2023-10-24 04:41:04 ET
Summary
- Charter Communications has experienced revenue growth of 5% per year since its merger with Time Warner in 2017.
- The slowdown in growth is due to factors such as the pull forward of demand during COVID, increased competition from fiber and fixed wireless, and a low market activity environment.
- Despite these challenges, Charter expects growth to accelerate in the latter half of 2023 and beyond, driven by investments in the network, strong demand for Spectrum One, and the rural expansion initiative.
Since the Time Warner merger in 2017, Charter (CHTR) has grown revenues at 5% per year. This 5% growth was driven by internet revenue growing 9% annually, the video segment stagnating, and the wireline business declining, offsetting the strong internet performance. Coupled with the strong buyback program, that Charter employs, revenue per share growth has compounded at 15% annually.
Since the peak in 2021, revenue growth has been slowing down significantly. The slowdown in growth is being driven by a number of factors, including the pull forward of demand during COVID, increased competition from fibre and fixed wireless (FWA), and a low market activity environment. The pull forward of demand is a result of consumers having already made many of the necessary broadband upgrades during the pandemic, leading to lower demand for these services. Increased competition from fiber and fixed wireless is also contributing to the slowdown, as these technologies offer consumers more choice and flexibility. Finally, the low market activity environment is making it more difficult for Charter to generate new sales.
Despite these challenges, Charter believes that growth will accelerate, starting in the latter half of 2023, and be sustainable beyond that. This is because the company is continuing investments into the network and seeing strong demand for its Spectrum One product. Additionally, the company is expecting to see a tailwind from its rural construction initiative. The first signs of growth were seen in Q2 2023 as internet subscriber growth accelerated slightly.
In this article I will discuss the long term growth prospects for Charter.
Internet Revenue
Internet revenue makes up 41% of Charter's consolidated financials and has been the growth driver for the business in the past.
As shown in the chart and mentioned above, internet revenue growth has slowed down substantially since 2021 to 3.1% in Q2 . There are multiple different drivers which give Charter the potential to re-accelerate this growth towards its long term historical average of 9%.
Rural Expansion
The rural expansion initiative presents a significant growth opportunity for Charter. The company is well-positioned to capitalise on this opportunity due to its experience as the largest rural broadband provider in the country.
The government's Rural Digital Opportunity Fund (RDOF) and Broadband Equity Access Deployment (BEAD) programs will provide Charter with billions of dollars in funding to expand its rural footprint. In the recent RDOF grants, Charter took 20% of the whole grants amounting to $ 1.2 billion in subsidies. This funding will allow Charter to reach millions of unserved and underserved households and businesses.
In addition to the direct benefits of increased home passings, rural expansion also provides Charter with the opportunity to capture growth from new home construction. As rural areas develop into suburban communities, the demand for broadband services will increase. Charter will be well-positioned to meet this demand, given its existing infrastructure and experience in the rural market.
Charter's rural expansion efforts are expected to generate mid-to-high teens internal rates of return (IRRs). This is generated by a 40 % penetration of home passings after 6 months, increasing to 50% after a year.
Charter currently has 800,000 miles of infrastructure across the US. Through the RDOF program, Charter is expanding its infrastructure by 100,000 to 115,000 miles of new fiber-to-the-home (FTTH) builds. Additionally, the company has secured an additional 20,000 miles of infrastructure through ARPA and state grants.
In the near term, the rural expansion is anticipated to accelerate home passing growth. By 2027, Charter expects to have built an additional 1.2 million passings (300,000 per year). This represents a 30% increase over Charter's historical build pace of 1 million per annum. Along with the increased growth rate, as explained above, the penetration rate will be significantly better with roughly half of the 300,000 passings becoming customers within 12 months. This sets a base of 150,000 internet adds per year.
As RDOF funding starts to wind down, the BEAD program is expected to provide Charter with an even larger and longer runway for growth to the end of this decade, with the opportunity to expand its footprint significantly while driving mid to high teens rate of returns. The company is confident in its ability to win a significant portion of BEAD funding, given its strong track record of success in taking 20% share of the RDOF auction. I share this belief.
Mobile
Charter Communications is a mobile virtual network operator (MVNO), which means that it does not own or maintain its own wireless network infrastructure. Instead, it leases access to Verizon's ( VZ ) network at wholesale prices. Since Charter offered the mobile offering in 2018, revenue has compounded at 66%.
