Greetings from the Southland where, contrary to popular belief, business is booming and growth opportunities are expanding. Pictured is half of the bourbon wall from Louisville-based El Toro, one of the fastest-growing start-ups in Kentucky (their current offices are in a restored distillery).
This week, we will take a look at the last quarterly earnings call from Frontier prior to their acquisition of Verizon’s California, Texas, and Florida properties, and also highlight a series of announcements made during February which point to a resurgence in wireline interest.
Before doing this, our thoughts go out to Level3 CEO Jeff Storey and his family as he continues to recover from recent unplanned heart surgery. There are many Level3 readers who are regular readers of The Sunday Brief who were equally surprised by Monday’s announcement. Fortunately, Sunit Patel, Level3’s current CFO and now interim CEO, has the deep understanding and operating experience to continue Level3’s transformation into an enterprise-focused provider. We wish Jeff a speedy recovery and look forward to his return in a few short months.
Frontier’s “To Do” List
- Close the Verizon CA, FL, TX market transaction with as few issues as possible
- Identify and implement $600 million in planned synergies as a result of the VZ transaction starting at transaction close (while minimizing customer-facing impacts)
- Expand current video products to 3-4 million additional homes in 40 markets over the next 3 years. Clearly demonstrate that video growth will be profitable and the best use of incremental capital expenditures
- Translate additional broadband capacity improvements in CT into lower customer churn and improved Average Revenue per Residential Customer
- Manage promotions to grow revenue, increase the customer experience, and reduce the impact of post-promotion churn
- Continue to translate Connect America Fund (CAF) deployments into incremental customer relationships, especially for the 100,000 additional homes planned for 2016
- Translate improved bundle capabilities into lower residential voice churn
- Grow and demonstrate the value of self-service tools
- Improve business (SMB) competitiveness as a result of the Verizon properties acquisition
- Maintain or improve leverage and dividend payout ratios. Use increased cash flow to clean up some of the debt maturities on the balance sheet
Frontier Communications reported decent earnings this week as they prepare to double their size with the acquisition of Verizon properties in California, Texas, and Florida (full earnings report is here and their presentation is here).
Included is a map that management used in their first quarter earnings report describing the company’s footprint evolution (remember, the pending acquisition doubles the company’s size). This map tells us a lot about where Frontier is headed.
First, they are following the general population and moving south and west. Los Angeles and Dallas suburbs are growing faster than West Virginia and Upstate New York (see census data here). More moving equals more (and less costly) choices than overthrowing the incumbent at existing households. Any near term upside in subscriber growth will likely come from this secular trend.
Second, Frontier’s overall footprint density is going to improve with the Verizon transaction. There are real operational and capital cost improvements from this change. Trucks have to travel less, there are more Multi-Dwelling(MDU) / Multi-Tenant Units (MTU), and lower network unit costs are possible. MTUs present a double-edged sword, because this also means that business/ enterprise offerings need to be robust and competition (not only from cable but from fiber-based CLECs such as Alpheus in Texas) will be intense. How Verizon Enterprise supports and grows these legacy connections will be one of the interesting dynamics of a post-close Frontier.
Finally, they set the stage for further clustering. Frontier’s model to date has been “buy and manage” – they have done little if any trading of properties (common in the cable industry after large transactions such as Adelphia Communications acquisition by Comcast and Time Warner Cable). It’s interesting to think about the potential for Central Florida, the Great Lakes region, and Texas from a few transactions. Texas consolidation is especially ripe for this opportunity with Windstream and CenturyLink under-indexed in their exchange presence.
As if these three dynamics were not enough, their cable competition is also involved in a large three-way merger (Tampa is largely served by Bright House Networks, who is being acquired by Charter Communications; Texas and California properties have a decent overlap with Time Warner Cable, who is also being acquired by Charter Communications). Because Bright House and Time Warner Cable are performing quite well (see TWC’s Top 10 list here), it’s unlikely that Charter will make the kinds of dramatic changes that would open up the door for Frontier. Stranger things have happened, however, and the Charter/ TWC/ Bright House transaction is still awaiting California and federal approvals.
Bottom Line: Frontier has managed to do something that other ILECs have not – grow the high speed subscriber base in the middle of speed and technology transitions. The acquisition of selected Verizon properties will improve their customer density, network competitiveness, and product diversity (particularly in the business arena). They should use this opportunity to demonstrate their operating effectiveness and to re-cluster/ re-concentrate their footprint.
