Charter's Rutledge says enterprise market penetration is low, but growth prospects are good

Charter Communications (NASDAQ: CHTR) is poised to gain more market share in the small to medium and larger enterprise business markets -- two segments where it is still a young player.

Tom Rutledge, Charter


Speaking to investors during its first quarter earnings call, President and CEO Tom Rutledge noted that while Charter's service is gaining market share in the larger enterprise market it is still a relatively new entrant so it has plenty of potential to grow this segment further. 

"We serve the business enterprise space today and we sell 10-Gig Internet products, Ethernet products, and we can sell those through a large portion of our footprint," Rutledge said. "So, from a technology platform perspective, we're highly capable. And we can create new products and take speeds up, whatever the theoretical threshold speeds are, and we can efficiently build fiber optics to enterprise customers. So, we already have a full range of customers and full range of products, but our penetration is relatively low."

The cable MSO also echoed similar concerns that fellow cable MSO Comcast (NASDAQ: CMCSA) expressed about the FCC's new proposals on special access or what Chairman Tom Wheeler now calls business data services (BDS).

Following an investigation into the special access pricing of the largest ILECs like AT&T (NYSE: T), CenturyLink (NYSE: CTL) and Verizon (NYSE: VZ), the FCC voted along party lines to propose what they call technology neutral rules that apply both to the traditional telcos and cable companies.

"With regard to special access, we haven't seen the full scope of that yet, only what's been publicized and we're a nascent player in that market with -- the whole cable industry I think is less than 10 percent penetrated against that very large marketplace," Rutledge said. "And so it seems premature to me to be thinking about regulating a new entrant to a marketplace."

Driven by small and medium business revenue growth, Charter's commercial revenues were $301 million, up 12 percent over the prior-year period.

Out of the commercial services mix, SMB revenue rose 11.3 percent to $202 million, while enterprise revenue grew 13.4 percent to $99 million.

"Total commercial revenue grew by approximately 12% and continues to reflect the same short-term ARPU pressure we saw in residential when we initially launched our new pricing and packaging in 2012," said Christopher Winfrey, CFO and EVP of Charter.

Following the launch of new pricing and packaging for commercial customers, primary service unit (PSU) growth has accelerated, albeit at lower promotional pricing.

During the first quarter of 2016, SMB customer relationships grew by 15,000, up from 10,000 during the first quarter of 2015. SMB PSUs increased 32,000, compared to 19,000 during the first quarter of 2015. Charter said it is accelerating SMB customer and PSU growth with the launch of the Spectrum Business product suite to the small and medium business segments during the quarter.

At the end of the first quarter, Charter had a total of 6.8 million residential and SMB customers. Over the last 12 months, the cable MSO has increased its small business customer growth by 18 percent. Likewise, it expanded its enterprise PSUs 19 percent to 31,000.

"We continue to see improving commercial customer net additions, with SMB PSU growth accelerating by 68 percent year-over-year in the first quarter," Rutledge said. "That customer growth improvement is being driven by the launch of new small business pricing and packaging in the first quarter of last year. We also launched new pricing and packaging for enterprise in the fourth quarter, including a deeper gigabit service offering that's driving a significant increase in sales."

With the FCC now approving the cable MSO's proposed deals for Time Warner Cable (NYSE: TWC) and Bright House Communications, Charter will soon have an even larger piece of the U.S. business services market.

By acquiring Time Warner Cable, Charter will gain over 150,000 miles of fiber and 75,000 on-net buildings. In addition to its own network, TWC has established over 130 external network-to-network interface (E-NNI) agreements with 25 other service providers. This enhanced reach will allow Charter to potentially reach into larger business accounts in more U.S. markets.

Charter's acquisition of Bright House is no less compelling. This acquisition will enable Charter to increase its scale across a number of key vertical industry segments such as healthcare, hospitality, government and education and gain a broader Ethernet footprint with an additional 18,000 miles of fiber. 

From an overall financial perspective, Charter reported that first quarter 2016 revenues rose to $2.5 billion, up 7.1 percent year-over-year, due to growth in Internet, video and commercial revenues.

For more:
- see the earnings release
- see the Seeking Alpha earnings transcript (reg. req.)

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