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Charter recovery on track, who dare doubted Rutledge?

Charter Communications has been upgraded by financial analysts following a successful fourth quarter in which the US cable operator gained 300,000 broadband subscribers. Time Warner Cable (TWC), which Charter closed its acquisition of last year, was considered the world’s worst cable company just two or three years ago – now with bullish CEO Tom Rutledge at the helm, Charter is making a comeback.

TWC attempted to influence the US broadband revolution by lowering prices for very poor internet services, resulting in widespread consumer backlash. Under Charter ownership, subscribers are paying reasonable prices for reasonable broadband services –repairing a damaged reputation and growing revenues as a result. It’s not rocket science, but are the cracks in the TWC side of the business being patched over temporarily, or is there a long-term fix in place?

The fact that Charter managed to gain video subscribers in Q4, while almost all of the country’s pay TV majors continued to lose TV customers, suggests the company is on the right path. It gained 2,000 video subscribers in Q4 2017, compared to a loss of 51,000 in the same period a year earlier. This was Charter’s first period of TV additions since taking on TWC and Bright House Networks – making an unexpected turnaround to leave the company with 16.5 million residential video customers. The news took Charter back to just below a 52 week high, valued at $102 billion.

Rutledge has gone on record saying that Charter’s strategy of shifting customers to new packages and pricing plans would trigger a spate of cord cutting in the short-term but was confident that it would pay off down the line. The acknowledged smart management team, led by Rutledge, has unified the broadband offerings under the Spectrum brand, and unified pricing. Yet Charter and the other big US operators are all planning to put through subscription increases which are ahead of inflation for 2018, making them more prone to cord cutting – so some sturdy defenses must be put in place.

Recovering the 292,000 TV subscribers lost by Charter in a year will be an all but impossible task. A silver lining for Charter’s video business may stem from rumors that Charter will begin offering Comcast’s X1 video platform, which has found favor at Cox Communications, as well as Canadian ISPs Shaw Communications and Videotron.

While Charter sits on this idea, the company plans to fully digitize its operations by the end of the year, upgrading the 50% of legacy Bright House Networks and 30% of legacy TWC which continue to carry full analog video line ups. These regions will deploy two-way set tops on all remaining analog TV appliances served by Charter, to grow its Worldbox set top footprint from the 2 million units shipped to date.

Charter also plans to expand its streaming video and on-demand library to approximately 50,000 HD titles and expects its Spectrum Guide to be available to all new video customers by the end of this year. Charter says it will soon expand availability of Netflix to Spectrum Guide users by making third-party apps available, eventually reaching legacy set tops over time. This project will likely be led by ActiveVideo, the joint Charter and Arris venture injecting legacy set tops with software for supporting OTT features. Charter is making all the right moves, just slightly late to the party.

Another key strategy is bundling subscribers into double and triple play options to increase ARPU. That said, subscribers to triple play services increased 1.4% from Q4 2016 to 8.7 million, while double play dropped 1.5% to 6.5 million. Although single play is by far the preferred option, growing 8.5% year on year to 10.45 million subscribers to either one of video, internet or fixed voice.

Charter now boasts 22.5 million broadband subscribers, adding 1.17 million in a year. Of its 300,000 broadband gains in the last quarter, 263,000 were residential adds and the remainder at small and medium businesses.

Rumors of a takeover still loom over Charter and this influenced Wells Fargo’s upgrade from Market Perform to Outperform, as Verizon, Sprint and Softbank have all been singled out as potential buyers of the cable company. Faultline Online Reporter has suggested Charter should instead team up with Comcast to take down Verizon, but that’s a cellular story for another day.

As we reported with AT&T’s results last week, Charter’s latest set of financials were flattered by the federal tax overhaul – favoring it to the tune of $9.3 billion. This gifted a generous net income boost to $9.5 billion for the quarter, up from $454 million in Q4 2016. Revenue grew from $10.3 billion to $10.6 billion for the period, marginally beating expectations.

Charter has pledged to spend the extra cash by hiring over 20,000 US workers and will put $25 billion into US investments over the next four years.

A final point of note is that Charter recently revealed its migration from DOCSIS 3.0 to 3.1, which had been delayed while it digested its TWC and Bright House acquisitions. Rutledge said on the company’s earnings call that rollout of DOCSIS 3.1 technology began in December, and by the end of 2018 it will offer gigabit services in virtually all its footprint of 50 million passings, rising from 9 million passings in eight markets today.

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