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Charter (CHTR) Q3 Earnings Beat, User Growth Aids Revenues

Zacks Equity Research

Charter Communications CHTR reported third-quarter 2019 earnings of $1.74 per share that beat the Zacks Consensus Estimate by eight cents but declined 17.5% year over year.

Revenues of $11.45 billion beat the consensus mark of $11.43 billion. The top line increased 5.1% on a year-over-year basis owing to growth in Internet, mobile, commercial and video revenues, and significant customer wins.

Segment Details

Residential revenues (78.9% of total revenues) came in at $9.03 billion, up 4.4% from the year-ago quarter.

Residential revenue per residential customer (excluding mobile) totaled $112, up 0.8% year over year, driven by promotional rate step-ups and rate adjustments. However, a higher percentage of non-video customers, an increasing mix of Choice and Stream customers within the company’s video customer base and lower pay-per-view and video on demand revenues hurt the top line.

Video revenues (48.3% of residential revenues) increased 0.6% to $4.36 billion, driven by annual rate adjustments and promotional roll-off.

Internet revenues (46.5% of residential revenues) grew 10.1% year over year to $4.20 billion owing to an increase in Internet customers, promotional roll-off and rate adjustments.
 

Charter Communications, Inc. Price, Consensus and EPS Surprise

 

Charter Communications, Inc. Price, Consensus and EPS Surprise

Charter Communications, Inc. price-consensus-eps-surprise-chart | Charter Communications, Inc. Quote

 

However, voice revenues (5.3% of revenues) decreased 6.8% to $477 million due to value-based pricing and a decline in wireline voice customers.

Commercial revenues (14.1% of total revenues) increased 4.1% year over year to $1.62 billion. Small and medium business (SMB) revenues (60.2% of commercial revenues) rose 5.6% year over year to $974 million. Enterprise revenues (39.8% of commercial revenues) increased 1.9% to $644 million.

However, commercial revenue growth was negatively impacted by the divestiture of Navisite, Charter’s managed cloud services business within Spectrum Enterprise, on Sep 6.

Moreover, advertising sales (3.4% of total revenues) declined 10.5% year over year to $394 million, primarily due to lower political revenues.

Mobile revenues (1.7% of total revenues) totaled $192 million compared with $17 million in the year-ago quarter.

Other revenues (1.9% of total revenues) came in at $215 million, down 5.7% year over year.

Subscriber Statistics

As of Sep 30, Charter had 28.967 million total customer relationships. The company added more than 1.1 million net new customer relationships over the past twelve months.

In the reported quarter, total residential and SMB customer relationships increased 310K compared with 234K in the year-ago quarter.

Moreover, residential and SMB Internet net additions were 380K in the reported quarter.

As of Sep 30, Charter had 24.6 million residential Internet customers, with 85% subscribing to tiers that provided 100 Mbps or more speed.

The company recently doubled its minimum Internet speed to 200 Mbps in several markets at no additional cost to new and existing Spectrum Internet residential and SMB customers.

Notably, 200 Mbps is currently the slowest speed offered to new Internet customers in approximately 60% of Charter's footprint. Moreover, 100 Mbps is offered as the slowest speed in the remaining 40% of its footprint.

Further, Charter added 276K mobile lines in the third quarter compared with 208K mobile lines in the previous quarter. As of Sep 30, the company served a total of 794K mobile lines.

However, Charter continued to lose video (75K in the reported quarter) and wireline voice customers (net losses were 190K).

Operating Details

Total operating costs and expenses increased 6.1% from the year-ago quarter to $7.36 billion. As a percentage of revenues, total operating costs and expenses expanded 60 basis points (bps) to 64.3%.

Programming costs rose 0.4% year over year to $2.79 billion due to a rise in renewals and contractual programming. However, as a percentage of revenues, programming costs shrank 110 bps year over year.

Regulatory, connectivity and produced content costs were up 12.1% to $612 million, primarily due to increased cost of video customer premise equipment sold to customers, higher regulatory and franchise pass-through fees, and elevated original programming costs. As a percentage of revenues, regulatory, connectivity and produced content costs increased 30 bps year over year.

Costs to service customers grew 2.2% year over year to $1.89 billion. Marketing costs were $793 million, up 0.4% year over year.

However, as a percentage of revenues, costs to service customers and marketing costs contracted 50 bps and 30 bps, on a year-over-year basis, respectively.

Notably, mobile costs were $337 million compared with $94 million in the year-ago quarter.

Adjusted EBITDA increased 3.4% year over year to $4.09 billion. However, adjusted EBITDA margin contracted 60 bps to 35.7%.

Balance Sheet & Cash Flow

As of Sep 30, 2019, cash and cash equivalents were $508 million compared with $696 million as of Jun 30, 2019.

Moreover, as of Sep 30, total principal amount of debt was $74.2 billion. At the end of the reported quarter, the ratio of net debt to the past 12-month adjusted EBITDA was 4.47x. Charter intends to stay at or just below the high end of its targeted 4x to 4.5x leverage range.

In third-quarter 2019, net cash flow from operating activities totaled $2.94 billion, higher than $2.76 billion in the previous quarter.

Capital expenditures were $1.7 billion that included $100 million related to the mobile business. The company generated $1.3 billion of consolidated free cash flow compared with $1.1 billion in the previous quarter.

In the reported quarter, the company bought back 7.8 million shares for approximately $3.1 billion.

2019 Guidance

Charter currently expects 2019 capital expenditure to be slightly below $7 billion compared with about $8.9 billion in 2018.

Zacks Rank & Stocks to Consider

Currently, Charter carries a Zacks Rank #3 (Hold).

Activision Blizzard ATVI, Discovery DISCA and Lionsgate Entertainment LGF.A are stocks worth considering in the broader Consumer & Discretionary sector. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Activision Blizzard, Discovery and Lionsgate are scheduled to report quarterly results on Nov 7.

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