CHTR - Charter Communications

[vince]

It really is incredible how fast they upgraded to 1 gig with minimal capital, I knew they were in an advantaged position but didnt realize the coax had that capacity...goes to show how much of an advantage they really do have.  As far as timing goes, I think it was a gradual ongoing process to upgrade the backbone.  I think another important point is the fact that if last mile fiber does indeed become mandatory from a performance perspective, or even 5G, cable is positioned better than the rest to deliver that with the best economics.  Keep an eye on Altice, they have committed to replacing their entire network with fiber and claim the cost is much lower than the street thinks.  If true, this is could be a negative development or it could mean that cable's cost for last mile fiber is significantly lower than everybody else's which is consistent with my previous statement about relative positioning.  Strange how I've never heard any analyst ask for details on this so I will ask the board now....Does anyone know if cable's cost for all fiber is lower than say Verizon's? If so, maybe explain with some detail.  This could also explain why Verizon is trying 5g, although Mr Rutledge has commented that 5g could actually be more expensive.  Whatever the case, Verizon's latest move is a head scratcher and Altice could be headed for stock price trouble if indeed their upgrade cost is not a wise use of capital.

 

Maybe I'm stating the obvious here, but Verizon is at a disadvantage in either 5G or Fiber because they don't have the backhaul for it... I think the capital intensive part of a fiber overbuild is all the passings, which the cable companies already have (and what I'm now learning is that a lot of it is already fiber...). So it seems Charter or Comcast should be in a position to upgrade their entire footprint to FTTH relatively easily if they needed to. Idk why the street would be underestimating that cost, maybe companies who have attempted fiber in the past haven't designated the difference in cost between a passing and an actual connection to a premise?

 

Another point to mention - the reason why fiber has failed in the past is because of customer penetration as a percentage of passings. Fiber would work if they could get a high enough customer penetration, but as we all know, this is a sticky business. And comcast/charter (and I'm assuming Altice) have very high customer penetration already, which would likely make any upgrade of infrastructure worth it in the long run if it led to increased pricing power and customer stickiness. This would probably make their fiber cost look cheap relative to the returns they'd see?

 

That's true they dont have the backhaul and that is a costly disadvantage but it is my understanding that the hardest part is the last mile, into the home.  It's not just cost, there is permitting/licensing, communities have different infrastructures (some wires underground, some on the pole) and so execution is very important.  Cable does not have fiber into this last mile (or 100 yards) because they havent needed take on the capex to replace yet, what they have is sufficient and better than anything else out there when cost uis taken into consideration.  The street is not underestimating the cost, Altice is claiming they can do it at a lower cost than what everyone else believes based on experience.  My comment was maybe the lower cost that Altice claims is accurate based on the belief that it may be less intensive for cable companies to complete the last mile based on their existing architecture.....but I have never heard anyone mention this on a relative basis.  Using previous estimates you needed very high penetration rates (north of 40% if I remember correctly) to make it economical.  And the potential benefits of fiber for cable that you mention are not likely, hence the non investment.  That doesnt mean they will never have to do it, but right now there is no reason to believe they will achieve any increased pricing, or churn improvement, they already have the best product.  If it was a good investment, financially and/or competitively it would have been high up on their list...but yes, long term it is likely they will have to replace it. 

[vince]

Charter latest monthly buyback filing is up, about 7/10ths of 1 percent bought back.  Doesn't sound like much but its around 6% a year after dilution or about 30 million more shares by end 2020 for a total ending share count of 230.  Now they are accomplishing this with very little cash flow and slow growing ebitda so we could expect lots more.  Anyway, buying thru gliba now is like paying a market cap of 58 billion when u use share count of 2 years out (no allowance for gliba buybacks)..... I know that sounds a little weird but it sounds rational to me

[Spekulatius]

As far as broadband is concerned, FIOS is better than Charter where it is available . I have owned and do own a house where both Charter is available. I tried Charter and I felt that Fios is better and most neighbour in my new neighbourhood agree. A small dataset for sure, but I would argue that Charter has the best product out there. They also have a reputation for atrocious customer service even by cable industry standards. In most areas (I have lived in 3 areas) , you have at least 2 viable broadband providers.

[vince]

As far as broadband is concerned, FIOS is better than Charter where it is available . I have owned and do own a house where both Charter is available. I tried Charter and I felt that Fios is better and most neighbour in my new neighbourhood agree. A small dataset for sure, but I would argue that Charter has the best product out there. They also have a reputation for atrocious customer service even by cable industry standards. In most areas (I have lived in 3 areas) , you have at least 2 viable broadband providers.

