Charter Communications, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Charter operates as a single cable-services segment, providing residential and commercial video, Internet, voice and related services.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $10,854 | $10,357 | $21,511 | $20,521 |
| Adjusted EBITDA | $4,051 | $3,847 | $7,944 | $7,501 |
| Income from operations | $1,360 | $1,052 | $2,402 | $1,993 |
| Net income attributable to Charter shareholders | $273 | $139 | $441 | $294 |
| Diluted EPS | $1.15 | $0.52 | $1.84 | $1.09 |
| Operating cash flow | $3,096 | $2,945 | $5,795 | $5,788 |
| Free cash flow | $804 | $1,144 | $755 | $2,282 |
| Capital expenditures | $2,391 | $2,148 | $4,574 | $3,703 |
Revenue increased 4.8% in both comparison periods. Adjusted EBITDA margin was approximately 37.3% in Q2 and 36.9% for the first half, versus 37.1% and 36.5%, respectively, in 2017. Operating income rose 29.3% in Q2 and 20.5% for the first half. Higher interest expense partly offset operating growth: net interest expense increased $129 million in Q2 and $267 million for the first half year over year. Six-month operating cash flow was essentially unchanged despite higher Adjusted EBITDA; free cash flow declined substantially.
- Residential revenue grew 4.6% in Q2 and 4.7% for the first half. Internet revenue rose 7.3% and 8.2%, respectively; video revenue rose 5.9% and 5.6%. Voice revenue fell 18.3% and 19.1%.
- Residential Internet customers increased by 1.065 million year over year, while residential video customers decreased by 296,000 and voice customers by 50,000. Total customer relationships were 27.621 million, up from 26.737 million.
- Commercial revenue grew 4.4% in Q2 and 4.9% for the first half. Advertising sales rose 12.0% and 9.0%, respectively.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $773 million, total assets $146.251 billion, and total shareholders’ equity $45.642 billion. Current assets of $2.750 billion compared with current liabilities of $14.024 billion.
- Debt principal was $71.1 billion, including $9.1 billion of credit-facility debt. The balance sheet reported $5.387 billion of current debt and $66.730 billion of long-term debt. Charter reported leverage of 4.5x, within its stated 4.0x–4.5x target range.
- Approximately $3.9 billion was available under credit facilities at quarter-end. Management said it believed cash, free cash flow, revolving credit availability and capital-market access would be sufficient for projected needs.
- First-half financing included $5.628 billion of debt borrowings and $3.500 billion of repayments. Charter repurchased 7.3 million Class A shares for approximately $2.2 billion; $786 million of repurchase authorization remained.
Material changes, outlook and risks
- Free cash flow fell by $340 million in Q2 and $1.527 billion for the first half year over year. Management attributed the decline primarily to working-capital movements, higher capital expenditures and higher cash interest, partly offset by Adjusted EBITDA growth and lower merger and restructuring costs. Mobile reduced free cash flow by approximately $116 million in Q2 and $141 million for the first half.
- Charter launched Spectrum Mobile at the end of Q2, using Verizon’s wireless network and Charter WiFi hotspots. Management anticipated an initial funding period and negative working-capital effects from device installment plans; mobile reduced Adjusted EBITDA by approximately $33 million in Q2 and $41 million for the first half.
- Management expected programming expenses to continue increasing, citing contractual rate increases, retransmission-consent costs and industry consolidation. It said the company could not fully pass those increases on to customers without potential customer losses. No formal revenue or earnings guidance was provided in the filing.
- Management said integration of Charter, Time Warner Cable and Bright House would continue in 2018, with substantial integration of practices and systems expected by 2019. About 70% of residential customers were in Spectrum pricing and packaging plans and 91% of the footprint was all-digital at quarter-end.
- In April, Charter issued $2.5 billion of long-dated senior notes; proceeds and cash were used for debt repayment, fees and general corporate purposes, including potential repurchases. In July, after quarter-end, it issued a further $1.5 billion of notes, including floating-rate notes.
- A major disclosed contingency arose after quarter-end: New York’s Public Service Commission issued orders challenging Charter’s compliance with merger conditions, rescinding approval of its acquisition of TWC’s New York operations and directing a transition plan for Charter to cease New York operations within six months. The PSC also sought penalties of $100,000 per day from June 18, 2018, plus injunctive relief. Charter disputed the claims and said it would defend itself; it could not estimate a possible loss range and acknowledged an adverse outcome could be material.
- Other litigation includes a $146 million jury award and prejudgment interest in the earlier Sprint patent case, which Charter appealed, and subsequent Sprint patent suits. The filing also describes shareholder litigation, regulatory investigations and other intellectual-property matters. Management generally did not expect the specified matters to materially affect results, but stated that other litigation could have a material aggregate effect.
- Other notable items: the six-month results included a $22 million charge related to withdrawal liability from a multiemployer pension plan. Adoption of the new revenue-recognition standard had no material overall effect; Charter adopted it using the modified retrospective method.
Important facts for investors to verify
- Developments and potential financial exposure from the New York PSC actions, including the requested daily penalties and any impact on Charter’s New York operations.
- Whether Internet and commercial customer growth can offset video and voice subscriber declines, and whether pricing changes affect churn.
- Programming-cost inflation and the company’s ability to recover those costs through customer pricing.
- Mobile’s customer adoption, funding needs, device-related working capital and effects on EBITDA, capital expenditures and free cash flow.
- Free-cash-flow conversion, capital spending, debt maturities, refinancing conditions and leverage relative to the 4.0x–4.5x target.
- The pace and cost of integration, and progress against the expected substantial completion of integration by 2019.