Charter Communications

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 2/5

Charter Communications is a leading broadband connectivity company and cable operator that provides internet, video, mobile, and voice services to residential and business customers, primarily under its Spectrum brand.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Charter Communications operates in a highly competitive industry, providing cable television, broadband internet, voice, and mobile services. Its primary offerings are marketed under the Spectrum brand and are available to both residential and commercial customers. The company’s services are generally bundled together to increase the customer base and reduce churn, while it continues to push into new opportunities like mobile and video, to diversify its offerings and generate more revenue.

Revenue Streams:

Charter’s revenue is diversified across several key segments:

Residential Services: This segment encompasses subscriptions for internet, video, mobile, and voice services. The largest revenue contributor for the company comes from residential broadband services, as customers increasingly value high-speed connectivity.
Commercial Services: This segment delivers business services to enterprises and institutions, including internet access, networking, and data services.
Advertising: This revenue stream comprises the sale of advertising services on the company’s platforms. The advertising sales has been facing a decline in the past years due to the shift of customer’s usage to online streaming platforms.

Industry Trends:

Several key industry trends affect Charter’s performance:

Broadband Internet Growth: With the increasing demand for high-speed data and reliable internet connections, broadband services have become the largest revenue stream for the industry. The growth of streaming services also drives the need for faster internet speeds, boosting demand for higher-tier broadband products.
Cord-Cutting: The rising trend of customers ditching traditional cable TV for streaming services presents a challenge for Charter’s video service. The company addresses this shift with bundles that integrate video with other services, such as Internet or mobile.
Mobile Service Competition: The expansion of mobile services, both by traditional mobile providers and cable companies like Charter, has intensified the competition in the wireless market. Charter aims to compete by leveraging its existing infrastructure to offer competitive mobile services.
Regulatory Landscape: The telecommunications industry is subject to stringent regulations, and policy changes by regulatory authorities like the FCC and various states can significantly impact Charter’s financial results. This includes net neutrality issues, universal service requirements, as well as privacy and cybersecurity regulations.

Competitive Landscape:

Charter faces intense competition across its service segments. Its main competitors are traditional telecom companies (Verizon, AT&T), wireless providers (T-Mobile, Verizon, AT&T), other cable providers (Comcast, Cox), and content providers (Amazon, Netflix). Competition is based on several factors, including pricing, service offerings, network quality, speed, availability, and customer support.

What Makes Charter Different?

Extensive Infrastructure: The company owns an extensive hybrid fiber-coaxial network that serves 41 states across America, which gives it an advantage over its competitors. This gives the opportunity to provide reliable and high-speed services to a large part of the country, which would otherwise be harder to serve due to its large upfront infrastructure investments.
Diversified Services: The focus on providing a bundled service gives an advantage over its competitors. This bundles tend to bring new customers and helps to reduce churn within the customer base.
Scale: Charter has more than 32 million customers. Its size can help it gain negotiating power with content providers and suppliers.

Moat Analysis

Based on the information available, Charter Communications’ economic moat can be rated as a 3/5: a narrow but sustainable moat.

Here’s a detailed look at what supports this rating:

Intangible Assets (Weak): Charter possesses a few intangible assets, but they are not enough to provide a sustainable moat. Charter’s brand is strong enough that people will chose its services, but this is not so strong, to stop people from switching if they get a better offer.
Switching Costs (Medium): There are several factors that create switching costs for the customers of Charter, like bundling, existing contracts, and more. However, they aren’t very strong, and thus a better offer from another service provider would potentially make customers switch.
Network Effects (Weak): Although they have a network of services, customers can switch between different internet service providers, cable providers, and mobile service providers easily, and there is not one network controlling the majority of the service. This limits the network moat that the business is able to build, and makes it vulnerable to competition.
Cost Advantages (Medium): Since most of Charter’s infrastructure is already built, they can continue to serve more customers at a relative low cost. However, competition will continue to drive down the price, which could erode this advantage.