Cablevision’s “To Do” List
- Get the Altice transaction approved by the end of 2Q 2016 without compromising the overall terms
- Continue to grow the quantity (2.8 million) and quality (monthly RPC = $155.88) of High Speed Data customers (Cablevision serves 3.2 million customers overall)
- Reduce customer service expenses through fewer trouble calls (down 33% in 2015) and truck rolls (down 23%)
- Improve number of Optimum Wi-Fi users (currently only 1 million or 36% of the HSD base) as well as the quantity consumed (9 GB/ month)
- Maintain competitive positioning and operating cash flows at Cablevision Lightpath (fiber-based business division)
- Respond to market need of “skinnier” video bundles while minimizing revenue write-downs
- Continue to manage capital expenditures to an $800-840 million range
- Keep churn at record-leading levels (4Q represented the lowest voluntary churn in six years)
- Improve cash burn at “other” business units (Newsday, News 12, etc.)
- Get the Altice transaction approved by the end of 2Q 2016 without compromising the overall terms
The headline said a lot more about the economic improvements in their service area than the company overall: Cablevision delivers organic customer growth for the first time since 2008. While this is a great sign, there are plenty of headwinds facing the Bethpage, NY, company. Two of their three primary products are under heavy substitution threats (current video packages from smaller, more selective varieties; home phone service from wireless substitutes), and there’s an opportunity for wireless 5G services to threaten High Speed Data by the end of this decade.
Regardless of when/ if the transaction with Altice NV is approved, Cablevision needs to continue to grow and innovate. Their out-of-home Wi-Fi footprint is the benchmark for their cable peers (see more here), and their overall revenue per customer for High Speed Data is $44.70, among the best in the industry (TWC led the fourth quarter with $48.20/ mo in Average Revenue per High Speed Data customer; Comcast close behind with $47.15/ mo.). Cablevision has historically had strong customer service/ experience metrics compared to their peers but continues to lag behind FiOS, according to last September’s JD Power survey.
Bottom Line: Cablevision is in many respects a victim of their own success. They are maintaining high product penetration in an increasingly competitive environment. And, once the Frontier transaction closes, Verizon will be squarely focused on improving operating metrics in the Northeast. Increased speeds and sponsored data opportunities represent new growth frontiers for the company or their successor. Cablevision is in danger of losing their pioneering reputation, however, because of the Altice transaction uncertainty.
Wireline is Cool Again
I never thought I would be able to use the words “wireline” and “cool” in the same sentence again. But, after AT&T’s announcement that they would be spending $10 billion in 2016 to support enterprise wireline activities (much of this for wireless fiber backhaul in Mexico), and after Verizon’s surprise purchase of XO Communications for $1.8 billion, wireline has gone from a footnote to a headline (XO network map is pictured nearby).
This is the push and pull of the dramatic rise of data consumption from today’s world: If the server is not sitting next to the tower serving the customer, some amount of transport/ backhaul/ longhaul is required. Verizon estimates in the announcement above that they can save $1.5 billion from the transaction in synergies – this is likely only the fiber leverage opportunity, and does not include Verizon’s replacement cost for the aging MCI network (XO leverages the Level3 network – see more from this recent Sunday Brief).
Without a doubt, servers are moving closer to customers (see EdgeConneX for a great example of how this is minimizing friction between cable providers and Netflix). At the same time, however, connectivity to highly-scaled cloud servers for business are increasing the need for reliable national and international connectivity.
Overcapacity was an issue for the wireline industry… in 2002. Thanks to increased DOCSIS, DSL, and Fiber deployments since then to support hundreds of millions of video-hungry broadband and wireless customers, most inter-city capacity has been absorbed. Regional capacity continues to be built out (see companies like Lightower/ Fibertech for a good example in the Northeast), but independent national backbones are largely the same as existed a decade ago: Level3, 360Networks (now owned by Zayo), and XO Communications (now owned by Verizon).
Bottom line: Wireline is cool again, as it should be. More investments will be required.
Next week, we’ll comb through additional headlines and also dive into the set top box debate. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Davidson Wildcats!
