Chit Chat Stocks - Charter Communications (CHTR) | Not So Deep Dive

Episode Date: June 28, 2022

Charter Communications is a broadband connectivity and cable operator. The company is the second-largest cable operator in the United States. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Lululemon. Enjoy the show!  This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here: https://streamrg.co/CCM  Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Contact us: [e-mail]  Timestamps  Company Background | (3:17)  Industry | (13:05)  Management & Ownership | (18:15)  Valuation | (22:14)  Earnings | (24:32)  Balance Sheet | (26:22)  Our Analysis | (29:25)  Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. This is the show where we go over the basics of an individual stock business company in about 40 to 50 minutes.

Today, it is just Ryan and I, and we're going to be talking charter communications. This was Ryan's choice, but in reality, it was my choice because Ryan told me to choose a different one for Carvana without getting everyone's brain in a pretzel. It is Charter Communications. Ryan, how was the research process for this one? It's a bit of an interesting business, but slightly complicated. Long, I would say. I'm not super familiar with the cable business, so it was a little bit of veggies for this one. and now I've got, I think,

a good grasp on Charter's business and hopefully that'll make it easier to apply to other cable operators. Yep, for sure. All right. And we're going to be talking about, yeah, of course, Charter, we're going to go through the business model,

broadband, mobile subscribers, all that good stuff, the buyback program and the debt, which is a big part of their strategy. But first we need to talk about Stream by AlphaSense. This episode is brought to you by Stream by AlphaSense,

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the bio as well. Yep. We'll get that 14 day free trial going for you. That is S T R E A M R G dot C O slash CCM. the link is in the show notes all right ryan introduce charter communications charter is the second largest cable operator in the united states so they serve more than 32 million customers across 41 different states through its spectrum brand so you may not have heard if you're uh that might sound more familiar to customers spectrum than charter that is kind of their

primary brand we had it in college we did you're stealing my anecdotal evidence there they uh while the cable space nationally is pretty competitive and there's obviously a lot of players and it's a pretty fragmented market, Charter still has a somewhat sizable market share within their specific local, at the local level, they dominate. So I saw, according to one report, Charter has an average market share greater than 60% in the markets where it's the incumbent. And it looks, just by looking at the map, it looks like they operate in a lot of rural areas so other like not necessarily big city markets there are they do cover big cities but for example we lived in a tiny college town in rural washington and they were the dominant

player if not the only player yeah and i think yeah and this may be our pacific northwest bias but i believe comcast is more in the big cities i don't know comcast as well so i could totally be wrong but at least in the pacific northwest comcast dominates you know the bigger city And through Spectrum, Charter provides essentially four services, which are offered to both – they sell to both residential and commercial customers, but most of their customers are residential, except for Voice has a little more small and medium-sized businesses. But overall, it's mostly residential customers, and they sell on a subscription basis. But the four product categories are internet, which is what they're most known for. So with spectrum consumers can get a bunch of different packages, a fixed internet or wireline internet. And so their, their entry level fixed internet download speed is 200 megabits per second across 85% of their footprint. That might sound like a bunch of nothing to most people, but for, I kind of just wanted to reference this for reference, the recommended internet speed for four or more devices is 25 megabits. Where did you get that source? Because I believe that is way, way too low that you would be yelling

at your internet. If that was the case, I Google, Google on this. Well, that is, I don't know if that's a DSL, big DSL trying to say that 25 megabits per second is good. But I think the key thing for any investor is that a spectrum can offer higher speeds than a lot of the legacy providers. Do you want to talk about just, I guess, sort of how their internet business works? Cause you have a better grasp on fiber versus. Yeah. It's not, it's not even fiber. That's the, that's their, their new competitor, but I mean, yeah, their, their infrastructure versus fiber.

I, okay. So there's, I'm not an, I'm not an expert on this, but I know that spectrum has broadband services, which is coaxial cable, a little bit of fiber, as they said in the annual report. And that offers that 200 megabits speed. And it's pretty solid. It's a lot better than some of the legacy. Obviously, it's better than dial-up. It's better than the DSL services.