Risks to Moat and Business Resilience

While Charter possesses some competitive advantages, there are several risks that could weaken its moat and impair its resilience:

Technological Disruption: The cable industry is highly susceptible to technological disruption. New technologies like fiber internet and low earth orbit internet can render the company’s infrastructure obsolete.
Increased Competition: The telecommunications industry is a competitive one, and a threat from new entrants and existing players is always a concern. Companies like Verizon, AT&T, and T-Mobile have been consistently expanding their services and competing directly with Charter.
Economic Recession: Due to economic recessions, consumers may switch from higher-tier internet and video packages to lower-tier ones to save money. This could hurt their revenue, as higher-priced services may account for a bigger portion of their revenue.
Regulatory Changes: Government regulations can be unfavorable, as any rules may be passed that cut into their profits or that limit the way they operate. For example, net neutrality laws could have a substantial effect on business.
Leverage: Charter’s highly levered balance sheet creates a significant financial risk. A large portion of its cash flows will be used to repay its debt, and high interest rates will reduce profitability.
Integration Risks: The company is still in the process of integrating its acquired operations from recent mergers and acquisitions. This poses risks including challenges from integration of processes, organizational structure, and systems which may not be done smoothly, therefore leading to a loss in profits and market share.
Customer Retention: Increased competition, increased prices, or unsatisfactory service can lead to a high churn of customers. The churn results in a decreased customer base for the company, which has a direct impact on the company’s revenue.
Dependence on Content Providers: As the main provider of video services, the amount the company pays for content is directly linked to its profitability. As such, an increase in content costs will directly impact the company’s profits, therefore companies like Netflix may get an edge in its business.

Financials Deep Dive

Understanding the financial health of a company is critical before making an investment. In this section, we have used Charter’s financial statements, and data from other sources to gauge its financial health and operating performance.

Income Statement

Revenue: Revenue shows an increase from $48.1 billion in 2021, to $51.7 billion in 2022, and $40.5 billion over 9 months ending in September of 2023, meaning a YOY revenue growth for the last periods of around 7.4%.
Operating Costs and Expenses: Overall operating costs and expenses are also increasing over time with an increase from $29.5 billion in 2021, to $33.9 billion in 2022 and $27.3 billion for 9 months ending in September 2023.
Net Income: Net income has seen a decrease in the last years. It has dropped from $4.6 billion in 2021, to $1.1 billion in 2022. Additionally, it had a loss of $529 million for 9 months ending in September 2023. This drop has several reasons including the increase in interest rate, and various charges.

Balance Sheet

Assets: Total assets are relatively stable between $14.5 billion and 15.0 billion over the last years. Most assets are long-term nature, including intangible assets, cable assets, and goodwill.
Liabilities & Equity: Total liabilities amount to over $140 billion in the last periods, largely consisting of senior notes, term loans, debt obligations and various other long-term liabilities. This means the company is highly levered, and a large portion of its capital structure comes from debt, thereby increasing financial risk.
Shareholder’s equity decreased drastically in the recent times and was around $46 billion in September 2023.

Cash Flows

Operating Cash Flows: Operating cash flows for the last three fiscal years and corresponding period show some volatility. There is a considerable increase in 2022, however a decrease of almost 50% in operating cash flow for the recent months ended in September 2023.
Investing Cash Flows: In general, the company’s net investing activities shows a negative cash flow. The company is investing to grow its operations, and its capital expenditures are consistently higher. The company’s main focus in this section is to maintain and increase its infrastructure and services.
Financing Cash Flows: Financing cash flows are mostly negative, showing that the company is actively using the cash to pay off and buy back its shares.

Although the company does not pay dividends, there has been several instances of buy-back programs. Management has used this approach in the recent past to provide value to the shareholders. However, with a large amount of debt and decreased profitability, this may not be the most prudent approach.