Greetings from Charlotte (Davidson College playing University of Richmond, pictured) and Dallas. We have a lot to cover this week with T-Mobile earnings and Samsung’s announcements from Mobile World Congress.
T-Mobile’s “To Do” List
- Continue to lead/ dominate industry phone net additions (through lower churn in Q1 2016 and through gross additions and churn in 2Q-4Q 2016)
- Within phone net additions, maintain overall porting ratio of 1.6 – 1.8
- Grow market share in recently launched 700 MHz markets (230 million POPs coverage)
- Launch network (and T-Mobile Premier Distribution) in additionally acquired markets
- Make business gains (SME, Enterprise) a “reportable” number
- Continue to develop a comprehensive video strategy using Binge On as the capstone offer
- Fire on both cylinders (prepaid and postpaid growth) throughout 2016
- Maximize the impact of the next two Uncarrier moves (11 and 12)
- Move from market share participant to market leadership in M2M
- Be prudent yet strategically invest in 600 MHz spectrum
While we had a lot of information already on T-Mobile’s subscriber growth from their January pre-announcement (see our January analysis here), this week’s earnings conference call filled in the gaps on the fourth quarter and provided meaningful guidance for 2016.
The most important words from T-Mobile’s call were “stability” and “growth.” Have a look at their ARPU and ARBU statistics from their earnings release:
Phone service revenue growth is up 13.2% from 4Q 2014 to 4Q 2015. Average phone subscriber growth is up 13.8% over the same period. This translates into an ARPU loss of 0.44%. Headline: The full effect of all of the Uncarrier moves (with the exception of Binge On launched in 4Q) is less than 1% to service ARPU. And, as T-Mobile’s COO Mike Sievert described on the conference call, T-Mobile has successfully been able to upgrade spending levels in accounts at a greater rate than the competition.
T-Mobile has begun to add tablets to their selling mix as well (many incoming customers are bringing tablets with them, costs continue to plummet, and Sprint was also in the market in 4Q with a tablet offer) with 1 million tablets added in 2015. From the tables above, the average ARPU on tablets is $27.57/ month ($179 million in 4Q revenues divided by 2.164 million average users) which is also in-line with or slightly ahead of the industry (tablet-only plans start at $20/ month for 2GB and each additional user is $20. A $10 discount applies to the tablet plan rate if the device is combined with a phone offer).
Combining service, equipment installment, and leasing revenues, T-Mobile managed to grow total postpaid Average Billings Per User by 3.14% year-over-year ($61.80 to $63.74). AT&T’s phone-only ARPU + Next Billing (the closest surrogate to the T-Mobile ABPU) grew from $65.87 to $68.91 or 4.62%, based entirely on growth in Next billings (phone-only ARPU was down 2% year-over-year). Sprint’s growth in ABPA is driven by a loss in accounts; ARPU decrease was 7.7% year-over-year.
To win in the newly bifurcated world (service and equipment revenues separated), carriers will need to offer services that compel users to grow their total spending (using Verizon’s term, to “buy up”). This cannot happen unless the value equation is correct – network quality needs to match the monthly service revenues charged (and this service fee must be weighed against all of the other ways the consumer or small business could spend that money).
T-Mobile has figured out this equation:
- Bring the customer in with the best device for their budget (all news devices are 700 MHz capable per comments made on the earnings call).
- Add devices (preferably phone, but also tablets) as the customer realizes that T-Mobile offers a faster and/or more reliable service (note: this is true in many areas of the country but not others).
- Grow the relationship with Netflix, Hulu and others so that customers associate their video viewing experiences with their mobile device, not their TV or their computer. Use the TV and/or other devices to display a larger version than a 5 or 6 inch screen, but have the primary data ingestion point be T-Mobile’s network.
- Use this increasing dependency to grow the number of hours (GB) the customer can spend viewing content inside or outside the home.
This is a big change from the “Bring any AT&T device” that was employed just a few years ago (think before T-Mobile had the iPhone and the aggressive efforts to employ a Bring Your Own Device or BYOD strategy). Given the deployment of 700 MHz spectrum to 190 million POPs today (growing to 250-260 million POPs with deployment of owned and newly acquired spectrum), and the corresponding reduction in traditional GSM capacity (which would be applicable on an older device), having new customers join the T-Mobile experience on their best network is essential.
