Charter Communications, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Charter is a U.S. cable and broadband communications provider offering residential and commercial video, Internet, voice, mobile, advertising and enterprise services. This unaudited report covers the three and nine months ended September 30, 2019; amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $11,450 | $10,892 | $34,003 | $32,403 |
| Adjusted EBITDA | $4,086 | $3,951 | $12,326 | $11,895 |
| Income from operations | $1,586 | $1,380 | $4,552 | $3,782 |
| Net income attributable to Charter shareholders | $387 | $493 | $954 | $934 |
| Diluted earnings per share | $1.74 | $2.11 | $4.23 | $3.93 |
| Net cash from operating activities | $2,943 | $2,804 | $8,390 | $8,599 |
| Free cash flow | $1,271 | $532 | $3,028 | $1,287 |
Revenue grew 5.1% in Q3 and 4.9% year to date. Adjusted EBITDA margin was approximately 35.7% in Q3 versus 36.3% a year earlier, and 36.3% for the nine months versus 36.7%. Operating margin improved to 13.9% in Q3 from 12.7%, and to 13.4% year to date from 11.7%. Charter-shareholder net margin was approximately 3.4% in Q3 versus 4.5%, and 2.8% year to date versus 2.9%.
Q3 net income attributable to Charter shareholders declined despite revenue and operating-income growth, as higher interest expense, lower pension benefits and a loss on financial instruments weighed on results. Nine-month net income increased modestly; diluted EPS also rose, with the lower average share count reflecting repurchases.
Free cash flow is a company-defined non-GAAP measure: operating cash flow less property and equipment purchases and changes in accrued capital expenditures. Its increase reflected lower capital expenditures and higher EBITDA; nine-month operating cash flow nevertheless fell $209 million, largely due to working-capital use and higher cash interest. Capital expenditures were $4,913 for the first nine months, compared with $6,692 in 2018.
At September 30, 2019, cash and cash equivalents were $508; restricted cash was $89. Principal debt was $74.2 billion, versus $74.9 billion carrying value, and available credit facilities were approximately $4.3 billion. Current assets of $3,388 were below current liabilities of $11,982. Management reported leverage of 4.5 times Adjusted EBITDA, within Charter’s stated target range of 4.0–4.5 times. Approximately 84% of debt principal was effectively fixed-rate. Nine-month cash interest paid was $3,065.
Material changes and operating trends
- Residential Internet revenue rose 10.1% in Q3 and 9.2% year to date; Internet customers increased by 1.259 million year over year to 24.595 million.
- Residential video customers declined by 415,000 year over year; video revenue edged up on rate changes. Residential voice customers fell by 623,000 and voice revenue declined 6.8% in Q3.
- Mobile revenue reached $192 in Q3 and $490 year to date, versus $17 in each comparable 2018 period. Charter had 794,000 mobile lines at quarter-end. Mobile reduced Adjusted EBITDA by approximately $145 in Q3 and $384 year to date, and free cash flow by approximately $256 and $844, respectively.
- Advertising revenue declined 10.6% in Q3, primarily because of lower political advertising. Commercial revenue increased 4.1% in Q3.
- Operating costs rose 6.0% in Q3, led by mobile costs, which increased $243 year over year. Programming costs were $2,790 in Q3; the company cited contractual rate increases, including retransmission-consent costs.
Outlook, risks and notable items
- Management expected 2019 capital expenditures, excluding mobile, to be slightly below $7 billion, compared with $8.9 billion in 2018. It attributed lower spending to completion of the all-digital conversion, DOCSIS 3.1 rollout and much of the TWC/Bright House integration.
- Management expected continued mobile-related pressure on EBITDA and working capital as the service scales. It cited potential benefits to core-product sales and customer retention, but said it could not be certain of revenue growth or maintaining historical margins.
- Management expected programming costs to continue rising and said it could not fully pass increases to customers without potentially losing customers. Competition, customer experience, network investment, regulation and access to financing were also identified as risks.
- Charter reported $121 of equity-investment impairments in the first nine months of 2019, versus $58 in 2018, and a $41 impairment of non-strategic assets. The prior-year comparison includes a $187 pension remeasurement gain in Q3 2018, contributing to lower 2019 pension benefits.
- Subsequent to quarter-end, Charter issued additional senior notes in October 2019 and amended its credit agreement to reprice and extend certain loan and revolving-credit maturities. The filing also describes an October refinancing of notes due 2021 and 2024.
- Notable litigation includes Sprint patent matters, including a prior $146 verdict and interest award for which the expected financial impact was reflected in the statements; Charter was pursuing further review. The company said it could not predict outcomes of several other intellectual-property claims or estimate a possible loss range.
Important facts for investors to verify
- Whether Internet and commercial customer growth can offset continued video and voice subscriber losses and lower advertising revenue.
- Mobile subscriber growth, unit economics and cash-flow impact, including device-installment working-capital requirements.
- Programming-cost increases, pricing actions and their effects on customer churn and margins.
- Debt maturities, refinancing terms, leverage and access to the stated $4.3 billion of credit availability; assess buybacks against debt and investment needs.
- Capital expenditure trajectory and whether the stated 2019 outlook was achieved; this filing provides an expectation, not a subsequent full-year result.
- Developments in Sprint and other legal matters, equity-investment valuations, and the impact of other contingencies.