CHTR - Charter Communications

[rogermunibond]

The issue is the marketing.  Obv the value of HSD is high.  I can see how the promo material could be more clear about the monthly price that is paid during the promo period and the monthly price that is paid after the promo period is over.  Lots of people miss this, usually the post-promo price is in much smaller font.

 

Is this as bad as WFC marketing and ghost account signups, no.  But as a CHTR long, it bears watching.  Growing ARPU at the expense of customers is not creating long-term value.

[Munger_Disciple]

 

In Canada, for most of the past 20 years we've had really low data caps and prices have been generally higher and/or speeds lower. In general we're getting screwed because of lower competition than in the US (with banks, telecoms, food, etc).

 

In some places like South Korea where population density is very high, speeds are insanely high and prices relatively low (afaik)

 

Density has a big impact on the buildout cost per household and it partly explains relatively lower prices in S Korea. Also as I understand, the government regulator has "input" into the prices charged in S Korea for wireless and broadband much more so than in NA.

 

Low population density (no incentive for cable or telco to install infrastructure) is the main reason why rural broadband is slower and more expensive in the US. Satellite or wireless broadband makes more sense for rural US than hooking up everyone with cable or fiber.

 

 

[Spekulatius]

^ Counterargument is that cable / internet isn’t really cheaper in NA population centers. It’s the regulatory framework that makes the difference. Korea has KT, which is heavily regulated.

[Liberty]

^ Counterargument is that cable / internet isn’t really cheaper in NA population centers. It’s the regulatory framework that makes the difference. Korea has KT, which is heavily regulated.

 

Part is definitely regulation (which can be a double-edged sword... can lead to cheaper service, and can lead to stagnation and less investment in future, better service).

 

Part is that more profitable areas tend to subsidize less profitable areas, and so the different in cost between some far off rural region and a big city isn't as wide as it would be if each paid exactly for their local economics, I think.

[Liberty]

On bandwidth usage, from CHTR Q2 call:

 

our average customers using over 250 gigs a month and if you look at our average customer who's on broadband only and who's still watching TV, all of the last discussion we just had, but they're watching it for free or they're paying for Netflix or some other service, and watching it for free, they are using over 450 gigs a month. And so the average cellular customer is using between 6 and 8 gigs

[rogermunibond]

People have been asking why South Korea's HSD is so much faster and cheaper than most other countries for years.

 

https://www.nytimes.com/2011/02/22/technology/22iht-broadband22.html

 

I don't think it's regulation or competition.  But cooperation.  SK expects its telecoms to cooperate and price kind of as a national utility.

 

https://www.publicknowledge.org/news-blog/blogs/why-does-south-korea-have-faster-internet-for-a-cheaper-price-tag

 

Would guess if you look at their returns that SK telecoms are not great.

[vince]

On bandwidth usage, from CHTR Q2 call:

 

our average customers using over 250 gigs a month and if you look at our average customer who's on broadband only and who's still watching TV, all of the last discussion we just had, but they're watching it for free or they're paying for Netflix or some other service, and watching it for free, they are using over 450 gigs a month. And so the average cellular customer is using between 6 and 8 gigs

 

Rutledge has tenderly started to comment on average cellular usage.  Obviously, he is highlighting the ultimate difficulty a wireless provider is going to encounter when trying to manage 250 gigs of broadband data usage.  Anyone have an idea (assuming they acquire 5G capability) how they will technically offer that kind of capacity (we are assuming, based on their statements that they will have a competitive to cable wireless broadband service) when they already throttle anyone that uses more than 20 gigs a month?  Anyone want to take a crack at explaining how they can do this? Or maybe use this fact to support an argument that they can't?

[BG2008]

On bandwidth usage, from CHTR Q2 call:

 

our average customers using over 250 gigs a month and if you look at our average customer who's on broadband only and who's still watching TV, all of the last discussion we just had, but they're watching it for free or they're paying for Netflix or some other service, and watching it for free, they are using over 450 gigs a month. And so the average cellular customer is using between 6 and 8 gigs

 

Rutledge has tenderly started to comment on average cellular usage.  Obviously, he is highlighting the ultimate difficulty a wireless provider is going to encounter when trying to manage 250 gigs of broadband data usage.  Anyone have an idea (assuming they acquire 5G capability) how they will technically offer that kind of capacity (we are assuming, based on their statements that they will have a competitive to cable wireless broadband service) when they already throttle anyone that uses more than 20 gigs a month?  Anyone want to take a crack at explaining how they can do this? Or maybe use this fact to support an argument that they can't?