The other important headline from fourth quarter earnings is free cash flow generation. Over the past two years (2014 and 2015), T-Mobile has burned through $1.3 billion in cash ($9.6 billion cash flow from operations less $16.8 billion in spectrum + capital + other short-term investments plus $5.9 billion in increased financing activities). Over that same period, they have added just under 12 million branded postpaid and prepaid customers, acquired two major blocks of spectrum (one of which has not been deployed), finished up the migration of Metro PCS, and rolled out LTE to over 305 million POPs. Headline: T-Mobile has redefined financially prudent multi-tasking for the telecommunications industry.
With all of this growth comes growing pains. CFO Braxton Carter described a “substantial” systems re-architecture and overhaul that is keeping their G&A costs higher than normal (this should be expected when you grow 12 million net branded subscribers in 24 months). The pace of T-Mobile Premium Retailers is probably not where management would like to be entering the year (management hopes to have 700 MHz network and distribution in place for 230 million POPs this year). And, while the percentage growth rates (likely from small numbers) for business are strong, T-Mobile needs an experienced partner who can bring in-building coverage to a new level (tw telecom/ Level3 and/or Comcast would be my picks to challenge AT&T and Verizon’s enterprise chokehold).
Bottom line: If all of the other parts of the country stayed even on subscriber additions (churned customers = gross additions), and T-Mobile were to have a stellar 700 MHz grand opening for new markets covering 20 million POPs (in cities like Boston, San Francisco, San Diego, Las Vegas, etc.) and they were able to have 4 months of aggressive gains in another 20 million POPs they recently acquired, the low end of their guidance of 2.4 million net new subscribers would be met (1.8 million from a full year of the first 20 million + 0.6 million from five months of the second 20 million). T-Mobile’s 2016 future depends on new 700 MHz market launches and maintaining low churn levels across the total base.
Samsung Launches New Devices at MWC: First Reactions
We at the Sunday Brief have just finished watching the Samsung Unpacked 2016 livestream and have to admit we came away feeling left out. Currently, we own and use a Samsung Galaxy S5 (the last Galaxy device with a replaceable battery) and a Galaxy S6 Edge. We’ve been Samsung fans since the Galaxy S III and are still learning about features on each model.
Samsung has focused on two (maybe three) markets with this device: a) Gamers (GPU up 60+%), b) Photography enthusiasts (dual pixel capabilities; low light improvements), and c) Gamers who are virtual reality enthusiasts (including Mark Zuckerberg who overshadowed the event with his appearance at the end of the session).
To Samsung’s credit, many of us have taken advantage of the Galaxy S5 to learn the art of cropping and also how to easily post to Facebook and Instagram (we also started to use Drop Box after purchasing the S5). We’ve taken first panoramic views with the Galaxy S6 Edge (and they have graced the cover of several editions of the Sunday Brief). We want to take better photos, but realize that sometimes the camera can only do so much – sometimes it’s the user.
An incremental color splash is good (Will we ever want to go back after using the S7?) but could you provide the ability to (voice) record a title for photos immediately as they are taken? Or generate an email of the photo to the most frequent photo recipients (which is likely a very small subset of the contact list) – insert more shortcuts to commonly used apps and recipients? Headline: Samsung has done a lot to improve the photography product – now it needs to improve the process. This is long overdue.
While Samsung is going to include a free Gear VR and some games to get me going (a huge incentive), will this entice user to make the Gear a regular part of their lives (some Sunday Briefers are as old as their 40s, and Gear is likely oriented towards the 20-year old set). To make a believer, Samsung needs to provide a NASCAR Daytona 500 experience over R, or introductory rock climbing, or a tour of the Louvre, or private language instruction. Simply making games better diminishes the market opportunity. Give us more Deadliest Catch – VR edition and less Gunjack.
Next week, we’ll look at remaining earnings due out from Cablevision and Windstream, and cover any continuing headlines from Mobile World Congress. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to email@example.com. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Davidson Wildcats!
Valentine’s Day greetings from Dallas, Miami, and Louisville (where Sherm Henderson and I enjoyed a few good jokes before dinner). Quarterly and full year earnings continue to trickle in, and this week we will focus on CenturyLink’s metrics and provide some updates on previous “To Do” list columns.
A quick note of thanks to those who continue to promote this column. Recent requests for the newsletter have been significant – over 100 added since the beginning of the year. I am humbled by your ideas and extensive comments and the enthusiasm you show every week.