And that's where they've been taking a ton of market share over the past two decades as people have needed better internet speeds. But then we'll talk about this in the competitive part. There's the competition from fixed wireless providers, and there's a competition from fiber-to-the-home providers. And fiber-to-the-home can offer a little bit better service, slightly better than the coaxial broadband stuff that, um, charter slash spectrum is doing, but it's not as big of a leap as say DSL to spectrum because any spectrum customer on here will know if you have the right,

you know, package, um, you're not going to have any trouble with internet, uh, lag, speed, all that good stuff. Okay. And charter services, 28.3 million residences across the country, or I should say Spectrum Internet does. And this segment is, it accounts for the largest portion of their business, and it's been steadily growing for Charter over the years. The second largest part of their business is video. And so this segment subscribers can, or this segment provides customers with a variety of choices on video programming packages. So they can get the video services either through a digital set-top box, which might sound like ancient tech for any of the, uh, under 30 listeners. Um, or they have a CTV device as

well. And I'm going to talk more about their CTV offering. Oh, the joint opportunity joined venture with Comcast. Is that what you're going to talk about? Yeah. Oh, cool. All right. They have a spectrum TV app for smart TVs as well. And so I'm sure it's robust. Exactly. What they're selling is the, the programming packages or the channel packages to these customers. This business has been in steady decline, as you might imagine, as smart TVs have kind of overtaken the legacy or linear TV providers. And so a lot of those set-top boxes are being replaced by Rokus, Fire TVs, stuff like that. And that's been sort of a uphill battle for Spectrum to climb. The third business that's important to them is the voice.

So these are wireline voice communication services. Well, this one's not, I don't know if this, this one might be meaningless, but this one, yeah, I guess the next two are now I would say voice is probably the most, they have a lot of residential customers. You can probably forget about it, but it's also a part of the business. Yeah. Yeah. And this also has, uh, the, the business side of voice is actually still growing. Um, but think landlines. So there aren't this Like video, this has been in a bit of a steady decline on the residential side. They offer unlimited local and long-distance calling, but I would say you should expect some steady decline in this business, especially on the residential side.

The S&P segment should likely grow. I think businesses still need phones. Maybe. I mean, this could be a whole other podcast episode, but remember Zoom and some of those other companies are trying to disrupt this that market true with the digital ones so we'll see yeah and then the fourth segment is mobile so spectrum mobile is offered to customers that subscribe to charters fixed internet service and it runs on verizon's mobile network combined with spectrum wi-fi so they're basically if you're using a spectrum internet you're basically

cross-sold the spectrum mobile which has been the fastest growing mobile provider in the country i I imagine that's on a percentage basis, but they talk about that and they have what they call the best deal in mobile, which is two phones, unlimited talk, text, and data for only $29.99 a month. It seems like a decent deal. And it's something I would personally explore if I were shopping around for a new mobile plan. This is the fastest growing segment for Charter, but it's still only about 5% of revenue overall.

Quite small. Yeah, quite small, but it's something they continue to push. and should grow hopefully over time. And then on the cost side, just for Charter's business overall, it's obviously high fixed costs because it requires a lot of spending to build out their infrastructure or their network infrastructure, which today passes more than 54 million households in the US. So theoretically, there should be operating leverage as this business grows and leverages all of that fixed cost infrastructure. But I'll move to the history. I think I covered the basics of the business enough. Sort of a convoluted history here because there have been

a lot, and I mean a lot, of mergers throughout the years. But Charter was founded in 1993 in St. Louis, Missouri by three former executives from CENCOM Cable Television. I'm not sure what the company is, might not exist today. But the three founders were Barry Babcock, Gerald Kent, and Howard Wood. They started by acquiring various cable systems throughout the 1990s. And by 1998, Charter had 1 million customers across the U.S. And in 1999, they decided to go public. Interesting note, 1998, Paul Allen acquired a controlling stake in the company. He's been sort of an influential figure throughout their history.

He relinquished the stake in 2009. Well, was, RIP. Yes. I mean, he was, obviously. But the 2000s marked even more acquisitions. And they even began swapping customers with other cable providers to improve their geographic clustering. So they would literally say, I think they did a 1.3 million customer swap, essentially, with AT&T that said, you get these customers, we get these ones to make it easier on their infrastructure. However, in 2008, Charter's stock failed to meet NASDAQ standards.

