Charter Communications, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; compared with the three months ended March 31, 2021. Charter is a broadband and cable operator serving more than 32 million customers across 41 states, with residential, commercial, mobile, advertising and other services. It reports one operating segment.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $13.20B | $12.52B | +5.4% |
| Adjusted EBITDA (non-GAAP) | $5.21B | $4.95B | +5.4% |
| Income from operations | $2.77B | $2.07B | +34.0% |
| Net income attributable to Charter shareholders | $1.20B | $807M | +49.1% |
| Diluted EPS | $6.90 | $4.11 | +67.9% |
| Net cash from operating activities | $3.65B | $3.75B | −$104M |
| Capital expenditures | $1.86B | $1.82B | +$36M |
| Free cash flow (non-GAAP) | $1.80B | $1.86B | −$55M |
Operating margin was approximately 21.0%, versus 16.5% a year earlier; net margin was approximately 9.1%, versus 6.4%. Adjusted EBITDA margin was approximately 39.5% in both periods. Adjusted EBITDA and free cash flow are non-GAAP measures and should be read alongside GAAP results.
Revenue and operating trends
- Revenue growth reflected residential Internet, mobile and commercial customer growth, along with price and product-mix changes. Internet revenue rose 7.2% to $5.45B; mobile revenue rose 40.2% to $690M; commercial revenue rose 4.3% to $1.72B.
- Video revenue was essentially flat at $4.35B, as pricing and mix gains offset customer losses. Residential video customers fell by 390,000 year over year. Residential wireline voice customers fell by 648,000.
- Residential Internet customers increased by 944,000 year over year; Charter added 185,000 Internet customers in Q1. Total Internet customers reached 30.27M, compared with 29.23M a year earlier.
- Mobile lines increased to 3.94M from 2.68M, including 373,000 net additions in Q1. Mobile generated $690M of revenue but reduced Adjusted EBITDA by about $70M and free cash flow by about $290M in the quarter.
- Operating costs and expenses rose $423M, mainly from mobile, customer-service, marketing and other costs. Depreciation and amortization declined $147M. Operating income also benefited from other operating expenses falling to $1M from $302M, including the prior-year period’s special charges and asset-disposal losses.
Cash, debt and capital allocation
- Cash and cash equivalents were $2.43B at March 31, 2022, up from $601M at year-end 2021. The company reported approximately $4.7B available under its credit facilities.
- Debt principal totaled $94.9B at quarter-end; balance-sheet carrying value was $95.2B. Charter reported leverage of 4.4 times Adjusted EBITDA and a target net leverage range of 4.0–4.5 times.
- Net interest expense increased to $1.06B from $983M, primarily reflecting higher average debt outstanding, partly offset by lower weighted-average interest rates. Interest expense is a significant ongoing cash requirement.
- Operating cash flow decreased despite higher Adjusted EBITDA, partly because Charter paid a previously recorded $220M litigation settlement and had less favorable working-capital movements. Mobile-related device cash flows also weighed on free cash flow.
- Q1 financing included new debt issuance. March issuances included $3.5B of senior secured notes due 2033, 2053 and 2063; January issuances included $1.2B of senior unsecured notes due 2032. Proceeds supported general corporate purposes, including buybacks and debt repayment.
- Charter repurchased approximately 5.3M Class A shares for $3.17B and purchased $416M of Charter Holdings units from a noncontrolling interest. Remaining repurchase authority at quarter-end was approximately $1.2B, excluding specified Liberty Broadband purchases.
Outlook, commentary and risks
- Management cited lower customer move rates and provider switching as reducing selling opportunities, while emphasizing customer relationship growth, network investment and improved products and service platforms.
- Charter expects its rural construction initiative to expand its footprint by approximately 1 million homes and businesses over six years. It also continues work on a company-owned 5G mobile data-only network using CBRS spectrum.
- Management expected 2022 cable capital expenditures, excluding the rural construction initiative, of $7.1B–$7.3B. Actual spending will depend on business growth, product development and the pace of rural construction.
- Management said mobile growth costs may constrain revenue growth or margins; mobile Adjusted EBITDA may remain negative, and equipment installment-plan timing and CBRS build-out may continue to pressure free cash flow.
- Programming rates are expected to keep increasing. Charter said it has not fully passed those increases to customers and may not be able to do so without potential customer losses. Other identified risks include competition, customer experience, vendor availability and cost, regulation, network disruption, access to financing and debt covenant compliance.
- The Sprint/T-Mobile litigation matters were settled and dismissed with prejudice; the settlement involved a $220M payment in 2022. Charter also disclosed other intellectual-property matters and ordinary-course litigation and regulatory inquiries; outcomes and potential losses for certain claims cannot be estimated.
- Charter stated that it believed available cash, free cash flow, revolving credit availability and capital-market access would be sufficient for projected cash needs. No material changes to previously disclosed risk factors or interest-rate risk were reported.
Important facts for investors to verify
- Whether Internet customer additions and revenue growth continue amid lower move rates and intensified broadband competition.
- Mobile line growth, customer acquisition costs, device-related working capital and the path to improved mobile profitability and free cash flow.
- Debt growth, refinancing terms, interest costs and leverage relative to Charter’s stated target range.
- Capital spending against the $7.1B–$7.3B cable capex outlook, plus additional rural construction and CBRS investment.
- Programming-cost increases, customer losses in video and voice, and the company’s ability to manage wage, service and other operating-cost inflation.
- Developments in remaining litigation and regulatory matters, and the effects of customer past-due balances; Charter reported higher numbers of accounts more than 60, 90 and 120 days past due, largely associated with government assistance program balances.