Charter Communications, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Figures are unaudited and, unless stated otherwise, in U.S. dollars. Charter provides cable, broadband, voice, advertising, enterprise and related services; it reported one segment, cable services.
Business context and comparability
Charter completed its acquisitions of Time Warner Cable and Bright House Networks on May 18, 2016. Accordingly, Q1 2017 includes those businesses, while reported Q1 2016 results do not. Actual year-over-year growth rates are therefore not like-for-like; the filing also presents illustrative pro forma comparisons assuming the transactions closed January 1, 2015.
Key financial metrics
| Metric | Q1 2017 | Comparison |
|---|---|---|
| Revenue | $10.164 billion | $2.530 billion reported in Q1 2016; $9.742 billion pro forma in Q1 2016 |
| Operating income | $941 million | $302 million reported in Q1 2016; $1.059 billion pro forma in Q1 2016 |
| Adjusted EBITDA (non-GAAP) | $3.654 billion | $883 million reported in Q1 2016; $3.433 billion pro forma in Q1 2016 |
| Net income attributable to Charter shareholders | $155 million; diluted EPS $0.57 | Net loss of $188 million; diluted loss per share $1.86 in Q1 2016 |
| Operating cash flow | $2.843 billion | $424 million in Q1 2016 |
| Capital expenditures | $1.555 billion | $429 million reported in Q1 2016 |
| Free cash flow (company-defined) | $1.138 billion | Negative $61 million in Q1 2016 |
| Cash and cash equivalents | $2.920 billion | $1.535 billion at December 31, 2016 |
| Debt | $61.3 billion principal; $62.844 billion carrying value, including current debt | $60.0 billion principal at December 31, 2016 |
| Available credit facilities | Approximately $2.8 billion | As of March 31, 2017 |
Calculated from reported figures, operating margin was approximately 9.3% and Adjusted EBITDA margin approximately 35.9%. These are derived ratios, not company-reported guidance. Net interest expense was $713 million; cash interest paid was $892 million. The filing does not provide a clear consolidated debt-to-EBITDA ratio as a reported metric.
Changes versus the prior comparable period
- On a pro forma basis, revenue increased 4.3% and Adjusted EBITDA increased 6.4% year over year; pro forma operating income decreased 11.1%. Management attributed revenue gains principally to Internet and commercial growth, while higher programming and other costs weighed on results.
- Pro forma Internet revenue grew 11.9%, commercial revenue 10.8%, and residential revenue 4.2%. Pro forma video revenue was essentially flat, voice revenue declined 4.8%, and advertising sales declined 7.7%.
- On a pro forma basis, residential Internet customers increased by 1.371 million, while residential video customers decreased by 350,000. Customer statistics combine legacy reporting methods that may differ materially.
- Operating cash flow and free cash flow improved substantially against reported Q1 2016, but the comparison is affected by the acquisitions. Capital expenditures and cash interest also increased materially.
Outlook, commentary, risks and unusual items
- Management gave no specific revenue, earnings or cash-flow guidance. It expects to continue applying Spectrum pricing and packaging across legacy markets, begin converting remaining Legacy TWC and Bright House analog markets to all-digital in 2017, and integrate customer-care, IT and network operations. It cautioned that it cannot be certain of growing revenue or maintaining historical margins during integration.
- Management’s target leverage is 4.0–4.5 times at Charter and up to 3.5 times at Charter Operating. It said liquidity from cash, free cash flow, the revolver and capital-market access should fund projected needs, while noting refinancing terms depend on market conditions.
- Programming costs are a key margin risk: management expects continued increases, including retransmission-consent costs, and says it may not be able to pass all increases to customers without risking subscriber losses. Competition, customer experience, integration execution, capital needs, regulation, network disruption and debt covenant compliance are also identified risks.
- Charter repurchased approximately 2.5 million Class A shares for about $799 million during the quarter; approximately $1.9 billion of board authorization remained at quarter-end. April 2017 debt issuances included $1.25 billion of CCO Holdings notes and $1.25 billion of Charter Operating secured notes; proceeds were intended for general corporate purposes, potentially including buybacks.
- Q1 included $95 million of merger and restructuring costs, $51 million of transition operating costs, and a $34 million loss on extinguishment of debt. The company recorded a $38 million gain on financial instruments, including cross-currency derivative valuation effects. Acquisition-related depreciation and amortization was substantial.
- A jury returned a $140 million verdict against Legacy TWC in a Sprint patent case and found willful infringement; the court declined to enhance damages. Charter plans to appeal and pursue vendor indemnity. The filing says the verdict was reflected in the purchase-accounting adjustment to net current liabilities and does not expect a material adverse effect, but the ultimate outcome is uncertain. Other matters include a New York Attorney General lawsuit over Internet-speed advertising and ongoing legal and regulatory proceedings.
- Management reported effective disclosure controls. It noted ongoing validation and integration of internal controls following the acquisitions and consolidation of HR platforms.
Important facts for investors to verify
- Use pro forma, not reported, Q1 2016 comparisons when assessing operating trends; confirm the assumptions and limitations of those pro forma figures.
- Track broadband customer growth against video losses, revenue per customer, and whether reported customer statistics become consistent across legacy systems.
- Monitor programming-cost inflation, pricing and subscriber response, and whether EBITDA growth converts to free cash flow after capital spending and interest.
- Review debt maturities, refinancing activity, covenant headroom, leverage against management’s targets, and the availability and terms of liquidity.
- Assess the outcome and potential financial exposure of the Sprint verdict and other litigation, and the costs and execution risks of integrating acquired operations.