And in 2009, the company announced that it planned to file Chapter 11. I put in quotes here, restructuring, which is what they kept calling it, which was a bankruptcy filing. reduced Charter's debt by 40% or $8 billion, and it canceled the outstanding common stock, i.e. it left shareholders basically holding an empty bag. There was a lot of outrage, but that is what you're taking as a risk as an equity holder, as opposed to a bond holder. Charter emerged from it with a much cleaner financial position. They ended up changing management teams after this as well. They were able to relist on the NASDAQ. And in 2016, Charter acquired Time Warner Cable and Bright House Networks for just under $80 billion,

making them the second largest cable operator in the United States. So it's been a history of just gobbling up cable systems. And that's basically what's built them into the cable powerhouse that they are today. Yep. All right. I'll hit industry and competition. This is a dynamic one. Sometimes it's fun to just say that we're looking at an apparel company and just saying

people like to wear clothes. There you go. But this one's a little bit different. Like Ryan said, they also provide cable video, but since that's in runoff, I'm really going to focus on broadband and wireless competition here. So the industry TAM is basically internet users in the United States. So they're only in the United States and that's the majority of the population, probably 99% of the population. Now, broadband providers like Charter have an estimated 83% to 85% market share of internet users in the United States. This has steadily risen over the past two decades. Like we said before, when people needed higher speeds, they've steadily gone over to these better providers.

They're taking share from other slower providers like DSL and others. Now, competition is very interesting because in a lot of places, broadband has a virtual monopoly for the majority of customers who would never use DSL. So there might be other services that you've seen offered to you, but you're never going to use them. So it's essentially been a monopoly. However, there is some competition from new sources that are heating up. These can be put into three different categories. There is one, fiber to the home and fiber overbuilders. These are companies like AT&T, Verizon, Fios, Ziply, that's a local one for us, CenturyLink, and tons of small ones. There's a lot out there. By CenturyLink, do you mean Lumen now?

Uh, I, maybe I was looking at a website, CenturyLink, Lumen, whatever they are. So these fiber to the home and fiber overbuilders are increasingly adding, um, lines, which is just houses. They are able to service and the replacing DSL. So that is adding more legitimate competition for internet customers to a company like charter fiber is slightly better than broadband. Like I mentioned before, but basically equivalent for today's internet needs. Something to watch though, as an investor is these companies, you'd probably want to look at AT&T and Verizon's investor presentations and all that good stuff to see how much growth they're getting with their fiber customers. Then the second big competition, which is

understandable, and it's kind of, it seems all the cable providers are trying to compete with the mobile providers and the mobile providers are trying to counter position and compete with the cable providers. And there's this competition in this category called fixed wireless to the home. And that would be T-Mobile, Verizon, AT&T, and then some of those ancillary players that are on top of their networks. T-Mobile is the biggest threat here and pushing really heavily. And you should think of this as an offering similar to a mobile phone plan, but to your home. So you don't have that wired connection. Now, it's a little bit more inconsistent a lot of times. And I've read that it's not as the quality isn't there in a lot of places just because the wired connection

to the home is way, way more consistent, which makes sense. But T-Mobile especially is investing heavily into it right now. And that could be competing with customers. And lastly, there's moonshots out there like Starlink and Starry and others. I think Amazon's investing in some stuff. Yeah. Project Kuiper. Thank you. Those are some smaller threats right now, but don't need to cover it on this show. They might eat some customers at the edge. And then lastly, in mobile, Charter has a licensed spectrum from Verizon, like Ryan mentioned, and they're able to compete with the big three mobile wireless providers. They currently have 3.9 million mobile lines. That one's a little bit more straightforward, understandable how they're

trying to bundle the internet and the mobile plans to compete with AT&T, Verizon, T-Mobile. Here's the question I want to talk about. What competitor, not individual, but the type of competitor, do you think is the biggest risk for them, for Charter? Probably the fiber would be my thought, especially given that, I know it's not, I know the difference in quality isn't that meaningful, but just with today's emphasis on like remote work and how much data capacity or uh how much speed people need i think those companies can make a compelling pitch that

customers need fiber yeah and it might not even be the competition of taking customers it might force someone like charter to invest more capex than they thought they would to get their speeds up to par if you kind of get what i mean to keep their customers yeah yeah it just seems more like it seems more like a competition from all sides than any one big customer. They are sort of the main, I do like that they are positioned well in that their local markets, they're sort of the dominant player and they aren't having to compete with sort of the big providers like a Comcast.

