Charter's EPS Rose 16%, but Broadband Losses Deepened

The clearest change was a further deterioration in customer trends. Charter lost 172,000 Internet customers in Q2 FY2026, compared with 116,000 in Q2 FY2025 and 120,000 in Q1 FY2026. Total customer relationships declined by 184,000 during the quarter, versus a loss of 100,000 a year earlier. At June 30, Charter had 29.4 million Internet customers and 31.5 million total relationships, down 1.7% year over year in both cases. Customer penetration of estimated passings fell 230 basis points to 53.4%.

Revenue followed the customer base lower. Total revenue declined 1.7% to $13.526B, with residential revenue down 3.5%. Internet revenue fell 3.2% to $5.776B because of fewer customers and unfavorable pricing and packaging mix. Video revenue dropped 9.7% to $3.149B, partly because $251M of programmer streaming-application costs was netted against revenue, compared with $67M a year earlier. Excluding advertising and those allocated streaming costs, Charter said total revenue declined 0.8%.

Mobile remained the strongest operating counterweight. Charter added 406,000 mobile lines, taking the total to 12.5 million, 15.5% above the prior year. Mobile service revenue rose 18.9% to $1.095B. Growth nevertheless moderated from the 491,000 lines added in Q2 FY2025. Commercial revenue increased 1.5%, while advertising rose 12.3% because of political spending; excluding political revenue, advertising declined 4.6%.

Profitability weakened faster than revenue. Adjusted EBITDA declined 4.3% to $5.449B, or 3.2% excluding Cox transition expenses, because revenue fell while operating costs and expenses were flat. Adjusted EBITDA margin contracted from 41.4% to 40.3%. The supplied quarterly analytical table's operating-margin field, treated here as the pre-tax margin field under the provided convention, fell from 23.8% to 22.6%. Gross margin is not disclosed and is not a meaningful measure for this analysis.

Reported earnings looked better than the operating result. Diluted EPS rose 16.1% to $10.66 from $9.18 even though net income attributable to Charter shareholders slipped 0.7% to $1.292B. The principal bridge was a 14.4% decline in diluted weighted-average shares to 121.3 million. Pre-tax income increased from $1.909B to $1.999B, helped by a gain on debt extinguishment, rather than an improvement in Adjusted EBITDA.

Cash generation was mixed. Operating cash flow increased 9.0% to $3.925B, mainly because of lower cash taxes, while capital expenditures were nearly unchanged at $2.871B. Charter-defined free cash flow declined 7.4% to $969M because of an unfavorable change in accrued capital expenditures. This measure is reported for completeness, but for this capital-intensive and highly leveraged company, revenue, pre-tax income, capital needs and balance-sheet capacity provide the more useful analytical frame.

The quarter weakened the operating side of the thesis. Broadband is Charter's core customer relationship and an important anchor for mobile and other services. Internet losses not only continued but widened sequentially and year over year. Falling penetration despite 2.5% growth in estimated passings indicates that footprint expansion has not yet offset competitive pressure within established markets.

Mobile shows that the converged strategy has customer appeal, but it has not yet stabilized the consolidated income statement. Connectivity revenue, which combines Internet and mobile service, declined 0.3% despite the 18.9% increase in mobile service revenue. Other mobile-related costs also rose: other costs of revenue increased 11.3%, partly because of higher mobile service direct costs and device sales. The relevant test is therefore not line growth alone, but whether mobile improves retention and consolidated economics.

Video trends were comparatively better. Charter lost 21,000 video customers, an improvement from 80,000 losses a year earlier. Management attributed the change to simplified pricing and packaging and the inclusion of programmers' streaming applications. That improvement carries an accounting and economic cost, however, because $251M of streaming-application costs was netted against video revenue. Video may be becoming more useful as a retention product even as its reported revenue contracts.

Capital allocation amplified EPS but also underscores the balance-sheet tension. Charter spent $838M to repurchase 4.0 million shares and used $1.0B of cash to repurchase $1.2B of debt principal. Buying debt below par is constructive, and reducing shares at a low earnings multiple can increase per-share value. But principal debt was still $93.8B at quarter-end, compared with $509M of cash and a $17.0B market capitalization. Repurchases cannot substitute for stabilizing EBITDA.

Capital expenditures remain another constraint. Charter retained its expectation for approximately $11.4B of 2026 capital spending, excluding the Cox transaction. Q2 upgrade and rebuild spending increased to $657M from $457M as the network evolution program accelerated, while line-extension spending declined. Management expects to complete network evolution in 2027. The thesis requires those investments to improve competitiveness without producing a permanently higher capital burden.

There is no prior SageNoodle fair value to carry forward, so this update establishes an initial value. We use the provided trailing EPS of $38.43 and apply scenario multiples rather than free-cash-flow or enterprise-value measures. This is deliberate: the supplied framework identifies free cash flow, ROIC and net debt as unsuitable primary columns here, while no comparable-company or consensus valuation data was provided. EV/EBITDA and free-cash-flow yield are therefore shown as not used, represented by zero in the structured snapshot rather than silently estimated.

The bear case applies 3.0 times trailing EPS, producing $115 per share. That case assumes Internet losses remain elevated, revenue continues to decline, mobile fails to offset broadband and video pressure, and leverage prevents meaningful multiple expansion. The base case applies 4.5 times EPS for $173 per share. It assumes customer losses moderate, mobile growth supports the bundle, capital spending remains near the disclosed 2026 plan, and earnings remain broadly durable without requiring a near-term return to revenue growth.

The bull case applies 6.0 times trailing EPS for $231 per share. It assumes network evolution, rural expansion and converged pricing stabilize broadband, mobile remains a double-digit grower, and reduced share count converts stable aggregate earnings into higher per-share earnings. Probabilities of 25% bear, 50% base and 25% bull produce a probability-weighted value of $173, equal to the base case because the valuation outcomes are symmetric around it.

At $140.56, the $173 fair value implies 23.1% upside and an Undervalued verdict under the required 15% threshold. That discount is not evidence that the operating concerns are resolved. It compensates for high leverage, shrinking core customers, competitive intensity and Cox integration risk. Q2 does not justify a higher multiple: the EPS increase was primarily financial rather than operational, while EBITDA and customer metrics moved in the wrong direction.

The bullish interpretation fails if Internet losses become structural rather than cyclical or execution-related. Fiber, fixed-wireless, satellite and other alternatives could continue reducing penetration even after Charter completes its network evolution. Another two or three quarters of widening Internet losses accompanied by declining connectivity revenue would challenge the assumption that mobile can defend the broadband relationship.

The valuation also fails if EBITDA declines faster than the share count. Q2 demonstrated that repurchases can support EPS temporarily, but lower Adjusted EBITDA reduces the cash available for interest, capital investment and debt reduction. With $93.8B of principal debt and only $509M of cash, small changes in operating performance have an amplified effect on equity value.

Cox creates a separate execution risk. Charter incurred $65M of Q2 transition expenses before closing, and the filing warns about closing conditions, operating restrictions and integration risks. The transaction may add scale, but no transaction-specific synergy realization or integration outcome is included in our valuation assumptions because the necessary figures were not provided here.

Finally, the apparent 3.7 times P/E could prove misleading if current EPS is not durable. Q2 benefited from fewer shares and a gain on extinguishment of debt, while underlying EBITDA declined. The evidence needed to raise fair value is straightforward: moderating Internet losses, stable or growing connectivity revenue, firmer EBITDA margins and capital spending that begins to normalize after network evolution. Until then, Charter is undervalued on stated earnings but remains a high-risk turnaround.