Charter Communications, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Charter is a broadband and cable operator serving more than 30 million customers in 41 states, with residential and commercial Internet, video, voice, mobile, advertising and other services. This unaudited filing covers the three and six months ended June 30, 2020; results are consolidated and reported as one cable services segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $11,696 | $11,347 | $23,434 | $22,553 |
| Adjusted EBITDA (non-GAAP) | $4,489 | $4,185 | $8,885 | $8,240 |
| Income from operations | $1,969 | $1,541 | $3,771 | $2,966 |
| Net income attributable to Charter shareholders | $766 | $314 | $1,162 | $567 |
| Diluted EPS | $3.63 | $1.39 | $5.48 | $2.50 |
| Operating cash flow | $3,529 | $2,761 | $6,749 | $5,447 |
| Free cash flow (non-GAAP) | $1,866 | $1,112 | $3,237 | $1,757 |
Revenue rose 3.1% in Q2 and 3.9% year to date; Adjusted EBITDA rose 7.3% and 7.8%, respectively. Approximate operating margin increased to 16.8% in Q2 from 13.6%, and to 16.1% for the first half from 13.2%. Approximate Adjusted EBITDA margin was 38.4% and 37.9%, respectively, versus 36.9% and 36.5% in the comparable periods.
- Revenue mix: Q2 Internet revenue increased 10.4% to $4,530 and mobile revenue increased 96.1% to $310. Video revenue was down 0.4% to $4,371; voice fell 7.7% to $451. Advertising sales declined 37.0% to $249, reflecting COVID-19-related weakness in local and national advertising. Enterprise revenue fell 7.1% to $606.
- Cash generation and investment: First-half capital expenditures were $3,338, compared with $3,262 in 2019. Free cash flow growth reflected higher Adjusted EBITDA, working-capital changes and lower cash interest, partly offset by increased capital spending. Management reported that mobile reduced free cash flow by approximately $493 in the first half.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $2,097, versus $3,483 at year-end 2019. Debt principal was approximately $77.8 billion, compared with $78.4 billion at year-end; the balance sheet reports $78.4 billion of debt at accreted value. Charter reported approximately $4.7 billion available under its credit facilities and a 4.3x leverage ratio. Its stated target leverage range is 4.0x–4.5x net debt to last-twelve-month Adjusted EBITDA.
Material changes versus the prior comparable period
- Residential Internet customers increased by 2.069 million year over year; total customer relationships reached 30.476 million, up from 28.657 million. Mobile lines increased to 1.697 million from 518,000.
- Residential video customers declined by 150,000 and wireline voice customers by 410,000 year over year. Monthly residential revenue per customer decreased to $110.82 from $112.20; SMB revenue per customer decreased to $166.06 from $170.42.
- Operating costs increased $53 in Q2 and $249 in the first half. Higher mobile, customer-service and programming costs were partly offset by lower regulatory/connectivity/produced-content costs. Depreciation and amortization declined $72 in Q2 and $125 year to date.
- Net income growth also reflected period-specific items: Q2 included a $64 gain on financial instruments versus a $119 loss a year earlier; first-half results included a $254 loss on financial instruments and $63 of debt-extinguishment losses. These items affect comparability.
- Charter repurchased approximately 6.5 million shares for $3.2 billion in the first half, versus 4.9 million shares for $1.7 billion in 2019. Remaining repurchase authority at June 30 was $837 million.
Outlook, management commentary, risks and unusual items
- Management said network service continued uninterrupted despite pandemic-driven traffic growth, and customer adoption of self-installation and digital self-service accelerated. The Remote Education Offer generated 448,000 Internet customer connections through June 30; 160,000 were still in the free period at quarter-end. The offer ended June 30, and nearly 90% of cumulative connects remained customers as of July 27.
- Under the Keep Americans Connected pledge, approximately 700,000 residential and SMB customers sought disconnection protection. Charter waived about $85 million of receivables, recorded as a reduction to revenue. Management expects some pandemic programs may contribute to incremental churn and bad debt during the remainder of 2020; the overall economic impact remains uncertain.
- Charter expects continued losses of video and wireline voice customers, ongoing programming-cost increases, and continued negative Adjusted EBITDA effects as mobile scales. Mobile reduced Adjusted EBITDA by approximately $103 in Q2 and $219 in the first half. Management expects 2020 cable capital expenditures to decline as a percentage of cable revenue versus 2019, subject to business growth and investment needs. No specific revenue or earnings guidance was provided in the supplied filing text.
- In February–April, subsidiaries issued new notes and used proceeds for general corporate purposes, including debt repayments. In July, after quarter-end, CCO Holdings issued a total of $3.0 billion of 4.250% notes due 2031, with proceeds intended in part to repay 2024 notes and fund buybacks.
- Risks include pandemic effects on customer payment, churn, business demand, advertising, vendors and service deployment; competition; inability to pass through programming-cost increases; and substantial debt and refinancing needs. The filing describes stockholder, regulatory and intellectual-property litigation, including Sprint matters; management did not expect the described proceedings to have a material effect, but states that adverse outcomes in other IP claims could be material and loss ranges cannot be estimated.
Most important facts for investors to verify
- Whether pandemic-related payment accommodations and waived receivables translate into higher churn, bad debt or weaker customer growth after programs ended.
- Whether mobile subscriber growth can improve unit economics and cash contribution, given its reported negative Adjusted EBITDA and free-cash-flow effects.
- Whether advertising, enterprise and SMB demand recover, while video and voice customer losses and programming-cost inflation persist.
- Debt maturity/refinancing plans, leverage against management’s target, and the sustainability of buybacks alongside capital expenditure needs.
- How much first-half free-cash-flow growth reflects durable operating improvement versus working-capital timing; reconcile non-GAAP measures to GAAP cash flow and earnings.
- Developments in the Sprint and other litigation, and any material changes to the pandemic-related risks or contingencies.