At only 6% of revenue in 2022 before it was combined into the internet segment, Charter has a significant opportunity to drive growth through its mobile business. The company has over 55 million broadband passings and the average household in its footprint has over 2 mobile lines. This means that there is a large and growing market for Charter's mobile services, of which it only accounts for 5% at the moment.
The company's mobile offering is more than half the price of competitors, and it is bundled with Charter's other services in its Spectrum One product. This makes Charter's mobile offering very attractive to consumers, and it is expected to drive higher sales of Charter's core products, create longer customer lives, and increase profitability and cash flow over time.
In addition, Charter's mobile offering is still in its early stages of growth, with over 11 % of Charter's internet customers now having the mobile service as well. As Charter continues to educate consumers on the Spectrum One value proposition, mobile penetration is expected to grow meaningfully over the next several years. This will also lead to an increase in the number of lines per household.
Although revenue is now bundled into the internet segment of the income statement (as of Q4 2022), Charter still breaks out mobile net adds. As you can see in the chart above, net adds growth is accelerating, demonstrating the differentiated value proposition that Spectrum One offers. Over the long run, the mobile business has the ability to drive significant top line growth.
Risks
Fiber competition
Fiber overbuild on Charters footprint (Charter Communications 2022 Investor presentation )
Charter Communications faces a significant competitive threat from fiber optics, which is a superior product in terms of speed, latency, security, reliability, and maintenance requirements. However, Charter has a number of advantages that allow it to compete effectively.
First, fiber is expensive to deploy, and it has not yet been rolled out to a large portion of Charter's footprint. As a result, Charter is able to offer its services at a more competitive price in many areas.
Secondly, Charter is in the process of upgrading its network to DOCSIS 4.0, which will provide significant speed increases. Once DOCSIS 4.0 is fully deployed, Charter's network will be able to offer speeds that are comparable to fiber for most customers.
Thirdly, Charter has a strong converged offering, which includes mobile phone service, video streaming, and internet access. This gives Charter a significant advantage over fiber providers, which cannot compete at the same price point as Charter.
Finally, fiber has built on the most economically attractive areas first. This means that the areas where fiber expands to in the future are going to be less economically attractive and allow cable to compete even more effectively until a point where it is no longer reasonable. In Q2 , Charter called out that they are seeing a slower pace of fiber overbuilding, suggesting this may already be the case.
FWA
Fixed wireless access (FWA) is a new technology that is disrupting the broadband market. FWA uses radio frequencies to deliver 5G broadband internet speeds to the home. This technology is predominantly found in rural areas of the country where cable & fiber passings are often limited or unavailable and DSL remains the only option. The two main providers of FWA in the US are T-Mobile and Verizon who, together, have amassed millions of subscribers in a short period of time.
FWA is a threat to Charter because it offers a lower-cost, more convenient alternative to traditional cable broadband in rural areas. FWA providers do not need to build out expensive infrastructure, which allows them to offer lower prices. Additionally, FWA is easy to install and does not require a contract, which makes it more convenient for consumers.
Again, Charter has a number of advantages that allow it to compete with FWA.
The first advantage is superior speeds and reliability. Charter's cable network offers faster speeds and more reliable service than FWA. Charter is also investing in upgrading its network to DOCSIS 4.0, which will provide even faster speeds over time as the world demands more from their internet providers. FWA doesn't have the same upgrade capabilities.
Secondly, fixed wireless faces capacity constraints in the most densely populated neighbourhoods. This makes deployment skewed towards rural areas where there is capacity on the network. As FWA cannot compete very well in the most important economic neighbourhoods, it is unlikely that they will be able to gain a meaningful share of the overall broadband market.
Conclusion
In conclusion, Charter Communications has witnessed a substantial growth trajectory in its revenues, primarily driven by its internet services, even with some challenges in recent times. The slowdown in growth, attributed to factors like the pull forward of demand during the pandemic, increased competition from fiber and fixed wireless. A low market activity environment is a noteworthy short term concern.
However, Charter is poised to regain its growth momentum in the latter half of 2023 and beyond. The company's strategic investments in its network, coupled with strong demand for its Spectrum One product and the Rural Digital Opportunity Fund (RDOF) and Broadband Equity Access and Deployment (BEAD) programs, provide substantial growth opportunities that, given their track record, I expect Charter's management to capitalise on.
For further details see:
Charter Communications: Long Road Of Internet Growth Ahead