CenturyLink’s “To Do” List
- Complete the restructuring/ sale of the data center assets. Translate potential interest into acceptable terms.
- Continue consumer sales momentum (Prism TV, High Speed Data)
- Improve High Speed Data churn levels in both consumer and business
- Improve sales productivity (achieve the objectives of the 2014/ 2015 sales reorganization)
- Expand distribution partnerships, particularly for business products
- Demonstrate customer experience effects of streamlined business processes
- Refinance $1.2 billion in debt due in 2016 at favorable rates
- Integrate new management (Dean Douglas and Bill Hurley)
- Turn Connect America Fund (CAF2) commitments into a regional competitive advantage
- Demonstrate EBITDA stability that translates into 3.0x leverage and consistent dividend payouts
CenturyLink’s earnings call last week was full of candor, confession and confidence (see full earnings release details here). They touted the rollout of their Gigabit-capable Passive Optical Network (GPON) more than 940,000 addressable households and 490,000 business locations, yet confessed that slightly less than 70% of their footprint is not equipped to compete against the next generation of cable speeds (40 Mbps and higher).
To CenturyLink’s credit, however, they are offering standalone 40 Mbps service for $29.95/ mo. with a one-year commitment (with phone service, the price jumps to $54.95). That’s more aggressive than they have been in the past, and indicates that they are willing to attractively price their product on shorter terms to get a shot against cable.
Nearby is the ACSI table comparing customer satisfaction for Internet Service Providers. CenturyLink is the lowest scoring incumbent telco in the mix, and only a few notches above their principal competitor, Comcast. They score worse on DSLreports.com “Good, Bad, and Ugly” index (see here), ranking slightly behind Suddenlink and ahead of Mediacom for overall satisfaction. And the most recent JD Power surveys put CenturyLink at the middle of the pack for both Internet and phone service, better than Comcast (Qwest service territory), but behind Bright House (Florida) and Cox (Las Vegas, Phoenix).
CenturyLink acknowledged that their myriad of systems and processes was preventing them from achieving higher levels of satisfaction. Glenn Post, CenturyLink’s CEO, set high expectations when he said, “We … expect to gain revenue and operating efficiencies and improved cash from operations through more aggressive systems consolidation, automation, and process improvement.” Improving delivery intervals, ticket resolution timeframes, and self-service metrics will not be easy to accomplish. However, when you are the challenger and not the incumbent for the most valued in-home product (High Speed Internet), you have to differentiate on the customer experience. Dish and DirecTV did it, and both grabbed market share as a result.
Once those streamlined processes are in place (and Prism has been rolled out to more locations), CenturyLink should mimic their wireless service brethren and do the unthinkable: Offer to pay early termination fees (up to $200) to the customer if they will switch to CenturyLink (GPON) Prism Internet. This would move the needle on revenue growth and give them an opportunity to (re)establish relationships.
It’s likely going to take more capital in 2016 than the $1.2 billion CenturyLink outlined on their call for broadband deployment and capacity if they are going to effectively challenge cable. They outlined on the call that penetration in the GPON markets had already reached 15%, but they have not disclosed how many of those customers were upgrades from DSL and how many were cable conversions. To get the next 15% penetration, it’s going to require a disproportionate level of cable conversion, and performance expectations need to be consistently exceeded.
Finally, CenturyLink’s core business operation (excluding wholesale and hosting) needs to be more profitable. Here’s the supplemental information for business performance by quarter:
While this shows sequential and year-over-year improvement, it’s important to remember that these figures now include the wholesale segment which has historically posted 65-70% segment income margins (see this link for the last earnings supplement that had Business, Wholesale and Hosting revenues delineated. A little over a year ago, the segment income margin for business was 36.5% and had dropped 310 basis points year-over-year). It’s likely that the returns on the hosting business began to improve in the fourth quarter as CenturyLink took necessary cost measures to improve their EBITDA, and this is probably a key source of the sequential boost.
The retail business division is broken and needs a makeover. More speed, integrated cloud services, and superior support could revive their prospects. If CenturyLink does not change, a unified cable industry (Comcast + Charter/TWC/BrightHouse + Cox) will eat their lunch.
