Charter Communications, Inc. — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; unaudited consolidated U.S. GAAP results. Charter is a cable and broadband communications company with one reportable segment, cable services. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $10,657 | $10,164; up 4.9% |
| Adjusted EBITDA | $3,893 | $3,654; up 6.5% |
| Income from operations | $1,042 | $941; up 10.7% |
| Consolidated net income | $223 | $211 |
| Net income attributable to Charter shareholders | $168 | $155 |
| Diluted EPS | $0.70 | $0.57 |
| Net cash from operating activities | $2,699 | $2,843 |
| Capital expenditures | $2,183 | $1,555 |
| Free cash flow, as defined by Charter | $(49) | $1,138 |
- Operating margin was approximately 9.8%, versus 9.3% a year earlier; Adjusted EBITDA margin was approximately 36.5%, versus 36.0%.
- Revenue growth reflected Internet and commercial customer growth and price adjustments. Internet revenue increased 9.1% to $3,708; video revenue rose 5.3% to $4,297; voice revenue fell 19.8% to $556.
- At March 31, cash was $576. Principal debt was $69.8 billion (carrying value, including accretion, was $70.9 billion); $3.34 billion of debt was classified as current. Charter reported approximately $2.8 billion available under credit facilities.
- Cash declined $45 during the quarter. Operating cash flow fell $144 year over year, while capital spending rose $628. Free cash flow was affected by working-capital timing, higher capital expenditures, and interest payments.
Material changes and operating trends
- Residential Internet customers increased by 1.074 million year over year to 22.876 million; video customers declined by 314,000 to 16.422 million. Total customer relationships rose to 27.460 million from 26.570 million.
- Programming costs increased $148, and costs to service customers rose $54. Interest expense increased $138, primarily reflecting higher average debt outstanding. Depreciation and amortization rose $160.
- Other operating expenses declined to $69 from $94, primarily because merger and restructuring costs decreased. Special charges increased, including a $22 charge related to withdrawal liability from a multiemployer pension plan.
- Share repurchases totaled approximately $556, and Charter Holdings purchased $127 of units from Advance/Newhouse. The lower weighted-average share count contributed to higher EPS.
- Charter adopted the new revenue-recognition standard on January 1, 2018. Adoption increased equity by $38 through a cumulative adjustment and did not materially affect Q1 results; certain installation revenues and contract costs are deferred rather than recognized immediately.
Outlook, risks and unusual items
- No specific revenue, earnings, or cash-flow guidance was provided. Management said integration of Charter, Time Warner Cable and Bright House would continue in 2018, with substantial integration expected by 2019; Charter also planned to begin launching mobile service in 2018.
- Management cautioned that mobile launch costs and integration spending could limit revenue growth or the ability to maintain historical margins. The all-digital transition in former TWC and Bright House markets was expected to continue, with most of that initiative occurring in 2018.
- Management expects programming costs to continue rising and said it may not be able to pass those increases fully to customers without risking subscriber losses. Competition, customer experience, integration execution, network disruption, financing access and debt-covenant compliance are among the stated risks.
- Charter’s leverage was 4.5 times at quarter-end; its target range was 4 to 4.5 times. Management said it may increase debt to maintain leverage within that range and believed available liquidity and capital-market access were sufficient for projected needs.
- After quarter-end, Charter issued $2.5 billion of senior notes in April 2018. Proceeds and cash on hand were intended to refinance debt, including $2.0 billion of notes due July 2018, and for general corporate purposes, potentially including repurchases.
- Legal matters include a $146 million Sprint patent verdict against TWC, including pre-judgment interest, which Charter appealed; a separate Sprint patent suit; and New York litigation concerning advertised Internet speeds. Outcomes cannot be assured. The filing says the Sprint verdict is not expected to have a material adverse effect, but warns that certain intellectual-property claims could be material.
Important facts for investors to verify
- Whether Internet customer growth and video customer losses persist, and how pricing and bundling affect customer retention and revenue per customer.
- Whether operating cash flow recovers after working-capital movements and elevated capital spending; reconcile reported free cash flow, including the $565 million change in accrued capital expenditures.
- Debt maturities, refinancing terms and interest costs, particularly following the April 2018 note issuance, and the sustainability of leverage and repurchases.
- Execution, costs and customer response to integration, the all-digital transition and the mobile launch.
- Potential outcomes and financial exposure from the Sprint and other legal matters, and any changes in tax estimates or contingencies.
- Customer statistics are based on differing legacy-company reporting methods; Charter said it planned to standardize the methodology beginning in Q2 2018 and restate prior periods.