CHTR - Charter Communications

[WayWardCloud]

Awesome document FiveSigma!

I did not realize until now how much better of than anyone else Charter is in terms of competition, especially when you consider that only Verizon Fios can really compete in terms of bandwidth.

 

Does anyone have numbers that would give an idea of major players' entire backbone capacity? How much fiber they own and how dense is it. I don't even know what unit that would be in... average petabyte per mile capacity X number of miles in their network? Do I make sense? If last mile delivery methods (wifi, 5g, etc) end-up converging, like most of us believe, and in the event there is an explosion of data transfer needs, it could come down to that.

[vince]

I am pasting a paragraph from a research paper that I found while trying to understand (a rarely talked about feature of HFC plant) what Mike Fries referenced when talking about the advantages that the cable plant has in a 5G world......the fact that HFC has power.

 

  In all the current definitions of a converged network one feature is rarely mentioned but is of paramount

importance …. the power required to run the network components. In particular, far-edge Access Point

(AP) devices require power to operate. This is where the HFC (Hybrid Fiber Coax) architecture deployed

by the industry shines. Where other industries have shed the cost of network powering infrastructure for

short term gains and reduced OPEX (operations expense), the MSO (Multiple System Operator) industry

has maintained network powering to activate signal amplifiers for the coax portion of the HFC network.

Power is required every 50-500 meters for the mass deployment of LTE densification and 5G mobility

and only HFC networks have the network powering budget required to meet these needs.

 

 

 

[JRM]

Does he estimate differences in power use?  A wireless router doesn't use much power and is paid for by the customer.  A wireless router serving as a "small cell" access point would require significantly more power (10x?) as well as be designed to handle various environmental factors.  I could probably run some rough estimates, but just curious.

[vince]

He doesn't....his point was that HFC plant is ideally positioned due to power, backhaul and site availability.  And not even a pure fiber to the home network has this combination of capabilities.  However, true 5G small cell backhaul, with latency requirements was not considered and although cable is still trying they arent there yet

[JRM]

Ahh, I guess I mis-understood the entire comment.  He is talking about the total power requirement of the entire network.  I was not familiar with a lot of his terminology.

[DooDiligence]

Noice!

 

https://news.slashdot.org/story/19/06/05/2154228/the-days-of-getting-a-cheaper-cable-bill-by-threatening-to-leave-may-be-over

[DooDiligence]

Star Wars - Slashing Satellites

 

https://spacenews.com/rival-plan-to-c-band-alliance-calls-for-spectrum-auction-fiber-switchover-for-satellite-broadcasters/

[Liberty]

CHTR Q2:

 

https://ir.charter.com/static-files/e0f7c07a-b669-4978-a22c-3ee1e42b958b

 

https://ir.charter.com/static-files/2eef69f2-d3d2-471c-8555-a7c3e4d47557

 

"In the second quarter, free cash flow grew nearly 40% year-over-year"

 

Cable FCF was up 53% (taking out the startup costs of the wireless segment, which is just ramping up).

[DooDiligence]

CHTR Q2:

 

https://ir.charter.com/static-files/e0f7c07a-b669-4978-a22c-3ee1e42b958b

 

https://ir.charter.com/static-files/2eef69f2-d3d2-471c-8555-a7c3e4d47557

 

"In the second quarter, free cash flow grew nearly 40% year-over-year"

 

Nice, on the cash & buybacks.

 

They could be up to a million wireless phone subs by the end of the year?!?

 

Not a word in either report on 5G.

 

How do you think Dish will fare in all this?

 

https://www.fiercewireless.com/wireless/expected-5b-dish-deal-paves-way-for-t-mobile-sprint-approval

[peterHK]

Perhaps I'm missing something here, but I think annualized EBITDA from TV is maybe $2bn and FCF is pretty close to $0, but the market reacts to TV sub losses like it's the worst thing ever. Is this just the market getting the narrative wrong, or am I missing something where TV sub declines are terrible for Charter?

