Charter Communications, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Charter is a U.S. cable and broadband provider with one reportable segment. Financial figures are in millions of dollars unless stated otherwise.
Financial performance and liquidity
- Revenue: $11,206, up 5.1%. Residential revenue rose 4.2% to $8,912; commercial revenue rose 4.3% to $1,588. Internet revenue increased 8.6% to $4,024, while voice fell 9.4% to $504. Mobile contributed $140.
- Profitability: Operating income was $1,425, up 36.7%; net income attributable to Charter shareholders was $253 versus $168. Diluted EPS was $1.11 versus $0.70. Approximate operating margin rose to 12.7% from 9.8%; Charter-attributable net margin was 2.3% versus 1.6%.
- Adjusted EBITDA: $4,055, up 4.2%; approximate margin was 36.2% versus 36.5%. Adjusted EBITDA is a non-GAAP measure.
- Cash flow and investment: Operating cash flow was $2,686 versus $2,699. Capital expenditures were $1,665 versus $2,183. Company-defined free cash flow was $645 versus negative $49, reflecting lower capex and higher Adjusted EBITDA.
- Debt and liquidity: Principal debt was $73.4 billion, including $10.6 billion of credit-facility debt. Cash and cash equivalents were $1.451 billion; restricted cash was $175 million. Revolver availability was approximately $4.6 billion. Reported leverage was 4.4x; management’s target leverage range was 4.0–4.5x.
- Balance sheet: Total assets were $147.3 billion and total shareholders’ equity was $43.6 billion at March 31. Current liabilities were $12.0 billion versus current assets of $3.8 billion.
Changes and operating trends
- Customer relationships increased to 28.454 million from 27.425 million. Residential Internet customers rose by 1.171 million year over year to 24.023 million; video customers fell by 327,000 to 15.952 million, and wireline voice customers fell by 355,000 to 10.015 million.
- Residential monthly revenue per customer increased to $112.47 from $111.41. Small and medium business monthly revenue per customer declined to $170.64 from $178.84.
- Programming costs increased $113 million year over year; mobile costs increased $252 million as the service scaled. Lower depreciation and amortization and reduced special charges helped lift operating income.
- Net interest expense increased $74 million to $925 million, primarily reflecting higher average debt outstanding. Other expense included an approximately $110 million impairment of equity-method investments.
- Share repurchases totaled approximately $870 million for 2.6 million Class A shares; Charter also spent $93 million to repurchase Charter Holdings units from Advance/Newhouse.
Outlook, risks and unusual items
- Management expected 2019 capital expenditures, excluding mobile, of approximately $7 billion, compared with $8.9 billion in 2018, citing completion of the all-digital conversion, DOCSIS 3.1 rollout and much of the TWC/Bright House integration. Actual spending remains dependent on growth and product-development needs.
- Mobile generated $140 million of Q1 revenue but reduced Adjusted EBITDA by approximately $120 million and free cash flow by approximately $291 million. Management expected continued near-term EBITDA and working-capital pressure as the service scales; it planned to expand the bring-your-own-device program.
- Management cited competition, customer experience and retention, rising programming and retransmission-consent costs, and the ability to pass those costs through without losing customers as significant business risks. The filing does not provide quantified revenue or earnings guidance.
- On April 19, 2019, after quarter-end, Charter and New York’s Department of Public Service presented a proposed settlement to the Public Service Commission concerning merger-related network buildout and other disputes. It requires final PSC approval; the proposed terms provide for no penalties, but an adverse outcome if not approved could not be estimated and might be material.
- Other contingencies include Sprint patent litigation, a stockholder lawsuit and regulatory investigations. Management generally stated it did not expect the described matters to have a material effect, while noting outcomes cannot be predicted. The Sprint litigation includes a prior $140 million jury award plus $6 million prejudgment interest; Charter continued to pursue appeal rights.
- Adoption of lease accounting in 2019 added operating lease right-of-use assets of about $1.1 billion and lease liabilities of about $1.2 billion; management said adoption did not affect equity, results or cash flows.
Key facts for investors to verify
- Whether Internet and commercial customer growth continues to offset video and voice subscriber declines.
- Whether mobile adoption can grow without sustained pressure on EBITDA, free cash flow and working capital.
- Progress on planned 2019 capex reductions and the resulting cash generation.
- Debt refinancing, leverage and interest costs, including use of cash and borrowing for repurchases.
- PSC approval and implementation of the proposed New York settlement, and developments in material litigation.