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Charter (CHTR) Up 2.6% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Charter Communications (CHTR - Free Report) . Shares have added about 2.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Charter due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Charter Communications reported second-quarter 2018 adjusted earnings of $1.15 per share that beat the Zacks Consensus Estimate by 20 cents and surged 121.2% from the year-ago quarter.

Revenues increased 4.8% year over year to $10.85 billion that beat the Zacks Consensus Estimate of $10.84 billion.

Segment Details

Residential revenues (79.8% of revenues) came in at $8.66 billion, up 4.6% from the year-ago quarter. Video and Internet revenues increased 5.9% and 7.3%, respectively. Voice revenues plunged 18.3% year over year.

Management stated that launch of Spectrum pricing and packaging in legacy Time Warner Cable (“TWC”) and legacy Bright House footprints drove top-line growth.

Commercial revenues (14.2% of revenues) increased 4.3% year over year to $1.54 billion. Small and medium business (SMB) and Enterprise revenues increased 2.8% and 6.6%, respectively.

Advertising sales (3.9% of revenues) climbed 12.1% year over year to $427 million, primarily driven by higher political revenues. Other revenues (2% of revenues) came in at $221 million, up 1.8% year over year.

Subscriber Statistics

In the reported quarter, total residential and SMB customer relationships increased 196K as compared with 213K in the year-ago quarter.

As of Jun 30, 2018, Charter had 27.6 million total customer relationships and 49.6 million total Primary Service Units (PSUs) as compared with 27.5 million total customer relationships and 52.5 million total PSUs as of Mar 31, 2018.

Total residential and SMB video, Internet and voice customers increased by 202K. Charter added 218K net Internet subscribers, but lost 57K and 8K video and voice subscribers, respectively.

Moreover, Monthly Residential Revenue per Residential Customer decreased 7% year over year to $176.96.

Higher Internet Speed Attracts Subscribers

As of Jun 30, Charter had 23.1 million residential Internet customers. More than 80% of these residential Internet customers are subscribed to tiers that provided 60 Mbps or more speed. Further, more than 60% have subscribed to Internet tiers that provided 100 Mbps or more speed. Currently, 100 Mbps is the slowest speed offered to new Internet customers in 99% of Charter's footprint.

During the quarter, the company further 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 60% of its footprint.

Charter expects to launch its Spectrum Internet Gig service to nearly its entire footprint by the end of 2018. Additionally, the company is doubling minimum Internet speeds to 200 Mbps in a number of markets at no additional cost to new and existing Spectrum Internet customers.

All-Digital Initiative Continues

At the end of the second quarter, 91% of Charter's footprint was all-digital. The company continued with its all-digital efforts in almost 6% of legacy TWC's footprint and 50% of legacy Bright House's presence.

All-digital initiative allows Charter to offer more advanced products and services, and provides residential customers with two-way digital set-top boxes, which offer better video picture quality, an interactive programming guide and video on demand on all TV outlets in residences.

Charter launched its Spectrum Mobile service on Jun 30.

Operating Details

Total operating costs and expenses increased 4.5% from the year-ago quarter to $6.80 billion. As percentage of revenues, total operating costs and expenses declined 20 basis points (bps) to 62.7%.

Programming costs increased 5.8% year over year to $2.80 billion, reflecting contractual programming increases, renewals and a higher number of expanded basic video customers on a year-over-year basis.

Regulatory, connectivity and produced content costs were up 5.3% from the year-ago quarter to $560 million, primarily due to the company's adoption of FASB's ASU 2014-09 standard as of Jan 1, 2018.

Both costs to service customers and marketing costs increased 1.2% year over year to $1.78 billion and $769 million, respectively. Moreover, mobile costs were $33 million in the quarter.

Adjusted EBITDA increased 5.3% from the year-ago quarter to $4.05 billion. Adjusted EBITDA margin expanded 20 bps on a year-over-year basis to 37.3%.

Balance Sheet & Cash Flow

As of Jun 30, 2018, cash and cash equivalents were $773 million as compared with $576 million as of Mar 31, 2018.

In second-quarter 2018, net cash flow from operating activities totaled $3.1 billion, as compared with $2.7 billion reported in the previous quarter.

Capital expenditures totaled $2.4 billion as compared with $2.2 billion in the year-ago quarter, primarily driven by in-year timing differences and its all-digital initiative.

Charter generated $804 million of consolidated free cash flow this quarter, including $116 million of investment in mobile.

The company bought back almost 6.4 million shares for approximately $1.9 billion.

Charter also finalized its mobile joint venture with Comcast, with a portion of the funding representing an equity investment on the formers balance sheet. Moreover, a portion representing a prepayment of software development and related services for the mobile back-office platform will also be accounted for in the balance sheet.

Guidance

For 2018, Charter expects cable capital expenditures, as a percentage of cable revenues, to be similar or slightly lower than 2017.

For 2019, cable capital expenditure is expected to decrease in absolute dollar terms and in terms of capital intensity.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Charter has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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