[scorpioncapital]

well, it was a little ahead of itself. I think it's just valuation adjustment and earning reports are just excuses to re-adjust these days. after all, it's around 100 billion market cap and doing what 5 billion of fcf? pe of 20 for a utility like business is probably fairish...but they also have huge debt like 50 to 60 billion and if interest rates normalize then the cost of that should increase somewhat.

 

 

[walkie518]

CHTR has been taking it on the chin... earnings were fine, but I suppose far less than what was expected? 

 

perhaps mgmt is waiting for price decline before purchasing more shares?  Cadence is $4B annually?  This seems to be nearly every available dollar?

 

mgmt says FCF increased meaningfully, but this is on lower PPE and likely more about the investment cycle than the business showing improvement? 

 

I suppose the question is how much more margin expansion will mgmt unlock to justify the current mcap? 

 

There is some expensive Time Warner debt due 2023 and 2033 ... not sure why they don't refi?  Likely better use of capital to buyback shares before paying down debt as this will yield better return on equity as market dislikes debt-laden companies, even if it's a near-utility. 

[scorpioncapital]

none of it matters. when markets go down everything goes down.

[vince]

CHTR has been taking it on the chin... earnings were fine, but I suppose far less than what was expected? 

 

perhaps mgmt is waiting for price decline before purchasing more shares?  Cadence is $4B annually?  This seems to be nearly every available dollar?

 

mgmt says FCF increased meaningfully, but this is on lower PPE and likely more about the investment cycle than the business showing improvement? 

 

I suppose the question is how much more margin expansion will mgmt unlock to justify the current mcap? 

 

There is some expensive Time Warner debt due 2023 and 2033 ... not sure why they don't refi?  Likely better use of capital to buyback shares before paying down debt as this will yield better return on equity as market dislikes debt-laden companies, even if it's a near-utility.

 

Ebitda growth less than expected but if you do an apples to apples (exclude advertising in both periods and excluse ebitda loss from mobile startup) you get to 7%.  You should probably normalize for the repricing of commercial business (growing units at 10% but revs at 4-5) which adds probably another point to ebitda growth which incidentally is the same growth rate for last couple years.  If their growth rate really is 8% (3.5-4% unit growth, 5-6% rev growth and some increasing ebitda margins seems very probable) and sustainable for 5-7 years then you will see the multiple expand significantly.  Additionally you will get some leverage on the capex line with a cash tax offset.  The increase in fcf from declining capex is entirely appropriate.  If you want to see what Charters financials will look like in 2-3 years, take a look and isolate Comcasts cable business and adjust numbers for debt/interest expense.  I see a 50 billion rev business with 40% plus ebitda margins, 10-12% capex , something for cash taxes and then your interest expense.  I see 8-10 billion of fcf, growing at 6-9% for forseable future, driven by high margin broadband business.  The negative that I see is that video is shrinking MUCH faster than mgmt was guiding just 1 year ago.  Sure, a low profit video business shrinking by 1% is nothing to be concerned about.  But if its shrinking at 3% plus, this absolutely makes the business worth less than if it wasnt. 

[KJP]

 

  The negative that I see is that video is shrinking MUCH faster than mgmt was guiding just 1 year ago.  Sure, a low profit video business shrinking by 1% is nothing to be concerned about.  But if its shrinking at 3% plus, this absolutely makes the business worth less than if it wasnt.

 

Probably the wrong place to post this, but I've long believed that video cord-cutting is a much bigger issue for stuff like GTN (retrans revenue?) and MSGN (it, not MSG, bears the brunt of sub losses) than CHTR.  Of course, if look that the FCF yields of those companies relative to Charter, that's hardly a novel thought.

[peterHK]

CHTR has been taking it on the chin... earnings were fine, but I suppose far less than what was expected? 

 

perhaps mgmt is waiting for price decline before purchasing more shares?  Cadence is $4B annually?  This seems to be nearly every available dollar?

