It has been about a month since the last earnings report for Charter Communications (CHTR). Shares have lost about 4.9% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Charter due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Charter’s Q2 Earnings Miss, Revenues Up Y/Y
Charter reported second-quarter 2019 earnings of $1.39 per share that lagged the Zacks Consensus Estimate of $1.79. However, the figure jumped 20.9% year over year.
Revenues of $11.35 billion came below the consensus mark of $11.39 billion. However, the top line increased 4.5% on a year-over-year basis attributable to growth in Internet, mobile, commercial and video revenues, and significant customer wins.
Residential revenues (79.2% of total revenues) came in at $8.98 billion, up 3.7% from the year-ago quarter. Video revenues (48.9% of residential revenues) increased 0.6% to $4.39 billion on the back of annual rate adjustments and promotional roll off. This was partly offset by a decline in video customers last year, a higher mix of Choice and Stream customers within the video segment, and lower pay-per-view and video on demand revenues.
Internet revenues (45.7% of residential revenues) increased 8.8% year over year to $4.1 billion due to increase in Internet customers, promotional roll off and rate adjustments. However, voice revenues (5.4% of revenues) decreased 7.9% to $489 million due value-based pricing, and a decline in wireline voice customers a year ago.
Commercial revenues (14.2% of total revenues) increased 4.7% year over year to $1.62 billion. Small and medium business (SMB) and Enterprise revenues increased 5.2% and 4%, respectively.
However, commercial revenue growth was below commercial customer relationship growth due to migration of customers to Spectrum pricing and packaging from Legacy TWC and Legacy Bright House.
Moreover, advertising sales (3.5% of total revenues) declined 7.5% year over year to $395 million, primarily due to lower political revenues. Other revenues (1.7% of total revenues) came in at $196 million, down 11.3%.
Mobile revenues (1.4% of total revenues) totaled $158 million.
In the reported quarter, total residential and SMB customer relationships increased 203,000 up 3.8% year over year. As of Jun 30, 2019, Charter had 1.9 million SMB customer relationships and 258,000 enterprise Primary Service Units (PSUs). Enterprise PSUs increased by 5,000 during the second quarter compared with 7,000 rise in the year-ago quarter. Notably, 82% of residential customers migrated to Spectrum pricing and packaging.
The company had 28.7 million total customer relationships at the end of the quarter.
The company’s residential customer relationships grew 164,000 compared with an increase of 141,000 in the year-ago quarter.
Residential video customers declined 2.5% while voice customers fell 5%. Residential video customers were 15.8 million as of Jun 30, 2019.
Residential wireline voice customers declined 207,000 compared with a fall of 45,000 in the year-ago quarter. Residential wireline voice customers were 9.8 million as of Jun 30, 2019.
In second-quarter 2019, SMB customer relationships increased 39,000 compared with a rise of 55,000 in the year-ago quarter. SMB customer relationships and SMB PSUs were 1.9 million as of Jun 30, 2019.
Notably, residential revenue per customer (excluding mobile) increased 0.3% year over year to $112.2 due to “lower rate of SPP migration and promotional campaign roll-off and rate adjustments.”
Higher Internet Speed Attracts Subscribers
In the second quarter, Charter added 221,000 residential Internet customers compared with net additions of 218,000 in the year-ago quarter. The increase was primarily driven by lower churn rates. As of Jun 30, 2019, the company had 24.2 million residential Internet customers.
More than 85% of these residential Internet customers are subscribed to tiers that provide 100 Mbps or more speed. Moreover, Charter has doubled its minimum Internet speeds to 200 Mbps in a number of markets without any additional cost to Spectrum Internet customers.
In the second quarter, Charter added 208,000 mobile lines. As of Jun 30, 2019, a total of 518,000 mobile lines were served by the company.
Total operating costs and expenses increased 5.3% from the year-ago quarter to $7.16 billion. As a percentage of revenues, total operating costs and expenses increased 40 basis points (bps) to 63.1%.
Capital expenditures were $1.6 billion compared with $2.4 billion in the prior-year quarter, primarily due to a decline in consumer premises equipment (CPE) and scalable infrastructure spending. Lower set-top box purchases contributed to the decline of CPE.
Programming costs increased 0.9% year over year to $2.83 billion due to rise in renewals and contractual programming. Regulatory, connectivity and produced content costs were up 6.7% to $597 million, primarily due to increase in cost of video customer premise equipment, regulatory and franchise pass-through fees.
Costs to service customers declined 0.9% year over year to $1.77 billion and marketing costs fell 0.1% to $768 million.
Notably, mobile costs were $277 million compared with $33 million in the year-ago quarter. The increase in costs was due to mobile device cost associated with EIP device revenues, subscriber acquisition and usage cost and operating expenses, including personal and overhead cost and Charter’s portion of a joint venture with Comcast.
Adjusted EBITDA increased 3.3% from the year-ago quarter to $4.2 billion. Adjusted EBITDA margin contracted 40 bps to 36.9%.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash and cash equivalents were $696 million compared with $1.45 billion recorded in the previous quarter.
In second-quarter 2019, net cash flow from operating activities totaled $2.76 billion, higher than $2.69 billion in the previous quarter.
Moreover, Charter generated $1.1 billion of consolidated free cash flow compared with $645 million in the previous quarter. The increase was due to lower capital expenditures, partly offset by a decline in net cash flows from operating activities and accrued capital expenditures.
In the reported quarter, the company bought back almost 2.7 million shares for approximately $998 million.
Cable capital expenditure is expected to be $7 billion compared with about $8.9 billion in 2018, despite a lower run rate in the first half of this year.
Management expects the second half of 2019 to have a neutral impact to free cash flow. Changes in cable working capital are likely to be neutral to positive to full-year free cash flow performance.
The company expects to continue adding mobile customers in the forthcoming quarters.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
Currently, Charter has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Charter has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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