage of video, leveraged to emerging markets, has a substantial mobile business.  Sure they are not (really) buying back stock, but thats because they have higher ROI places to deploy capital, building out infustructure. 

[vince]

One thing I find interesting that investors don't talk about much is Chtr's pricing. Back of envelope shows a 5 dollar allocation increase to their monthly internet billings equals over a billion in earnings.  And we absolutely have at least that amount because our pricing is very attractive.  I hear analysts always pushing on mgmt and suggesting that pricing more aggressively would be beneficial to profits, lmao.  As if mgmt doesn't realize the profit increase potential.  Why does everybody think that higher profits now is always better?  I like having that option in our back pocket.  It discourages competitive entry, increases customer satisfaction and goodwill, and potentially decreases regulatory intervention.  I own two cable companies, Chtr and Cabo and a big reason why I prefer those is their pricing strategies.  And I strongly believe that the market is currently not giving any value to that pricing optionality.  Just another clear example of "we want results now" mentality.  God bless them!

[Spekulatius]

A couple of points.

 

I do think that today was an overreaction. The loss of video does not matter much and the overall revenue and EBITDA growth rate were within expectation. The numbers were satisfactory, but not as good than the stellar numbers that CMCSA and that is probably part of the reason for the reaction.

It also does not make sense to look at FCF in a single quarter. FCF is a lumpy number and will move significantly from quarter to quarter.  I expect more Capex spending due to wireless and when it comes to that 5G, the latter may be a few years oout.

 

CHTR seems to have some catching up to do - their EBITDA margin is 37% vs CMCSA 40%+ and it is increasing very slowly. CHTR still trades at a premium to CMCSA on most metrics.

 

To elaborate on BG2008 point, cable is a toll road business, similar to a pipeline or and utility. pipeline and regulated utilities trade at 10x EBITDA or higher while Cable trades at 8.7x in thr case of CHTR or <8x in thr case of CMCSA, despite somewhat similar economics. So cable companies are cheap right now.

 

I like CMCSA better, because they are simply excellent operators and run their company with much lower leverage than Malone does. CMCSA leverage is 2.2x EBITDA and CHTR is 4.5 (roughly). This is why CMCSA can make a cash bid for SKY, which bumps up leverage to 3x, scale back stock purchases for a couple of years and then going back to 2.2x, while CHTR right now is close to the max of their leverage and can’t buy back stock in size, even though it would be a great time to do so. clearly not ideal, but that happens when you play to closemtomthr edge, like Malone likes to do.

 

That said, I added to CHTR today and also bought a bit more CMCSA. I like them both, but hard pressed, I would rather own CMCSA than CHTR.

 

Regarding Video, I think 10 years from now, the cable companies will just sell streaming packages with their broadband.  The risk for cable and to some extend TV networks is that they have to compete against Netflix and Amazon video and both don’t give a damn about profits. Sure, channels with proprietary content like HBO, DIS or TV channels for live news like ESPN or CNN should be able compete, but may have to live with lower profit margins, but stuff like Discovery Channel is probably going to hurt a lot, folks will just cut the cord and forget about them. That why I sold out of cable content stocks like DISK or AMCX despite them being quite cheap. I think they will get Amazoned like retail gets killed now.

 

[Liberty]

Some interesting threads:

 

 

 

[CorpRaider]

How does it blow up? 

 

Some wireless tech advances that don't "need" fiber for the backhaul and thereby have a cost advantage, unless and until CHTR goes through BK (again) and cleans up balance sheet from legacy costs of all that fiber to the home?

 

Why did GOOG stop laying fiber?