Yeah. Yeah. That makes sense. I think someone like Altice USA has way more competition from Fiverr, but don't have the data in front of me. Management and ownership. let's move to that pretty simple one uh in ceo uh and chairman of the board is tom rutledge penn the ceo since 2012 so right after the bankruptcy he took over the stock has more than doubled the s p 500 total return during that time span by my quick math i think it's even more than that really uh 43 years of experience in the cable industry and fun fact a member of the cable hall of fame inducted in 2011 so congrats to him that it must be it was

was on the bio. His base salary is $2.5 million a year, $8.9 million cash bonus last year. And the metrics on those hurdles seem fine, but not the best ones. They had a little bit of adjusted EBITDA in there. And then they had $30 million in annual option grants going to Rutledge, also based on long-term stock performance. Now, the second person, I think, if you were interested in the company, you'd probably want to research further before you buy the stock, is the CFO, Jessica Fisher. She has been at Charter since 2017 and then worked in traditional finance and consulting roles. Before that, she manages treasury, accounting, et cetera, and is in charge of the buyback program. So measuring that, they run a really levered strategy.

So it's very important that she manages it properly. And with rising interest rates, they might have to thread the needle a bit. We'll talk about that maybe later in highlights and lowlights. And then in general, executives are getting paid heavy stock option grants based on long-term share price performance. This is not a bad thing. It's kind of good to have those incentives alive sometimes, but this will be a slight headwind on share count reduction for that buyback program. Okay. And Liberty Broadband, let's get to ownership here. Liberty Broadband owns 27.6% of the stock. That is a, as people probably can guess, a Liberty Complex, one of the Liberty companies. We don't need to go into the details of that.

It'll be a whole nother episode. But Advanced Newhouse also owns 12.55% of the stock. And TCI Fund Management owns 5.12% of the stock. Rutledge owns about 1.1%. There is a heavy influence with the Liberty Complex. Both Liberty Broadband has three members on the board and a and n i believe has two uh liberty people here positive or negative for you i know they're the you know malone and all the um people in his quote-unquote coaching tree i guess as you describe it are you know the cable industry so i i don't know what are your thoughts if they own the common stock if that's the portion of their ownership that you're talking about that to me is a great sign uh just given their history that uh they uh they winning cable

common stockholders out to dry in the past well yeah charter has yeah that is the big risk so it kind of gives me a little bit of confirmation having john malone or the liberty team on your side assuming that you are similarly aligned with them yeah that is true i think everyone here wants the stock price to go up i think that is the case they all have a lot of ownership uh but interestingly fisher the cfo kind of underpaid i think i was looking at her compensation way way lower than rutledge um i think it was base was less than a million and options weren't nearly as high. So let's pump that up. She's a very important part of this team. You know, the buyback is a huge deadline. Maybe the first time I've ever heard you complain about low executive competition.

Well, you know, yeah, you get paid for the value you provide. She's getting paid under a million a year. I mean, obviously, if you're getting paid like $700,000, I don't think you're, you know, you're not banging on the streets, but hey. It's for you. Credentials to advance, confidence to stand out in your career. At Regent University, you'll join more than 30,000 world changers making a difference in high-demand fields. Pursue your bachelor's, master's, or doctorate online or on campus in Virginia Beach. Your degree from top-ranked Regent University is waiting. So is the world you will elevate. Say yes to your purpose and position yourself for a brighter future. Visit regent.edu slash learn more. regent.edu slash learn more. All right, valuation. Given

the debt load here, liabilities, value and charter is a bit more complicated. And there's actually some debate on what should get included in the enterprise value, but I'm going to keep it simple. All I did was cash, short-term debt, long-term debt. Market cap is $87.5 billion using fully diluted shares outstanding plus exchangeable shares in, I believe it's the advanced new house ownership. Something there we don't need to go into on this episode. They have some weird structures that could add some shares that they convert some, what are they called? Like holding units. They love complicated stuff. So yeah, but they do outline it in their investor presentation. So I use that one to get that market cap. Enterprise value is $180 billion. You read

that right. Due to heavy amounts of debt, they target a four times to four and a half times debt to EBITDA target, which basically means they want their debt load to be about four times the size to four and a half times the size, they're trailing 12-month adjusted EBITDA. And what was that? About $21 billion. So as their adjusted EBITDA grows, they're actually going to take on more debt. That is their strategy. Yeah. In other words, it's how many years of their current EBITDA would it take to pay off all of their debt? And right now they're running at about 4.43 times. So it'd take about just under four and a half years, assuming that EBITDA stayed consistent.