 

I cant say for sure but it has been hinted/stated a few times that 50% of chtr's footprint has only DSL as competitor.  No high speed in 50% of their footprint.  Also, and I dont know how this overlaps with the 50% DSL, Chtr's footprit has lots of satellite which is an inferior set-up when you want high speed in your bundle.  So if there are multiple viable broadband providers and their service is atrocious maybe you can explain to me why they are getting  100 percent of all broadband net adds?  It's not like Chtr investors are saying "watch out, when we are finished with the integration our superior products will shine through and our market share will go up and prove what we have been saying all along"......it's already happening, has been happening for years, and happening in a big way.  Not just that, they have been growing their business customers by double digits for years.  And this is all happening basically with every cable company Sometimes I feel like I am looking at different data or reading different filings.  Yes there is some stuff to worry about but that is different than hoping what they are doing will play out in a positive way, it already is proving itself out, IT IS WORKING ALREADY, THEY HAVE A SUPERIOR PRODUCT, and their end markets are telling you in a very very clear way.

[Liberty]

5-min Malone interview about CHTR, CMCSA, Sky..

 

https://www.cnbc.com/video/2018/11/14/liberty-media-john-malone-on-comcast-verizon-and-charter.html

 

Here's the full 55-min thing:

 

https://www.cnbc.com/video/2018/11/14/watch-cnbcs-full-exclusive-interview-with-liberty-media-chairman-john-malone.html

[gurpaul88]

Thanks for the post!

[dwy000]

When you watch the entire 55 minute interview you really appreciate what an entirely different strategic plan Malone operates on. He has a vision for 10 years out (and suspect he only shares a fraction of it) and then understands where each piece of the puzzle needs to fit.  I'm always in awe of Maffei talking but Malone is just in a league of his own.

 

I bet there are very few CEO's who understand the long term future of their industry (not just company) and how each of the players behaves to the extent Malone does.  Every time I see hi ling interviews I just want to call my broker and say "buy anything in the group"

[DooDiligence]

When you watch the entire 55 minute interview you really appreciate what an entirely different strategic plan Malone operates on. He has a vision for 10 years out (and suspect he only shares a fraction of it) and then understands where each piece of the puzzle needs to fit.  I'm always in awe of Maffei talking but Malone is just in a league of his own.

 

I bet there are very few CEO's who understand the long term future of their industry (not just company) and how each of the players behaves to the extent Malone does.  Every time I see hi ling interviews I just want to call my broker and say "buy anything in the group"

 

I'll take that & put it in my already bulging confirmation bias bag.

In short, that means I trust Malone too.

 

On another note, I may be reading him wrong but does Faber seem cynical of Malone or is he just playing the semi-incredulous devils advocate?

[colinwalt]

Impossible to know how far this goes...

 

http://fortune.com/2018/10/01/cord-cutting-home-internet-broadband/

 

The percentage of people who say they depend solely on their smartphones to connect to the Internet has risen steadily from 8% in 2013, to 12% in 2016, to 20% this year.

 

....

 

 

On the other hand, lately wireless carriers have been raising prices and making their unlimited plans more complicated and less generous.

[KJP]

Impossible to know how far this goes...

 

http://fortune.com/2018/10/01/cord-cutting-home-internet-broadband/

 

The percentage of people who say they depend solely on their smartphones to connect to the Internet has risen steadily from 8% in 2013, to 12% in 2016, to 20% this year.

 

....

 

 

On the other hand, lately wireless carriers have been raising prices and making their unlimited plans more complicated and less generous.

 

It's hard to square the numbers in the article with Charter's disclosures, in particular the percentage of residential passings that subscribe to its high-speed internet service.  The percentage has been constantly increasing from 44.9% in Q1 2016 to 49.4% in Q3 2018.  [source:  https://ir.charter.com/static-files/5a364774-972e-416b-88f7-b77b0cf00cf6] 

 

Similarly, Comcast has added 1.2 million new residential broadband customers in the last 12 months.  [source:  https://www.cmcsa.com/static-files/1da36911-f361-446b-941e-e104db45ba72]

 

If you go to the Pew study itself, you'll see the following disclaimer:  "Note: The Center has used several different question wordings to identify broadband users in recent years, which may account for some variance in broadband adoption figures between 2015 and 2018. Our survey conducted in July 2015 used a directly comparable question wording to the one conducted in January 2018."  [source:  http://www.pewinternet.org/fact-sheet/internet-broadband/]

 

Putting all that together, it's hard to see any actual trend towards "cutting" the cable internet cord. 