“To Do” List Updates
Over the past three weeks, there have been a few updates to carriers’ “To Do” lists:
- Verizon made a critical decision to zero rate all data for Verizon customers who use Go90, their recently launched on-line service (news release here). Verizon was quick to distinguish its actions from T-Mobile’s Binge On product, saying that they offer the service with no throttling. AT&T is contemplating moving forward with a zero rated service for their wireless customers and DirecTV. If the FCC does not intervene, Verizon could user this move to attract YouTube content to Go90.
- Sprint decided to extend their “half off” promotion through the end of March (see press release here). We talked about the need for sustainable replacement to this promotion and it looks like that isn’t ready. Sprint cannot rely on a low margin solution to attract customers. To add to the pain, Sprint also announced a new four-line unlimited plan bundle for $150 (see nearby chart comparison). This new plan will likely drive existing Sprint unlimited plan subscribers to this new rate structure after their current plans expire.
- New York City does not Parlez-vous français (See Multichannel News article here). New York City Public Advocate Letita James filed a brief with the state PUC on February 5th citing great concerns about Altice’s ability to meet cost cutting commitments to investors without damaging customer service and provisioning. In this CNBC interview Maya Wiley, Counsel to Mayor Bill de Blasio, is challenged by David Faber on the City’s ability to hold up a deal. Her response (paraphrased): “We may not have the ultimate approval, and the state PUC might see things differently, but we control your franchise.” Meanwhile, Altice’s stock is about 40% lower than it was a year ago, and more than 65% lower than its peak in mid-June of last year.
- Charter gets an accelerated date with the California PUC (see Bloomberg article here). In a coup of sorts, Charter persuaded the administrative law judge in California to forego a hearing next week and to reach a final decision on the merger by May 12. It is likely that California will be the last remaining state to approve the merger (New Jersey and Hawaii approvals are also outstanding). More details are provided in the aforementioned article.
- Old smartphones are still good enough for some. Parks Associates released their new report on the relationship between home broadband users and smartphones (see Comcast’s “To Do” list Sunday Brief for more commentary). While many of the study’s findings are not too surprising (e.g., 86% of wired broadband homes have smartphones), it was interesting to find that 33% of all Apple and 30% of all Samsung users in the study owned a device that was over two years old (which would equate to an iPhone 4s, 5c, or 5s for Apple and a Galaxy II, 3, 4, or 5 for Samsung). As we have discussed in many columns, the continuation of subsidy-based plans for iPhones and Galaxy devices encouraged many users to purchase low cost/ free models along with a two-year contract commitment. Sprint continued to give away these units with two year contracts well into 2015 even though this particular model did not have an LTE ratio (it was 3G EVDO-Rev A only). If the Parks Associates research is any indication, they may be living with this decision for a while.
- India Flexes Net Neutrality Muscle (and draws Anti-Colonialism Tweet from one of their Board Members). In one of those “Wish you hadn’t said that” moments, Facebook board member Marc Andreesen took to Twitter to lash out at the Indian government’s decision to ban Facebook’s Free Basics offering (his since deleted tweet is posted nearby). Marc later apologized for his “ill-advised and ill-informed” comments. Facebook founder Mark Zuckerberg also publicly chastised his Board member (but, interestingly, did not ask him to step down). Bet that next Board meeting will be an exciting one. A good summary article on the online fracas can be found from The Guardian here.
- Can’t let this week go without a final reference to the T-Mobile Super Bowl ads here and here. Steve Harvey correcting the record – genius.
Next week, we’ll focus on commentary from T-Mobile’s profits (Wednesday), provide a preview of Mobile World Congress and comment on Samsung’s Unpacked 2016 event (this means that next week’s Sunday Brief will be an evening edition). Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to firstname.lastname@example.org. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Davidson Wildcats!
Super Sunday greetings from Paris (pictured), Charlotte, and Dallas. The continued outpouring of national unity throughout France, but particularly in Paris, was striking this week. Having armed forces (no pictures) accompany travelers on the Paris Metro also served as a reality check on their situation. It’s an interesting and different time to travel in France.
Thanks for all of the referrals and comments to last week’s column, and especially the accolades on the format. Because of the overwhelming response, we are going to continue with that format for the next couple of weeks. From a writing perspective, it allows more content to be covered without writing a novel.
