Charter Communications, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Charter is a broadband and cable operator providing residential and business Internet, video, voice, mobile, advertising and related services. It reported one operating segment and served more than 32 million customer relationships across 41 states.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Revenue | $13.55B | $13.15B | $40.35B | $38.47B |
| Adjusted EBITDA (non-GAAP) | $5.41B | $5.29B | $16.13B | $15.25B |
| Income from operations | $2.92B | $2.93B | $8.92B | $7.57B |
| Net income attributable to Charter shareholders | $1.19B | $1.22B | $3.86B | $3.04B |
| Diluted earnings per share | $7.38 | $6.50 | $23.06 | $15.78 |
| Operating cash flow | $3.76B | $4.26B | $11.14B | $12.01B |
| Free cash flow (non-GAAP) | $1.51B | $2.48B | $4.97B | $6.40B |
Q3 revenue rose 3.1% and Adjusted EBITDA rose 2.4%; operating income was nearly flat and shareholder net income declined 2.6%. For the nine-month period, revenue increased 4.9%, Adjusted EBITDA 5.8%, operating income 17.9% and shareholder net income 26.8%. Approximate Q3 operating, Adjusted EBITDA and shareholder net income margins were 21.6%, 39.9% and 8.7%, respectively; the prior-year Q3 figures were about 22.3%, 40.2% and 9.3%.
Revenue growth reflected Internet, mobile and commercial customer growth and price adjustments. Q3 Internet revenue increased 3.9%, mobile 40.2% and advertising 22.9%; video revenue fell 2.7% and voice fell 4.6%. Residential Internet customers increased by 355,000 year over year, while video customers declined 645,000 and wireline voice customers declined 855,000. Total customer relationships increased 192,000 year over year, excluding mobile-only customers; mobile lines increased by 1.493 million.
Cash, capital spending and debt
- Cash and cash equivalents were $480 million at September 30, 2022, down from $601 million at year-end 2021. Cash from operations for the first nine months declined $875 million year over year.
- Capital expenditures were $6.46 billion for the first nine months, versus $5.56 billion a year earlier. Rural construction accounted for $1.11 billion of 2022 spending. Management expected full-year 2022 cable capital expenditures of $7.1–$7.3 billion, excluding rural construction.
- Principal debt was $96.8 billion, compared with $91.2 billion at December 31, 2021. Debt carrying value was $97.0 billion. Cash interest paid in the first nine months was $3.25 billion, versus $3.04 billion.
- Charter reported approximately $4.6 billion available under credit facilities and a 4.5x leverage ratio. Its stated target was net debt to last-twelve-month Adjusted EBITDA of 4.0x–4.5x, with a target of up to 3.5x at the Charter Operating first-lien level.
- First-nine-month free cash flow fell $1.43 billion year over year, mainly due to higher capital expenditures, cash taxes and interest. The company became a meaningful federal cash taxpayer in 2022 as most net operating losses had been used.
Material changes, outlook and risks
- Mobile growth contributed revenue but remained a drag: management estimated mobile reduced Adjusted EBITDA by $96 million in Q3 and $237 million in the first nine months, and reduced free cash flow by $208 million and $768 million, respectively. Charter expected mobile Adjusted EBITDA could remain negative during growth and cited device-financing working-capital needs and CBRS network investment as free-cash-flow pressures.
- Rural broadband construction is underway; management expects to extend the footprint to approximately 1 million additional homes and businesses over six years. Charter introduced Spectrum One in October 2022 and continued plans to build its own 5G mobile data-only network using CBRS spectrum.
- Management cited lower customer move and provider-switching rates as reducing selling opportunities. It also warned that programming rates per customer were expected to rise and that passing those increases fully to customers could risk customer losses.
- Debt financing increased, and interest expense rose $144 million in Q3 and $326 million in the first nine months, attributed to higher average debt and interest rates. The May credit agreement amendment extended certain loan and revolving-credit maturities and shifted the revolving facility benchmark to SOFR; some term loans remained LIBOR-based.
- A Texas jury found an indirect subsidiary 90% at fault in a fatal-stabbing lawsuit and awarded $375 million in compensatory and $7.0 billion in punitive damages in July. Plaintiffs later sought a reduced total judgment of $1.144 billion, signed by the trial judge on October 7, after the quarter-end. Charter posted a $25 million bond and intends to appeal. The company concluded a loss was not probable and reasonably estimable at September 30 and recorded no liability.
- Other notable items included a $189 million pension remeasurement gain in Q3 2022 and $199 million of Q3 special charges, primarily litigation settlements. The nine-month special-charge figure also included a $54 million multiemployer pension settlement gain. These items affect comparisons of reported earnings.
- Charter repurchased $9.07 billion of Class A shares during the first nine months, excluding employee withholding and exercise costs; it also spent $1.38 billion buying Charter Holdings units from a noncontrolling holder. Remaining board repurchase authority was $680 million at quarter-end, excluding purchases from Liberty Broadband.
Important facts for investors to verify
- Track Internet and total relationship growth against continued video and voice subscriber losses, and assess whether mobile growth improves profitability after acquisition, device and network costs.
- Compare cash generation with rising capital spending, rural buildout requirements, cash taxes and interest; review the stated full-year core cable capital expenditure range.
- Monitor debt, refinancing costs, variable-rate exposure, leverage and access to the revolving facility and capital markets.
- Follow the appeal and potential financial exposure from the Texas judgment, which was not accrued in the September 30 statements, and other litigation and intellectual-property claims.
- Distinguish reported results from non-GAAP Adjusted EBITDA and free cash flow, and account for pension gains, special charges and buybacks when assessing earnings and per-share trends.