[cameronfen]

^The two studies aren't mutually exclusive.  Charter can be stealing share from lower value providers which masks the losses from cord cutters. 

[KJP]

^The two studies aren't mutually exclusive.  Charter can be stealing share from lower value providers which masks the losses from cord cutters.

 

That's mathematically possible.  But it's hard to believe it's likely once you expand the data set to include other companies.  Collectively, the entire U.S. cable industry has been growing residential subscribers:  https://www.statista.com/statistics/217348/us-broadband-internet-susbcribers-by-cable-provider/ 

 

Among the telcos, AT&T has been flat overall and Verizon has been growing subscribers.  So, at the company level, it's hard to see evidence of a significant number of people cutting the residential internet cord.

 

The other studies I've seen also show increasing residential broadband penetration: 

https://www.ustelecom.org/sites/default/files/USTelecom_Industry_Metric%20_and_Trends_2018.pdf  [see Slides 14-15]

https://www.brookings.edu/blog/the-avenue/2018/09/28/broadband-subscriptions-are-up-but-too-many-households-are-still-disconnected/

https://www.marketingcharts.com/digital-81804

https://www.ntia.doc.gov/data/digital-nation-data-explorer#sel=wiredHighSpeedAtHome&demo=&pc=prop&disp=chart

[The July 2015 data point seems wrong]

 

So, I don't see evidence that corroborates the Pew's interpretation of its survey data.  If anyone has seen evidence of U.S. residential broadband "cord cutting," I'd be very interested to see it. 

[dwy000]

Forget the cord cutting (which I don't buy for a second - see all the studies posted above) the most shocking claim in the Pew study is that only 65% of households have any internet connection!  Down from 70%! That's not referencing high speed broadband, it's cable broadband, DSL, satellite, dial up etc. - no internet connection at all.

[cameronfen]

^The two studies aren't mutually exclusive.  Charter can be stealing share from lower value providers which masks the losses from cord cutters.

 

That's mathematically possible.  But it's hard to believe it's likely once you expand the data set to include other companies.  Collectively, the entire U.S. cable industry has been growing residential subscribers:  https://www.statista.com/statistics/217348/us-broadband-internet-susbcribers-by-cable-provider/ 

 

Among the telcos, AT&T has been flat overall and Verizon has been growing subscribers.  So, at the company level, it's hard to see evidence of a significant number of people cutting the residential internet cord.

 

The other studies I've seen also show increasing residential broadband penetration: 

https://www.ustelecom.org/sites/default/files/USTelecom_Industry_Metric%20_and_Trends_2018.pdf  [see Slides 14-15]

https://www.brookings.edu/blog/the-avenue/2018/09/28/broadband-subscriptions-are-up-but-too-many-households-are-still-disconnected/

https://www.marketingcharts.com/digital-81804

https://www.ntia.doc.gov/data/digital-nation-data-explorer#sel=wiredHighSpeedAtHome&demo=&pc=prop&disp=chart

[The July 2015 data point seems wrong]

 

So, I don't see evidence that corroborates the Pew's interpretation of its survey data.  If anyone has seen evidence of U.S. residential broadband "cord cutting," I'd be very interested to see it.

 

Again I think broadband is still growing not at the expense of each other but against DSL providers like windstream, satalite and perhaps RLECs type providers.  Again dont have surveys but that could be why both could be true.  I think one way to verify this thesis (I dont care enough because I have no investment long or short in Charter) is to see if new ads tend to be more rural and lower gross margin than established base.  Obviously this is true to some extent but perhaps the marginal gross margin of net ads may show an alarming trend.  Also I think pew is more likely to be unbiased compared to corporations reporting their own numbers.  Not saying Charter is lying but the incentives are much higher for investor presentations and industry groups to paper over potential problems then a non affiliated non profit think tank. 

[cameronfen]

Forget the cord cutting (which I don't buy for a second - see all the studies posted above) the most shocking claim in the Pew study is that only 65% of households have any internet connection!  Down from 70%! That's not referencing high speed broadband, it's cable broadband, DSL, satellite, dial up etc. - no internet connection at all.

 

No you are mistaken.  That is internet connection to the home that's down from 70% to 65%.  90% of US adults have access to internet (see the top of the study).  Pew then shows the majority of the decline comes from young people and discusses evidence that this decline comes from cord cutters. 

