Business context and reporting period
Charter Communications, Inc. is a broadband and cable operator serving more than 31 million customers in 41 states through Spectrum. Its services include residential and business Internet, video, voice, mobile, enterprise connectivity and advertising. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Dollars are in millions unless stated otherwise.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $13,146 | $12,039 | $38,470 | $35,473 |
| Adjusted EBITDA | $5,286 | $4,639 | $15,251 | $13,524 |
| Income from operations | $2,927 | $2,172 | $7,570 | $5,943 |
| Net income attributable to Charter shareholders | $1,217 | $814 | $3,044 | $1,976 |
| Diluted EPS | $6.50 | $3.90 | $15.78 | $9.35 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $12,013 | $10,413 |
| Free cash flow | $2,476 | $1,754 | $6,399 | $4,991 |
| Capital expenditures | $1,861 | $2,014 | $5,563 | $5,352 |
Revenue increased 9.2% in Q3 and 8.4% for the nine-month period. Adjusted EBITDA increased 13.9% and 12.8%, respectively. Calculated Adjusted EBITDA margin rose to about 40.2% from 38.5% in Q3 and to 39.6% from 38.1% for the nine months. Operating income grew 34.8% in Q3 and 27.4% year to date. Results reflect revenue growth and lower depreciation and amortization, partly offset by higher operating expenses, interest and taxes.
Internet was the largest growth driver: revenue increased 13.6% in Q3 and 14.7% year to date, supported by customer growth, pricing and promotional roll-off. Mobile revenue increased 45.4% in Q3 and 65.2% year to date, with mobile lines up 1.124 million year over year to 3.184 million. Residential video customers fell 418,000 and voice customers fell 551,000 year over year; total customer relationships increased to 31.949 million from 30.933 million.
Debt, liquidity and capital allocation
At September 30, 2021, principal debt was $87.9 billion, including $11.5 billion of credit-facility debt. Balance-sheet current and long-term debt totaled $88.4 billion; long-term debt was $85.4 billion and current debt $3.0 billion. Cash was $466 million, down from $1.001 billion at December 31, 2020. The company reported approximately $3.2 billion available under its credit facilities and a 4.3x leverage ratio. Management’s target net leverage range is 4.0x–4.5x Adjusted EBITDA.
Nine-month operating cash flow was $12.0 billion; investing cash outflow was $5.8 billion and financing cash outflow was $6.8 billion. Financing included $10.8 billion of treasury-stock purchases and $1.5 billion spent purchasing noncontrolling interests, partly offset by $15.3 billion of debt borrowings. Charter repurchased $10.45 billion of its shares in the first nine months, in addition to employee-related share withholding; Charter Holdings also purchased $1.5 billion of units from Advance/Newhouse. Debt issuance proceeds funded refinancing, general corporate purposes and buybacks. The company reported $1.5 billion of remaining repurchase authorization at quarter-end, excluding Liberty Broadband purchases.
Outlook, commentary, risks and unusual items
- Management expects 2021 cable capital expenditures to be relatively consistent as a percentage of cable revenue with 2020; actual spending depends on growth and product-development needs.
- Charter expects mobile Adjusted EBITDA to remain negative as it invests in customer acquisition and growth. Mobile reduced Adjusted EBITDA by about $72 million and free cash flow by about $145 million in Q3 2021; nine-month impacts were about $219 million and $606 million, respectively.
- Management expects to become a meaningful federal cash taxpayer in 2022 as most net operating losses are used. It expects current Emergency Broadband Benefit funding to run out in early 2022 absent an extension; effects on customer disconnects and bad debt are uncertain.
- Programming rates are expected to keep rising, and Charter says it has been unable to pass all such increases to customers without potentially losing subscribers. Competition, customer retention, network investment, vendor access, regulation, economic conditions and access to financing are among the stated risks.
- A tentative settlement of Sprint-related litigation would require a $220 million payment to T-Mobile; the filing says it had not been finalized. The amount was included in nine-month special charges. Charter also recorded about $165 million of equity-investment impairments in the first nine months.
- Nine-month other expenses included a $124 million pension remeasurement gain, partly offset by debt-extinguishment losses and losses on financial instruments. A $300 million deferred tax liability was recorded in connection with the June conversion of Advance/Newhouse’s preferred units.
- October events disclosed after quarter-end included $4.0 billion of senior secured note issuance and a $561 million purchase of additional Charter shares from Liberty Broadband. The filing contains no specific full-year revenue or earnings guidance.
Most important facts for investors to verify
- Whether revenue and margin growth can continue as programming, labor and mobile costs rise and video and voice customers decline.
- Mobile unit economics, including the timing of profitability and the continuing cash demands of device financing and network investment.
- Debt refinancing needs, interest costs, leverage and liquidity, particularly alongside sizable share repurchases and other capital uses.
- Whether the tentative $220 million litigation settlement is finalized and whether other intellectual-property or legal matters could have material outcomes.
- The impact of EBB funding expiration and the expected 2022 increase in federal cash taxes on customer trends and free cash flow.