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WIKI ANALYSIS
Charter Communications (NASDAQ: CHTR) sells bundled cable, internet and landline telephone services to 5.7 million customers in 29 States.[1] Charter is the nation's fourth-largest bundled cable, internet, and telephone provider, but its revenues have contracted steadily as it struggles to compete with Comcast, Time Warner Cable, and Cox Communications. These cable providers are larger than Charter, and as a result they can offer cheaper and more extensive services. [2] [3] [4]
Charter's economic niche is also threatened by a growing number of telecommunications companies like Verizon, AT&T, Sprint Nextel, and Bell South. These firms are expanding into video and internet services by partnering with Satellite TV companies like DirecTV and Dish Network, while also developing fiber optics technology that will enable a video, internet, and telephone triple play at much higher speeds than what's possible with current equipment. To put this in perspective, Charter is only the 12th largest telecommunications company, despite the fact that it is the 4th largest bundled home service provider. [5]
The single largest reason Charter has reported net losses year after year is its $21 billion dollar debt, which regularly creates interest expenses twice the size of Charter's operating income.[6] These sizable debt expenses, in addition to a one time legal expense for accounting fraud in 2004 that ate over 50% of Charter's operating income that year, have effectively prevented Charter from reinvesting its revenue into its business. [7] [8]
In fact, Charter has actually started selling some of its assets to help pay off its debt.[9] As its ability to refinance its debt diminishes due to the 2008 credit crunch, Charter Communications has acknowledged the possibility of bankruptcy and/or asset liquidation to pay its debt obligations.[10]
Business Financials
Charter Communications sells monthly telecom services such as high-speed Internet access, video on demand, high-definition and interactive television, and VOIP (Voice Over Internet Protocol) to residential and business customers. Charter also helps businesses with networking, entertainment, telephone and advertising services. The company has a market capitalization of $374.3 million, and employs 16,500 workers. [11]
Charter carries a large debt load, which inhibits its ability to reinvest earnings into its business and improve key divisions such as customer service. A 2007 PC World surveys showed that Charter had below average overall customer satisfaction, and was ranked as the worst Internet Service Provider. [12] The Better Business Bureau has received enough complaints about Charter to issue a warning about the company's service. [13]
Charter's sales growth since 2003 has been 5.34%, whereas the industry average has been 26.03%.[14] In 2004, it paid dearly for questionable financial reporting practices in a class action lawsuit, incurring special charges that subsumed over half of Charter's 2004 annual revenue. [15] 2005-2007 have seen interest payments on Charter's $21 Billion debt completely eclipse its operating income. Cable companies must make massive infrastructure investments to deliver bandwidth to users, and must also pay huge fees for content. [16] Such large investments are often financed by debt [17], and communications companies must rely on high revenues and growth to pay interest and principal payments. Charter has amassed its staggering $21 billion long-term debt over many years because its earnings have seldom covered its high operating expenses.
Due to its heavy indebtedness, Charter has acknowledged that its required interest payments will continue to cause net losses for the foreseeable future. Charter's financial situation prevents R&D and significant capital outlays, and may prevent future renewal of television access contracts set to expire in 2008. [19]
Segment information
Charter's physical products (that require a serviceman to come to your house) can be split into three categories: phones, internet lines, and cable boxes. Charter also generates miscellaneous revenue from networking solutions and advertising. Charter tries to bundle these products together, but some are more successful than others and make up a larger part of Charter's business. The pie-graph below shows that Charter primarily sells cable boxes, fewer internet lines, and even fewer phones.
Here is a more in-depth description of Charter's products.
Video Service Units
Charter Communications provides standard hotel-room style television services with options to increase the number of channels available, buy digital video, premium channels, pay-per-view, OnDemand, high-definition, and digital video recording.
Internet Units
Charter provides monthly high-speed internet service to its users. It sells both standard high speed (5 Mbps) and high-speed plus (10 Mbps) packaged with free e-mail accounts, anti-virus software, and online storage. [21]
Telephone Units
VoIP technology digital voice signals over the internet allows unlimited nationwide calling and all standard land-line services. International services also provided. Charter is trying to expand this category more actively in 2008. [22]
Additional Services
Charter has two additional revenue sources, Commercial Services and Advertising Sales, which charge businesses for networking solutions and advertising space. The total breakdown of Charter's 2007 Revenues can be seen on the graph below.
