Charter Communications, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2018. Charter is a U.S. cable and broadband provider with one reportable segment. It serves residential and business customers with video, Internet, voice, mobile, advertising and enterprise services. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $10.892 billion | $10.458 billion | $32.403 billion | $30.979 billion |
| Adjusted EBITDA (non-GAAP) | $3.951 billion | $3.819 billion | $11.895 billion | $11.320 billion |
| Income from operations | $1.380 billion | $909 million | $3.782 billion | $2.902 billion |
| Net income attributable to Charter shareholders | $493 million | $48 million | $934 million | $342 million |
| Diluted EPS | $2.11 | $0.19 | $3.93 | $1.29 |
| Free cash flow (non-GAAP) | $532 million | $594 million | $1.287 billion | $2.876 billion |
Q3 revenue increased 4.2% and Adjusted EBITDA increased 3.5% year over year; nine-month increases were 4.6% and 5.1%, respectively. Q3 operating margin was approximately 12.7%, compared with 8.7% a year earlier. Profit comparisons reflect notable pension remeasurement and lower merger, restructuring and special charges; see unusual items below.
- Revenue mix: Q3 Internet revenue rose 7.2% to $3.809 billion, video rose 2.9% to $4.332 billion, and voice declined 16.2% to $512 million. Advertising revenue increased 18.1% to $440 million. Mobile contributed $17 million after launching in Q2.
- Cash flow and investment: Nine-month operating cash flow was $8.599 billion, versus $8.696 billion. Capital expenditures were $6.692 billion, versus $6.096 billion. Free cash flow fell by $1.589 billion, primarily due to working-capital movements, higher capital expenditures and interest payments, partly offset by higher EBITDA. Mobile reduced nine-month free cash flow by an estimated $290 million.
- Debt and liquidity: Principal debt was $71.5 billion at September 30, including $9.6 billion of credit-facility debt. Balance-sheet cash was $612 million, restricted cash was $48 million, and available credit facilities were approximately $3.4 billion. Charter reported leverage of 4.5x and a target range of 4.0–4.5x at Charter; management may increase debt to maintain its target range.
- Other balance-sheet items: Total assets were $146.1 billion and total shareholders’ equity was $45.2 billion at September 30. Current liabilities were $11.9 billion, including $3.3 billion of current debt.
Material changes versus the prior comparable period
- Residential Internet customers increased by 1.081 million year over year to 23.336 million; residential video customers declined by 258,000 to 16.140 million, and voice customers declined by 183,000 to 10.218 million.
- Total customer relationships rose to 27.855 million from 26.952 million. Monthly residential revenue per customer edged up to $111.13 from $110.66; small and medium business revenue per customer fell to $173.52 from $186.66.
- Programming costs increased $79 million in Q3 and $381 million for the first nine months, driven mainly by contractual rate increases. Operating costs also include $94 million of Q3 mobile expense and $135 million for the nine-month period.
- Interest expense rose $113 million in Q3 and $380 million for nine months, primarily because weighted-average debt outstanding increased by approximately $8 billion. Nine-month share repurchases totaled $3.142 billion; Charter also spent $473 million to buy Charter Holdings units from a noncontrolling holder.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific quantitative full-year revenue or earnings guidance. Management expects programming expenses to continue rising and says it has not been able to fully pass those increases to customers. It expects an initial funding period for mobile and warns that product growth costs and integration efforts could pressure revenue growth and margins.
- Mobile and integration: Spectrum Mobile is offered to residential Internet customers through a Verizon network arrangement. Management said mobile reduced Adjusted EBITDA by approximately $77 million in Q3 and $118 million in the first nine months. The company expected integration of legacy Charter, Time Warner Cable and Bright House practices and systems to be substantially complete by 2019.
- Unusual items: A $187 million pension remeasurement gain in Q3 2018, largely related to a higher discount rate, compared with a $30 million pension remeasurement loss in Q3 2017. Other operating expenses were $18 million in Q3 2018 versus $145 million in Q3 2017; nine-month expenses were $116 million versus $374 million, reflecting lower merger and restructuring costs and special charges. The filing also reports a $12 million Q3 income-tax benefit to update provisional tax-reform estimates.
- Contingencies: New York’s Public Service Commission challenged Charter’s compliance with merger conditions, sought penalties of $100,000 per day, and ordered the company to submit an exit plan for New York operations. The parties were discussing a possible resolution, with the filing stating a December 24, 2018 deadline for the plan. Charter disputes the actions; it could not estimate a possible loss and cautioned that an adverse result could materially affect financial condition, results or liquidity.
- Other disclosed litigation includes a prior Sprint patent verdict against TWC of $140 million plus $6 million interest, which Charter appealed, and additional Sprint patent suits. Charter also disclosed a New York Attorney General case concerning Internet-speed advertising and other legal and regulatory matters. Management generally said it did not expect these matters to have a material adverse effect, while noting outcomes are uncertain.
- Management said liquidity was sufficient for projected needs, relying on operating cash flow, cash, revolving credit availability and potential refinancing. Debt maturities, interest-rate exposure, competition, programming costs, customer experience, network investment and integration execution remain relevant risks. Approximately 85% of principal debt was effectively fixed-rate; the weighted average rate was 5.4%.
Important facts for investors to verify
- Whether the New York PSC dispute is resolved, and the potential financial and operating consequences if it is not.
- Whether Internet customer growth and revenue per customer can offset continued video and voice subscriber declines.
- How mobile adoption, device financing and launch spending affect margins, working capital and free cash flow over time.
- Whether capital expenditures and working capital normalize after the nine-month free-cash-flow decline, and how much cash remains for investment and repurchases.
- Debt levels, refinancing terms, variable-rate exposure and covenant headroom; the filing reports $3.4 billion of facility availability and leverage of 4.5x.
- The sustainability of reported earnings growth after considering the $187 million pension gain, lower one-time costs, higher interest expense and continuing programming-cost inflation.