Charter’s first-quarter revenue rose 6.6% year over year to $12.5 billion.
Courtesy of Charter Communications
Charter Communications ’ broadband internet growth continued in the first quarter, although at a slower pace than earlier in the pandemic.
Americans have doubled down on their home-internet connections over the past year, adding new services or upgrading to faster speeds as work and play moved online and a better connection proved a necessity for many. That has made the U.S. cable industry a good place to be during Covid-19, with surging demand and operating leverage to be exploited.
Charter stock (ticker: CHTR) was about flat in premarket trading on Friday.
Charter operates its cable internet and TV service under the brand name Spectrum in at least some parts of most U.S. states. Although pay-TV continues to be pressured by cord-cutting by consumers, high-speed internet plans have been flying off the shelves.
Charter added 1.9 million residential internet customers over the past four quarters to serve a total of 29.2 million accounts. That includes the 334,000 added in the first quarter, about matching the Wall Street consensus forecast. The company also lost 156,000 cable TV subscribers, to end the quarter with about 16 million. That was worse than the 121,000-loss that analysts had been expecting.
As Charter adds more customers to a network that is already built, its profit margins increase and earnings rise faster than revenue. That’s because the marginal cost to Charter of each additional subscriber is small, but the fixed costs of maintaining the overall network are high. That gives cable companies high operating leverage.
So while Charter’s first-quarter revenue rose 6.6% year over year to $12.5 billion, its adjusted earnings before interest, taxes, depreciation, and amortization—or Ebitda—jumped 12.5% to $4.9 billion. That profit measure excludes stock compensation and other nonrecurring costs and benefits. The revenue figure matched analysts’ average forecast, while adjusted Ebitda was about $200 million ahead of estimates.
First-quarter earnings per share came in at $4.11, up 121% from the year-ago period but below Wall Street consensus. Free cash flow in the quarter rose 35% to $1.9 billion, and was about in line with expectations.
“The Ebitda beat was helped in part by two things that will likely reverse over time: very low bad debt and market churn, and a Covid-related bonus adjustment,” wrote New Street analyst Jonathan Chaplin on Friday morning. “The bad debt and churn impact was the bigger of the two, and when this reverses it will come with faster subscriber growth—a trade investors will be happy to make.”
Bad debt means money that Charter’s customers owe that the company doesn’t expect to be able to recover. Churn refers to the percentage of customers who cancel their service each month.
Chaplin sees Charter’s subscriber growth picking up as industrywide churn increases because it has faster speeds and a more competitive product than competitors. So when more customers are switching their service each month, Charter should benefit. CEO Tom Rutledge said on Friday morning’s earnings call that he expects churn to pick up later in 2021 as the economy continues to return to normal and the pandemic recedes. That would come with higher operating expenses, however, with upfront costs to win and set up each new customer.
“That opens additional opportunities for us as a share taker, so we would like to see that,” said Rutledge.
Rutledge also spent considerable time on Friday’s call discussing Charter’s wireless phone service. That’s based on a wholesale agreement with Verizon Communications (VZ) to provide service on its network. Charter has been pushing its Spectrum Mobile product as part of a bundle with its cable services, with steep discounts to the nationwide carriers. It has also bought wireless spectrum licenses and expanded its public Wi-Fi network to supplement Verizon’s service.
Subscribers seem to appreciate the value of that service. Charter added 285,000 residential wireless lines last quarter, on top of roughly a million lines added in the previous three quarters combined. Charter’s wireless business isn’t profitable yet, but it’s moving in that direction. Cable rival Comcast (CMCSA) likewise reported rapid growth in its Xfinity Mobile subscriber base on Thursday, and said that its service broke even for the first time last quarter.
Investors haven’t paid much attention to cable companies’ wireless offerings so far. That could change, however, if the services continue to outpace the likes of AT&T (T) and Verizon in subscriber growth and begin to turn a profit.
Charter spent $1.8 billion on capital expenditures in the first quarter and bought back $4 billion of stock. Its shares have climbed 38% since the start of 2020, versus a 33% return including dividends for the S&P 500. Comcast and Altice USA (ATUS) stocks have returned 29% and 33%, respectively.
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