 

mgmt says FCF increased meaningfully, but this is on lower PPE and likely more about the investment cycle than the business showing improvement? 

 

I suppose the question is how much more margin expansion will mgmt unlock to justify the current mcap? 

 

There is some expensive Time Warner debt due 2023 and 2033 ... not sure why they don't refi?  Likely better use of capital to buyback shares before paying down debt as this will yield better return on equity as market dislikes debt-laden companies, even if it's a near-utility.

 

Ebitda growth less than expected but if you do an apples to apples (exclude advertising in both periods and excluse ebitda loss from mobile startup) you get to 7%.  You should probably normalize for the repricing of commercial business (growing units at 10% but revs at 4-5) which adds probably another point to ebitda growth which incidentally is the same growth rate for last couple years.  If their growth rate really is 8% (3.5-4% unit growth, 5-6% rev growth and some increasing ebitda margins seems very probable) and sustainable for 5-7 years then you will see the multiple expand significantly.  Additionally you will get some leverage on the capex line with a cash tax offset.  The increase in fcf from declining capex is entirely appropriate.  If you want to see what Charters financials will look like in 2-3 years, take a look and isolate Comcasts cable business and adjust numbers for debt/interest expense.  I see a 50 billion rev business with 40% plus ebitda margins, 10-12% capex , something for cash taxes and then your interest expense.  I see 8-10 billion of fcf, growing at 6-9% for forseable future, driven by high margin broadband business.  The negative that I see is that video is shrinking MUCH faster than mgmt was guiding just 1 year ago.  Sure, a low profit video business shrinking by 1% is nothing to be concerned about.  But if its shrinking at 3% plus, this absolutely makes the business worth less than if it wasnt.

 

I actually think its better than that.

 

If you take residential video + advertising revenue (excluding other revenue, which is to my understanding largely video based) , subtract programming costs, and then split the remaining costs by video + advertising as a % of revenue, you get EBITDA margins for Video + advertising of about 5%. If you figure that a lot of customer equipment is set top boxes (over 50%) then video is basically FCF neutral/negative today.

 

This implies residential internet EBITDA margins are somewhere in the 60's, which I think sort of gels with CABO EBITDA at 45% but at much much smaller scale than Charter. Maybe commercial internet margins are lower, so consolidated EBITDA is in the 50's, but regardless the point is that video is basically a breakeven business, and almost all the EBITDA and cash flow is generated by internet today.

 

The biggest risk I see is that video + voice subs decline and revenues decline faster than CHTR can adjust costs, so that eats into internet EBITDA.

 

 

[Spekulatius]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

[cmlber]

If you take residential video + advertising revenue (excluding other revenue, which is to my understanding largely video based) , subtract programming costs, and then split the remaining costs by video + advertising as a % of revenue, you get EBITDA margins for Video + advertising of about 5%. If you figure that a lot of customer equipment is set top boxes (over 50%) then video is basically FCF neutral/negative today.

 

This may not be the case with you peter, but it amazes me how many CHTR longs I've heard go from thinking CABO math was crazy (i.e., video contribution margin isn't really profit because there are tons of variable costs that are generally thought of as fixed) to thinking CABO is absolutely right that video generates no profit when it was convenient for the thesis.

 

This implies residential internet EBITDA margins are somewhere in the 60's, which I think sort of gels with CABO EBITDA at 45% but at much much smaller scale than Charter. Maybe commercial internet margins are lower, so consolidated EBITDA is in the 50's, but regardless the point is that video is basically a breakeven business, and almost all the EBITDA and cash flow is generated by internet today.

 

Does "scale" really add 15 pts of margin on a pure internet business?  Where is the scale benefit?  In video they have buying power to get lower programming rates, but what cost specifically is lower as a % of internet revenue due to scale?

