October greetings from Boston, Cedar Rapids, and Kansas Metropolis. It was nice to fulfill with Troy Doom, the CEO of Ice Home America, one in every of Fort Level Capital’s investments (extra on the corporate right here) in Boston earlier this month. Third quarter earnings begin subsequent week and proceed into November, offering traders with 2024 and 2025 priorities for the telecom and infrastructure sectors. After a brief market commentary, we are going to focus this week’s Transient on questions we’d ask Comcast and Constitution. Whie their legacies are rooted in linear video, their futures are extremely depending on wi-fi providers and broadband.
Right here is the ultimate earnings presentation schedule with hyperlinks to every of the investor relaitons web sites. You probably have not had an opportunity to learn the final Transient (right here), we propose you achieve this previous to Tuesday when Verizon kicks off the earnings parade.
The fortnight that was
Whereas the Fab 5 and the Telco High 5 had been each up within the mixture during the last two weeks, all or almost all of these features had been pushed by two shares: Apple (+$125 billion) and T-Cellular (+$17 billion). Of the ten shares we monitor, T-Cellular and AT&T are at present the second and third-highest share gainers for 2024, outpacing Google, Apple, Amazon and Microsoft. Sure, a greenback invested in AT&T on January 1 has returned extra worth than in every of the Fab 5 shares besides Meta/ Fb. We might not be stunned to see Ma Bell overtake Comcast someday within the subsequent 6-9 months because the third most respected US telecom. AT&T is a outstanding story that seems to have legs.
The Chinese language hack that impacted many carriers together with Verizon, AT&T, and Lumen is continuous to draw lawmaker curiosity. In accordance with this Broadband Breakfast article, Congressional Democrats and Republicans on the Power and Commerce Committee despatched the heads of Verizon, AT&T and Lumen a sequence of questions with responses due by final Friday. The magnitude of this breach, based mostly on our conversations with analysts, was higher than others as a result of it might have enabled the Chinese language to find out how the federal government displays communications actions. For background, the unique Wall Road Journal article on the breach is right here and the follow-up article from The Washington Publish is right here.
Lastly, whereas we predict that Verizon is overpaying for Frontier’s belongings, there are a lot of Frontier shareholders who take the alternative view. In accordance with this Reuters article, Glendon Capital Administration, who owns almost 10% of Frontier shares, has publicly introduced that they are going to be voting towards the deal. Cerberus Capital Administration, who owns greater than 7% of Frontier shares, has voiced considerations however has not gone so far as indicating a “no” vote.
3Q earnings questions (Half 2)
Within the first a part of our earnings questions (hyperlink above), we targeted on Verizon’s pay as you go enterprise transformation, their Frontier acquisition rationale, T-Cellular’s postpaid churn problem, and AT&T’s enterprise wireline woes. Total, wi-fi is challenged by the worth proposition of present and future know-how improvements. Briefly, 5G has not created the step perform in worth creation for traders that different funding alternatives (e.g., Synthetic Intelligence) have. We’re coming into the sixth 12 months since deployment, and the customer-facing advantages are nonetheless rising.
We warned concerning the 5G hype in July 2019, devoting a complete Transient to the subject: “About This Factor Referred to as 5G.” We posited that the way forward for 5G is dependent upon “Extra software program, doing extra issues, quicker and higher.” Like LTE, 5G trusted progressive purposes that might enhance lives. There’s nonetheless time, however exterior of mounted wi-fi as a wired different for each residences and companies, it’s laborious to level to mass market purposes which were reworked due to 5G. Shipyards is perhaps extra environment friendly, however your yard hasn’t modified a bit.
This improvements drought has positioned extra stress on wi-fi carriers like Verizon and T-Cellular to develop subscriber share (5G has helped enhance community scalability and buyer profitability). That worth creation has come via two sources: a) Improved month-to-month revenues per wi-fi subscriber (ARPU) via modifications in month-to-month subscription pricing buildings, and b) Fastened wi-fi providers to make the most of extra capability that ought to have been consumed by the software program improvements described earlier.
