Charter progress report, a masterclass in setting expectations

We’re not sure that anyone thought that the Charter rollup, taking in Time Warner Cable and Bright House would end badly, most were happy to accept that it would benefit from the combination and a stronger, unified management style. And so it is turning out if you listened to the results call this week.

As you probably remember we anticipated the deal even before Comcast moved to snatch Time Warner Cable from Charters hands, and forecast that the Comcast deal would founder and Charter would eventually prevail. It’s not so much that we like Charter, so much as the skew the market would have been under had Comcast won out. Faultline is just prescient like that.

But the pains of taking over two cable operators, not fully digital, with low video pricing, was always going to cost Charter some customers, and lead to video losses, and so it has turned out. But this week the PE of the two businesses, Comcast and Charter, were more or less in line at 20 or so, and respective values of S186.6 billion and $103.5 billion are more or less in line given that Comcast also owns a major studio.

Charter lost 100,000 video customers in the quarter and 360,000 over the entire year, but gained 428,000 broadband customers on the quarter and 1.37 million from a year ago to reach 16.7 million video customers, and 21.8 million broadband, with 10.36 million in fixed voice, more or less unchanged.

The acknowledged smart management team, led by Tom Rutledge, has unified the broadband offerings under the Spectrum brand, and unified their pricing. Spectrum broadband at 100 Mbps reaches 50% of the footprint, and at 60 Mbps, for the other 50%. Some considerable proportion of the acquired cable companies are not fully digital and Rutledge promised to get them all there by 2019, and he also promised to launch a Wireless service before that, in 2018. Here he is, starting a long way behind Comcast, which has been working at leveraging its dominant WiFi footprint and putting in place the proper authentication and billing systems for wireless for around 3 years.

The financial result was a lift in revenues of 4.3% to $10.2 billion, a net income of $155 million, against a loss last time of $188 million, but when comparing like with like it would have been a small fall from a pro forma net income of $179 million.

But when you look at what is pulling the business backwards, it all seems to be predictable and under control. There were some suicidal deals done by the previous Time Warner Cable management, giving away premium video deals for basic video pricing, and as that is being shifted onto new Spectrum pricing, it has upped the churn rate. But, of course, the new pricing has upped the ARPU.

And Capex spending was mostly put in the ground last year, so it is falling now, off by around $280 million in the quarter, although the management mostly says this is a matter of timing of when certain assets needed to be acquired and it may go up again.

Content spend had accounted for all the other cost increases which cut into net income. He reminded us that these come from contractual increases, built into existing contracts for the most part, and we’re pretty sure that Rutledge will be waving his increased reach as a way to get most favored nation clauses where he has not currently got them, as he renews deals, and this trend will actually go into reverse and programming spend will come under control or even fall, on a per home basis.

“We are seeing renewals as well. We’re getting longer-terms where we want them, shorter terms where we don’t and getting better rights along the way,” he said.

Rutledge also revealed that, like Comcast, Netflix would be integrated into the cable UI, and that he has had other talks about doing the same for YouTube and Hulu and fully expected these OTT tiers to be part of his integrated offering, the same way Comcast has absorbed them. It’s a sensible defense against cord cutting, and many questions from financial analysts focused entirely on that, and Rutledge batted them away, citing access to a huge hoard of content, under terms which allowed him to push it out of home and off footprint, if he needed to, and reminded everyone that Charter TV Everywhere was as good an OTT service as any out there.  And with Netflix, Hulu and YouTube inside the walled garden, that makes for an even better defense.

But not content with that, the deal that Charter announced last week with AMC for original content, is yet another hedge against external OTT services.

Charter is likely in two or three more quarters, to eliminate the TWC customers that are unable to afford its Spectrum offerings, and begin to add video customers once again, and accelerate its broadband uptake, perhaps even beyond that of Comcast.

Charter estimates that it will take another two years to fully integrate the three companies and multiple billing, provisioning and network environments. And that in some cases he has actually been adding costs temporarily to get to these gains, as Charter maintains legacy systems and processes and prepares for back-office integration in parallel. Once again, doing the right thing, in order to reach a more efficient state.

Finally he said that the company has tax assets to the tune of $6 billion, and doesn’t expect to be a cash income tax payer until 2019 at the earliest.