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Why Is Charter (CHTR) Down 1.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for Charter Communications (CHTR - Free Report) . Shares have lost about 1.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Charter’s Q3 Benefits From Higher Residential Revenues

Charter Communications reported third-quarter 2018 adjusted earnings of $2.11 per share compared with 19 cents in the year-ago quarter. The figure beat the Zacks Consensus Estimate by a massive $1.07.

Although revenues of $10.89 billion lagged the consensus mark of $10.96 billion, the figure increased 4.2% on a year-over-year basis.

Migration of customers to Spectrum pricing and packaging, installation of uniform business practices, the integration of various products, and parallel network upgrades and integration adversely affected the company’s revenues.

Segment Details

Residential revenues (79.8% of revenues) came in at $8.65 billion, up 3.3% from the year-ago quarter. Video (39.8% of revenues) and Internet revenues (35% of revenues) increased 2.9% and 7.1%, respectively. Voice revenues declined 16.2% year over year.

The company stated that the total Internet customer base increased 1.2 million or 5.3%.

Commercial revenues (14.3% of revenues) increased 4.3% year over year to $1.55 billion. Small and medium business (SMB) and Enterprise revenues increased 2.9% and 6.4%, respectively.

Advertising sales (4% of revenues) climbed 18% year over year to $440 million, primarily driven by better inventory utilization. Other revenues (2.1% of revenues) came in at $228 million, up 3.2% year over year.

Subscriber Statistics

In the reported quarter, total residential and SMB customer relationships increased 234,000 compared with 215,000 in the year-ago quarter.

As of Sep 30, 2018, Charter had 26.1 million residential customer relationships and 49.7 million residential Primary Service Units (PSUs).

The company’s residential customer relationships grew 192,000 this quarter compared with an increase of 172,000 in the year-ago quarter. However, Residential PSUs plunged 79,000 year over year, owing to a decline in voice net additions.

Residential voice customers in this quarter declined 107,000, while third-quarter 2017 voice customers grew 26,000. This decline was due to lower triple play selling mix and lower retention at Time Warner Cable (TWC).

In the third quarter, SMB customer relationships remained approximately flat year over year at 42,000. Moreover, SMB PSUs increased 84,000 compared with an increase of 89,000 during the third quarter of 2017.

Notably, Residential revenue per customer increased 0.4% year over year to $111.13.

Higher Internet Speed Attracts Subscribers

As of Sep 30, 2018, Charter had 23.3 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 has doubled the Internet speed to 200 Mbps for the new and existing Spectrum Internet customers at no extra cost.
 
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 95% of its footprint.

Charter expects to launch its Spectrum Internet Gig service across its entire footprint by the end of 2018.

All-Digital Initiative Continues

At the end of the third quarter, 96% of Charter's footprint was All Digital. The company continued with its all-digital efforts in almost 3% of legacy TWC's footprint and 23% of legacy Bright House's presence.

The company believes that by the end of this year, it will be fully digitized as it continues to deploy fully functioning two-way digital set-top box. The total expenditure in All-Digital this quarter declined 7 million year over year.

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 launched its Spectrum Mobile service in September, which is now available for both Android and iPhone users.
 
Operating Details

Total operating costs and expenses increased 4.6% from the year-ago quarter to $6.94 billion. As a percentage of revenues, total operating costs and expenses increased 20 basis points (bps) to 63.7%.

Programming costs increased 3% year over year to $2.78 billion owing to contractual rate increases and renewals.

Regulatory, connectivity and produced content costs were up 4.4% from the year-ago quarter to $546 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 increased 1.7% year over year to $1.85 billion and 3.7% year over year to $790 million, respectively. The increase in marketing costs was due to ad sales cost, enterprise cost and IT cost from ongoing integrations. Moreover, through changes in business practices, the company is trying to reduce relationship service costs.

Notably, mobile costs were $94 million in the quarter due to device cost, market launch cost and operating expenses.

Adjusted EBITDA increased 3.5% from the year-ago quarter to $3.95 billion. Adjusted EBITDA margin declined 20 bps on a year-over-year basis to 36.3%.

Balance Sheet & Cash Flow

As of Sep 30, 2018, cash and cash equivalents were $612 million compared with $621 million as of Dec 31, 2017.

In third-quarter 2018, net cash flow from operating activities totaled $2.8 billion compared with $2.9 billion reported in the third quarter of 2017. The year-over-year decline in net cash flow from operating activities was primarily due to an unfavorable change in working capital. The company had lower severance-related expenses this quarter.

Capital expenditures totaled $2.1 billion compared with $2.4 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 $532 million of consolidated free cash flow this quarter.

The company bought back almost 3.5 million shares for approximately $1.1 billion.

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. Moreover, the company expects to witness a decline in working capital investment in the first quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

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 top 40% 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.

Outlook

Estimates have been broadly trending upward 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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