Liberty Broadband Corporation

Moat: 1.5/5

Understandability: 4/5

Balance Sheet Health: 4/5

Liberty Broadband Corporation is a holding company primarily owning Charter Communications (CHTR) stock. It also has some investments in other companies.

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.

Liberty Broadband’s value is significantly tied to the performance of Charter Communications, as a vast portion of its holdings are in CHTR stock. Therefore, the analysis will focus on CHTR’s business, moat, risks, and financials.

  • Business Description
    • Charter Communications, a prominent player in the telecommunications industry, is a broadband connectivity company primarily operating in the United States. They provide broadband internet, video, mobile, and voice services to residential and business customers.
    • Its operations are focused on serving customers, with a focus on growing their Spectrum brand, which is their name for its high-speed internet, cable TV, mobile, and landline phone service offerings.
  • Revenue Distribution
    • Residential segment: Revenue from residential internet, video, and voice services. This segment constitutes most of the company’s revenue. Internet contributes the most, followed by video.
    • Business segment: Revenue from services sold to small and mid-size businesses including internet, video, voice, and cloud-based solutions.
    • Mobile segment: Revenues from sales and service of wireless and mobile broadband communication devices. This segment is growing.
    • In recent years, Charter has been shifting its focus from video to internet services. The growth in internet users is more than offsetting the decline in video subscribers. Also, mobile services are a new revenue generator.
  • Industry Trends
    • Convergence: Traditional telecoms and cable companies are competing with internet, mobile, and streaming companies.
    • Cord cutting: Customers are cutting the cord (removing their cable/satellite TV) and moving to streaming services. The rise of streaming has changed the landscape of media consumption.
    • Broadband Demand: Increasing demand for fast internet access, especially to support work-from-home, education, entertainment, and other data usage.
    • Mobile Adoption: Fast growth in the use of mobile devices, smartphones, and tablets has increased the demand for reliable wireless services.
    • Regulatory scrutiny: The telecommunications industry faces continuous regulatory changes.
  • Competitive Landscape
  • The broadband and cable industry is highly competitive, with a mix of entrenched companies and new entrants. The competition is primarily based on price, service quality, availability, and reliability.
  • Telecom providers: They provide phone service, television and broadband internet services. Companies like Verizon, AT&T, Lumen Technologies, and Frontier communications are major competitors to Charter’s cable networks. * Cable TV providers: Compete with Charter’s Spectrum TV with similar service offerings. This list includes Comcast, Cox Communications, Altice, and Cable One. * Satellite providers: Compete with Charter’s Spectrum TV by providing subscription TV options. Major satellite providers are Dish Network and DirecTV. * Wireless providers: They provide mobile service and, increasingly, fixed-wireless internet service. Compete with Charters mobile service. T-Mobile and Verizon are the major mobile providers. * Internet Service Providers (ISPs): Other ISPs are providing competition from new, innovative, more affordable services such as Google fiber and other FTTx services.
  • Moat Analysis
    • Scale:

Charter has a significant scale and distribution advantage, especially with the residential segment. As a huge cable and internet provider, it’s extremely tough for new entrants to compete. However, scale is a more important factor in local markets. * Switching Costs: * Switching costs for broadband and other services are generally low as they are relatively standardized products. In a market where the consumer isn’t locked into a long-term contract, switching to a competitor can be very easy.

However, when it comes to bundling services, Charter can retain customers since it is more difficult for users to change multiple services, and to get discounts by bundling products. This would classify as moderate switching costs. * Network Effect: * The company does not rely heavily on network effects to retain customers; however, scale does matter somewhat, and more network equals better services. * Intangible assets: * The Spectrum brand, however, gives Charter a competitive edge. The Spectrum brand itself is an intangible asset because of how reliable it is, and its reputation. * Moat Rating: * Based on the above, the moat rating is around 1.5 out of 5. Charter has some competitive advantages based on the scale of its business, and customer switching costs, and to some extend their brand, however, competition from other telecom, cable, mobile, and internet companies are high which puts pressure on its margins, and also prevents it from having a wide moat.

  • Risks to the Moat and Business Resilience
    • Technological disruption: New and innovative technologies pose a significant risk to Charter. Fixed wireless and fiber technologies could prove to be far superior to cable and even potentially replace cable entirely.
    • Intensifying competition: As more providers move into areas, this competition can erode profitability. It is not a winner-takes-all market.
    • Cord-cutting: As the market continues to be saturated, and customers continue to switch to streaming, this can put pressure on the margins and profitability. The company is addressing this risk by creating and expanding its Spectrum mobile brand.
    • Regulatory risks: A regulatory change could also threaten the profitability and growth. For example, an increase in municipal broadband could reduce Charter’s market share.
    • Economic conditions: The performance of a company like Charter is correlated to the economic conditions. If a slowdown happens, customers could cut on services.
  • Financial Analysis
    • Revenue growth: Charter has seen steady revenue growth in the past, driven primarily by new customers in both residential and business. Internet is the main driver of the growth.
    • Profitability: Margins have been relatively stable in the past, however, the recent acquisitions have caused a slight margin decline. Operating margin is around 20% which is healthy for this type of business.
    • Cash Flow: The company generates a lot of cash flow from its operations which allows it to reinvest and pay down its debt. The company had $869 million free cash flow in Q3 2023 which represents a growth of 41% on a YoY basis.
    • Debt: The company has a fairly high amount of debt, with a debt-to-equity ratio of about 1.5, which is in line with other communications companies. High level of debt creates a risk in time of economic slowdown.
    • Liquidity: The company also has good liquidity as they have around $1.9 billion in cash. The company has a good runway to operate the business as the debt repayment is spread over many years.
    • Capital expenditures: The company had CapEx of about $2.2 billion in the first 9 months of the year which is 13.5% of revenue. CapEx is crucial for keeping up with competitors, as it is used to invest in building new technology infrastructure.
    • Earnings Call Insights
        • The company is growing its total revenue and EBITDA faster than the previous few years, partly because of the increased investment in infrastructure.
      • The company added 49,000 mobile customers in the recent quarter, and has more than 7 million mobile lines.
      • The company is seeing an increase in fixed mobile convergence (FMC), with a lot of customers using the services together.
      • Management said they are planning to bring a new advanced broadband technology, called Xumo, that will provide a new, advanced way to watch tv.
      • They also added that 5G spectrums is becoming important to their business.
      • Management said they are focusing on reducing the churn in their customer base.

In summary, the company has had a consistent revenue growth in the past, and has a large subscriber base, which indicates a loyal customer base. However, to continue to create value, the company needs to execute well on its broadband and mobile products, especially since the competition in the space is very high.

  • Understandability Rating
    • The business model is fairly straightforward, it provides internet, TV, voice, and mobile services to customers, with internet being the main revenue driver. The core service is easy to understand. This makes the business relatively easy to follow. Therefore, a rating of 4/5 for understandability is fair.
  • Balance Sheet Health Rating
    • The company has large amounts of debt, which poses a risk to business if interest rates rise and can impact profitability of business. However, the company generates a lot of cash and has substantial liquid assets, which makes a strong argument for rating its balance sheet as healthy. Thus a rating of 4/5 is good enough for balance sheet health.