Exactly. All right. And then the most important metric here, and the key one to track, is enterprise value to trailing free cash flow. And I have that pegged at 21. They're also a heavy repurchaser of stock. According to the Q1 presentation, they have bought back 42% of shares outstanding since September 2016. Also note here in the valuation, I did not include $20 billion in deferred income taxes and their liabilities. This could become a headwind on free cash flow growth this decade because they are going to, I don't have the exact numbers, I didn't outline the exact numbers,

they are going to start becoming a heavy taxpayer to the U.S. government. So that might lower their free cash flow margins. Okay, let's touch on earnings. So their total revenue, I'm just going to talk about the first quarter and you can try to just annualize it. I'll give you some of the trailing numbers, but let's go with the first quarter for starters. So total revenue during the quarter was $13.2 billion.

That was up 5.5% year over year, roughly. Internet contributed the most to that growth. Video stayed relatively flat year over year. Voice declined by about 2%. Like I said, that's sort of a terminally declining business. And then mobile, which is still only about 5% of revenue, grew up 40% year over year. On that $13.2 billion in revenue, about 39% of it, they generated in EBITDA or earnings before

interest taxes, depreciation, and amortization. So $5.2 billion in EBITDA in the first quarter. That was up also about 5.5% year over year. Only about $1.8 billion in free cash flow. This was actually down year over year, but if you exclude a one-time litigation expense, it grew about 9% year over year. So to bridge the gap between EBITDA and free cash flow, the two big expenses for them are typically interest on that debt and then capital expenditures. This quarter, they had just over a billion dollars in interest expense and they had $1.9 billion in capital expenditures. Some of that is mobile related, but the majority is related to the build out of their internet infrastructure. Right. Because the mobile is on top of

Verizon's at the moment. So it's going to have lower margins, but they're just free loading off of Verizon. Yeah. So to summarize, I guess the earnings, it's a business that's growing slowly but steadily through both subscribers and small price increases. And then it's steadily increasing its margin since the bulk of its cost structure is fixed. So they've seen margin increases over the years. But to talk about the balance sheet and liquidity, as Brett has alluded to, Charter is a company that uses a ton of debt to grow. So they have $95 billion in total debt, $4.5 billion of that is current. About $90 billion of it is long-term.

The average cost of that debt or the weighted average cost is 4.6%. And the weighted average life of the debt is just over 14 years. 92% of the debt matures after 2024. So some of these bonds or loans are not due until like 2063. They have some really long-term debt, which is interesting. And they're going to continually refinance stuff. So it's really about the interest payments and the service, the servicing. Right.

And so they just keep in mind that there's going to be a ton. When we use the EBITDA figure, that is not the most relevant proxy for actual earnings because there is that giant interest expense plus a lot of CapEx. And so- But the ratings agencies, that's what they use. So it's a bit of a conundrum, but you have to like follow it, but it's like you want to track free cash flow, but on their debt ratios, they're using EBITDA. EBITDA is a fair metric to use to pay when you're trying to find the earnings that it will take to pay off their debt.

Correct. But after debt, it's not that relevant to stockholders. And then their current cash and cash equivalence balance is $2.4 billion. So $2.4 billion in cash relative to about $95 billion in debt. They run this thing pretty lean. um the other thing i'll say you already mentioned it but their current leverage ratio is 4.43 times that's total net debt divided by the last 12 month ebitda over the last 12 months they generated about 21 billion dollars in ebitda so i wanted to pull a quote to kind of summarize the balance

sheet that i found really interesting and so this is from andrew walker who runs the yet another value blog uh feel free to go check it out he's done some really good work on charter but he says Most Liberty Stans know this, but Charter is a classic John Malone company in that it pursues a levered buyback model. This means that as the company grows earnings, they take out more debt, which they then use to buy back shares. An example might show this best. Say EBITDA this year is $10 and the company commits to five times leverage. That means they need $50 in debt. If EBITDA grows to $12 next year, the company needs $60 of debt. That means they'll go borrow an additional $10 of debt to bring their debt from $50 to $60, and they'll give that $10 a share to

shareholders in the form of a buyback. On top of that, they'll generally give whatever free cash they generate to shareholders as well. I know that's probably a little hard to wrap your mind around, but they use debt, not only to finance growth, but also to return cash to shareholders. Is that the best way to summarize it? I think it was summarized great, although I'm reading it so in audio format just think more profits they're gonna have more debt I like how he said they need to take it out I was like I don't know if they need to but that is their strategy this episode is brought to you by La Quinta by Wyndham here you are miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham they have free

