STOCK BRIEF | CHARTER COMMUNICATIONS (CHTR)

Key Callouts

Chris Winfrey - Charter Communications CEO

• On investment priorities

• Winfrey said this is the most interesting time in the industry since broadband was introduced

• Charter focused on the 'three E's'

• Evolution, Expansion, Execution

• "So an evolution, what that is, is really the opportunity to drive at a very low cost in a faster pace than our competitors, to have symmetrical speeds and multi-gig capabilities. And at the same time, to be able to deliver convergence with the product set that our competitors can't replicate."

• Expansion refers to rural passings generating attractive return with an emphasis on winning government subsidies

• Execution refers to digitizing their service, providing higher quality service

• On TWC Assets

• Assimilation of the Time Warner assets was the world's largest ever cable integration

• "In 2016, just as a reminder, we combined Charter, Time Warner Cable, Bright House. It's the world's largest-ever, I think, cable integration, and it was successful."

• On legacy Charter, KPIs, and looking forward to success

• Winfrey said success isn't multiple years away but also not a few quarters away

• Want to make sure they're transparent with investors; will pull forward investment if it makes sense

• "Yes, I think it's -- is it going to be many years before you can see it? No. But it's not going to be a couple of quarters either. And so that's been pretty consistent with Charter. We've never tried to manage for the short term. We've always said, "Look, it may be bumpy or choppy along the way. We'll pull forward investment if we think we can get a great return off it."

• On Charter's unique product offering

• Winfrey asserted they've competed against fiber before, and acknowledged new market entrants are nibbling away at the edges

• FWA is nothing new according to Winfrey, just wireless substitution being marketed in a new way

• "We now have overbuilders in a portion of our footprint. And to address that and take away the marketing claims, really we'll do this high split, DOCSIS 4.0 upgrade. We'll do it over 3 years. We'll do it at $100 per passing. So faster and cheaper than our competitors, and we're going to do it across our entire footprint."

• "Fixed wireless access, I can make the argument, I will, it's not anything really new. It's wireless substitution, but somebody has decided to market it in a cheaper way. And it's interesting, but it really is just wireless substitution. And so it will suffer from the exact same thing that's always been the case is a lack of capacity, by definition, an inferior product. And as data usage goes up, I think that's going to be pressured and customers will want to focus on having a quality product."

• On the near-term outlook for broadband

• Charter has always focused on the long-term; not keen on giving near-term results

• Goal is to have more net adds in 2023 than 2022

• "So to answer the question, to be clear, do I think that our -- is our goal to have 2023 net adds to be higher than 2022? Yes, it is. It remains that case. But I'm not saying anything about a particular quarter and -- nor should we"

• On competition from fiber

• 45% of Charter footprint is overbuilt

• Charter is on the path of upgrading their network; Winfrey says one goal is to take away the marketing claim of higher speeds

• In a normal market environment, Charter was growing in overlap areas and outside of overlap areas

• FWA is chipping away at the lower end of the market, but once they run out of capacity it will fade

• "So 45% roughly of our footprint has gig overbuild. And we are on this path to upgrade the network, to take away the marketing speed claim, which actually is -- it's a marketing speed claim. So we want to make sure that we tell our competitors, we're going to be faster, we're going to be there faster, we're going to be ubiquitous and we're going to have a marketing claim everywhere we operate, not just for fixed-line Internet, but we're going to have a converged product that you can't replicate."

• "As you've seen at the lower end of the market, I mentioned fixed wireless access, and I've said it a couple of times now, it's kind of chipping away at the lower end of the market. And I don't think that's going to go away anytime soon until they run out of capacity, and they will, and customers realize, "Hey, this doesn't work the same way as full-blown broadband. And I'm not actually saving any money relative to what I could have."

• On multi-gig offerings and decision not to go symmetrical

• Winfrey says marketing claims matter a lot; people want higher speeds

• Also reiterated that Charter is upgrading their entire spectrum and not redlining like other operators

• "But it also matters for us in terms of doing the upgrade now and why over 3 years, not longer, is we want to make sure everybody is clear that you're not going to have marketing claims inside of our footprint."

• The decision not to go symmetrical was a conscious one - Winfrey says downstream speeds are much more important

• Also mentioned Charter's fiber on demand product, and their ability to eventually provide high gig symmetrical services

• "Because I think the downstream is where you get the marketing claim over time. So we likely will go to 10x1. But we could provision the DOCSIS 4.0 modems in a way that you could go to 5x5, maybe even 6x6. And by the way, I don't think DOCSIS 4.0 -- DOCSIS is not done at 4.0."