 

NIMBYism at work

 

https://www.wsj.com/articles/cities-are-saying-no-to-5g-citing-health-aestheticsand-fcc-bullying-11566619391?mod=hp_featst_pos3

[DooDiligence]

On bandwidth usage, from CHTR Q2 call:

 

our average customers using over 250 gigs a month and if you look at our average customer who's on broadband only and who's still watching TV, all of the last discussion we just had, but they're watching it for free or they're paying for Netflix or some other service, and watching it for free, they are using over 450 gigs a month. And so the average cellular customer is using between 6 and 8 gigs

 

Rutledge has tenderly started to comment on average cellular usage.  Obviously, he is highlighting the ultimate difficulty a wireless provider is going to encounter when trying to manage 250 gigs of broadband data usage.  Anyone have an idea (assuming they acquire 5G capability) how they will technically offer that kind of capacity (we are assuming, based on their statements that they will have a competitive to cable wireless broadband service) when they already throttle anyone that uses more than 20 gigs a month?  Anyone want to take a crack at explaining how they can do this? Or maybe use this fact to support an argument that they can't?

 

NIMBYism at work

 

https://www.wsj.com/articles/cities-are-saying-no-to-5g-citing-health-aestheticsand-fcc-bullying-11566619391?mod=hp_featst_pos3

 

https://publicintegrity.org/business/5g-wireless-pits-cities-against-telecoms-and-their-friends-in-the-fcc/

[Gamecock-YT]

Knocked it out of the park this quarter:

 

Third quarter total residential and SMB customer relationships increased 310,000, compared to 234,000

during the third quarter of 2018. As of September 30, 2019, Charter had 29.0 million total customer

relationships, and added over 1.1 million net new customer relationships over the last twelve months.

 

• During the third quarter, Charter generated residential and SMB Internet net additions of 380,000, video

net losses of 75,000 and wireline voice net losses of 190,000.

 

• Charter added 276,000 mobile lines in the third quarter, compared to 208,000 mobile line net additions in

the second quarter of 2019. As of September 30, 2019, Charter served a total of 794,000 mobile lines.

 

• Third quarter revenue of $11.5 billion grew 5.1%, as compared to the prior year period, driven by residential

revenue growth of 4.4%, mobile revenue growth of $175 million and commercial revenue growth of 4.1%.

 

• Third quarter Adjusted EBITDA

of $4.1 billion grew 3.4% year-over-year, while third quarter cable Adjusted

EBITDA1

of $4.2 billion grew 5.0% year-over-year.

 

• Net income attributable to Charter shareholders totaled $387 million in the third quarter, compared to $493

million during the same period last year. The year-over-year decrease in net income attributable to Charter

shareholders was primarily driven by a pension remeasurement gain in the third quarter of 2018, partly

offset by higher Adjusted EBITDA.

 

• Third quarter capital expenditures totaled $1.7 billion compared to $2.1 billion during the third quarter of

2018. Third quarter capital expenditures included $100 million of mobile-related capital expenditures.

 

• Consolidated free cash flow1

for the third quarter of 2019 totaled $1.3 billion, compared to $532 million

during the same period last year. Cable free cash flow1

for the third quarter totaled $1.5 billion, compared

to $681 million during the same period last year.

 

• During the third quarter, Charter purchased approximately 7.8 million shares of Charter Class A common

stock and Charter Communications Holdings, LLC ("Charter Holdings") common units for approximately

$3.1 billion.

 

Presentation:

 

https://ir.charter.com/static-files/86d4bcd1-6121-4798-b179-7b99a572629a

 

PR:

 

https://ir.charter.com/static-files/76cf320f-4610-448b-9768-c1a27f2d2c2e

 

 

[wabuffo]

...and the price increases for video and broadband they just executed is still ahead of them (effect of price increase will be seen next Q since it began in October). 

 

CHTR's margins have been below peers and up until now it seemed that they were reluctant to take pricing.  If they can take pricing AND reduce capex - free cash flow will surge.

 

wabuffo

[vince]

Knocked it out of the park this quarter:

 

Third quarter total residential and SMB customer relationships increased 310,000, compared to 234,000

during the third quarter of 2018. As of September 30, 2019, Charter had 29.0 million total customer

relationships, and added over 1.1 million net new customer relationships over the last twelve months.

 

• During the third quarter, Charter generated residential and SMB Internet net additions of 380,000, video

net losses of 75,000 and wireline voice net losses of 190,000.

 

• Charter added 276,000 mobile lines in the third quarter, compared to 208,000 mobile line net additions in

the second quarter of 2019. As of September 30, 2019, Charter served a total of 794,000 mobile lines.

 

• Third quarter revenue of $11.5 billion grew 5.1%, as compared to the prior year period, driven by residential

revenue growth of 4.4%, mobile revenue growth of $175 million and commercial revenue growth of 4.1%.

 

• Third quarter Adjusted EBITDA

of $4.1 billion grew 3.4% year-over-year, while third quarter cable Adjusted

EBITDA1

of $4.2 billion grew 5.0% year-over-year.