Comcast’s “To Do” List
- Build on 2015’s broad momentum
- Convince investors that the “worst case” for wireless yields a better return than share buybacks
- Grow Xfinity base and market share (through takeaways from DirecTV and Dish)
- Roll out DOCSIS 3.1 and other high-speed data solutions while keeping cap levels unchanged
- Grow Comcast Business by 20% on the back of successful Medium/ Enterprise unit performance
- Prevent the FCC from interfering with set-top boxes and electronic programming guides
- Earn acknowledgement from JD Power, ACSI and other rating agencies that customer service is improving
- Maintain overall capital spending (excl. wireless) at 15% of revenues
- Become a better network, product, and distribution partner
- Build the overall Comcast brand through flawless execution of 2016 Olympics coverage
Comcast announced very strong quarterly and total year earnings on Wednesday (materials here). Everything (except cable unit political advertising) performed better. It’s must be hard for those who celebrated the defeat of Comcast last April to see this quarter’s healthy customer and unit growth. But the fourth quarter results (as we saw with TWC last week) clearly show that no momentum was lost:
- 89K net video additions
- 30% of the video base on the new X1 platform (with 40% more VOD and 50% more DVR usage)
- 460K High Speed Internet net additions (more than U-Verse and FiOS combined)
- 139K Voice customer additions; 20.6% share vs. 25-30% for AT&T, Verizon, Frontier (remaining homes passed use wireless as primary communications vehicle)
- Business services revenue up 19% in the quarter and 20% for the year
- Cable communications revenue growth of 5.9% for the quarter and 6.2% for the year
Against this backdrop is the perception that there is a market share ceiling. Using Cablevision as a proxy, it’s likely 50% share of homes passed for data (adjusting for Google Fiber), and, with wireless penetration increasing, 30% for voice. Comcast is currently at 42% penetration for High Speed Internet and 21% for voice.
As CFO Mike Cavanagh indicated on the conference call, Comcast has built a very strong beach head in small business services (“healthy market share”), but lacks the territory presence and the experience to win large national accounts (with Canadian and European sites likely even more difficult to serve).
It should be no surprise, then, to see Comcast show renewed interest in [in region] licensed wireless services and also [out of region] enterprise expansion. Looking down the road (2020), Comcast could be at 48-50% share of High Speed Internet (especially with their current numbers) and 25-27% penetration of voice. They could hit diminishing returns on serving small business customers at that point. What service does every single one of Comcast’s customer base have that could erode the value of in-home and in-office services? You guessed it – wireless.
The hand-wringing has begun, however, by those who believe that Comcast will buy some 600 MHz spectrum and MVNO the regions that they do not win. These views tend to come from traditional cellular purists who have minimal understanding of how a cable company might use a local spectrum purchase.
For example, many TV Everywhere shows cannot be viewed except over Wi-Fi (and specifically Wi-Fi in a subscribers’ home). What if Comcast could extend the local viewing area to the entirety of San Francisco (presumably covering both the office and home), with Wi-Fi viewing only for Southern California? Would that offering improve the value of the video (and High Speed Internet) franchise to Comcast? A strong case could be made for local video purchase based on this premise alone.
For voice, Comcast lacks the radio equipment, but clearly has the local voice assets throughout their territories. How much easier does having a ready-made local voice infrastructure make it for Comcast to be profitable?
Lastly, the pundits cite Comcast’s lack of storefronts, which is an issue today (no one would go to a Comcast service center to browse the latest Samsung or Apple device). With the right partnership, however (think Apple, or even an exclusive dealer model which would replace the service center entirely), could they pull it off? It’s a stretch, but so was NBC Universal.
Comcast is a wireline and content company. They used to just be a wireline company. Is it such a stretch to imagine them as a wireline, content, and wireless company?
Charter’s “To Do” List
- Get final approval for the Time Warner Cable and Bright House mergers as soon as possible
- Improve Charter Spectrum product offerings
- Generate Commercial Services revenue growth that is more comparable to peers
- Demonstrate short and long-term benefits of customer service and IT in-sourcing
- Manage pre-integration capital spending to 15-18% of revenue
- Prevent the FCC from interfering with set-top boxes and electronic programming guides
- Continue to improve off-promo churn
- Carefully manage the rollout of the new program guide
- Improve the take rate (and, as a result, asset turnover) for existing High Speed Internet customers
- Get final approval for the Time Warner Cable and Bright House mergers as soon as possible
Charter continued the string of revenue and cash flow growth that was seen at Time Warner Cable and Comcast. Clearly, as Charter is working within a smaller footprint, it can be subject to wider swings in political advertising and other revenues, but CEO Tom Rutledge made a strong case for their PSU-growth strategy.
