Charter Communications, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless noted. 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 results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $11,738 | $11,206 | +4.8% |
| Adjusted EBITDA (non-GAAP) | $4,396 | $4,055 | +8.4% |
| Income from operations | $1,802 | $1,425 | +26.5% |
| Net income attributable to Charter shareholders | $396 | $253 | +56.5% |
| Diluted EPS | $1.86 | $1.11 | +$0.75 |
| Operating cash flow | $3,220 | $2,686 | +$534 |
| Free cash flow (non-GAAP) | $1,371 | $645 | +$726 |
| Capital expenditures | $1,461 | $1,665 | −12.3% |
Operating margin was approximately 15.4% versus 12.7%; Adjusted EBITDA margin was approximately 37.5% versus 36.2% (calculated from reported figures). Revenue growth reflected residential Internet, mobile and commercial customer growth and pricing. EBITDA growth was partly offset by higher mobile, marketing and programming costs.
- Revenue mix: Internet $4,407 (+9.5%); video $4,422 (+0.9%); voice $457 (−9.4%); commercial $1,618 (+1.9%); advertising $365 (+5.7%); mobile $258 (+85.0%).
- Customer measures at March 31: 29.721 million customer relationships, up from 28.454 million; 25.471 million residential Internet PSUs, up from 24.023 million; 15.550 million video PSUs, down from 15.952 million; 9.360 million voice PSUs, down from 10.015 million; and 1.372 million mobile lines, versus 310,000.
- Balance sheet and liquidity: Cash and cash equivalents were $2,908, down from $3,483 at year-end 2019. Total debt principal was $79.1 billion; the balance sheet showed $4,905 current debt and $74,787 long-term debt. Credit-facility availability was approximately $4.7 billion. Net leverage was 4.4x Adjusted EBITDA.
Material changes versus Q1 2019
- Revenue rose $532, led by residential Internet growth (+$383) and mobile; residential Internet customers increased by 1.448 million year over year. Video customers fell by 402,000 and residential wireline voice customers by 655,000.
- Operating costs increased $196, including $114 higher mobile costs, $31 higher marketing, and $27 higher programming costs. Programming expense was approximately $2.9 billion in both periods.
- Net income and EPS benefited from stronger operating income and lower tax expense, but results included a $318 loss on financial instruments, compared with a $37 gain in 2019. The 2020 loss primarily reflected cross-currency derivative fair-value changes. Q1 2020 also included a $27 debt-extinguishment loss; Q1 2019 included an approximately $110 equity-investment impairment.
- Free cash flow increased $726, reflecting higher Adjusted EBITDA, working-capital changes and lower capital expenditures, partly offset by higher cash interest. Mobile reduced free cash flow by approximately $260 in Q1 2020, versus $291 in Q1 2019.
- Charter repurchased approximately 4.5 million Class A shares for $2.2 billion and purchased $393 million of Charter Holdings units from a noncontrolling owner. Remaining buyback authority at quarter-end was $286 million.
Outlook, management commentary and risks
- Management reported uninterrupted service during the early COVID-19 period and said network capacity and frontline operations were responding to increased demand, though customer-call wait times had risen. The Remote Education Offer added 119,000 Internet accounts in March; the company also participated in the FCC Keep Americans Connected pledge and offered reduced-price seasonal plans to certain small-business customers.
- Management could not predict COVID-19’s ultimate effects, including customers’ ability to pay, bad debt, advertising demand, vendor supply, employee health and the ability to deploy, maintain and service networks. The filing reported higher expected credit losses and identified COVID-19 as a material risk.
- No specific revenue or earnings guidance was provided. Management expected 2020 cable capital expenditures to decline as a percentage of cable revenue versus 2019, while noting actual spending would depend on business growth and product-development needs. It expected continued video and wireline voice customer losses.
- Management expected mobile growth to continue weighing on Adjusted EBITDA and cash flow in the near term, including from device-related working-capital timing. Spectrum Mobile launched 5G service in March 2020.
- Programming rates were expected to keep rising; Charter said it had not fully passed those increases to customers and might not do so without risking customer losses. Competition, economic conditions, regulation, network disruptions, and access to capital are also cited risks.
- In February and March, Charter issued $4.15 billion of unsecured notes due 2030 and 2032, partly to refinance debt and for general corporate purposes. After quarter-end, it issued $3.0 billion of secured notes due 2031 and 2051. Management stated it believed available cash, free cash flow, revolver capacity and capital-market access were sufficient for projected needs.
Investor verification priorities
- Track COVID-related payment behavior, bad debt, disconnections, advertising trends and the financial impact of customer-assistance offers.
- Assess whether Internet and commercial growth can offset continuing video and voice subscriber losses, and whether pricing supports revenue per customer.
- Monitor mobile line growth alongside its ongoing EBITDA, free-cash-flow and device-working-capital costs.
- Review debt maturities, refinancing terms, leverage, interest expense and the use of capital for share repurchases; reported leverage was 4.4x against a stated target range of 4.0–4.5x.
- Reconcile non-GAAP Adjusted EBITDA and free cash flow with GAAP results, including the effects of derivative marks, debt transactions, capital spending and working capital.
- Review the status and potential exposure of disclosed litigation and regulatory matters; the filing says outcomes and possible loss ranges cannot be predicted for certain claims.