 

• Net income attributable to Charter shareholders totaled $387 million in the third quarter, compared to $493

million during the same period last year. The year-over-year decrease in net income attributable to Charter

shareholders was primarily driven by a pension remeasurement gain in the third quarter of 2018, partly

offset by higher Adjusted EBITDA.

 

• Third quarter capital expenditures totaled $1.7 billion compared to $2.1 billion during the third quarter of

2018. Third quarter capital expenditures included $100 million of mobile-related capital expenditures.

 

• Consolidated free cash flow1

for the third quarter of 2019 totaled $1.3 billion, compared to $532 million

during the same period last year. Cable free cash flow1

for the third quarter totaled $1.5 billion, compared

to $681 million during the same period last year.

 

• During the third quarter, Charter purchased approximately 7.8 million shares of Charter Class A common

stock and Charter Communications Holdings, LLC ("Charter Holdings") common units for approximately

$3.1 billion.

 

Presentation:

 

https://ir.charter.com/static-files/86d4bcd1-6121-4798-b179-7b99a572629a

 

PR:

 

https://ir.charter.com/static-files/76cf320f-4610-448b-9768-c1a27f2d2c2e

 

Yes, absolutely great quarter, their share count has fallen rapidly and now sits below 250 million shares.  What was most surprising is how little losses they had in video subscribers this quarter.  Comcast had more than 3 times the losses despite being well ahead of charter in terms of their impressive video product (x1, voice remote, etc).  I think the higher multiple being given to charter is well deserved and the superiority of Charters operating strategy will become increasingly apparent

[rogermunibond]

Charter has less overlap with fiber overbuilders.  I'm in an area where Comcast and Fios compete.  The incentives offered for new subs are biggish.

[Munger_Disciple]

Excellent results! I am especially impressed with the 351K residential HSD net adds and SMB results (positive net adds in all three services: video, internet & voice). Given that residential HSD penetration is still under 50%, there is a long runway for future HSD net adds. Mobile is icing on the cake when it turns cash flow positive.

[Deepdive]

Charter has less overlap with fiber overbuilders.  I'm in an area where Comcast and Fios compete.  The incentives offered for new subs are biggish.

It's amazing how much more profitable monopolies are versus duopolies.  Imagine if Lyft did not exist and Uber had all the market share?

 

[muscleman]

Charter has less overlap with fiber overbuilders.  I'm in an area where Comcast and Fios compete.  The incentives offered for new subs are biggish.

It's amazing how much more profitable monopolies are versus duopolies.  Imagine if Lyft did not exist and Uber had all the market share?

 

 

It is still industry dependent. Look at Didi taxi in China, who acquired Uber China and became a monopoly. They are still losing tons of money

[Munger_Disciple]

 

It's amazing how much more profitable monopolies are versus duopolies.  Imagine if Lyft did not exist and Uber had all the market share?

 

 

Many duopolies/oligopolies are very successful for example: Coke & Pepsi, Tobacco companies, Costco/Walmart/Amazon, etc.

 

On the other hand, regulated monopolies like utilities are not that profitable.

 

[BG2008]

Charter has less overlap with fiber overbuilders.  I'm in an area where Comcast and Fios compete.  The incentives offered for new subs are biggish.

It's amazing how much more profitable monopolies are versus duopolies.  Imagine if Lyft did not exist and Uber had all the market share?

 

 

It is still industry dependent. Look at Didi taxi in China, who acquired Uber China and became a monopoly. They are still losing tons of money

 

Now imagine if Uber was still competing with Didi

[Liberty]

Many duopolies/oligopolies are very successful for example: Coke & Pepsi, Tobacco companies, Costco/Walmart/Amazon, etc.

 

It's all about how rational the competition is, and how hard/attractive it is for new entrants (who could be less rational and disturb the equilibrium).

[CookingByTheNumbers]

Oldie but goodie. The question then becomes, what multiple should a company with a superior terrestrial infrastructure, capable of propagating a high-capacity, two-way network, while continuously & simultaneously realizing operating cost efficiencies and declining capital intensity, trade at? 12x? Perhaps, 13x?

 

https://www.cnbc.com/video/2019/10/02/cable-has-come-to-realize-crazy-save-offer-is-no-longer-sensible-craig-moffett.html?__source=sharebar%7Ctwitter&par=sharebar

[vince]

Oldie but goodie. The question then becomes, what multiple should a company with a superior terrestrial infrastructure, capable of propagating a high-capacity, two-way network, while continuously & simultaneously realizing operating cost efficiencies and declining capital intensity, trade at? 12x? Perhaps, 13x?

 

https://www.cnbc.com/video/2019/10/02/cable-has-come-to-realize-crazy-save-offer-is-no-longer-sensible-craig-moffett.html?__source=sharebar%7Ctwitter&par=sharebar

 

Cabo is trading at 25 times fcf (which is representative of current earning power).  The other cable companies took notice of their non-video strategy which brought mid-high 40's ebitda margins, and decided to change their tone around the attractiveness of video.  Stop chasing unprofitable business and margins increase dramatically, and the multiple follows.

