CHTR - Charter Communications

[muscleman]

 

 

I saw the results earlier today, and scratching my head as to why CHTR is doing much better than Liberty Global. Any thoughts on that?

 

define "doing much better".

 

Pro forma EBITDA growth is around 9%. The growth of EBITDA is what I meant doing much better.

Liberty Global said they were targeting 7-9% growth YoY into 2018, but this year so far it has only been 2%. They said in Q1 that they think the second half will accelerate and this year's growth will be 7-9%, but in Q2 they lowered to 5-7% but still stuck to the 7-9% for the next two years. Not sure how much I can trust from the promotional Mike Fries's mouth.  :(

[muscleman]

 

I saw the results earlier today, and scratching my head as to why CHTR is doing much better than Liberty Global. Any thoughts on that?

 

Lot of reasons -- but the biggest is probably that there is a lot more English content for an American audience in TV than there are local-language (and cultural) context for European markets. This means that the average American has higher quality content than the average European (the average quality of the content does't matter -- just the raw volume of it). Hence TV, has always been a bigger US phenomenon than in Europe, so its a much more important product here.

 

~15 years ago, the TV market was very competitive in the US with the advent of Satellite but now, broadband internet is far more important and this has shifted the balance back towards cable. Broadband internet is also largely (though not entirely) about video and the shift from a subscription package to one plus an OTT package has allowed for a secular growth in cable subscriptions at a cost to traditional internet providers and satellite. In Europe, which is also far more Balkanized and far more competitive, doesn't face this same pressures to the same degree. In contrast, Charter inherited a substantial pool of assets (in terms of wires in the ground) that were under-managed that now have a substantial, and importantly, new, competitive advantage. There aren't any clever bits of strategy here -- Charter really just has to execute to grow revenue and the extra scale and low interest rates (and NOLs) provide a lot of operating and financial leverage for that growth. B/c of the leverage involved, any data that reinforces this story will send the stock through the roof.

 

 

Just full disclosure, I made all of this up, and I know very little about LBTYA/K but I think it's pretty compelling.

Well, I think that's the reason why content companies are making a ton in the US. EU cable operators have higher EBITDA margins than US. (65% vs 48% roughly)

Do you think there is more competition in the EU? I read through the risk factors of LGI and the primary competition comes from DSL internet providers, which is similar to US.

[TheAiGuy]

 

I saw the results earlier today, and scratching my head as to why CHTR is doing much better than Liberty Global. Any thoughts on that?

 

Lot of reasons -- but the biggest is probably that there is a lot more English content for an American audience in TV than there are local-language (and cultural) context for European markets. This means that the average American has higher quality content than the average European (the average quality of the content does't matter -- just the raw volume of it). Hence TV, has always been a bigger US phenomenon than in Europe, so its a much more important product here.

 

~15 years ago, the TV market was very competitive in the US with the advent of Satellite but now, broadband internet is far more important and this has shifted the balance back towards cable. Broadband internet is also largely (though not entirely) about video and the shift from a subscription package to one plus an OTT package has allowed for a secular growth in cable subscriptions at a cost to traditional internet providers and satellite. In Europe, which is also far more Balkanized and far more competitive, doesn't face this same pressures to the same degree. In contrast, Charter inherited a substantial pool of assets (in terms of wires in the ground) that were under-managed that now have a substantial, and importantly, new, competitive advantage. There aren't any clever bits of strategy here -- Charter really just has to execute to grow revenue and the extra scale and low interest rates (and NOLs) provide a lot of operating and financial leverage for that growth. B/c of the leverage involved, any data that reinforces this story will send the stock through the roof.

 

 

Just full disclosure, I made all of this up, and I know very little about LBTYA/K but I think it's pretty compelling.

Well, I think that's the reason why content companies are making a ton in the US. EU cable operators have higher EBITDA margins than US. (65% vs 48% roughly)

Do you think there is more competition in the EU? I read through the risk factors of LGI and the primary competition comes from DSL internet providers, which is similar to US.

 

I think broadband internet is more important in the US b/c video is more important. I don't know enough about LGI to really comment on their competitive position. The Charter story is about growing into this massive internet monopoly -- is that true for LGI?

[muscleman]

 

I saw the results earlier today, and scratching my head as to why CHTR is doing much better than Liberty Global. Any thoughts on that?

 

Lot of reasons -- but the biggest is probably that there is a lot more English content for an American audience in TV than there are local-language (and cultural) context for European markets. This means that the average American has higher quality content than the average European (the average quality of the content does't matter -- just the raw volume of it). Hence TV, has always been a bigger US phenomenon than in Europe, so its a much more important product here.

