Charter Communications, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; amounts below are in U.S. dollars unless noted. Charter is a broadband and cable operator serving more than 32 million customer relationships across 41 states.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $13.598B | $12.802B | $26.798B | $25.324B |
| Adjusted EBITDA (non-GAAP) | $5.509B | $5.020B | $10.722B | $9.965B |
| Income from operations | $3.227B | $2.575B | $5.998B | $4.643B |
| Net income attributable to Charter shareholders | $1.471B | $1.020B | $2.674B | $1.827B |
| Diluted EPS | $8.80 | $5.29 | $15.66 | $9.37 |
| Operating cash flow | $3.734B | $3.999B | $7.381B | $7.750B |
| Free cash flow (non-GAAP) | $1.659B | $2.068B | $3.459B | $3.923B |
Q2 revenue increased 6.2%, Adjusted EBITDA 9.7%, operating income 25.3%, and Charter-attributable net income 44.2% year over year. Approximate Q2 operating margin was 23.7% versus 20.1%; Adjusted EBITDA margin was 40.5% versus 39.2%. Revenue growth reflected residential Internet, mobile and commercial growth and price adjustments. EPS growth also coincided with lower weighted-average diluted shares, down to 167.1 million from 199.1 million.
Q2 revenue by major product included Internet $5.562B (+6.5%), video $4.484B (+2.4%), commercial $1.749B (+4.2%), advertising $460M (+12.0%) and mobile $726M (+39.8%). Operating costs rose $311M in the quarter, mainly from mobile, customer-service and marketing expenses. Net interest expense rose $105M to $1.109B.
Liquidity, debt and capital allocation
At June 30, cash was $483M, total debt principal was $95.731B ($96.001B carrying value), and approximately $4.4B remained available under credit facilities. Management reported leverage of 4.5 times Adjusted EBITDA and a target net leverage range of 4.0–4.5 times. The filing states management believes available cash, free cash flow, revolving credit and capital-market access will fund projected needs.
First-half capital expenditures were $4.050B, up from $3.702B. The company repurchased $6.847B of Class A shares and purchased $994M of Charter Holdings units from Advance/Newhouse; financing cash outflows also included debt repayments. Shareholders’ equity fell to $13.513B from $18.156B at year-end 2021. The balance sheet reported $11.395B of current liabilities and $1.533B of current debt.
Material changes, outlook and management commentary
- Residential and SMB customer relationships declined 74,000 during Q2 but were up 360,000 year over year. Internet customers declined 21,000 in Q2 and increased 164,000 in the first half; approximately 59,000 Q2 Internet disconnects were associated with changes to federal broadband-assistance programs. Mobile lines increased 344,000 in Q2 and 717,000 in the first half, reaching 4.281 million.
- Video customers fell 567,000 year over year, while Internet customers rose 619,000. Management cited lower customer move rates and switching behavior as reducing selling opportunities. Residential revenue per customer was $116.00 monthly, versus $112.85 a year earlier.
- Mobile growth is currently dilutive: management estimated mobile reduced Adjusted EBITDA by $71M and free cash flow by $270M in Q2. It expects mobile Adjusted EBITDA may remain negative during customer-acquisition growth and notes device-installment timing and CBRS network investment can weigh on free cash flow.
- Management expects 2022 cable capital expenditures, excluding the rural construction initiative, of $7.1B–$7.3B. The rural initiative is expected to add approximately one million homes and businesses over six years. No specific revenue or earnings guidance was provided.
- In June, Charter and Comcast formed a 50/50 streaming-platform joint venture. Charter’s expected investment is approximately $979M, with $175M paid in June and remaining non-cancelable contributions payable over multiple years.
- Debt actions included issuing notes and amending credit facilities, extending certain term-loan and revolving-credit maturities to 2027 and 2028. The amended revolving facility has $5.5B capacity; its benchmark changed to SOFR. Higher average debt outstanding contributed to increased interest expense.
- Free cash flow declined $409M in Q2 and $464M in the first half year over year. Management attributed the first-half decrease principally to higher cash taxes, capital expenditures and interest, partly offset by Adjusted EBITDA growth. Charter became a meaningful federal cash-tax payer in 2022.
Risks, contingencies and unusual items
- On July 26, 2022, a jury awarded $375M compensatory and $7.0B punitive damages in a Texas wrongful-death case involving an off-duty technician. Charter said it would vigorously appeal, concluded a loss was not probable and reasonably estimable, and recorded no liability as of June 30. The verdict occurred after the reporting date and creates significant contingent exposure.
- Other risks include intense broadband and mobile competition, customer retention, programming-cost increases that may not be fully passed through to customers, supply-chain and labor costs, network disruption, regulation, and access to financing. The filing also notes potential material exposure from intellectual-property litigation, for which loss ranges could not be estimated.
- Q2 2022 included a $54M gain related to a multiemployer pension-plan settlement. Comparability with 2021 was also affected by prior-year litigation charges, including a $220M Sprint/T-Mobile settlement, and prior-year pension and equity-investment gains/losses.
Important facts for investors to verify
- Developments in post-trial motions and appeals, potential liability, and any subsequent accounting or disclosure concerning the $7.0B punitive verdict.
- Whether customer relationship and Internet growth recover after Q2 declines, and the effects of subsidy-program changes and customer aging trends.
- Mobile line growth, unit economics and cash-flow drag, including device receivables and CBRS build-out costs.
- Actual capital spending against the $7.1B–$7.3B cable-capex outlook, plus rural-construction spending and funding.
- Debt refinancing, interest-rate exposure, leverage relative to the 4.0–4.5-times target, and continued capacity to fund repurchases and other investments.
- Free cash flow conversion as cash taxes, interest, working capital and capital expenditures evolve; the filing’s non-GAAP measures should be considered alongside GAAP results.