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Where Charter's Chugging Along... & Where It's Not

Mari Silbey

From the precipitous post-earnings-report drop in stock price, it would be reasonable to assume that Charter had a disastrous Q1. It didn't. Charter beat revenue and income expectations, pulling in $10.7 billion in revenue for the quarter, compared to Zacks analyst predictions of $10.63 billion, and reporting earnings per share of $0.70, beating analyst forecasts of $0.44.

Still, the stock price tumbled as much as 16% in early morning trading. Why?

The best guess is that investors are concerned about continued subscriber losses in the residential video market, and disconcerted by higher-than-normal capital expenditures. Charter Communications Inc. shed 122,000 residential video subs in Q1, compared to 100,000 in the year-ago quarter. And capex was up to $2.2 billion, compared to $1.6 billion in Q1 2017, largely because of Charter's continued transition to all-digital video services.

The investor response ignores a lot of good news in the Charter report, however. Residential Internet subs increased by 331,000 customers (not as positive as the 428,000 added in Q1 2017, but still impressive), and both Internet and video revenues ticked upwards, thanks to price hikes and broadband speed increases. As of the end of March, Charter had 22.9 million residential Internet customers, less than one and a half million customers shy of broadband leader Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s 24.2 million data subs. (See Comcast Romps With Subs Gains, Sky Bid .)

In other good news, Charter is rolling out gigabit-speed services faster than expected. After a late start launching its DOCSIS 3.1 upgrades late last year, the cable operator is now on track to take gigabit broadband to nearly its entire customer base by the end of 2018. So far, the gigabit service covers roughly 45% of Charter's footprint, or nearly 23 million customer locations. (See Charter Gives the Gift of Gigabit.)

Even with worries about capex increases, Charter is likely to stem that tide once the all-digital video transition is complete later this year. And CFO Chris Winfrey predicts that total cable capex intensity for 2018 will actually end up a bit lower than it was in 2017.

Ironically, one area that doesn't appear to have investors concerned -- at least as judged by the questions on the Q1 earnings call -- is commercial services. Charter's commercial services revenues rose to $1.5 billion in the quarter, with SMB revenue growing 4.1% and enterprise revenue rising 7.3%. However, the rate of Charter's growth in the business services sector has slowed significantly.

Between Q1 2016 and Q1 2017, commercial services revenue grew 10.8%. Between Q1 2017 and Q1 2018, that rate dipped by half to 5.3%.

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Charter had little new to say in this quarter's earnings presentation about its upcoming mobile service launch. The company did note that it spent $17 million in capex and $8 million in operating expenditures related to the mobile product. CEO Tom Rutledge also said that Charter is beginning a field trial with 5,000 employees that will take them through the end-to-end mobile sales process. Charter is expected to introduce its mobile offering around the middle of this year.

Rutledge continued to emphasize that he sees mobile services as simply an add-on to the company's connectivity bundle. "Ultimately the goal is to use our mobile service to attract and retain cable-bundled, multi-product customers," he said.

As for the recently announced partnership with Comcast, Rutledge pointed out that it gives Charter a proven MVNO back office system, which Charter can use to complement the wireless infrastructure it already owns as a provider of WiFi connectivity services. (See Comcast, Charter Hint at New MVNO Deals.)

Charter also continues to run tests in the 28GHz and 3.5GHz frequency ranges. Those tests will be used to help determine the company's 4G and 5G strategy going forward. (See Charter Reveals New Details on 4G/5G Trials.)

— Mari Silbey, Senior Editor, Light Reading

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