Charter Communications, Inc. — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 2, 2018. Charter is a U.S. cable and broadband provider serving approximately 27.2 million residential and business customer relationships with video, Internet and voice services, as well as commercial, enterprise and advertising offerings. The 2017 results include the operations acquired in the Time Warner Cable and Bright House transactions, completed in May 2016, so reported year-over-year growth is not directly comparable without pro forma context.
Key financial and operating metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $41.581 billion | $29.003 billion |
| Income from operations | $4.106 billion | $2.456 billion |
| Adjusted EBITDA (non-GAAP) | $15.301 billion | $10.592 billion |
| Net income attributable to Charter shareholders | $9.895 billion | $3.522 billion |
| Net cash from operating activities | $11.954 billion | $8.041 billion |
| Capital expenditures | $8.681 billion | $5.325 billion |
| Free cash flow (non-GAAP) | $4.093 billion | $3.319 billion |
| Principal debt at year-end | $69.003 billion | $60.036 billion |
| Cash and cash equivalents at year-end | $621 million | $1.535 billion |
2017 operating margin was approximately 9.9% and Adjusted EBITDA margin approximately 36.8%; these are calculated from reported figures. Net income included a $9.087 billion income tax benefit, primarily from U.S. tax reform, and therefore does not represent earnings from recurring operations alone. The company reported $70.231 billion of debt on an accreted-value basis on its balance sheet, versus $69.003 billion principal.
At year-end, Charter reported 27.199 million customer relationships, up from 26.205 million; residential Internet PSUs reached 22.545 million, up from 21.374 million, while residential video PSUs declined to 16.544 million from 16.836 million. Residential monthly revenue per customer was $109.75 versus $109.57. It reported leverage of 4.5 times and approximately $3.6 billion available under credit facilities.
Material changes versus the prior comparable period
- Reported revenue rose 43.4% and Adjusted EBITDA rose 44.5%, largely reflecting the acquired businesses. On a pro forma basis, assuming the transactions occurred at the start of 2015, revenue increased 3.9% and Adjusted EBITDA 5.8%.
- Pro forma revenue growth was led by Internet and commercial services. Residential Internet customers increased by 1.171 million in 2017; video customers declined by 292,000.
- On a pro forma basis, video revenue increased 1.5%, Internet revenue 11.2%, commercial revenue 8.5%, and advertising sales revenue decreased 10.9%. The advertising decline reflected lower political and local advertising and the absence of a prior-year early-contract-termination benefit.
- Programming costs increased to $10.596 billion from $7.034 billion. On a pro forma basis, costs to service customers fell by $144 million, while programming costs increased by $982 million.
- Free cash flow increased $774 million year over year, as higher EBITDA more than offset increased capital spending, interest and working-capital effects. Capital expenditures rose to $8.681 billion, including spending for customer equipment, all-digital conversion and network expansion.
Outlook, commentary, risks and unusual items
- Management expected integration of Legacy Charter, TWC and Bright House to continue in 2018, with substantial integration of practices and systems expected by 2019. It cautioned that growth costs for mobile and integration could make revenue growth or maintenance of historical margins uncertain.
- Charter planned to launch Spectrum-branded mobile service in 2018 through a Verizon MVNO arrangement. Management anticipated initial product investment and negative working-capital effects from handset and tablet financing.
- The company expected to continue its all-digital transition, with most remaining Legacy TWC and Bright House conversion activity in 2018. It also planned further broadband buildout and WiFi expansion.
- Management’s target leverage range was 4.0–4.5 times; year-end leverage was 4.5 times. It expected to use free cash flow, cash, credit facilities and refinancing to fund obligations and extend maturities. No specific 2018 revenue or earnings guidance was provided in the supplied filing text.
- Programming fees, especially sports and broadcast retransmission costs, were rising faster than inflation. The company said it could not fully pass these increases to customers without risking subscriber losses; contracts expiring at or before year-end 2018 posed renewal and potential channel-removal risks.
- Other principal risks include intense competition in broadband and video, successful integration of acquisitions, substantial debt and covenant compliance, interest-rate exposure, regulatory changes, cybersecurity and service disruption, and execution of new products. Merger-related conditions include broadband buildout and restrictions on fixed broadband data caps and usage-based pricing for specified periods.
- Unusual items included the $9.3 billion estimated tax-reform benefit from remeasuring deferred tax liabilities, employee retention and termination costs, and the prior-year pension curtailment gain. Charter repurchased approximately $11.6 billion of its Class A shares in 2017; it reported no intention to pay cash dividends in the foreseeable future.
- Contingencies include a Sprint patent verdict against Legacy TWC of $140 million plus $6 million interest, which Charter appealed, and other patent, advertising and shareholder litigation. Management did not expect the cited matters individually to materially affect results, but noted aggregate legal matters could be material.
Important facts for investors to verify
- Reconcile reported growth with pro forma growth and assess the sustainability of the underlying revenue and EBITDA trends.
- Review the tax-reform benefit, its provisional accounting, and the extent to which future earnings and cash taxes differ from reported 2017 net income.
- Assess debt maturities, refinancing assumptions, interest-rate exposure, covenant headroom and the company’s 4.5-times leverage against its target range.
- Track whether cash flow can support the high capital-spending program, integration, mobile launch and continuing share repurchases.
- Monitor Internet subscriber gains against video losses, programming-cost inflation and competitive pricing pressure.
- Review the status and potential exposure of litigation, tax attributes and ownership-change limits, merger commitments, and A/N-related governance and tax-receivable arrangements.