That brings us to Comcast and Constitution, two of the Telco High 5 which have had higher years. For the reason that finish of 2019, Comcast and Constitution’s fairness values have decreased by 27% and 58% %. The Triple Play tiger (Excessive Velocity Web + Linear Cable + Dwelling Telephone) of the earlier 20 years is now toothless because of Google (YouTube TV), Hulu (Comcast+Disney), Netflix, and wi-fi substitution. The identical technique used to scale back scale and profitability with incumbent telcos (create “Swiss cheese networks”) in earlier years is now being utilized by mounted wi-fi and fiber to the house (FTTH) suppliers to restrict cable’s scale economies. And the Inexpensive Connectivity Program (ACP) is gone.
Regardless of all of those headwinds, cable marches on. They nonetheless have scale. They’ve alternatives to increase into beforehand unserved geographical areas. They proceed to develop their business enterprise. They’ve wi-fi. Briefly, they’ve choices and proceed to have a better market share than fiber or mounted wi-fi of their footprint.
Listed below are the questions we’d pose to Constitution and Comcast:
- (For each). What number of gross additions are coming from fiber suppliers? These probably signify prospects who’ve beforehand been double or triple play (wi-fi, not house telephone) prospects and are returning to cable. Whereas there isn’t any bodily porting, this could be a great proxy for product superiority (a “port ratio” equal utilized in wi-fi).
Our view is that this quantity could be very low. Cable is shedding to fiber and prospects are reluctant to return for a lot of causes. First, new networks have fewer oversubscription points (cable nodes can develop into congested – assume again to April and Might 2020 throughout COVID). Second, there may be an “funding” in fiber for many new prospects – the multi-hour set up course of. Lastly, most FTTH deployments include new Wi-Fi gear (many instances built-in into the FTTH in-home gear) that’s Wi-Fi 6 or larger. Fiber can ship a buyer expertise that’s materially completely different from DOCSIS 3.1. That’s why the “port in from fiber” ratio is necessary.
We agree with the cable suppliers that mounted wi-fi is perhaps extra weak. However neither T-Cellular nor Verizon invested in 5G for the needs of solely offering mounted wi-fi. When a number of money flows are feeding the economics of a tower/ city/ area, the affect on wi-fi suppliers will be transferred to different services.
- (For each). Whither Xumo? We listened to a number of latest investor convention updates from Constitution and Comcast and their set-top field/ aggregation three way partnership referred to as Xumo was barely talked about. Xumo streaming packing containers began distribution in October 2023, so a 12-month assessment/ milestone announcement ought to have been made. Thus far, no information.
That is stunning because the Xumo platform is great (we’ve been utilizing ours for six+ months and enormously favor it to Roku). Comcast contains one Xumo field for each new Xfinity Web buyer, and Constitution permits prospects to buy the field outright for $60. Each supply the “gear as a service” for $5/ mo. which represents a $6-8/ mo. low cost to set-top field prices.
Xumo additionally has a line of televisions which are distributed via Greatest Purchase (right here) and Walmart (right here). A follow-up query like “Why not give away a Xumo TV with chosen bundles?” makes numerous sense if a better high quality expertise would create extra affinity (pun supposed) for conventional cable packages. With cloud DVR obtainable/ included, the expertise can be extra cellular pleasant than a set-top field. We battle to see why each Constitution and Comcast usually are not pushing Xumo tougher and selling the 2025 roadmap.
- (For each). Will cable buy further spectrum? Chris Winfrey appeared to trace on the Goldman Sachs Communacopia convention in September that future shared spectrum purchases and deployments is perhaps within the offing:
“We’ve additionally bought CBRS licenses for shared license. We predict that framework could be very pro-consumer, and it’s good for lots of different individuals within the spectrum area. And so, we count on to proceed to be lively within the shared-license spectrum area as properly… In some sense, we’ve not been in a race [to deploy spectrum] due to the connection and the setup that we’ve with Verizon and a few of that construct out is tempered by the connection with Verizon. We even have a major quantity of different capital tasks and work and labor that should happen. However we are going to totally deploy the CBRS, however we’re not in a rush to do it. Curiously, the extra traces we’ve, the higher the return on funding for the construct. So the return of deploying that spectrum and deploying these small cells simply continues to get higher.”
We agree with Chris that specializing in the shared spectrum area makes numerous sense for cable and assume that they need to have a dialog with Dish about utilizing their CBRS holdings to extend capability.