[Liberty]

A/NH filing for what they sold into the buybacks last month:

 

https://www.sec.gov/Archives/edgar/data/914545/000089924319000712/xslF345X03/doc4.xml

[vince]

Amount has been pretty steady for last few months and comes out to about 8 percent of total charter shares for the year when extrapolated.  I cant wait to see how much they devote to buybacks when cash starts flowing and ebitda starts growing at the expected rate.  Hopefully the stock stays down for another 18 months....as long as the business is doing well.

[Liberty]

Amount has been pretty steady for last few months and comes out to about 8 percent of total charter shares for the year when extrapolated.  I cant wait to see how much they devote to buybacks when cash starts flowing and ebitda starts growing at the expected rate.  Hopefully the stock stays down for another 18 months....as long as the business is doing well.

 

I get about 10% annualized on my napkin math, but I might not be taking into account all the A/NH shares if they're not all included in the filing number (as previously discussed). Is this the adjustment you're making, or am I making some other mistake?

[skanjete]

I keep reading suggestions from posters that from 2019 on the EBITDA and cash flow will rise and capital investments will ease, thus free cash flow will boom.

 

Where can I verify this information? I can't seem to find it in their earnings release?

 

Thanks in advance!

[Liberty]

I keep reading suggestions from posters that from 2019 on the EBITDA and cash flow will rise and capital investments will ease, thus free cash flow will boom.

 

Where can I verify this information? I can't seem to find it in their earnings release?

 

Thanks in advance!

 

Have you looked at the transcripts of the recent calls and investor presentations? I remember them talking about it multiple times, but can't remember with enough precision exactly where to point you to the right spot.

[skanjete]

Thank you!

 

I searched the presentations, but not the transcripts.

 

I'll have a look in the coming days.

 

 

[vince]

Amount has been pretty steady for last few months and comes out to about 8 percent of total charter shares for the year when extrapolated.  I cant wait to see how much they devote to buybacks when cash starts flowing and ebitda starts growing at the expected rate.  Hopefully the stock stays down for another 18 months....as long as the business is doing well.

 

I get about 10% annualized on my napkin math, but I might not be taking into account all the A/NH shares if they're not all included in the filing number (as previously discussed). Is this the adjustment you're making, or am I making some other mistake?

 

I am taking the extra ANH shares into consideration but my number was a really quick calculation so I wouldnt be surprised if I was off by a point.  And you can find the true number of shares ownes by ANH in Charters quarterly slides near the end.  Interesting to see how the share count is diluted every qtr with compensation.

[vince]

I keep reading suggestions from posters that from 2019 on the EBITDA and cash flow will rise and capital investments will ease, thus free cash flow will boom.

 

Where can I verify this information? I can't seem to find it in their earnings release?

 

Thanks in advance!

 

Hey Skanjete, if you follow the cable business you will start to get a sense of their earning power with some useful shortcuts.....metrics that the industry uses to quickly digest quareterly results.  Instead of relying on what other people say, including management, you can quickly figure things out starting with how many homes are passed, their customer relationship penetration of those homes, their ARPU (average rev per user), ebitda margins, ebitda per home passed, operating margin etc.  As an example, a large well run cable company (which Charter certainly is) will be in the area of 40% ebitda margins.  From there you can pencil in 15% of revenues for capex to get your pre interest, pre tax cash flow.  You will find with Charter, once you normalize for the large integration they are finishing up, they will generate about 7-7.5 billion in free cash flow (there are some tax issues and other things to consider but this is ballpark)  One reason the industry is attractive is that historically, it was/still is very predictable in terms of their earning power.  So someone like yourself, who takes the time to really understand the industry can make highly probable forecasts while the market is unsure with a comapny that is going through some kind of transition.  Please keep in mind that their competitive position could change and I'm sure the market is scared of some potential threats on the horizon.  I believe the price more than compensates for the probabilities of disruption and the related loss of earning power taking into account the timeline

[khturbo]

I think I mentioned on here (could have been somewhere else) that I went back with all of the monthly A/N numbers and tried to match it up to how many shares were bought back in a quarter, and they don't match really at all. It just seems like they sell some shares but not in direct proportion to the buyback.

[skanjete]

Vince,

 

Thank you very much for your explanation.

It helped a lot to get some feeling with the numbers behind the company.

I'll have a look also on the base numbers behind the economics of the sector.

 

thanks!