Revenue Efficiency and Expansion
The above graph shows that Charter's internet services have higher rates of return than their video and phone services. Despite lower rates of return, Charter gets most of its revenue from video services and is looking to expand more into the phone industry. Specifically, Charter aims to increase its share of the small business telephone industry in 2008, even while acknowledging that cut-throat competition and low profitability will likely drive down already low revenue per unit. [25]
Company Officers
Company Leadership as of 1Q 2009:
- Neil Smit – President and Chief Executive Officer
- Michael J. Lovett – Executive Vice President and Chief Operating Officer
- Gregory L. Doody – Chief Restructuring Officer and General Counsel
- Marwan Fawaz – Executive Vice President and Chief Technology Officer
- Grier C. Raclin – Executive Vice President and Chief Administrative Officer
- Eloise E. Schmitz – Executive Vice President and Chief Financial Officer
- Ted Schremp – Executive Vice President and Chief Marketing Officer
- Steve Apodaca – West Operating Group President
- Joshua L. Jamison – East Operating Group President
- Kevin D. Howard – Vice President, Controller and Chief Accounting Officer
Board of Directors as of 1Q 2009:
- Paul G. Allen – Chairman
- W. Lance Conn
- Rajive Johri
- Robert P. May
- David C. Merritt
- Jo Allen Patton
- Neil Smit
- John H. Tory
- Larry W. Wangberg
Trends and Forces
Tight Debt Markets Threaten Charter's Continued Operations
Charter's future depends on its ability to cope with $21 billion of outstanding debt. Charter's low stock price removes issuing equity as a reasonable financing option. Prolonged Charter stock declines may even result in Charter's reclassification as a penny stock (a stock that chronically trades under $1). With 2008 expected annual interest payments 200% greater than optimistically predicted operating income, Charter has begun to pay off its old debt with new debt. [26]
Risk averse debt markets caused by the credit crunch related to the 2007 subprime lending difficulties make further debt refinancing more difficult and expensive. Charter's debt prevents it from using its cash flow to renew channel subscriptions and provide good customer support. This makes it difficult to Charter to retain its customers. Debt default could also force liquidation of Charter's operations, or full bankruptcy. [27]
Difficult credit markets could cause interest expenses to erode Charter's service quality. Because Charter's operating income would have to grow more than twofold in 2008 to cover its debt payments, a bet on Charter is a bet that the credit markets will be good enough for Charter to refinance its outstanding debt.
Changing Media Landscape Endangers Charter's Business
Consumers are increasingly replacing their television viewing with online entertainment. Commercial-free streaming of television shows and movies online has become an attractive option, while Social media sites like MySpace and YouTube take away advertising revenue for communications companies.
Because of today's various media options, only the Fall season sees prime-time television programming dominate other entertainment alternatives. Young people want programming at more flexible times, necessitating downloading or digital recording which eats into advertisers' traditionally captive audience. [28] The changing media landscape has increased competition for Charter Communications, and has made Charter's services more easily replaceable. [29]
For Charter to avoid bankruptcy and find stability, it will be need to provide more flexible services to increasingly demanding customers and somehow retain advertising revenues in a declining market. That means competing head-to-head with telecommunications giants Verizon Communications (VZ) and AT&T (T) who have started providing video, internet and phone services backed by significant financial, regulatory, and technological advantages.
Larger Competitors Have Inherent Advantages
Economies of scale that exist in the communications business provide major competitive advantages for large firms. Comcast (CMCSA) and Time Warner Cable (TWC) dominate over 60% of the Multiple Service Operator market share. This allows the companies to negotiate national programming deals with entertainment companies, expand their video on-demand and HD technologies, and make other technology and customer service investments that rely on the revenue support of the company's large subscribers. [30] Scale also gives Comcast and Time Warner regulatory advantages - for instance, the FCC has allowed Comcast exclusive sports network contracting that affords subscribers improved viewing access. [31]
The television industry is also seeing major price increases for programming. Larger service providers have an advantage when it comes to affording these price increases, as they can spread the cost over their bigger subscriber base, and actually drive up prices through competitive bidding. Programming contracts must be renewed every few years, and Charter may have difficulty maintaining its channel variety in the next few years, which would further alienate its already thinning customer base. [32]
Reclassification as an Investment Company Endangers Charter's Liquidity
Charter Communications invests much of itself in a holding company called Charter Holdco. Charter currently has more than a 50% membership interest in Charter Holdco. If Charter's membership interest in Charter Holdco dipped below 50%, Charter Communications' interest in Charter Holdco would be considered an "investment security" under the Investment Company Act. If a court were to determine that Class B common stock holders no longer held voting rights, Charter's membership in Holdco would dip below 50%, and Charter Communications would likely become an investment company (unless it were granted an exception from the Investment Company Act by appeal).