• "We also have -- if you remember, in the December presentation, we talked about having remote OLTs that have fiber drop inside of them. So we kind of call that fiber on demand.  So inside of every node, we'll have the capability to market 25, 50, 100-gig symmetrical service and have fiber on the increment. So that also provides marketing claims, probably at a premium price, not so different than what we do with enterprise today. But the ability to have those marketing claims and footprint and protect it for a long time, whether that's DOCSIS 4.0 or whether it's DOCSIS 5.0 or whether it's fiber on demand, we're going to maintain our marketing claims and we're going to maintain our product pricing and service superiority."

• On rural passings and terminal value perception

• Winfrey spoke to the appeal of mid to high teens IRR for rural builds, but emphasized the boost Charter should see from an EBITDA valuation perspective

• At minimum, they'll have a much higher multiple on their terminal value from incremental builds and the perpetuity growth rate will be higher

• "We know what we're going to get. It's pretty mechanical in terms of the penetration. We see that as well with RDOF off and state grants. And so we get to mid- to high-teen IRRs, which is great."

• "I think there's been more understanding and better modeling of what we're doing, but a lot of that modeling is focused on a terminal value, which is a multiple of EBITDA. And it's a current multiple of EBITDA, but these are faster-growing systems by definition, with lower operating costs, higher penetration. And so at a minimum, I would say you have to have a much higher multiple on that terminal."

• "But from the company perspective, you now have a higher perpetuity growth rate. And so I don't think anybody has really thought about the fact that you have a higher perpetuity growth rate and what that means from an overall valuation perspective of the company. And when you think to the history of cable, it's always had cycles where there's been investment opportunities that drive spikes in capital, but it's always delivered way more perpetuity growth rate than everybody put into their models for decades."

• On their MVNO partnership with Verizon

• Winfrey said they like their MVNO partnership with Verizon + it has ideal economics on their side

• "The other piece is that, maybe it's not the case there, but here, 85% of the traffic today already before additional offloading, is on our network. It's on our fastest Internet. So we have the fastest mobile product because it's relying on our WiFi and it works better together with our WiFi and allows us to have the claim of fastest mobile."

• "And at the same time, we have a pretty strategic relationship with Verizon. I think it's good for us, it's good for them, but it's attractive economics for us. Jessica has highlighted that. It's attractive economics now, and I think it can continue to get better over time, both as a standalone, which isn't necessarily how we look at it, but also as an integrated product."

• On Spectrum One promotions and margins

• Winfrey mentioned that churn implies there's better places for a customer to go, which he doesn't believe is true

• Believes Charter offers the best mobile product at the lowest price, isn't worried about promotional roll-off

• "I think because the product saves customers money, both at promotion as well as at retail, and it works better and it's faster, I'm pretty confident that we're not going to have that type of issue. It doesn't mean that we're not focused on it and that we won't manage through, but I'm not as worried."

• Winfrey also said Charter isn't focused on % margin, rather that every customer they gain now from existing passings is incremental

• 32M of the 55M passings are on the Charter network, which means there's 23M locations they can sell to - all incremental

• "You can have really high margins on very low revenue, and you got a bad business. And so you have to avoid falling into that trap. For us, it's even deeper than that, which is we have 55 million passings, and 32 million of those are connected to our network today, which means that there's 23 million passings that the opportunity for us to not just sell one product, but multiple products into. And we're already paying the operating cost and the capital expense to maintain those additional passings."

• "And so every customer that we acquire on the increment is more profitable than the last."

• On Xumo

• Winfrey is very pleased with the product, believes it to be a best-in-class aggregate streaming product

• "What Xumo gives us the ability to do is a fully integrated app and live video experience for customers all in a single place with the very best that Comcast has to offer together with our Spectrum TV app, to the extent somebody wants to take video. And to provide utility to customers whether they want to take traditional live video or not, and we can be more agnostic on that. I think Xumo is really good for consumers. It's what I want."

• On capital allocation, leverage

• Winfrey likes their 4.5x leverage position, but says they won't be dogmatic about it if conditions change

• Organic investments remain the top priority

• Haven't seen cable M&A opportunities that make sense right now
  
  

Please call or e-mail with any questions.

Andrew Freedman, CFA

Managing Director
@HedgeyeComm