Charter Communications, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Charter is a U.S. cable and broadband provider with one reportable segment, cable services. Results include Time Warner Cable and Bright House only from their May 18, 2016 acquisition closing, so reported year-over-year comparisons are not like-for-like; pro forma comparisons are more informative.
Key financial metrics
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $10.357 billion; +3.9% versus 2016 pro forma | $20.521 billion; +4.1% versus 2016 pro forma |
| Adjusted EBITDA | $3.847 billion; +8.6% versus 2016 pro forma | $7.501 billion; +7.5% versus 2016 pro forma |
| Income from operations | $1.052 billion; 10.2% of revenue | $1.993 billion |
| Net income attributable to Charter shareholders | $139 million; diluted EPS $0.52 | $294 million; diluted EPS $1.09 |
| Operating cash flow | $2.945 billion | $5.788 billion |
| Capital expenditures | $2.148 billion | $3.703 billion |
| Free cash flow, as defined by Charter | $1.144 billion | $2.282 billion |
Q2 Adjusted EBITDA margin was approximately 37.1%. Charter’s free cash flow is a non-GAAP measure, defined as operating cash flow less capital expenditures and changes in accrued capital-expenditure liabilities.
- Debt and liquidity: Debt principal was $61.8 billion at June 30, 2017, versus $60.0 billion at December 31, 2016; balance-sheet carrying value was $63.248 billion. Cash was $694 million, and approximately $2.8 billion was available under credit facilities. About 87% of debt was effectively fixed-rate; the blended weighted-average rate was 5.4%.
- Balance sheet: Total assets were $146.960 billion; current assets were $2.564 billion and current liabilities were $8.123 billion. No current portion of long-term debt was reported at quarter-end.
Material changes and operating trends
- On a pro forma basis, revenue growth reflected Internet and commercial-business expansion. Internet revenue rose 12.1% in Q2; video revenue was essentially flat, while voice revenue declined 10.9%.
- Residential Internet customers increased by 1.366 million year over year to 22.033 million. Residential video customers declined by 288,000 to 16.646 million. Total customer relationships were 26.781 million.
- Pro forma Adjusted EBITDA growth exceeded revenue growth, with cost savings in customer service and other expense categories partly offset by higher programming costs. Programming costs were about 37% of pro forma operating costs in Q2.
- Capital expenditures and cash interest rose versus reported 2016 amounts, largely reflecting the acquired businesses. Q2 free cash flow increased from $524 million to $1.144 billion on the reported comparison, but that comparison is also affected by acquisition timing.
Outlook, commentary, risks and unusual items
- Management reported no specific numerical revenue or earnings guidance. It expects to begin converting remaining Legacy TWC and Bright House analog markets to all-digital in the second half of 2017, while continuing integration and customer-care transitions.
- Management cautioned that integration outcomes are uncertain and that Charter may not sustain revenue growth or margins at historical rates. It expects programming costs to continue rising and said it may not be able to pass those increases on fully without risking customer losses.
- Charter’s stated target leverage was 4.0–4.5 times, and up to 3.5 times at Charter Operating. Management said liquidity, free cash flow, credit-facility capacity and capital-market access were expected to fund projected needs; refinancing terms depend on market conditions.
- Charter repurchased approximately 10.0 million shares for $3.3 billion in Q2 and 12.4 million shares for $4.1 billion in the first half. Remaining repurchase authorization was approximately $3.0 billion as of July 25, 2017.
- Charter and Comcast agreed to explore wireless operational cooperation for one year. Charter noted that any wireless investment, partnership or joint venture is uncertain and may require significant investment.
- Reported earnings comparisons are distorted by 2016 one-time items: a roughly $3.3 billion tax-valuation-allowance benefit drove unusually high 2016 net income, and 2016 pension accounting included a $675 million curtailment gain and $157 million remeasurement loss. In 2017, merger and restructuring costs were $226 million for the first half; management expected further integration costs.
- Notable litigation includes a $140 million jury award against Legacy TWC in a Sprint patent case plus $6 million prejudgment interest; Charter appealed and is pursuing vendor indemnity. The New York Attorney General’s Internet-speed advertising suit seeks restitution and injunctive relief. Charter said it did not expect these matters to have a material adverse effect, while noting outcomes cannot be assured.
- Other key risks include competition, customer retention and service quality, programming and retransmission-consent costs, integration execution, network or information-system disruptions, regulation, significant debt and covenant compliance. The filing reported no material change to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Use the pro forma growth comparisons—not reported year-over-year totals alone—to assess underlying performance after the 2016 acquisitions.
- Track Internet customer growth against continuing video subscriber losses, revenue per customer, and customer-service and churn trends as integration proceeds.
- Monitor programming-cost increases, capital spending, free cash flow, leverage, refinancing needs and the impact of continued share repurchases.
- Assess the assumptions behind non-GAAP Adjusted EBITDA and free cash flow, and distinguish recurring performance from tax, pension, acquisition and restructuring items.
- Follow the Sprint appeal, the New York Attorney General matter, integration milestones, and any concrete developments in wireless cooperation.