[Munger_Disciple]

it amazes me how many CHTR longs I've heard go from thinking CABO math was crazy (i.e., video contribution margin isn't really profit because there are tons of variable costs that are generally thought of as fixed) to thinking CABO is absolutely right that video generates no profit

 

What would you like them to do? Keep insisting that video is profitable? You cannot blame Charter & Comcast for trying to make money in the video business until they figured out that cord cutting is unstoppable.

 

I love the Keynes quote (and it applies here): <i> When the facts change, I change my mind. What do you do, sir? </i>

[cmlber]

it amazes me how many CHTR longs I've heard go from thinking CABO math was crazy (i.e., video contribution margin isn't really profit because there are tons of variable costs that are generally thought of as fixed) to thinking CABO is absolutely right that video generates no profit

 

What would you like them to do? Keep insisting that video is profitable? You cannot blame Charter & Comcast for trying to make money in the video business until they figured out that cord cutting is unstoppable.

 

I love the Keynes quote (and it applies here): <i> When the facts change, I change my mind. What do you do, sir? </i>

 

The point is, I don’t think the facts changed.  Video wasn’t profitable in 2017 and suddenly unprofitable in 2019.  Video was and still is profitable, but the narrative changed once the outlook went from “we can still steal share from satellite and grow or maintain video subs” to “video is declining.”  Maybe it’s not very profitable on a % basis, but there’s a lot of leverage adding gross margin from video onto an existing customer relationship.

[peterHK]

If you take residential video + advertising revenue (excluding other revenue, which is to my understanding largely video based) , subtract programming costs, and then split the remaining costs by video + advertising as a % of revenue, you get EBITDA margins for Video + advertising of about 5%. If you figure that a lot of customer equipment is set top boxes (over 50%) then video is basically FCF neutral/negative today.

 

This may not be the case with you peter, but it amazes me how many CHTR longs I've heard go from thinking CABO math was crazy (i.e., video contribution margin isn't really profit because there are tons of variable costs that are generally thought of as fixed) to thinking CABO is absolutely right that video generates no profit when it was convenient for the thesis.

 

This implies residential internet EBITDA margins are somewhere in the 60's, which I think sort of gels with CABO EBITDA at 45% but at much much smaller scale than Charter. Maybe commercial internet margins are lower, so consolidated EBITDA is in the 50's, but regardless the point is that video is basically a breakeven business, and almost all the EBITDA and cash flow is generated by internet today.

 

Does "scale" really add 15 pts of margin on a pure internet business?  Where is the scale benefit?  In video they have buying power to get lower programming rates, but what cost specifically is lower as a % of internet revenue due to scale?

 

Inernet is an incredibly high fixed cost business (cable in the ground, customer relations/call centres, corporate G&A etc., and fewer truck rolls than video, and no content costs), whereas video is lots of variable cost (content/sub, set top box per sub, higher truck rolls). The exact number probably isn't 15%, it's probably lower and its impossible to tease out exactly, but I'm very sure that Charter's internet margins are higher than CABO.

 

If you run the math my way, video + advertising has shown declining EBITDA margins for years. That gels with the consistent rises programming costs per sub, coupled with fixed cost deleveraging (there's still the whole customer support/marketing etc. apparatus to support). You can argue that their backoffice/support/marketing costs could be loaded onto internet, but I thik that's unfair and it's better to use a % of sales approach.

 

Frankly I don't see a way you can argue that Video is anything other than marginally profitable between video + advertising + a good share of "other" revenue. If that's the case, you can back into the fact that internet EBITDA margins are very likely well above 50%.

 

I do allocate more capex to internet, though, so while EBITDA margins are higher, FCF conversion from EBITDA is worse, but still probably in the mid to high 20's range (I think).

 

This is all my view, of course, and happy to see where people disagree. Specifically, I'm calculating internet EBITDA as internet revenue - internet % of sales x regulatory, marketing, and other costs. Of costs to service customers, of the portion not allocated to voice (again allocated on % of revenue), I allocate 40% to internet, 60% to video as there are fewer truck rolls for internet.