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Ryan, you had the small town one. Anything else or should we move on? I mean, I was satisfied with my spectrum internet. They're fine. They're good. Were they the only provider in the town? I think so. I think so.

and they had like a shop you know so you went there it was it was fine good customer service uh you had i don't know we had the cheap ones though just because of college so it's it's hard to get a good grasp and college people it's you're on campus and stuff so it's slightly different they did try to upsell me on the spectrum tv app uh they asked me what i do for my video needs i said i have a roku i was not compelled to take it at all yeah well and it honestly could have been cheaper than i i use youtube tv and i guess this is kind of important and it's a password share granted with some family members but i use youtube tv and my first thought was like i don't want to bundle any of this together just give me my internet needs and i'll deal with anything else

with someone else. Yeah. Okay. Yeah. That makes sense. Um, I, my anecdotal evidence or Comcast in our area. So it's tough to really get a grasp, but the mobile strategy from both those seems solid. I would definitely go after that if I was looking for a new provider. All right. Future growth opportunities, Brian, what do you have? It looks like Comcast JV on what these joint these uh i don't even know what they're called flex boxes yeah so they recently last quarter charter and comcast announced a joint venture this is apparently a 50 50 venture to push comcast flex streaming platform into more homes so comcast will be licensing flex to charter so charter spectrum subscribers will get access to the interface so flex boxes i believe are

being given away for free to new broads new broadband subscribers i use the comcast smart tv interface and it's fine it's not like my ideal choice um it's okay share it with other people i think it's okay um i'm not sure exactly how it benefits charter maybe the spectrum app will be embedded on there and well uh i'm guessing it's revenue share but i didn't look into the deal quite too much but isn't it just to not lose customers to roku and amazon and google yeah i think as long as it's if it helps retain video subscribers then i think that's great and not even subscribers just like they don't need to be subscribed to the cable bundle even right it's not just that it's beyond that people that have cut the cord aren't going to necessarily

they go to roku that's the goal right that's that would be fine i guess if they had that revenue share with comcast which is what i'm kind of guessing the economics are behind the deal i'm not optimistic on this though no because yeah and anthony wood on the conference call and he's the ceo of roku he addressed this and basically said i don't know how they think they're going to compete we've been at this for 10 years yeah i don't even think this starts for a few years if i'm not mistaken yeah it's gonna be it would be like roku or amazon or google i mean google at google fiber going in to try to compete with their core stuff i don't think it would work i think it's way too late to the party yeah i wish they comcast and charter would just invest

like a big stake in roku and just do a partnership or something like that you know what i mean yeah that would make way way more sense it feels that feels a bit like uh not monopolistic but everyone's trying to you know uh if you know what i mean if that feels a bit antitrust or anti-consumer to you know attach yourself to someone like that i don't even know if roku wants that but i'd much rather them spend a billion dollars to acquire um 10 of roku i think one one problem i guess with Spectrum's video strategy or their cross-selling strategy with some of these other services

is that the younger, and maybe I'm just speaking for myself, but the younger generations, there seems to be a lack of clarity around what you're getting with Spectrum when they're trying to offer you cable as well and various video needs that it almost just feels cleaner for me to say,

all right, I'm just going to take Roku. I'll get my Netflix. And then if I need cable needs, I'll go to YouTube TV or something like that or I'll find a new provider. It just, it feels messy. Yeah. Branding. You don't know what you're getting. I agree with that sentiment as well. All right, let's move into mine. It's mobile. We talked about what it is. They're getting great traction. They have 3.9 million subs and apparently account for 30% of wireless net ads over the past year. Now that I believe is

Comcast and Charter combined. So basically in their geography, Charter's geography, they account for 30% of new mobile wireless plans, which is great traction. If the segment can continue growing and get to profitability, this can be great for the bundle for charter, bundling home internet and mobile. Now, two things to watch are, or one thing to watch is the profitability. It's still losing money. And that could mean that EBITDA margins and free cash flow margins could get higher over time and there could be a nice inflection you know in the next five to seven years but at four million subs they're not profitable yet when are they going to get there this is probably going to

be lower margin just because they're on top of verizon's network and they have to pay them but overall it could be a great even if it isn't that profitable it could be a great way to fight off competitors for internet subscriptions with that bundle yeah i agree all right highlights and lowlights ryan highlights for me i think the core internet business is very durable it's a service that everyone needs um and it allows them to take chances on some of the other uh verticals that they're going after uh and it's also just good unit economics as well uh very profitable in that segment however or i guess this was a highlight for me but it sounds like i may have missed something. Well, historically it was, if I'm reading what you have. Yeah. The general

