Citigroup: Charter (CHTR.US) faces pressure from high base numbers, negotiations with SpaceX may face obstacles.

Charter Communications (CHTR.US) will release its second-quarter financial report before the market opens on July 24. The quarter is expected to reflect the company's investments in network upgrades, rural expansion, and preliminary efforts for its merger with Cox Communications. Citigroup research analyst Michael Rollins cautioned that EBITDA may fall short of expectations, mainly due to the high base effect from the same period last year, moderate increases in advertising-related sales expenses, and factors such as "broadband average revenue per user (ARPU) remaining flat on a sequential basis without price increases." Rollins pointed out, "Weak user growth combined with competitive headwinds on ARPU are suppressing short-term stock performance." He also mentioned that Charter lost 64% of its broadband users year-over-year. Rollins further stated that Charter faces intense competitive pressure. While the company has some room to leverage its infrastructure, negotiations with SpaceX (SPCX.US) for consumer-level mobile services could be challenging. "We would be surprised if Charter were to transfer its mobile virtual network operator (MVNO) agreement with Verizon to a third party," Rollins wrote. The MVNO model allows Charter to lease cellular capacity in bulk from mobile network operators such as Verizon (VZ.US), AT&T (T.US), and T-Mobile (TMUS.US) who own tower networks. As MVNO agreements typically limit resale to the reseller and do not allow further sublicensing, Rollins believes that if Charter were to collaborate with SpaceX, it may need to establish distribution agreements to sell its Spectrum Mobile service. Rollins further noted, "From a broader perspective, we do not rule out cable companies achieving a balance of users and revenue share in the broadband market through more competitive market strategies, including the possibility of reselling their broadband platform in exchange for a more favorable mobile MVNO agreement." Citigroup reiterated its "buy" rating for Charter Communications, but lowered the target price by 17% to $190.