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Charter Communications (CHTR) Q4 Revenues Up Y/Y, Earnings Down

Zacks Equity Research

Charter Communications CHTR reported fourth-quarter 2018 earnings of $1.29 per share that lagged the Zacks Consensus Estimate of $1.49. The figure was also well below the year-ago earnings of $34.56 per share. The decrease was primarily due to lack of GAAP tax benefit in the recently reported quarter results coupled with “higher interest expense, pension derivative and other non-cash adjustments.”

Revenues of $11.23 billion beat the consensus mark of $11.16 billion and increased 5.9% on a year-over-year basis due to growth in Internet, video, advertising and commercial revenues.

Notably, revenues increased 3.9% year over year excluding advertising revenues, and mobile revenues.

Charter Communications, Inc. Price, Consensus and EPS Surprise

Charter Communications, Inc. Price, Consensus and EPS Surprise | Charter Communications, Inc. Quote

Segment Details

Residential revenues (78.1% of revenues) came in at $8.77 billion, up 3.9% from the year-ago quarter. Video revenues (49.7% of revenues) increased 3.3% year over year to $4.36 billion on the back of higher revenue allocation due to the launch of Spectrum pricing and packaging and annual rate adjustments.

Internet revenues (44.4% of revenues) increased 7.1% year over year to $3.89 billion due to increase in Internet customers and rate adjustments. However, voice revenues (5.9% of revenues) declined 12.3% year over year to $515 million due to decline in voice customers and lower revenues due to the launch of Spectrum pricing and packaging.

The company stated that the total Internet customer base increased 1.3 million or 5.3%.

Commercial revenues (14% of revenues) increased 4.5% year over year to $1.57 billion. Small and medium business (SMB) and Enterprise revenues increased 3.7% and 5.7%, respectively.

However, commercial revenue growth came below commercial customer relationship growth in fourth quarter 2018 due to migration of customers to Spectrum pricing and packaging from Legacy TWC and Legacy Bright House.

Advertising sales (5% of revenues) surged 34.1% year over year to $562 million, primarily driven by higher political revenues. Other revenues (2.1% of revenues) came in at $234 million, up 0.9% year over year.

Subscriber Statistics

In the reported quarter, total residential and SMB customer relationships increased 248,000 compared with 209,000 in the year-ago quarter. For the year, total residential and SMB customer relationships increased 3.5% to 28.1 million.

As of Dec 31, 2018, Charter had 26.3 million residential customer relationships and 49.9 million residential Primary Service Units (PSUs). Notably, 70% of residential customers migrated to Spectrum pricing and packaging.

The company’s residential customer relationships grew 207,000 this quarter compared with an increase of 170,000 in the year-ago quarter. Residential PSUs increased 170,000 this quarter compared with an increase of 288,000 in the year-ago quarter owing to a decline in voice and video net additions.

Residential voice customers in this quarter declined 83,000 while fourth-quarter 2017 voice customers grew 23,000 primarily due to lower triple play selling mix. Residential voice customers were 10.1 million as of Dec 31, 2018.

In fourth-quarter 2018, SMB customer relationships increased 41,000 compared with an increase of 39,000 in the year-ago quarter. Moreover, SMB PSUs increased 81,000 compared with an increase of 85,000 during the fourth quarter of 2017. SMB customer relationships and SMB PSUs were 1.8 million and 3.2 million respectively as of Dec 31, 2018.

Enterprise PSUs in the fourth quarter of 2018 increased 5,000 compared with an increase of 10,000 in the fourth quarter of 2017. Enterprise PSUs were 248,000 as of Dec 31, 2018.

Notably, residential revenue per customer increased 0.9% year over year to $111.78 in the reported quarter due to rate adjustments and promotional rate step-ups offset by single play Internet sell-in.

Higher Internet Speed Attracts Subscribers

In the fourth quarter of 2018, Charter added 289,000 residential Internet customers compared with net additions of 263,000 in the year-ago quarter. As of Dec 31, 2018, Charter had 23.6 million residential Internet customers.

More than 80% of these residential Internet customers are subscribed to tiers that provide 100 Mbps or more speed. Currently, 100 Mbps is the slowest speed offered to new Internet customers in 99% of Charter's footprint. Moreover, the company doubled minimum Internet speed to 200 Mbps in a number of markets for new and existing Spectrum Internet customers at no extra cost.

During the quarter, the company expanded the availability of its Spectrum Internet Gig service (940 Mbps) to a number of new markets. The service, which uses DOCSIS 3.1 technology, now covers approximately 99% of its footprint. Therefore, Charter’s Spectrum Internet Gig service is available across its entire footprint.

All-Digital Initiative Complete

As of Dec 31, 2018, Charter’s entire residential and business footprint was All Digital including its legacy TWC and legacy Bright footprint.

Notably, the All-Digital initiative enables Charter to offer advanced products and services, and provides residential customers with two-way digital set-top boxes to enhance video picture quality; an interactive programming guide and video on demand on all TV outlets in residences.

Charter, which launched its Spectrum Mobile service in September 2018, added more than 110,000 mobile lines in the reported quarter.

Operating Details

Total operating costs and expenses increased 6.7% from the year-ago quarter to $7.06 billion. As a percentage of revenues, total operating costs and expenses increased 50 basis points (bps) to 62.9%.

Programming costs increased 5.6% year over year to $2.79 billion. Regulatory, connectivity and produced content costs were up 11.7% from the year-ago quarter to $571 million, primarily due to the company's adoption of FASB's ASU 2014-09 standard as of Jan 1, 2018.

Costs to service customers and marketing costs declined 0.8% year over year to $1.84 billion and 2.4% year over year to $732 million, respectively.

Notably, mobile costs were $211 million in the quarter due to device cost, market launch cost and operating expenses.

Adjusted EBITDA increased 4.6% from the year-ago quarter to $4.16 billion. Adjusted EBITDA margin contracted 50 bps on a year-over-year basis to 37.1%.

Balance Sheet & Cash Flow

As of Dec 31, 2018, cash and cash equivalents were $551 million compared with $612 million as of Sep 30, 2018.

In fourth-quarter 2018, net cash flow from operating activities totaled $3.17 billion compared with $3.26 billion reported in the year-ago quarter.

Capital expenditures totaled $2.43 billion compared with $2.59 billion in the year-ago quarter, primarily driven by a decline in consumer premises equipment (CPE) and scalable infrastructure spending. Lower set-top box purchases contributed to the decline of CPE.

Moreover, Charter generated $885 million of consolidated free cash flow this quarter compared with $1.22 billion in the year-ago period, primarily due to lower cash flow benefit from working capital.

In the reported quarter, the company bought back almost 4.3 million shares for approximately $1.4 billion. In 2018, Charter bought back almost 16.2 million shares for approximately $5 billion.

Guidance

In 2019, capital spending and cable capital expenditure is expected to decrease significantly. Cable capital expenditure is expected to be $7 billion compared with about $8.9 billion in 2018.

Additionally, management expects cash flow from the cable business to increase on the back of investments made and customer-focuses strategy.

However, SMB average revenue per user (ARPU) is expected to decline in 2019 owing to repricing.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader consumer-discretionary sector include Discovery DISCA, Planet Fitness PLNT and Churchill Downs, Inc. CHDN. All the three stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Discovery, Planet Fitness and Churchill Downs is projected to be 26.8%, 19.6% and 20%, respectively.

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