Understandability: 2 / 5

Charter Communications is a complex business to grasp. Its operations involve a mix of interconnected technological and operational details. Here are the key drivers for its understandability score:

Multiple Revenue Streams: With diversified revenue sources, an investor has to analyze various business segments and their interplay, requiring a broader understanding of the different markets.
Complexity of Financial Statements: The debt and tax structures of the company is complicated and require a considerable understanding of how different parameters affect their financial performance.
Technological Nuances: To understand the company’s business properly, an investor needs to have a basic understanding of cable, internet, video, and mobile technologies. A lack of technological knowledge can make understanding the company harder, reducing its comprehensibility.
Regulatory Environment: Due to the ever-changing regulatory environment, an investor has to continuously track and stay updated on the changes in FCC and state legislation. This adds a layer of complexity to the business model, as its performance is tied with the regulatory environment.

Balance Sheet Health: 2 / 5

Charter’s balance sheet is concerning. Here’s why:

High Debt: Charter is highly leveraged with long-term debt obligations. This debt puts them in a risky financial position, as it is very sensitive to interest rate fluctuations and could harm the profitability of the business.
Negative Equity: The company has recorded a decreasing shareholders equity in the past years, which signals that its equity is shrinking and could present potential future problems for the company.
Goodwill and Intangibles: A large portion of the assets is attributed to goodwill and acquired intangibles. This poses risk if the assets are overvalued as they are not tangible, and therefore do not offer a reliable representation of the value of the business.
Limited Flexibility: Due to the large debt burden the company has a limited capacity to invest or make acquisitions to scale business operations.
Interest Rate Risks: As most of the debt is linked to floating interest rates, increasing interest rates pose a danger to the company. If rates go up, the cost of servicing its debts will rise and thus lower profitability.
Poor Credit Ratings: Recently, Moody’s rating agency cut its rating on Charter Communications to BAA3, which is just one level above the non-investment-grade level, a signal of increased financial risks.

Recent Concerns, Controversies and Management Thoughts

Here’s an overview of the recent issues the company has been facing, and what the management thinks of these issues.

Slowing Revenue and Customer Growth: After years of rapid expansion, in the past year Charter has been struggling to grow its revenue and subscriber base. The company has been facing a challenge in getting and retaining customers in its various business lines, which is directly impacting the profitability of the business.

Management has acknowledged the slowing revenue and customer growth as it looks to increase its presence in new segments like rural broadband. They have stated their aim in diversifying the business from its traditional reliance on video to services like broadband and mobile.

Increased Competition: Charter has been facing increased competition from telcos and wireless providers. These new players tend to eat away the company’s market share as a result of better deals and new technologies being introduced in the market.

Management has acknowledged the competitive landscape, and has focused on leveraging their bundled strategy to retain customers. They also stated that they are looking to provide faster internet speeds and better mobile plans to compete.

High Debt Load: Charter’s high level of debt and rising interest rates have been a growing concern, as these factors reduce profitability.

Management has indicated its commitment to paying down its debt and that they have been taking a conservative approach towards any future acquisition to better safeguard financial stability.

Cord-Cutting: The increase in usage of streaming services has been directly cutting down the demand for traditional cable television. This trend is expected to increase.

The company is looking to counter this effect by combining video with internet and mobile offerings. Furthermore, they are promoting bundled offers, which provide incentives for its customers.

Employee Layoffs: Charter has recently started to implement layoffs to cut costs, which reduces employee and customer satisfaction and can impact business performance.

Although management has stated that these layoffs are necessary, it is expected that they would provide some negative backlash with respect to company morale.

Adversary Activity: There have been several reports over the past 2 years regarding potential vulnerabilities on the Spectrum network by possible foreign adversaries.

Charter has denied any involvement in such activities but also mentioned that a cyber security framework is in place to protect the network and its customers.

Bottom Line

Charter Communications is a complex business in a quickly changing technological landscape and a highly competitive market, the current market climate is forcing them to restructure their business, while dealing with high debt levels and the competition. Therefore the investment in this business should be done with caution and one should look for indications of an increase in growth and profitability, while also carefully considering the risks it poses and making a decision.