Charter’s plan is simple: (Re) Establish relationships with residential customers through attractive High Speed Internet pricing, led by 60 Mbps speeds. Then add additional services (particularly video), usually under promotional windows, to build the revenue per household. Support the customer with onshore service and company-employed technical operations personnel (e.g., people in trucks).
This strategy is clearly beginning to unfold but is by no means completed. 39.1% of the company’s total residential customer relationships are single play (most of these are High Speed Internet), and 28.5% are double play (likely meaning they have High Speed Internet and Video). Both of these penetration figures are unchanged over the past two years. While Charter has made tremendous gains in High Speed Internet (37.4% High Speed Internet penetration at Q1 2014 vs 44.5% at the end of 2015), they have not been able to improve sell-in rates.
Charter is successfully walking the tightrope of price increases, profitability, and pending changes to scale. Simply put, they are willing to endure the short-term gross margin hit from programming cost increases (rising at a 7.8% annual rate in the fourth quarter; video revenues rose 2.9%) until they complete the three-way merger with TWC and Bright House. The longer the merger approval process takes, the greater the strain on new PSU growth to grow cash flow. But it’s the politically savvy move to take a short-term hit today in order to enjoy scale efficiencies tomorrow.
Level3’s “To Do” List
- Grow Core Network Services (CNS) Enterprise revenue at 8% or more on a constant currency basis in 2016
- Manage customer revenue churn to 1% or less
- Improve global sales force productivity through increased share of wallet
- Capitalize on assets/ other competitive advantages in Europe/ Middle East/ Asia (EMEA)
- Streamline and unify processes and systems across the globe
- Reduce net debt to EBITDA leverage ratio to 3.4x (from 3.8x)
- Generate $1.1 billion in full year free cash flow and invest proceeds in organic growth and deleveraging
- Leverage 40,000 on-net building footprint to develop partnerships with T-Mobile and Sprint
- Achieve merger-related targeted access savings by the end of 2016
- Prepare for future M&A activity
We have not spent a lot of time in The Sunday Brief discussing Level3 (earnings materials here). Before their merger with tw telecom, they were a fiber and backbone play. With the integration, however, they have a superior local backbone in many metro markets in the US. Level3 largely stayed out of the Fiber to the Tower (FTTT) bidding cycle as well. Now, as densification takes hold (inside and out of their building footprint), and as their balance sheet improves, Level3 is able to effectively compete against Zayo and regional fiber providers, as well as AT&T and Verizon.
One of the insights I have discussed with several of you is that Verizon’s backbone network outside of the Northeast is in need of an upgrade (the legacy MCI network is fully depreciated). Sprint’s fiber network (which we listed as a Top 10 need last week) is in largely the same boat. And if cable ever falls out of love with T-Mobile, they are without a national backbone alternative. Level3 is the last backbone standing that isn’t AT&T (which was produced out of the Velocita saga, and which will rank as one of the greatest telecom deals in AT&T’s history).
While much of today’s growth is asymmetric and moving to the edge (another Level3 advantage), we have just begun to tap the opportunities presented by video person-to-person communication. Web Real Time Communications (RTC) is starting to be adopted by some big name sites, and is becoming a fixture in Android and Windows environments. If real-time video begins to be largely adopted (beyond Facetime, Oovoo, and Hangouts), there’re only a couple of backbones that can handle it.
That should lead to a stronger working relationship between Level3 and the large wireless carriers. Content delivery, capacity management, and video enablement are all drivers, and higher cash flows and lower leverage actually enable the company to take some calculated partnership risks for the first time.
We’ll discuss more about Level3 when we cover Windstream and CenturyLink “To Do” lists. Global Crossing and tw telecom have changed their trajectory, and their footprint is going to be difficult for others to duplicate.
Next week, we’ll add results from CenturyLink (earnings our Wed) and others into the mix. Until then, please invite one of your colleagues to become a regular Sunday Brief reader by having them drop a quick note to email@example.com. We’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive). Thanks again for your readership, and Go Panthers!