Charter Communications, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Charter is a broadband and cable operator serving residential and business customers through Spectrum, with one reportable segment: cable services. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12,039 | $11,450 | $35,473 | $34,003 |
| Adjusted EBITDA (non-GAAP) | $4,639 | $4,086 | $13,524 | $12,326 |
| Income from operations | $2,172 | $1,586 | $5,943 | $4,552 |
| Net income attributable to Charter shareholders | $814 | $387 | $1,976 | $954 |
| Diluted EPS | $3.90 | $1.74 | $9.35 | $4.23 |
| Operating margin | 18.0% | 13.9% | 16.8% | 13.4% |
| Free cash flow (non-GAAP) | $1,754 | $1,271 | $4,991 | $3,028 |
Revenue rose 5.1% in Q3 and 4.3% year to date; Adjusted EBITDA rose 13.6% and 9.7%, respectively. Operating income increased 36.9% and 30.6%. Net income growth also reflects non-operating items, including debt-extinguishment losses, derivative valuation changes and a pension remeasurement loss.
- Revenue mix: Internet revenue increased 12.5% in Q3 and 10.8% year to date; mobile revenue increased 91.8% and 91.3%. Video revenue declined 3.2% and 0.9%; voice declined 5.8% and 7.7%. Q3 advertising revenue grew 16.8%, partly on political advertising, while year-to-date advertising fell 5.3%.
- Customer trends: At September 30, 2020, Charter reported 30.933 million customer relationships, up from 28.967 million a year earlier; 28.633 million Internet customers versus 26.325 million; and 2.060 million mobile lines versus 794,000. Video customers were nearly flat at 16.235 million versus 16.245 million, while voice customers declined to 10.542 million from 10.715 million.
- Cash flow and investment: Nine-month operating cash flow was $10,413, up from $8,390. Capital expenditures were $5,352, up from $4,913; free cash flow increased to $4,991 from $3,028. Management attributed the FCF increase primarily to higher Adjusted EBITDA and favorable working-capital changes; mobile reduced FCF by approximately $758 year to date.
- Liquidity and debt: Cash and cash equivalents were $1,283 at quarter-end, down from $3,483 at year-end 2019. Debt principal was $79.1 billion, including $10.2 billion of credit-facility debt; approximately $4.7 billion remained available under credit facilities. Management reported leverage of 4.3 times Adjusted EBITDA and no covenant default at September 30. The balance sheet reports $1,715 of current debt and $77,947 of long-term debt.
Material changes and unusual items
- COVID-19-related video customer credits of $218 reduced revenue; sports-network rebates reduced programming costs by $163 and related regulatory/content costs by $10. Charter said customer credits would reflect the network rebates once details were finalized. It also waived approximately $85 of receivables under the Keep Americans Connected program, recorded as a Q2 revenue reduction.
- Operating costs rose $48 in Q3 and $297 year to date, principally from mobile costs, partly offset year to date by lower regulatory, connectivity and produced-content costs. Mobile generated $368 of Q3 revenue and $936 year to date, but reduced Adjusted EBITDA by approximately $88 and $307, respectively.
- Q3 included a $125 pension remeasurement loss following significant lump-sum participant settlements. Debt-extinguishment losses were $58 in Q3 and $121 year to date. Nine-month 2019 results included a $121 equity-investment impairment and a $41 impairment of non-strategic assets.
- Charter repurchased approximately $6.5 billion of its Class A shares in the first nine months and purchased $884 of Charter Holdings units from A/N. Remaining board authorization at September 30 was approximately $1.6 billion.
- Debt refinancing included new secured and unsecured notes during 2020, with proceeds used for refinancing, general corporate purposes and buybacks. After quarter-end, Charter issued an additional $1.5 billion of 4.500% notes due 2032; proceeds were intended for debt repayment and potential buybacks.
Outlook, risks and contingencies
- Management said network service continued uninterrupted through the pandemic and cited increased demand for connectivity. It expects continued customer-relationship growth from bundled services and retention efforts, while anticipating continued losses of video and wireline voice customers.
- Management cannot predict COVID-19’s ultimate effects and warned of possible incremental churn and bad debt into the remainder of 2020 and 2021, alongside uncertainty around customer payment capacity, advertising, business demand, vendors and network deployment or service work.
- Charter expected 2020 cable capital expenditures to be consistent with, and possibly lower as a percentage of cable revenue than, 2019; actual spending depends on growth and product-development needs. No specific revenue or earnings forecast was provided.
- Management expects programming rates to keep increasing and said it may not be able to fully pass cost increases to customers without risking subscriber losses. Mobile growth is expected to continue weighing on Adjusted EBITDA and working capital as the business scales.
- Risks include competition, debt service and refinancing needs, interest-rate and foreign-exchange exposure, regulation, and litigation. Charter described several ongoing legal matters, including Sprint disputes, and stated that outcomes are uncertain; it could not estimate a possible loss range for certain intellectual-property claims.
Important facts for investors to verify
- Whether Internet customer growth and pricing can offset video and voice declines, and whether COVID-related customer credits or delinquent accounts lead to additional churn or bad debt.
- Whether mobile revenue growth can improve profitability and cash generation as device-related costs and working-capital needs persist.
- Whether free cash flow remains sufficient to fund capital spending, debt obligations and shareholder repurchases while maintaining the stated leverage target of 4 to 4.5 times.
- How sports-programming rebates and customer credits are finalized, and whether programming-cost inflation can be passed through to customers.
- Debt maturities, refinancing terms, credit-facility availability, and exposure to variable rates; also monitor the outcome of significant legal and regulatory matters.
Adjusted EBITDA and free cash flow are non-GAAP measures as defined by Charter and should be considered alongside GAAP results. This summary does not replace the full filing.