structure of a cable operator has been tax efficient in the past. At least that's the way I've understood it. They get to depreciate their infrastructure assets and deduct their interest expenses, which are their two primary reconciliations between EBITDA and cashflow. So that's like that to me. I mean, they only paid $27 million in cash taxes this year or this quarter on $5.2 billion in EBITDA. But if they've got, what was it, $20 billion in deferred income taxes, I may have misread on that one. yeah and we don't they didn't say specifically how much they're going to start paying but they said they are going to be a quote material taxpayer in 2022 and beyond so yeah watch out for that i don't know exactly how big of a hit it's going to be but it's going to be a hit okay and then low lights for me is well some of their business segments are in steady decline i don't

have faith that they'll be able to turn around the video business at all. So I think it'll just kind of be a runoff of subs over time. Same with the voice other than maybe even the business segment as well. But the voice and video, I'm not a big fan of. And then also carrying the debt load that they are. And I know some investors are more comfortable with it than I am, but it feels like they're flying close to the sun. It's fine right now, given the stability of their earnings and their business and just how recurring in nature it really is. But any long tail risks, so I'm thinking like Starlink or Project Kuiper, theoretically, if those ever worked out and there was any permanent impact or impairment to charter's earnings, that means common stockholders

are in for a world of hurt because that leverage ratio will start to creep up. They have to pay down that debt on diminishing earnings. You can see how the cycle turns into a 2008 scenario. Yeah, yeah, it definitely happens with all debt burden companies. Yeah, that is correct. Yeah, Starlink and Project Kuiper, I would give a very, very low probability of defeating them just because it doesn't work in high density areas. but who knows they could put up or even the onslaught of like fiber providers like that's

that i mean that's the bigger competition yeah just like if enough competition seriously eroded their earnings power in some way if defining businesses and if competition increases and there's you know the risk of pricing wars right we'll see we'll see highlights for me there's a clear moat just from uh geographic moat yeah i mean they have they have the fixed drugs the fixed infrastructure plus you know regulated regulation stuff which we didn't really get into it's not too important but kind of interesting to look into and also a lot of the times they're monopoly which it's very very moaty you can see why buffett owns a big stake in charter uh great Capital Allocators at the helm. I'm speaking of the new team, obviously the one that went bankrupt.

Rutledge is at the helm now and he has such a good track record and he seems to really know what he's doing in the cable industry. I love how they're trying to position themselves with the mobile offerings. I think that is a very, very sound strategy, even if we don't know what the margins will be at scale. They should be accretive though. And again, like I mentioned, And if churn goes down, that's great. Now, another repurchase strategy, reducing shares outstanding by that much is also, you know, shares outstanding go down. It's almost always a good thing if the business is stable.

Now, lowlights, competition from Fiverr, we already talked about that. Heavy debt low, we already talked about that. But I would add on to it, if interest rates rise while they try to refinance over this decade, and I believe they have 13% of their debt at variable interest rates, their interest expense could rise significantly. I know a lot of it's fixed rate, so it's not going to happen overnight, but I still think that's a risk for free cash flow. And then here's a couple of questions I have that I don't really know. I think they're risks. Will CapEx stay elevated due to the competition that we outlined? Is saturation for broadband closer than we think

with about 85% market share? Is mobile ever going to make money? And what if the video business subtly falls off a cliff and say sports rights all go digital cable bundle collapses i think those are kind of the big questions need to ask as a shareholder all right bold case ryan i'm gonna let you go first because you put some numbers behind it so i don't want to just repeat yours okay so i uh i put some numbers down we're gonna start maybe giving out uh google sheets that we use for these, for any sort of like bull and bear cases. It'll be nice to have to link for people. I know the numbers can get messy to hear. Yeah. So I'm going to link that so you can read them if you're really interested in kind of the bull or bear case, what we're outlining,

what we think is reasonable to happen. I modeled out 4% annual revenue growth. Remember here, the video business is declining. So there's a headwind there. I modeled out 100 basis points, which is 1% expansion in adjusted EBITDA each year and consistently better conversion to free cash flow and share count going down by 5% a year. This gets you a free cash flow per share compound growth rate of 19% through 2025. Given the current EV to free cash flow about the market average, I would think you would do well in this scenario. But I don't know, do you have anything else to add for a bull case until we get to the bear case? Well, I would just say, I guess some of the drivers behind that. I think if they're able to stabilize their video business and maybe

