Charter Communications, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Charter is a U.S. cable operator offering video, Internet, voice, commercial services and advertising; it reported approximately 6.3 million residential and commercial customers.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $2.362 billion | $2.202 billion |
| Income from operations | $249 million | $240 million |
| Operating margin | 10.5% | 10.9% |
| Net loss | $81 million | $37 million |
| Loss per diluted share | $0.73 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $800 million | $767 million |
| Cash from operations | $528 million | $577 million |
| Capital expenditures | $351 million | $539 million |
| Free cash flow (non-GAAP) | $101 million | $74 million |
Adjusted EBITDA margin was approximately 33.9%, compared with 34.8% a year earlier. Revenue rose 7%, while operating costs increased faster, including higher programming, customer-service and transaction-related transition costs. Net loss widened primarily because net interest expense rose $78 million, including approximately $86 million associated with Term G loans and CCOH Safari notes.
At March 31, cash and cash equivalents were $20 million and restricted cash was $7.112 billion, principally funds held in escrow for transactions. Reported debt was $21.0 billion, including $7.0 billion classified as current after the Comcast transaction termination notice; approximately $875 million was available under credit facilities. Excluding the escrow-funded debt subsequently repaid in April, the filing describes debt of about $14.0 billion. Shareholders’ equity was $77 million.
Business trends and changes versus prior year
- Internet revenue increased 16% to $717 million; residential Internet customers grew by 372,000 to 4.891 million.
- Commercial revenue increased 15% to $269 million. Video revenue rose 4% to $1.129 billion despite a 42,000 decline in residential video customers; voice revenue fell 10% to $134 million.
- Residential customer relationships reached 5.927 million, and monthly residential revenue per customer increased to $112.25 from $110.29.
- Programming costs rose $60 million to $666 million, reflecting contractual rate increases, retransmission consent costs and broader network carriage. Operating costs increased $134 million overall.
- Operating cash flow declined $49 million, while capital expenditures fell $188 million, principally following completion of the all-digital transition. Free cash flow increased to $101 million.
Outlook, material events and risks
- Management expected 2015 capital expenditures of approximately $1.7 billion, excluding acquisition-related transition costs. It anticipated programming expenses would continue to rise and said the company might not be able to pass those increases fully to customers without risking subscriber losses.
- On April 24, 2015, Comcast terminated its transaction agreement with Charter after Comcast and Time Warner Cable ended their merger agreement. Charter directed repayment of the $3.5 billion Term G loans from escrow at 99.5% of principal plus accrued interest; the $3.5 billion CCOH Safari notes were subject to special redemption at 100% of issue price plus accrued interest. These post-quarter events led Charter to classify $7.0 billion of related debt and escrow proceeds as current at March 31.
- The Bright House transaction, agreed on March 31, was contingent on regulatory, shareholder and other approvals and had depended on completion of the Comcast transaction. Following its termination, Charter, Liberty Broadband and Advance/Newhouse entered a 30-day good-faith negotiation period; no party was required to agree, and the Bright House agreements could subsequently be terminated. Charter said it would need to raise an additional $2.0 billion to finance the transaction and could not assure it would obtain the funds.
- April debt issuance totaled $2.7 billion: proceeds were intended to refinance or repurchase certain higher-coupon notes and for general corporate purposes. The filing also cites competition, video cord-cutting, programming costs, financing access, covenant compliance and regulatory changes as risks. The FCC’s 2015 broadband order was subject to appeals and could adversely affect operations.
- Management stated that it believed available cash, free cash flow, revolving credit availability and capital-market access were sufficient for projected operating cash needs, while noting refinancing terms depend on market conditions. The filing provides no specific revenue or earnings guidance.
Investor verification priorities
- Confirm completion and precise cash, interest and any redemption costs for the April repayment of escrow-funded Term G loans and CCOH Safari notes.
- Track whether the Bright House transaction was renegotiated, financed and approved, or terminated, and assess resulting dilution, debt and integration implications.
- Validate the $1.7 billion 2015 capital-expenditure expectation and the conversion of reported operating cash flow into free cash flow.
- Monitor subscriber trends, particularly Internet growth versus video and voice losses, and whether pricing can offset programming-cost inflation without increasing churn.
- Review refinancing execution, debt maturities, restricted-cash availability, covenant headroom and the effects of regulatory proceedings and litigation.