 

Video EBITDA I'm calculating the same way, but with 100% of programming costs going to video.

 

[Munger_Disciple]

 

The point is, I don’t think the facts changed.  Video wasn’t profitable in 2017 and suddenly unprofitable in 2019.  Video was and still is profitable, but the narrative changed once the outlook went from “we can still steal share from satellite and grow or maintain video subs” to “video is declining.”  Maybe it’s not very profitable on a % basis, but there’s a lot of leverage adding gross margin from video onto an existing customer relationship.

 

Video has always been much less profitable than HSD. It is just that CABO felt the video business meltdown effect much earlier because they are a sub-scale cable company relative to Comcast/Charter.

 

I think practically everyone's investment thesis of Charter or Comcast Cable is based on HSD business, not video. It has been for a long time now. Regardless of how video is consumed (OTT/linear), HSD business will benefit due to vastly higher amount of data consumed.

[vince]

 

The point is, I don’t think the facts changed.  Video wasn’t profitable in 2017 and suddenly unprofitable in 2019.  Video was and still is profitable, but the narrative changed once the outlook went from “we can still steal share from satellite and grow or maintain video subs” to “video is declining.”  Maybe it’s not very profitable on a % basis, but there’s a lot of leverage adding gross margin from video onto an existing customer relationship.

 

Video has always been much less profitable than HSD. It is just that CABO felt the video business meltdown effect much earlier because they are a sub-scale cable company relative to Comcast/Charter.

 

I think practically everyone's investment thesis of Charter or Comcast Cable is based on HSD business, not video. It has been for a long time now. Regardless of how video is consumed (OTT/linear), HSD business will benefit due to vastly higher amount of data consumed.

 

No question HSD business will drive the investment and no question video's importance has diminished.  But I take mgmt's word when they say video is still an important retention product for the bundle.  Remember also that cable has an important relationship with the customer and will most likely assume the role of having the billing relationship for the majority of streaming options and they will make some margin there.  The fact that churn is significantly higher for the OTT services plays right into cable's hands.

[vince]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

 

This statement is misleading if you dig in and make the appropriate adjustments.  A good way to compare them accurately is to look at rates of growth in customer relationships, per product....Chtr hasn't even begun to price aggressively.  I will never forget Munger saying that when you have an advantaged business with top notch mgmt WITH untapped pricing power, it's a damn cinch.  I'm not knocking Comcast, it's a well run business, but in my mind there is close to ZERO chance that they will have higher growth rates than Charter.  They don't compete against one another, all products can be identical if need be, Charter's footprint is clearly less competitive and their prices are significantly lower.  Go to where the puck is going to be!!!

[Value92]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

 

This statement is misleading if you dig in and make the appropriate adjustments.  A good way to compare them accurately is to look at rates of growth in customer relationships, per product....Chtr hasn't even begun to price aggressively.  I will never forget Munger saying that when you have an advantaged business with top notch mgmt WITH untapped pricing power, it's a damn cinch.  I'm not knocking Comcast, it's a well run business, but in my mind there is close to ZERO chance that they will have higher growth rates than Charter.  They don't compete against one another, all products can be identical if need be, Charter's footprint is clearly less competitive and their prices are significantly lower.  Go to where the puck is going to be!!!

 

Could you please expand on the less competitive footprint of Charter versus Comcast. It is/was my believe that Charter is not raising prices as they have competitors like WideOpenWest in their footprint that offer similar services for lower prices. Penetration varies by market but I find it interesting that there are some markets with more than 30% penetration for challenger companies like WideOpenWest. If you compare ARPUs of cable companies it is clearly the case that less competitive footprints have much higher HSD ARPUs - see Cable One (72$) vs. WideOpenWest (around 52$). That being said a well managed cable company that takes up speeds early and takes care of its customers will be in a good competitive position. There are other cable incumbents that are still in the process of upgarding to 1 gig (Mediacom, Atlantic Broadband,...) and are therefore much weaker competitors.