Charter Earnings: We Still Aren’t Fond of Buying Wireless Growth With Promotions
One of the primary debates coming out of Charter’s CHTR first-quarter earnings release concerns its wireless business. The firm added a record 686,000 net new wireless customers during the quarter, equal to more than 35% of the industry total. Spectrum One, which offers broadband and wireless at $50 per month for a year—essentially free wireless service with inexpensive broadband—is driving wireless growth, though management claims most new customers are taking other rate plans. The question is whether Spectrum One customers will keep wireless service once the promotion expires. Charter expects they will, on balance, but we remain skeptical. Regardless, we expect broadband will remain at the center of Charter’s customer relationships and drive the vast majority of profit over the long term. Our fair value estimate remains $580.
There’s likely some truth to T-Mobile’s argument that many Spectrum One wireless lines are “nice to have,” such as for younger children. We suspect a good portion of these lines will roll over to family plans with one of the major carriers, especially among those looking for a phone subsidy.
Spectrum One does appear to be driving broadband growth at the margin. Charter added 76,000 net broadband customers during the quarter, down from 185,000 a year ago but significantly better than peer Comcast (5,000) or rivals Verizon (44,000) and AT&T (42,000 net losses). Fixed-wireless services again took most new broadband customers during the quarter, igniting a debate about the stickiness of these customers, as well.
Total revenue increased 3.4% year over year, consistent with recent quarters, despite a sharp decline in ad sales, as broadband and television pricing remain solid. The consolidated EBITDA margin contracted slightly for the third consecutive quarter, coming in at 37.7% versus 38.4% a year ago. Higher wireless losses, marketing spending, and customer service costs continue to hit profitability.
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