[CookingByTheNumbers]

Oldie but goodie. The question then becomes, what multiple should a company with a superior terrestrial infrastructure, capable of propagating a high-capacity, two-way network, while continuously & simultaneously realizing operating cost efficiencies and declining capital intensity, trade at? 12x? Perhaps, 13x?

 

https://www.cnbc.com/video/2019/10/02/cable-has-come-to-realize-crazy-save-offer-is-no-longer-sensible-craig-moffett.html?__source=sharebar%7Ctwitter&par=sharebar

 

Cabo is trading at 25 times fcf (which is representative of current earning power).  The other cable companies took notice of their non-video strategy which brought mid-high 40's ebitda margins, and decided to change their tone around the attractiveness of video.  Stop chasing unprofitable business and margins increase dramatically, and the multiple follows.

 

I completely agree. CABO certainly paved the way for the non-video strategy. With CHTR still ~ 50% underpenetrated, there is enormous room for expansion. And if you consider potential mobile monetization as it shifts to core, and the buildup between both SMB and Enterprise, I think CHTR can only continue to experience long-runway for accelerated growth. A 12x 2020 EBITDA is severely understating this broadband development. Even at 20x 19E FCF, one can capture significant upside.

 

 

[vince]

Oldie but goodie. The question then becomes, what multiple should a company with a superior terrestrial infrastructure, capable of propagating a high-capacity, two-way network, while continuously & simultaneously realizing operating cost efficiencies and declining capital intensity, trade at? 12x? Perhaps, 13x?

 

https://www.cnbc.com/video/2019/10/02/cable-has-come-to-realize-crazy-save-offer-is-no-longer-sensible-craig-moffett.html?__source=sharebar%7Ctwitter&par=sharebar

 

Cabo is trading at 25 times fcf (which is representative of current earning power).  The other cable companies took notice of their non-video strategy which brought mid-high 40's ebitda margins, and decided to change their tone around the attractiveness of video.  Stop chasing unprofitable business and margins increase dramatically, and the multiple follows.

 

I completely agree. CABO certainly paved the way for the non-video strategy. With CHTR still ~ 50% underpenetrated, there is enormous room for expansion. And if you consider potential mobile monetization as it shifts to core, and the buildup between both SMB and Enterprise, I think CHTR can only continue to experience long-runway for accelerated growth. A 12x 2020 EBITDA is severely understating this broadband development. Even at 20x 19E FCF, one can capture significant upside.

 

If and when the market becomes confident that Chtr can compound ebitda at 8-10% over 5+ years, they will assign a 20+ multiple to fcf.  In fact, if you normalize for mobile losses and the gap between unit growth and revenue growth on the commercial business they have been growing at 7-8% right thru the integration.  This makes me confident that they can get at least this much going forward.  Lastly, fcf should grow faster than ebitda (when normalizing cash taxes) because capex intensity is falling.  Comcast will end this year at close to 12% capex to revenue.....thats a very interesting development.

[vince]

My latest numbers for Charter ending 2021 are..... revenues of close to 50 billion at a 5% growth rate, and ebitda at 19.5 billion at a 7% growth rate.  If they buy back 20% of their shares over 2.25 years, which is consistent with recent activity, they will have 200 million shares outstanding (246 now).  With an extra 15 billion in debt their cash interest expense will be 4.6 billion (90 billion at 5%), their capex will be 6.5 billion and I estimate their cash taxes at 700 million, we are left with roughly 8 billion in fcf, or 40 dollars fcf per share.  Still trading at an attractive price after recent run up and a 600-700 dollar share price in a couple years looks probable

[CookingByTheNumbers]

My latest numbers for Charter ending 2021 are..... revenues of close to 50 billion at a 5% growth rate, and ebitda at 19.5 billion at a 7% growth rate.  If they buy back 20% of their shares over 2.25 years, which is consistent with recent activity, they will have 200 million shares outstanding (246 now).  With an extra 15 billion in debt their cash interest expense will be 4.6 billion (90 billion at 5%), their capex will be 6.5 billion and I estimate their cash taxes at 700 million, we are left with roughly 8 billion in fcf, or 40 dollars fcf per share.  Still trading at an attractive price after recent run up and a 600-700 dollar share price in a couple years looks probable

 

Vince, you are right on the money. I also think it's safe to say that your growth measures are pretty conservative. Assuming they can ramp up other broadband measures and ultimately monetize mobile, and capture the remains of their underpenetrated footprint, I have 2021 slightly higher than $40/share. I think your base case will certainly play out. As attractive as it is, it's still an expensive stock (in absolute price) and i'd love to double up on shares.