Charter Earnings: Discounting Can’t Overcome the Disney Dispute, Muted Seasonality, and Competition

Charter’s CHTR third-quarter results were noisy and don’t provide much insight into the business’ performance. Management indicated that the dispute with Disney in September had only a small impact, but estimating customer losses or missed sales opportunities isn’t precise. More importantly, we won’t have concrete evidence of how customers will likely react to the expiration of Spectrum One promotional discounts until late this year or early next year. While we still don’t like Charter’s decision to offer big promotional discounts, we still like the firm’s long-term position to maintain share and generate cash flow. Our fair value estimate remains $580.

Customer metrics were on the weaker side overall during the quarter, mirroring peer Comcast, which reported yesterday. Charter added 63,000 net broadband customers, down from the prior quarter (77,000) and the same period a year ago (75,000), despite continued aggressive network expansion. Management estimates it lost about 15,000 broadband customers because of the Disney dispute, but even adjusting for that figure, Charter didn’t see the typical seasonal pickup in customer additions. The firm also added 594,000 net wireless customers, its weakest quarter since the launch of Spectrum One during the fourth quarter last year. Management claims that the retention of test customers who have passed the one-year promotional price period is better than expected, but we suspect there will be a lag between expiration and disconnection.

Spectrum One continues to pressure revenue per customer. Residential revenue per account declined about 1% year over year, though it would have been flat absent bill credits for days without Disney content. Total revenue increased 0.3%, with a sharp drop in ad revenue on lower political spending largely offsetting modest business services growth. EBITDA, including stock-based compensation, was roughly flat versus a year ago with modest margin contraction.