 

~15 years ago, the TV market was very competitive in the US with the advent of Satellite but now, broadband internet is far more important and this has shifted the balance back towards cable. Broadband internet is also largely (though not entirely) about video and the shift from a subscription package to one plus an OTT package has allowed for a secular growth in cable subscriptions at a cost to traditional internet providers and satellite. In Europe, which is also far more Balkanized and far more competitive, doesn't face this same pressures to the same degree. In contrast, Charter inherited a substantial pool of assets (in terms of wires in the ground) that were under-managed that now have a substantial, and importantly, new, competitive advantage. There aren't any clever bits of strategy here -- Charter really just has to execute to grow revenue and the extra scale and low interest rates (and NOLs) provide a lot of operating and financial leverage for that growth. B/c of the leverage involved, any data that reinforces this story will send the stock through the roof.

 

 

Just full disclosure, I made all of this up, and I know very little about LBTYA/K but I think it's pretty compelling.

Well, I think that's the reason why content companies are making a ton in the US. EU cable operators have higher EBITDA margins than US. (65% vs 48% roughly)

Do you think there is more competition in the EU? I read through the risk factors of LGI and the primary competition comes from DSL internet providers, which is similar to US.

 

I think broadband internet is more important in the US b/c video is more important. I don't know enough about LGI to really comment on their competitive position. The Charter story is about growing into this massive internet monopoly -- is that true for LGI?

 

Yeah. Same for LGI, and on top of that, EU content providers are more fragmented as you said, and they charge a fraction of the US content providers, so LGI is supposed to make money from both Video and internet.

But the growth so far has not been good. Hope the second half did pick up as they predicted.

[scorpioncapital]

My thesis for Charter vs Global was a simple one: America will outperform Europe. Also the regulatory framework is more pro-business and less distributional. I also thought the Europeans would cap pricing power and require more capex spending and this would cut into profits over time...Not saying American regulators don't do this but on a smaller scale. I remember Buffett's speech where he said if Coke was based in Amsterdam he'd still like it but just a little bit less. Cable is no Coke and probably far more regulated so it becomes more important to know the operating environment, consumer culture, etc...For some reason, US businesses seem to do well for shareholders in a safer fashion.

 

 

[muscleman]

My thesis for Charter vs Global was a simple one: America will outperform Europe. Also the regulatory framework is more pro-business and less distributional. I also thought the Europeans would cap pricing power and require more capex spending and this would cut into profits over time...Not saying American regulators don't do this but on a smaller scale. I remember Buffett's speech where he said if Coke was based in Amsterdam he'd still like it but just a little bit less. Cable is no Coke and probably far more regulated so it becomes more important to know the operating environment, consumer culture, etc...For some reason, US businesses seem to do well for shareholders in a safer fashion.

 

 

In the Liberty Global thread I asked why merger approvals tend to go in a few months instead of over a year like the CHTR/TWC merger, and people said regulatory environment in EU is much better than in the US. How come you think the opposite? From which metrics do you base your view on? Do you mean EU regulators push cable cos to spend more capex? I do see that EU broadband is in the 200-300 Mbps range but the US ones are typically touting the 60 Mbps speed.

 

Yeah EU's economic is not as good as the US, but the interest rates are so much lower in the EU, so that mitigates a bit. ::)

 

 

 

[scorpioncapital]

Perhaps the faster approvals are so that they can torture one company instead of two, a sort of ode to convenience :)

 

Of course you have to study each company. I just used a simple mental model, namely that regulators in Europe could be tougher on a utility-like business than in the US, perhaps even the starting profitability would be lower. They might even be swayed by the fact Liberty is a US founded company.

All of this is conjecture but when you pull the trigger you have to decide: I know the US environment and maybe the return will be lower but the outcome more certain.

A case of home-bias advantage with the bonus that the US home advantage is alright.

Also swirling in my head was the thought that over long periods of time virtually no stock market has done as well as the US one so there are probably structural benefits to the US economic system.

In short, I thought the Americans would shoot themselves in the foot, but less so than the Europeans.

It's an amazing ability of people to shoot themselves in the foot. It's fascinating to rank the foot-shooting.

 

I like to apply a mental model before getting scientific. Broad strokes, no need for too much numerical crunching at the start, just enough to choose A over B, then you can dig in to see if you want C or D under B, or E, F , G under C, etc...

[Liberty]

Soros's fund took a decent-sizd position in LBRDK. Almost 9m shares.

 

http://whalewisdom.com/filer/soros-fund-management-llc#/tabholdings_tab_link

 

Update: Thanks to @FrancoOlivera on Twitter for reminding me that they got these shares from the deal with Liberty to finance part of the TWC acquisition.

