Charter Earnings: Heavy Discounting Continues to Drive Customer Growth and Hit Margins

Charter’s CHTR differentiated and aggressive approach to the market showed clearly in its second-quarter results, with solid customer additions, weak revenue growth, and muted profitability. We still don’t like the firm’s deep discounting on broadband and wireless service with Spectrum One, which we think will challenge customer growth down the road. But we still believe Charter is well positioned to generate consistent cash flow over time. Our fair value estimate remains $580.

Charter added another 648,000 net wireless customers during the quarter, down slightly from the prior quarter but well ahead of a year ago (344,000) prior to the launch of Spectrum One. The wireless customer base has expanded 55% over the past year, which has had a positive effect on the core broadband business. Charter added 77,000 net broadband customers, better than the 21,000 net losses a year ago and besting peer Comcast, which lost 19,000 net customers. The downside is that Spectrum One has pressured revenue per customer. Residential broadband ARPU increased only 2% year over year despite a price increase late last year, while wireless ARPU declined 15% to less than $30 per month. With only modest business services revenue growth and a sharp drop in ad revenue on lower political spending, total revenue increased less than 1% year over year.

EBITDA, including stock-based compensation, declined nearly 1% versus a year ago. The margin contraction stands in contrast to Comcast, which reported record U.S. cable profitability for the quarter. Charter called out higher employee costs following actions taken late last year to improve retention, which should provide benefits in the future. However, increased marketing costs also hit margins and wireless losses were also likely higher than a year ago.