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Charter Shifts Mobile Into Higher Gear

Alan Breznick
7/26/2019

About ten months after introducing its wireless offering, Charter Communications is now going full steam ahead in the mobile market.

Charter, the second-largest cable and broadband provider in the US, reported adding 208,000 lines for its Spectrum Mobile business in the second quarter, up from 176,000 new lines in the first quarter. The latest gains boosted Spectrum Mobile's total lines to 518,000 after three full quarters of deployment.

Speaking on the company's earnings call Friday morning, senior Charter executives stressed that they are still revving up efforts to roll out their new MVNO service throughout their 51 million-home footprint. They noted that they are almost finished opening new retail outlets and extending the service's reach to all mobile devices.

"We're just getting to full-scale mode at the end of the second quarter," said Charter Chairman and CEO Tom Rutledge. "We'll continue to grow the mobile business at a more rapid rate."

Mobile revenues climbed to $158 million in the period ending June 30, up from $140 million in the first quarter. That puts the cableco on track to scale at least $600 million in mobile revenues this year.

Charter said its Q2 total operating costs included $277 million of mobile expenses, slightly up from $260 million in the previous quarter as the MSO spends heavily to develop the new product line. That total encompasses mobile device costs, marketing launch costs and operating expenses to stand up and operate the mobile business, as well as Charter's portion of the expenses for its joint MVNO venture with Comcast.

Noting that the company's expansion of its bring-your-own-device (BYOD) program is proceeding as planned, Charter CFO Chris Winfrey reiterated that the goal is to build Spectrum Mobile into a profitable unit ASAP. "Mobile is ramping up nicely and the early results look promising," he said. "We expect it to be profitable on a standalone basis once it reaches scale."

On today's earnings call, Winfrey did not spell out what that profitability point might be. But, in a similar earnings call Thursday morning, Comcast CFO Matt Cavanagh said his company would start turning a profit on mobile when its penetration rate reached "the mid-to-high single digits."

Moving onto Charter's other booming business, broadband continued to generate robust subscriber and revenue gains for the company in the spring quarter. The MSO netted 258,000 broadband subscribers (221,000 residential and 37,000 commercial), down slightly from last year's record haul because of lower commercial adds. That boosted its grand total to nearly 26 million high-speed data customers, with residential accounting for 24.24 million.

Not surprisingly, then, broadband services drove much of the revenue growth in Charter's residential business. That segment’s revenues surged to $4.1 billion, up 8.8% on a year-over-year basis. We'll have more to say on Charter's broadband business in a story later today on our sister site, Broadband World News.

Video was another story, however. Like other pay-TV providers that have reported their Q2 results so far, Charter dropped substantially more video subscribers as cord-cutting by consumers continued to accelerate. The cableco shed 150,000 residential video customers in the spring months, higher than the Wall Street consensus estimate and double its sub losses from a year ago. It closed June with 15.8 million residential video subs, down 2.5% from 16.2 million a year earlier.

Like their counterparts at Comcast yesterday, though, Charter officials shrugged off the higher video sub losses on their earnings call. Like other large US MSOs increasingly focused on letting more price-conscious consumers drop their pay-TV packages because of slim profit margins on the legacy video products, they are happy to let those "low-value" customers go if it means higher margins and lower costs overall.

"There's still a lot of value in the [pay-TV] bundle to a lot of consumers," Rutledge said. But, he continued, "the problem with the bundle is that content companies make their content available for free" on broadcast TV, the Internet and other distribution platforms. "It's hard to compete with free," he dryly noted.

Despite the sub decline, Charter's video revenues still edged up 0.6% on a year-over-year basis to $4.4 billion, driven by annual rate hikes and the expiration of various promotional deals. But the falloff in video customers dampened that effect, as did a higher mix of low-priced Choice and Stream subscriptions within the company's video base and lower pay-per-view and video-on-demand revenues.

Business services continued to shine for Charter as the operator added 39,000 small-to-midsized business (SMB) subscribers, raising its total to 1.9 million, and 5,000 enterprise customers, increasing that total to 258,000. Largely as a result, commercial services revenues climbed 4.7% to $1.62 billon, putting Charter on course to easily eclipse $6 billion in commercial revenues this year.

While Charter's overall Q2 performance seemed pretty solid, analysts noted that the company still fell a bit short of Wall Street's bullish expectations on nearly every key metric except for capital intensity, where the operator lowered its capex more than expected. For instance, Crag Moffett, a principal analyst at MoffettNathanson, picked apart the earnings report and faulted Charter for not executing on its strategy quite as well as Comcast has. In particular, Moffett faulted the company for not increasing its broadband subs, business services revenues and profit margins even more than it did.

"In a vacuum, these results would likely be viewed as very good," Moffett wrote. "Unfortunately, we don’t live in a vacuum."

That could help explain why in morning trading on the Nasdaq Stock Exchange, Charter's share price dipped 2.8% to $394.4 as of 12:30 p.m. ET.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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