Charter Communications, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Charter is a broadband and cable operator serving more than 32 million customers across 41 states. Results are unaudited and presented on a consolidated basis.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $13.584 billion | $13.550 billion | $40.896 billion | $40.348 billion |
| Adjusted EBITDA | $5.449 billion | $5.412 billion | $16.321 billion | $16.134 billion |
| Income from operations | $3.126 billion | $2.924 billion | $9.292 billion | $8.922 billion |
| Net income attributable to Charter shareholders | $1.255 billion | $1.185 billion | $3.499 billion | $3.859 billion |
| Diluted earnings per share | $8.25 | $7.38 | $22.94 | $23.06 |
| Operating cash flow | $3.944 billion | $3.757 billion | $10.578 billion | $11.138 billion |
| Free cash flow (non-GAAP) | $1.097 billion | $1.507 billion | $2.429 billion | $4.966 billion |
| Capital expenditures | $2.961 billion | $2.406 billion | $8.259 billion | $6.456 billion |
Q3 revenue increased 0.2%, Adjusted EBITDA 0.7%, and operating income 6.9% year over year. Approximate Q3 operating margin was 23.0%, versus 21.6%; Adjusted EBITDA margin was 40.1%, versus 39.9%. For the nine months, revenue grew 1.4%, while Charter-attributable net income declined 9.3%. Approximate nine-month operating margin was 22.7%, versus 22.1%.
Revenue, customers, and operating trends
- Q3 Internet revenue grew 3.7% to $5.776 billion and mobile service revenue grew 33.8% to $581 million. Video revenue declined 8.6% to $4.004 billion, and advertising sales fell 20.3% to $384 million. Nine-month trends were similar: Internet revenue +3.9%, mobile +30.7%, video −5.8%, and advertising −15.2%.
- At quarter-end, Charter reported 30.649 million Internet customers, up 321,000 year over year; 14.379 million video customers, down 912,000; and 7.220 million mobile lines, up 2.543 million. Q3 additions included 63,000 Internet customers, 594,000 mobile lines, and 8,000 residential and SMB customer relationships.
- Management attributed growth mainly to Internet and mobile expansion, partly offset by video and advertising declines. The temporary Disney programming interruption resulted in $68 million of total customer credits; the company also recorded a $61 million programming-cost benefit during the interruption.
- Q3 operating costs rose $52 million year over year. Lower programming expense was offset by higher other costs of revenue and customer-service costs, including mobile-related costs and investments in employee pay and benefits. Lower special charges also supported the increase in operating income.
Cash, debt, and liquidity
- September 30 cash was $571 million, down from $645 million at December 31, 2022. Principal debt was $97.588 billion (carrying value $97.799 billion), compared with $97.368 billion principal at year-end. Debt included $14.483 billion of credit facilities; available credit-facility capacity was approximately $3.3 billion.
- Net interest expense was $1.306 billion in Q3 and $3.869 billion for the first nine months, up from $1.160 billion and $3.329 billion, respectively. Management cited higher weighted-average rates and debt outstanding. The company reported leverage of 4.5 times Adjusted EBITDA and a target range of 4.0–4.5 times.
- Nine-month free cash flow fell $2.537 billion year over year, primarily due to $1.803 billion of higher capital expenditures, working-capital changes, and $403 million of higher cash interest paid. Cash paid for interest was $3.666 billion and cash paid for taxes was $1.149 billion for the nine months.
- Management said expected cash needs would be funded through operating cash flow, cash on hand, credit-facility availability, and potential refinancing. It stated that it believed liquidity was sufficient for projected needs, while noting refinancing terms depend on market conditions and that mobile equipment installment-plan sales create negative working-capital timing effects.
Outlook, capital allocation, and notable items
- 2023 capital expenditure outlook remained approximately $7.2 billion excluding line extensions, plus approximately $4 billion for line extensions. Nine-month total capital expenditures were $8.259 billion, including $3.037 billion of line extensions. Management cited rural construction, network expansion and evolution, support capital, and customer equipment as spending drivers.
- Charter activated approximately 78,000 subsidized rural passings in Q3 and 190,000 year to date; spending on the rural construction initiative was $512 million in Q3 and $1.4 billion year to date. The company is upgrading its network, pursuing multi-gigabit capability, expanding WiFi access, and developing targeted 5G data-only coverage using CBRS spectrum.
- In September, Charter entered a new Disney affiliation agreement; in October it began deploying Xumo Stream Boxes to new video customers. Management described these initiatives as part of evolving its video offering and improving customer experience.
- Charter repurchased approximately 5.1 million Class A shares for $1.963 billion in the first nine months, excluding employee withholding shares; it also purchased $254 million of Charter Holdings units from a noncontrolling owner. Remaining repurchase authorization was $672 million at quarter-end. A February issuance of $1.1 billion of 7.375% notes due 2031 was used for general corporate purposes, including debt repayment and buybacks.
- Other income and expense was affected by financial-instrument gains, pension items, and losses on equity investments, primarily related to the Xumo joint venture. Q3 net income benefited from lower special charges than in 2022, while higher interest expense weighed on earnings. The company transitioned relevant floating-rate debt benchmarks from LIBOR to SOFR.
Risks and contingencies
Management highlights intense competition, customer retention and experience, programming costs and pricing, technology and network investment needs, economic conditions, regulation, vendor and staffing availability, and access to funding and compliance with debt covenants. It reported no material changes to the risk factors in its 2022 Form 10-K. Patent litigation includes multiple Entropic suits seeking monetary damages and, in some cases, future license fees; Charter said it was defending the cases and did not expect the Entropic matters to materially affect operations, financial condition, or cash flows. It could not predict outcomes or estimate a loss range for other intellectual-property claims, and cautioned that legal matters could be material individually or in aggregate. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Internet and mobile growth can offset continuing video and advertising declines, and how customer additions translate into revenue and margins.
- Whether elevated capital spending and working-capital demands allow free cash flow to recover while Charter maintains its leverage target and funds debt maturities.
- The sustainability of the 2023 capital expenditure outlook and the pace, cost, and returns of rural construction and network upgrades.
- The impact of programming negotiations and customer credits, including the Disney agreement, on video retention, programming costs, and revenue.
- Debt refinancing costs, interest-rate exposure, liquidity, and the company’s continued access to credit markets.
- Developments in Entropic and other litigation, including any change in potential exposure; the filing does not provide a clear estimated loss range for the broader intellectual-property matters.