that Comcast partnership ends up working out, um, and they see continued progress with their internet business, with their, with their internet business, um, shareholders will probably be all right. I think the path to two to 3% annual growth in subscribers and two to 3% annual growth in pricing. They need to lobby for some immigration. That's what they need. Yeah. I mean, that would definitely help help their tam uh but two to three percent in both subscribers and pricing seem reasonable to me and if that happens uh i imagine shareholders are going to be uh more than happy with the results all right bear case i'm sure we talked about these a lot already but what do you got for yours well i think that the the decline of the video business is a real risk

and then uh competition in the internet space slowing subscriber growth potentially um and even it doesn't like completely eat away at their subscribers it could potentially limit pricing power just to have like a whole bunch of substitutes or alternatives um i know that they're still the dominant player in a lot of their local markets but just this is the bear case so it's i wanna i wanna present some of the risks uh if those two things happen i think uh there's a world where charter could see flat or declining revenue yep and the part of the thing with the video too is that could increase churn because the bundle dynamics so if if people are only subscribing to internet uh and they're not on the cable video subscriptions anymore

are they at more risk to leave we'll see um my bear case yeah i had those same things but it kind of led me to model out flat revenue stable adjusted ebitda margins and then weak free cash flow conversion due to high capex needs to compete with everyone and high interest expense like we outlined before with interest rates rising, blah, blah, blah. In that scenario, they're kind of running in place. They're able to buy back stock like they want to do. And free cash flow per share would only grow by 8%. Now, the floor seems high, which is great. But there's a risk, I think, that the stock price is still in between the same $400 to $500 range, which is right where it's been now after the 2022 sell-off in 2025. I mean, there's some of that risk that you outlined about

things kind of collapsing, but I really think that's unlikely. Yeah. Especially any sort of dramatic drop, it seems the most likely scenario is probably some steady decline in that video business. And maybe a realistic bear case is that internet growth is just a little slower than the market's projecting. Yeah, alright More or less interested, last question It's in my two-heart pile Really?

I do struggle with The technological side On the infrastructure part I don't quite understand If they have a network advantage Over some of the other players But I also just have a two-heart pile

In terms of, I don't know where these industries End up in 10 years Who's going to be a gainer or a loser So For that reason I'm out I think I'm more interested Because at a certain price It feels like

It'd be really really hard to lose money You can kind of get low risk returns if they're able to buy back So much stock However I have the same concerns as you Where it feels like They're playing A bit of a hard game now Competing with

it's not a monopoly anymore and they're competing with at&t verizon t-mobile um the competition just concerns me a bit i know that sorry what'd you say cricket wireless yeah well we'll discount them but i yeah plus the interest rate risk just concerns me and i know it's not that big of a deal because they have the fixed debt and they're very very smart at that It just still concerns me because it's outside of their control a little bit. And then the CapEx needs, I don't, that just also makes it less quality, lower, sorry, not less quality, lower quality to me. So I think there's easier bars to jump over to give that cliche that everyone talks about.

and it's pretty easy to envision you not losing money and getting solid returns here. But I, I think there's a bigger risk of running in place for a decade. If you get what I mean, I don't know if that'll happen, but I think there's a risk here and that's kind of why I'm not interested. But Buffett owns it. But Buffett owns it. And I think, well, he's probably, well, he owned it. I think he's owned it, you know, well, it's done quite well.

yeah it doesn't mean he has a decent doesn't yeah it doesn't mean he's buying shares now all right stock for next week i believe it's my turn and i forgot because i in my head i thought this was my show let me look at my watch list here see if there's any ones that we haven't covered we've already got chipotle on the docket yeah that's with brad that's with brad for probably two weeks from now um did rh at farfetch what about digital turbine did we cover that recently someone just recommended that yeah that's a hot before that's a hot one apps apps yeah yeah that's i want to make sure that's all right we did that like two years ago but i'd be down to revisit it for sure all right wow it okay last three year returns up 266 in the last three years but year to date

down 71%. Sounds like an interesting company. Yeah, it definitely was part of that bubble there. All right. Well, we're going to be doing digital turbine next week. That's going to do it for this episode. Give us a review on Spotify or Apple. If you enjoyed the show, it takes five seconds to get it done. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.