If Charter Communications were reclassified as an Investment Company, it would lose much of its ability to finance itself through issuing debt and selling its stock. Because Charter does not generate enough cash to cover its expenses through its operations, reclassification as an Investment Company could destroy Charter's liquidity and have other unpredictable negative impacts. [33]
Competitor Analysis
Charter's direct competitors are other Multiple Service Operators. These companies provide bundled communication services which include television, internet, and phone services in discounted monthly packages.
Charter provides very similar services to other Multiple Service Operators at comparable or higher prices. [35] While Charter has embarked on a $3.5 billion system upgrade to offer superior broadband services it lacks channels, marketing, and ease of use common in other service providers.[36]
All Multiple Service Operators must compete in terms of each of their individual services.
Television Competition: The Satellite Sensation Sweeps the Nation?
Charter competes with other forms of video access like direct broadcast satellite, which 27 million Americans subscribe to due to its greater variety of channels. DBS packages are cheaper than comparable Charter Communications services by 30% on average [37] . Popular direct broadcasting satellite providers include The DirecTV Group (DTV) and EchoStar Communications (DISH).
The internet's increasing delivery of free, high quality television programs and movies also imperils a growing number of Charter's video services.
Telephone Competition: Threats of Verizon on the Horizon?
Charter's internet and telephone services directly compete with the entire telecommunications industry, containing many firms with greater financial and personnel resources, strong brand name recognition, and long-standing relationships with regulatory authorities and customers that Charter lacks. A growing number of these companies like AT&T (T) and Verizon Communications (VZ) are looking to become Multiple Service Operators by partnering with satellite television providers. [38]
Internet Competition: Will Web Business Ebb?
DSL services from companies like AT&T (T) , Verizon Communications (VZ) , and Bell South undermine Charter's internet service providing market. While most DSL providers cannot compete with Charter's download speed, Verizon Communications (VZ) has been beefing up its fiber deployment, which is allowing them to offer higher bandwidth services than Charter. [39] Charter's services, while priced at an average level, are notoriously inconsistent. Consumers consistently rank Charter's internet services poorly compared to competitors. [40], [41]
References
- ↑ CHTR Official Website, About Us
- ↑ Top 25 MSOs of 2007
- ↑ PC World's Best and Worst ISPs
- ↑ Charter Cable Rating, #6
- ↑ http://money.cnn.com/magazines/fortune/fortune500/industries/Telecommunications/1.html
- ↑ Charter's 2004-2007 Statements
- ↑ Charter's 2004-2007 Statements
- ↑ Charter Communications Executives Sentenced In Accounting Schemes
- ↑ Charter Sells Blue Earth and Elmore TV Assets
- ↑ CHTR 2007 10K, pg. F-8
- ↑ CHTR Official Website, About Us
- ↑ PC World's Best and Worst ISPs
- ↑ [http://stlouis.bbb.org/WWWRoot/Report.aspx?site=142&bbb=0734&firm=110075917 BBB Reliability Report on CHTR]
- ↑ CHTR Financial Ratios
- ↑ SEC Report on CHTR Lawsuit
- ↑ Rising Cable Rates, pg. 17
- ↑ [CHTR 2007 Balance Sheet
- ↑ http://caps.fool.com/Ticker/CHTR.aspx
- ↑ CHTR 2007 10K, pg.13
- ↑ [<CHTR 2007 10K, pg.10
- ↑ http://www.charter.com/
- ↑ CHTR 2007 10K, pg.2
- ↑ CHTR 2007 10K, pg.9
- ↑ CHTR 2007 10K, pg.9
- ↑ CHTR 2007 10K, pg.8
- ↑ [http://phx.corporate-ir.net/phoenix.zhtml?c=112298&p=irol-newsArticle&ID=1120780&highlight= Discussion of CHTR's New Debt]
- ↑ CHTR 2007 10K, pg.21
- ↑ MIT's Communication Forum: The nature of changing audiences
- ↑ CHTR 2007 10K, pg.25
- ↑ MSO Subscriber Numbers
- ↑ Ruling Granting Comcast Exclusive Access
- ↑ CHTR 2007 10K, pg.25
- ↑ CHTR 2007 10K, pg.27
- ↑ [http://www.ncta.com/Statistic/Statistic/Top25MSOs.aspx
- ↑ CHTR 2007 10K, pg.14
- ↑ [http://www.hoovers.com/charter-communications /--ID__47288--/free-co-factsheet.xhtml, Hoover's CHTR Overview]
- ↑ CHTR 2007 10K, pg.13
- ↑ CHTR 2007 10K, pg.14
- ↑ CHTR 2007 10K, pg.15
- ↑ PC World ISP Provider Analysis
- ↑ National DSL Rankings
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