Charter Communications, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Charter is a broadband and cable operator serving more than 31 million customers in 41 states through Spectrum. Financial amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $12,802 | $11,696 | $25,324 | $23,434 |
| Adjusted EBITDA | $5,020 | $4,489 | $9,965 | $8,885 |
| Income from operations | $2,575 | $1,969 | $4,643 | $3,771 |
| Net income attributable to Charter shareholders | $1,020 | $766 | $1,827 | $1,162 |
| Diluted earnings per share | $5.29 | $3.63 | $9.37 | $5.48 |
| Net cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $7,750 | $6,749 |
| Free cash flow | $2,068 | $1,866 | $3,923 | $3,237 |
Revenue grew 9.5% in Q2 and 8.1% for the first half; Adjusted EBITDA rose 11.8% and 12.2%, respectively. Approximate Q2 operating margin was 20.1% versus 16.8% a year earlier; Adjusted EBITDA margin was 39.2% versus 38.4%. For the first half, operating margin was 18.3% versus 16.1%, and Adjusted EBITDA margin was 39.4% versus 37.9%. Adjusted EBITDA and free cash flow are company-defined non-GAAP measures.
At June 30, cash and cash equivalents were $1,711, versus $1,001 at year-end 2020. Debt principal was $87,526, including $10,012 of credit-facility borrowings; balance-sheet debt was $87,964 including accretion and discounts. Long-term debt on the balance sheet was $86,962, with $1,002 current. Charter reported $4.7 billion of available credit-facility capacity, a 4.4x leverage ratio, and a target net-debt-to-Adjusted-EBITDA range of 4.0x–4.5x. First-half capital expenditures were $3,702.
Business trends and changes versus prior year
- Internet revenue increased 15.2% in Q2 and 15.3% for the first half, supported by customer growth and pricing. Residential Internet customers increased by 1.409 million year over year.
- Mobile revenue increased 67.5% in Q2 and 78.0% for the first half. Mobile lines reached 2.940 million, up 1.243 million year over year. Mobile service growth came with substantial device, acquisition, and operating costs.
- Video revenue was nearly flat in Q2 and declined 0.8% for the first half; video customers fell 232,000 year over year. Voice revenue declined 12.7% in both periods, with residential wireline voice customers down 384,000.
- Advertising revenue rose 65.1% in Q2 and 23.0% for the first half, partly reflecting pandemic-related weakness in 2020. Residential and SMB customer relationships totaled 31.764 million, up from 30.476 million.
- Operating costs increased $585 in Q2 and $864 for the first half. Higher mobile, programming, and regulatory/connectivity/produced-content costs were partly offset by lower customer-service costs, including lower bad-debt expense.
- Operating cash flow increased $1,001 for the first half, primarily reflecting higher Adjusted EBITDA. Free cash flow rose $686; capital expenditures increased $364 and cash interest increased $24, partly offset by EBITDA growth.
Outlook, commentary, risks and unusual items
- Management expects 2021 cable capital expenditures, excluding Rural Digital Opportunity Fund investments, to be relatively consistent as a percentage of cable revenue with 2020. No specific revenue or earnings guidance is provided.
- Management expects mobile Adjusted EBITDA to remain negative while the service grows, and anticipates continued negative mobile free cash flow due to device-payment timing and retail-store and CBRS network investment. Mobile reduced Q2 Adjusted EBITDA by approximately $67 and free cash flow by $277; first-half impacts were approximately $147 and $461.
- Management expects programming costs per customer to continue rising and says it may not be able to pass those increases fully to customers without risking subscriber losses. Competition, customer retention, network investment, vendor availability, regulation, and the continuing effects of COVID-19 are also cited risks.
- The FCC Emergency Broadband Benefit program was estimated to have added approximately 60,000 to Q2 net customer relationship additions. Management expects to become a meaningful federal cash taxpayer in 2022 as most net operating losses are used.
- Q2 other income/expense included a $155 pension remeasurement gain, primarily driven by discount-rate changes, and approximately $165 of equity-investment impairments. First-half special charges included a $220 tentative settlement of Sprint/T-Mobile litigation; settlement finalization was not assured. Other legal and intellectual-property matters remain pending, with potential outcomes not reliably estimable.
- Charter issued new long-dated debt and used proceeds for general corporate purposes, including debt repayment and share/unit repurchases. First-half treasury-stock purchases were $7,168, and Charter Holdings also purchased $1,090 of units from Advance/Newhouse. Charter reported $1.7 billion of remaining buyback authorization at quarter-end, excluding purchases from Liberty Broadband.
- All significant forward-looking plans are subject to risks and uncertainties. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the tentative $220 million Sprint/T-Mobile settlement was finalized, and the ultimate cost and resolution of other litigation.
- Whether Internet and mobile customer growth and revenue can offset continued video and wireline voice subscriber declines.
- How mobile losses, device-related working capital, and CBRS investment evolve as the service scales.
- Whether rising programming costs and increased capital spending affect margins, free cash flow, and customer retention.
- Debt refinancing needs, leverage relative to the 4.0x–4.5x target, and the sustainability of buybacks alongside network investment and expected higher cash taxes.