Thursday, December 10, 2015

Charter Communications (CHTR) comments at 43rd UBS Conference (12/08/2015)

43rd Annual Global Media and Communications Conference
Charter Communications (“CHTR”)
Speaker: CEO Tom Rutledge
Tuesday: 12/8/2015

Notes:
·         Been through most states and cities, very few approvals to go: New York, Hawaii, and California
·         California has given CHTR far out date, trying to move that in, no response from them yet
·         DOJ & FCC – already submitted all documents
·         No surprises thus far through the deal process; will be smaller company than existing Comcast (CMCSA), not vertically integrated like CMCSA
·         Have made comments and actions to be more favorable for customers and other business, such as Netflix
·         Have had conversation with Netflix (“NFLX”) over how to get them involved in CHTR’s product set
·         Have worked with field people and call centers on integration, which is about 90% of the employees
·         Know that CHTR has to create go-to-market strategy to attract customers
·         CHTR has the highest penetration on “fat basic” – a valuable product that customers can relate to, and thus growing video, voice, and internet business
·         Will have to do all-digital at Time Warner Cable (“TWC”) that will take a couple of year
·         Will have to bring calls back on-shore as some are still off-shore
·         Will have to make sure quality of service calls improve by hiring more expensive, high quality people to answer those calls
·         Big issue: can CHTR pull of the execution? Believe we can do it.
·         CHTR believes in putting a two-way interactive box on every outlet, and they have been putting one-way digital/analog boxes, which gets data speed, but still need to do it the CHTR way
·         CHTR believes the future is “on demand” and two-way interactive, every TV that is connected should be two-way interactive experience
·         $800 million synergies still good? It may look conservative compared to Altice’s projections (laughs), and maybe we are –programming synergies is about 50% of that number, operating synergies as well.
·         Believe margins will improve over time, most of which coming from just being a better service organization, improving the quality of the products by investing in them, the service, and how we relate to customers, can take costs out of the business
·         These take upfront costs – training, hiring – which are operating expenses, but should result in a higher margin because it takes transaction intensity out of the business
·         Also working on taking capital out of the business, such as set-top boxes, downloadable security, a process can buy multiple STB from different vendors, can deploy them in a different way.  
·         If you look at CHTR’s curve for capital intensity, it peaked in 2014 and is coming down. Similar curve for new assets, but new company will be more efficient than old CHTR because of (1) Worldbox being developed already, (2) all-digital strategy already developed, just needs to be implemented through new company, and (3) TWC assets are in better shape than old CHTR was, since coming out of bankruptcy.
·         Old CHTR went through bankruptcy and coming out of bankruptcy has a lot of deferred maintenance costs. A lot of work was being contracted out. Had to walk out and look at the physical infrastructure – 200,000 miles of assets – and made a list so CHTR could go all-digital. CHTR hired people to improve customer service, etc.
·         Bright House already has good customer service, TWC is pretty good
·         2 year investment process? Parts are shorter. Pricing and packaging will occur right out of the gate. Will need to do two-way interactive for TWC, but will be different rollout than CHTR did. Still a capital intensive project.
·         Competition? Very competitive environment, CHTR lost video subscribers for a decade. CHTR will have positive video sub growth in 2015, expect to have positive video sub growth in the future. Why is that? Believe CHTR video better than competitors video, specifically satellite. If overall pie isn’t growing, still believe can take market share. Do this by making our product superior. TV is becoming a more “on-demand” product.
·         Spectrum Guide update, and Worldbox? Worldbox is finished, ready to deploy. Spectrum Guide is finished, still testing it in Reno and Dallas/FW. It is complete, it works, is backward compatible user interface, that works on all CHTR boxes. Worldbox helps free CHTR from just buying boxes from two companies. Since it created a market shift, helped big time on pricing. A lot of value has been received by CHTR, new company will see a lot of improvements in pricing.
·         Churn? Churn rates going down, costs per customer going down from operating expense level, service calls are declining. This creates more satisfaction, thus customer life increases, which means churn goes down, which means costs per revenue goes down. This is how you reduce costs in the business. This also means less disconnect, so less disconnects with same amount of new connects means more growth.
·         Rollout? Have to be careful how you roll things out, because it negatively disrupts customers as they have to learn something new. High quality search-and-discovery on a user interface, that can change as tastes change
·         Over-the-Top video a threat? From broadband perspective, want to sell a really high capacity broadband, put network in position where can incrementally increase capacity at a low cost, thus differentiates from competitor. To realize these differences, consumers must use video on the network. Want OTT providers to go to 4K or 8K, thus network is perceived as more valuable. A lot of content companies went in streaming arena without a true strategy. Notion of “video space” is not a valid concept. Video comes back to digital world to the TV. Now content companies are reacting to their own bad behavior, but OTT helps CHTR control costs of content and increases need for broadband.
·         Password Sharing? Big deal, if you ask young people, all have someone else’s password. Real problem is content company have their own sites, but no uniform control over the stream. Can go to LA, NYC, and Chicago simultaneously, implying large password sharing. One account know of has 30,000 concurrent streams (laughs). The value of all content comes from the copyright.
·         Skinny bundles? Testing the cable service on a Roku box, specifically. Skinny bundles have been sold for years – for example, Basic only. It is about 15-20% market share of cable sold. While would love to buy everything a-la-carte and sell it in packages, that is not the way it is sold to CHTR. A lot of people want cheaper TV. But to get cheaper TV that satisfies is the hard part. Currently, have to buy all of a content companies offerings and package it the way they want. Can’t package it in a niche way CHTR wants.
·         Strategy for business? Want to put small Wi-Fi router in each small business, can have more mobility for customers.
·         Ultimately mobile platform is what CHTR wants to reach to, where the customer is moving, measured in megabits. CHTR can build this out relatively rapidly, stepping into MVNO relationship contracted with BHN/TWC. There is an auction coming up, but difficult for CHTR to participate in, not sure when deal will close.
·         Interested in how CHTR transforms from a stationary wireless to a non-stationary wireless.
·         Monetizing broadband? Fastest growing cable company in US in terms of revenue, EBITDA, subscriber growth in percentage terms. Think we got the pricing right to grow. Want to grow by adding high quality products, high quality service, and growth comes from subscribers over pricing. How you allocate revenue among segments is an academic exercise.
·         Underpenetrated assets – the more penetrated, the better the margin and costs per customer. Goal is to get more customers. The strategy is to create the most economic value for shareholders.
·         Video business at 34%-ish, broadband at 42%, customer relationships at 48-50%. Both TWC and BHN are within 2% of that. There is more upside than realized. Each upside comes at lower cost per new subscriber.
·         ARPU? Not how CHTR thinks. Want to grow revenue and customer relationships. Don’t think about products individually but rather attributes to a relationships, cost inputs to a relationship.
·         Model prior to this deal? Non-usage based pricing, no data caps, minimum of 60 mbps, no hidden taxes, nothing that distracts from the product and quality. All good things to drive value in the eyes of the consumer.

·         Liberty owns 26-27% of CHTR, will own 17-18% of new company. Not in a control position. From a conventional analysis, there is no issue with John Malone. 

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