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Charter Communications (CHTR) Q1 Earnings, Revenues Up Y/Y

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Charter Communications (CHTR - Free Report) reported first-quarter 2019 earnings of $1.13 per share that lagged the Zacks Consensus Estimate of $1.34. However, the figure surged 59.2% year over year.

Revenues of $11.2 billion came in line with the consensus mark but increased 5.1% on a year-over-year basis attributable to growth in Internet, video, mobile and commercial revenues.

Notably, revenues increased 4.1% 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 (79.5% of total revenues) came in at $8.91 billion, up 4.2% from the year-ago quarter. Video revenues (49.2% of residential revenues) increased 2.1% year over year to $4.38 billion on the back of annual rate adjustments and promotional rolloff.

Internet revenues (45.2% of residential revenues) increased 8.6% year over year to $4.02 billion due to increase in Internet customers, promotional rolloff and rate adjustments. However, voice revenues (5.9% of revenues) decreased 9.4% year over year to $504 million due to decline in wireline voice customers in the prior 12-month period.

Commercial revenues (14.2% of total revenues) increased 4.3% year over year to $1.59 billion. Small and medium business (SMB) and Enterprise revenues increased 5% and 3.4%, respectively.

However, commercial revenue growth came below commercial customer relationship growth in first-quarter 2019 due to migration of customers to Spectrum pricing and packaging from Legacy TWC and Legacy Bright House.

However, advertising sales (3.1% of total revenues) declined 3.1% year over year to $345 million, primarily due to lower political revenues. Other revenues (2% of total revenues) came in at $221 million, down 1.3% year over year.

Subscriber Statistics

In the reported quarter, total residential and SMB customer relationships increased 351,000 compared with 264,000 in the year-ago quarter. As of Mar 31, 2019, Charter had 26.6 million residential customer relationships and 50 million residential Primary Service Units (PSUs). Notably, 74% of residential customers migrated to Spectrum pricing and packaging.

The company had 28.5 million total customer relationships and 53.5 million total PSUs at the end of the quarter.

The company’s residential customer relationships grew 321,000 in the quarter under review compared with an increase of 231,000 in the year-ago quarter.

Residential video customers in this quarter declined 152,000 while voice customers declined 121,000 in the year-ago period. Residential video customers were 16 million as of Mar 31, 2019.

Notably, in the reported quarter, Charter launched an over-the-top (OTT) video service, Spectrum TV Essentials. The service is available to Spectrum Internet users in Charter’s footprint who do not avail Spectrum video services.

Residential wireline voice customers in this quarter declined 120,000 compared with a decline of 54,000 in the year-ago period. Residential wireline voice customers were 10 million as of Mar 31, 2019.

In first-quarter 2019, SMB customer relationships increased 30,000 compared with an increase of 33,000 in the year-ago quarter. Moreover, SMB PSUs increased 58,000 compared with an increase of 70,000 in the first quarter of 2018. SMB customer relationships and SMB PSUs were 1.9 million and 3.2 million respectively as of Mar 31, 2019.

Enterprise PSUs in the first quarter of 2019 increased 5,000 compared with an increase of 8,000 in the first quarter of 2018. Enterprise PSUs were 253,000 as of Mar 31, 2019.

Notably, residential revenue per customer (excluding mobile) increased 1% year over year to $112.47 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 first quarter of 2019, Charter added 398,000 residential Internet customers compared with net additions of 334,000 in the year-ago quarter. The increase was primarily driven by lower churn rates. As of Mar 31, 2019, Charter had 24 million residential Internet customers.

More than 80% of these residential Internet customers are subscribed to tiers that provide 100 Mbps or more speed and more than 30% are subscribed to tiers that provide 200 Mbps or more speed. Moreover, Charter is witnessing strong demand for the tiers that provide 400 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.

However, the company noted that its Internet penetration rate is about 50%, which is low when compared to Charter’s potential to deliver faster and cost efficient services.

In first quarter 2019, Charter added 176,000 mobile lines compared with net additions of 113,000 in the year-ago quarter. As of Mar 31, 2019, a total of 310,000 mobile lines were served by the company.

Operating Details

Total operating costs and expenses increased 5.7% from the year-ago quarter to $7.2 billion. As a percentage of revenues, total operating costs and expenses declined 10 basis points (bps) to 63.7%.

Programming costs increased 4.1% year over year to $2.87 billion due to increase in renewals and contractual programming. Regulatory, connectivity and produced content costs were up 5% from the year-ago quarter to $561 million, primarily due to increase in cost of video customer premise equipment, regulatory and franchise pass-through fees.

Costs to service customers declined 1.7% year over year to $1.82 billion and marketing costs declined 2% year over year to $735 million.

Notably, mobile costs were $260 million in the quarter compared with $8 million in the year-ago period. The increase in costs is due to device cost, market launch cost and operating expenses.

Adjusted EBITDA increased 4.2% from the year-ago quarter to $4.06 billion. Adjusted EBITDA margin contracted 30 bps on a year-over-year basis to 36.2%.

Balance Sheet & Cash Flow

As of Mar 31, 2019, cash and cash equivalents were $1.45 billion compared with $551 million as of Dec 31, 2018.

In first-quarter 2019, net cash flow from operating activities totaled $2.69 billion, which was in line with the year-ago quarter’s figure.

Capital expenditures totaled $1.7 billion compared with $2.2 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 $645 million of consolidated free cash flow this quarter as against negative free cash flow of $49 million in the year-ago period. The increase was due to lower capital expenditures.

In the reported quarter, the company bought back almost 2.9 million shares for approximately $963 million.

2019 Guidance

Cable capital expenditure is expected to be $7 billion compared with about $8.9 billion in 2018.

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 SeaWorld Entertainment, Inc. , Electronic Arts Inc. (EA - Free Report) and YETI Holdings, Inc. (YETI - Free Report) . While SeaWorld Entertainment and EA sport a Zacks #1 Rank (Strong Buy), YETI Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for SeaWorld Entertainment, EA and YETI Holdings is pegged at 7%, 16.5% and 16%, respectively.

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