Charter Communications delivered far better pay-TV customer metrics in the second quarter than predicted by investment analysts, with the No. 2 U.S. cable company dropping only 90,000 customers in the three-month period that is typically the weakest for pay-TV operators.
Consensus forecasts for Charter had the company losing anywhere from 140,000 to 158,000 video subscribers.
Video subscriber losses at legacy Charter (down 10,000 vs. -7,000 in the second quarter of 2016) and Bright House Networks (down only 12,000 vs. -72,000 in Q2 2016) were offset by 68,000 lost former Time Warner Cable customers during the period.
Most of the decline came from the loss of “limited basic relationships” at TWC, Charter CFO Christopher Winfrey told investment analysts.
Charter also added 231,000 high-speed internet customers in the second quarter, roughly flat on a pro forma basis with the year-ago period, during which it closed on its purchases of TWC and Bright House.
Revenue grew 3.9% to $10.4 billion on a pro forma basis, while second quarter EBITDA was up 8.6% to $3.8 billion.
“Results were a nice surprise, with EBITDA ahead of estimates and subscriber trends well ahead,” said New Street Research analyst Jonathan Chaplin. “Video losses in the TWC markets were half what we and consensus expected. This bears out management’s comment that they had turned the corner on TWC integration and churn. This quarter should have been the low-water mark, and the results were good.”
Here’s a breakdown of some of other key drivers for Charter in Q2:
Integration pain: Charter completed the rollout of its Spectrum brand across its acquired TWC and Bright House footprints in June. The cable operator continues to struggle to convert acquired customers to standardized pricing and packaging. “Churn remains elevated in the portion of the base that’s not converted to Spectrum pricing and packaging,” Winfrey conceded. “Sometimes, the customer relationships are difficult to save, because of the way their deals were packaged. The [conversion] will happen, but it won’t be overnight.”
Programming costs: Programming expenses grew 9.6% to $232 million for Charter in the quarter. Company Chairman and CEO Tom Rutledge doesn’t think these price increases will ebb anytime soon. “People ask about what’s going to happen in the video business three to five years from now, and I say the general trends are going to be the same … Programmers are going to drive revenue primarily from rate increases. Our objective is to manage that. It’s a high-cost business.”
Joint venture with Comcast: Rutledge talked a little bit about the wireless joint venture Charter entered into with Comcast over the quarter: “We share the same MVNO with Verizon. It is very similar to what Comcast’s MVNO is. They’re already launched and down the road with their successful effort. Because we have the same opportunity as Comcast using the MVNO to drive our business forward, it make sense to work together and be efficient … There are opportunities on the national level that neither Comcast or Charter has, and we’d like to take advantage of them. That’s the nature of the relationship.”
Merging with a wireless company: Just like his peer Comcast CEO Brian Roberts did during his Q2 conference call earlier in the morning, Rutledge attempted to shoot down rampant speculation about merging with a wireless giant. “I would say I agree with Comcast’s point of view on that,” Rutledge said. “We like our MVNO, we like our relationship with Comcast, and we do think the [wireless] industry has a lot of challenges.”