[Liberty]

CHTR is being added to the SP500 to replace EMC (and KHC is going in the SP100):

 

http://www.prnewswire.com/news-releases/kraft-heinz-set-to-join-sp-100-charter-communications-to-join-sp-500-300321081.html

[Liberty]

CHTR has asked Verizon to active its MVNO agreement, going for quad play:

 

http://www.fiercecable.com/cable/rutledge-charter-has-asked-verizon-to-activate-mvno-agreement

 

Verizon in 2011 purchased AWS-1 spectrum from Bright House Networks, Comcast, Cox and TWC (a group dubbed SpectrumCo) and in return gave those companies access to its wireless network for use in a potential MVNO offering. […]

 

“We’d like to put Netflix and other [sVOD] services into our UI, so our customers can operate them seamlessly with our products,” he said. “Our primary objective is to follow the customer wherever they go.”

 

Rutledge said 57 percent of Charter’s pay-TV users also subscribe to Netflix. 

[Liberty]

http://www.multichannel.com/news/distribution/charter-talks-wireless-network-play-fcc/408794

[muscleman]

http://www.multichannel.com/news/distribution/charter-talks-wireless-network-play-fcc/408794

 

 

How will this impact the existing wireless carriers? Softbank has long complained that US has more than 2 wireless competitors and that makes it brutal. Does CHTR want to join the competition here?

[Liberty]

http://www.multichannel.com/news/distribution/charter-talks-wireless-network-play-fcc/408794

 

 

How will this impact the existing wireless carriers? Softbank has long complained that US has more than 2 wireless competitors and that makes it brutal. Does CHTR want to join the competition here?

 

They want quad play to reduce their churn. They'll probably go the MVNO + wifi route, through the deal they have with Verizon.

[dwy000]

Would love to know the details of that MVNO agmt with Verizon.  Both parties are pretty savvy.  I would guess that they are (at least initially) using a pretty broad service offering from Verizon and then narrow it down if they get the uptake of customers.

 

It's a really tough business.  You need big volume to make it work but the only way to get that volume is through price - which kills the economics of it and the ability to invest big dollars in marketing and infrastructure (plus relationships and retail, etc. etc. etc.).

[Liberty]

Q3: Revenues: +7.4%, EBITDA +14.5%, subs +279k.

 

http://ir.charter.com/phoenix.zhtml?c=112298&p=irol-newsArticle&ID=2219119

 

 

[maybe4less]

Was there something not to like here?

[muscleman]

The results are far better than LBTYA and LILA. I don't understand why those two are struggling with growth, though to be fair, LBTYA's growth is not too bad, just not good compared with CHTR, and they trade at similar EV/EBITDA multiples.  ::)

[Shooter MacGavin]

just keep in mind there is probably some meaningful political spend this year hitting their advertising bucket.  ~100% margin.  That's not going to be in the print starting January.  Still a good story.

[Liberty]

Verizon apparently looking at a merger with CHTR:

 

http://www.wsj.com/articles/verizon-is-exploring-combination-with-cable-firm-charter-communications-1485439901

[Liberty]

More details:

 

https://www.bloomberg.com/news/articles/2017-01-26/verizon-exploring-combination-with-charter-wsj-reports

 

Looks like Maffei was approached, but not CHTR directly, and they're looking at multiple deals, but this might be the one that makes the most sense..

[Liberty]

FCC chairman Ajit Pai has circulated an item adjusting a Charter-Time Warner Cable deal buildout condition so that it would no longer require Charter to overbuild where a million homes were already getting broadband service.

 

http://www.broadcastingcable.com/news/washington/pai-proposes-removing-charter-twc-overbuild-condition/163581

[Liberty]

Greg Maffei talked a bit about CHTR this morning:

 

http://video.cnbc.com/gallery/?video=3000614682&play=1

[muscleman]

Does anyone know how this may impact CHTR?

 

https://www.law360.com/publicpolicy/articles/918984/breaking-dc-circ-refuses-to-rehear-net-neutrality-challenge?nl_pk=dcb4823a-d63f-4a78-8335-a8570deed8f6&utm_source=newsletter&utm_medium=email&utm_campaign=publicpolicy

 

[maybe4less]

Does anyone know how this may impact CHTR?

 

https://www.law360.com/publicpolicy/articles/918984/breaking-dc-circ-refuses-to-rehear-net-neutrality-challenge?nl_pk=dcb4823a-d63f-4a78-8335-a8570deed8f6&utm_source=newsletter&utm_medium=email&utm_campaign=publicpolicy

 

Likely no impact. The court challenge is moot now that Pai is planning on repealing the rule.

[Liberty]

CHTR Q1:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzc2MjU5fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636293131780142848