Earnings Update: Charter Communications
Reasonable results despite elevated volatility. Dialing in our cashflow estimates.
This earnings update should be read in conjunction with my original deep dive:
Quick Take
Charter Communications reported third-quarter earnings before the bell on Friday morning, 10/31. The stock saw a substantial sell-off on the initial print, gapping down 6.5% into the open. Despite the initial sell-off, CHTR fully recovered by the end of the day, closing +1.3% positive. This comes after similarly volatile trading the day prior, as peer Comcast reported mixed results, driving both stocks down ~4% (with a wide spread between peak and trough prices throughout the day).
Overall, the results came in virtually in line with our model's projections for top-line growth and key net additions. Investor consternation, in our opinion, is primarily focused on the cost structure, which was weaker than anticipated for Comcast and may portend cost inflation for Charter going forward. Charter lost 109k broadband subscribers this quarter, a hefty acceleration on losses y/y when accounting for ACP-related churn. Mobile, on the other hand, continues to be a tremendous growth engine, posting 22% y/y sub growth. Broadband ARPU remains intact and growing, even ahead of our initial tepid modeling.
While both revenue and EBITDA saw y/y headline declines (-0.9% and -1.5%, respectively), we note that adjusting for one-off Cox merger costs, odd-year political cyclicality, and cost allocation changes, adjusted Revenue grew +0.4% and EBITDA was ~flat.
Finally, this quarter marks peak capex, coupled with a first look at substantial OBBBA benefits. Inflection in cash flows enabled management to shift back to buybacks this quarter. Charter repurchased $1.8bn of shares in the open market, and we expect acceleration of repurchases on the go-forward.
The stock hasn’t performed yet, perhaps unsurprisingly, given that the competitive environment is still ramping aggressively. Despite this, the story has unfolded essentially as initially envisioned. We’ll unpack a few key points in further detail below.
Modeling Out Net Additions
Broadband
The broadband competitive environment remains fierce, with several notable areas of competition accelerating. AT&T launched FWA products in earnest via its acquisition of EchoStar’s spectrum in late August. FWA continues to post excellent net additions, chipping away at cable's low-income subscribers, a dynamic unlikely to reverse in the near term. Meanwhile, fiber net additions have remained robust, as the overbuilt footprint continues to expand. Couple this with a weak consumer, sluggish residential home building, and historically low move rates, and sub losses are unlikely to improve anytime soon.
Our initial hope was that ACP-related forced churn was hungover in the numbers and would work its way through the system this quarter, giving us a favorable compare on net additions. Unfortunately, this did not materialize, so we now need to adopt a more sanguine stance on broadband subscriber losses; moderation will occur incrementally over the next two years.
To be clear, this is more than acceptable in the model. Since August, we’ve shifted our modeling to account for no positive subscriber additions through 2030, a reality we think may prove modestly bearish. Even with this assumption, we still see mid-term resumption of top-line growth and substantial upside at today’s prices.
Our key stumbling block from here will be in broadband ARPUs, which we are meticulously cataloguing across the space, looking for early signs of price degradation.
Mobile
Mobile beat our expectations again (a consistent trend over the last few years) and continues to be a phenomenal bright spot in the dour world of CableCos. Net additions are moderating, but at a much slower pace than anticipated three years ago. Spectrum Mobile is now approaching 20% penetration across the relationship footprint.
We believe there’s a real path to achieving c.50% penetration over the next five years for the business, and we expect to start seeing ARPU inflection in 2027. Management commentary on the call was quite bullish on churn related to mobile. Not only this, but we also gained a rare insight into the business's economics for the first time. Clearly, we need to interpret these adjusted numbers with caution; however, directionally, this is encouraging to see.
Video
Video net losses moderated substantially, with management citing streaming bundles as the primary driver of this improvement. Ultimately, this remains a zero-margin business, but we believe it is structurally important for cable, given its ability to reduce churn and provide value through bundling to consumers.
Not only this, but a reduction in TV sub losses helps alleviate key bear arguments (“Isn’t cable just a melting ice cube?” and “How can I invest in something with top-line shrink?”). Specialists rarely level these arguments (as they understand cable TV is ancillary to the broader company), but at least this gets one potential roadblock out of the way for generalist tourists.
FCF + Buybacks
Charter is demonstrating strength in FCF and buybacks through the quarter. OBBBA tax benefits drove a meaningful gain to FCF (~$825m) as did NWC moderation. Capex was up sequentially this quarter (as expected) and is expected to begin a moderate decline in 2H, followed by a precipitous drop through 2026. Management has resumed aggressive buybacks, completing $1.8 billion in open-market purchases this quarter, coupled with $400m in LBRDK and A/N purchases, resulting in a reduction of ~7.6 million shares outstanding (-2.4% total stock).
We continue to see substantial FCF growth over the next two years as revenue returns to LSD% growth, capital expenditures decrease by $3-4 billion, and EBITDA expands modestly. Even without revenue growth or margin expansion, FCF can nearly double on reductions in growth capex alone and tax benefits, as shown in the pictures above.
This dynamic provides an excellent self-help dynamic to our story, as massive FCF per share will drive substantial reductions in the equity base, further accreting FCF/share, regardless of what the multiple does. Running this story forward, our current model estimates ~$100/s FCFE by EOY’28, short of a surge in the stock price between now and then. That’s an astonishing 2.3x 3-year forward cash flow on a company that we believe will exhibit LSD top and bottom-line organic growth.
Other Items
Mobile Business Lines Push. Charter and Comcast announced a new MVNO agreement with T-Mobile to launch a business mobile offering in July 2025. This partnership matters more for Comcast, which is scaling a more robust commercial offering; however, the optionality for Charter is also beneficial.
John Malone Retires. The cable cowboy is stepping aside, marking the end of an era. It’s not yet clear what role Malone will continue to play in Charter going forward, but we expect little to change strategically.
Wrapping Up / Revisting Valuation
We have substantially adjusted our valuation model over the last two months as we’ve evaluated the mid-term competitive environment and qualitatively analyzed expectations for maintenance capital expenditures. We modestly revised our mid-term revenue growth forecast (3% → 2%) and EBITDA margins. More importantly, we increased terminal depreciation as a % of sales from 11% to 15% which is higher than historic no-growth capex levels, but likely fair given lower network utilization and a higher number of rural passings.
These changes reduced our IV, but we think the adjustments are appropriate given the evolving environment. We suspect that the unlevered DCF outputs above understate the real levered upside when accounting for aggressive near-term buybacks, as noted in our discussion above.
CHTR (LBRDK) remains a high conviction long for us. We expect substantial interim volatility, but when the competitive dust settles, we believe these assets will deserve a significantly higher price than their current value today.
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Great summary and explanation in the modeling adjustments. Thank you for sharing this article.
What does this look like pro forma for Cox and LBDRK deals?