- (For Comcast). When will Comcast totally mirror [Charter] Spectrum’s cellular pricing technique and product choices? Our guess is that Constitution’s introduction of aggressive buyouts (extra right here) and their “Anytime Improve” inclusion within the Limitless Plus Plan (right here) is popping some heads and driving extra gross provides than their Philadelphia-based cousin. Mike Cavanagh, Comcast’s President, made a remark that there was no “delight of authorship” with respect to Constitution’s actions.
As a reminder, Constitution had 1.6 million (22%) extra wi-fi subscribers than Comcast on the finish of the second quarter. Over the past 4 quarters, Constitution has grown 80% quicker than Comcast (2.18 million internet additions vs. 1.22 million). For 3Q, we’d not be stunned to see 200-300K extra internet additions for Constitution than their counterpart. The first cause for this distinction is Spectrum’s concentrate on simplicity and switching promotions.
Whereas not wi-fi, we’d additionally counsel that Comcast mirror Constitution’s not too long ago introduced inclusion of Peacock Premium with all Spectrum TV prospects (announcement right here). It’s perplexing that Comcast has not prolonged their very own streaming service completely to their cable subscribers (see Peacock Premium promotions right here – simplification required).
- (For Constitution). How can shareholder worth be improved via further acquisitions? Chris Winfrey clearly articulated their capital allocation technique on the Goldman Sachs convention:
“… our capital allocation precedence, since I joined the corporate in 2010, really hasn’t modified, which is first port of name is to have natural investments that produce good and higher money flows over time and protect your terminal worth. Second is, to the extent there’s M&A that’s extra enticing than shopping for again your inventory, you do M&A. Third, you purchase again your inventory. And fourth, in the event you actually have nowhere to go and also you wish to simply flip money again over to traders so it may be taxed, you do dividends. And that’s by no means actually been in our profile.”
We see a depressed Cablevision (a part of Altice) asset as Constitution’s subsequent transfer. Each shares are down 20+% over the previous 12 months (and Altice has misplaced 92% of its market capitalization during the last 5 years). Altice is suffering from issues with their father or mother firm and monetary woes – the time seems proper for a transaction.
There is perhaps a deal the place Mediacom, one other rural-focused cable supplier (now in glorious monetary situation), takes all the non-Northeast holdings (or frankly no matter Constitution doesn’t need). A transaction with further re-clustering of belongings between Constitution and Mediacom can be attainable (they did this with Comcast when buying Adelphia Communications). Backside line: Whereas many acquisition alternatives exist or will floor within the subsequent 12 months, merging Lengthy Island and components of New Jersey into the remainder of the New York Metropolis metropolitan space would create worth for Constitution shareholders. Profitable execution of synergy achievement is excessive given the latest expertise with Time Warner Cable and Brighthouse.
Now we have lengthy argued on this column that re-clustering of belongings (telco, cable, wi-fi) creates synergies and aggressive “moats.” Constitution might have the chance to have an effect on a transaction and may take a look at half/ all of Altice prior to purchasing again further shares.
Constitution and Comcast proceed to keep up their broadband share, however the different three corporations within the Telco High 5 usually are not idle of their fiber methods. It’s time to take some calculated dangers which are targeted on creating aggressive benefit. Comcast has extra items to work with and, after a really profitable Olympics, ought to rethink their playbook. Constitution is definitely taking part in their (weaker) hand very properly, and can probably shock on many fronts, regardless of AT&T’s continued FTTH deployment success.
That’s it for this week. Search for the fourth week of Apple iPhone 16 Professional and Professional Max availability charts tonight on the web site, and within the subsequent Transient, we are going to start to digest every earnings report. Till then, in case you have mates who want to be on the e-mail distribution, please have them ship an e mail to [email protected] and we are going to embrace them on the record (or they will join instantly via the web site).
Lastly – go Sporting KC, Davidson School Soccer, and Kansas Metropolis Chiefs!
Necessary disclosure: The opinions expressed in The Sunday Transient are these of Jim Patterson and Patterson Advisory Group, LLC, and don’t replicate these of CellSite Options, LLC, or Fort Level Capital.
