10-QPeriod: Q2 FY2017

CHARTER COMMUNICATIONS, INC. /MO/ Quarterly Report for Q2 Ended Jun 30, 2017

Filed July 27, 2017For Securities:CHTR

Summary

Charter Communications, Inc. reported solid revenue growth in the second quarter of 2017, driven by the significant impact of recent acquisitions, primarily the Time Warner Cable (TWC) and Bright House transactions which closed in May 2016. While reported revenues saw a substantial increase year-over-year, this was largely due to the consolidation of these acquired entities. The company's net income attributable to Charter shareholders saw a significant decrease compared to the prior year's record results, which were boosted by a substantial tax benefit. However, focusing on operational performance, Adjusted EBITDA showed strong growth, indicating improved underlying profitability from the combined operations. Management highlighted the strategic integration of TWC and Bright House under Charter's operational model, "Spectrum pricing and packaging" (SPP), and the ongoing transition to an all-digital platform as key drivers for future growth and efficiency. The company also continued its share repurchase program, demonstrating a commitment to returning capital to shareholders.

Financial Highlights

49 data points
Beta

Revenue

$10.36B

Net Income

$139.00M

1.3% Net Margin

EPS (Diluted)

$0.52

Total Assets

$146.96B

Cash & Equivalents

$694.00M

Free Cash Flow

$797.00M

Financial Statements
Beta
Revenue$10.36B
Operating Expenses$9.30B
Operating Income$1.05B
Net Income$139.00M
EPS (Basic)$0.53
EPS (Diluted)$0.52
Shares Outstanding (Basic)263.46M
Shares Outstanding (Diluted)267.31M

Key Highlights

  • 1Total revenues increased significantly by 68.1% to $10.36 billion for the three months ended June 30, 2017, largely due to the impact of the TWC and Bright House transactions completed in May 2016.
  • 2Net income attributable to Charter shareholders decreased substantially from $3.07 billion in Q2 2016 to $139 million in Q2 2017, primarily due to a large tax benefit recognized in the prior year.
  • 3Adjusted EBITDA showed strong growth, increasing by 73.3% to $3.85 billion for the quarter, reflecting the combined operational strength of the merged entities.
  • 4The company continued to grow its customer base, with residential Internet customers increasing by 1.37 million year-over-year and small and medium business customer relationships growing by 306,000.
  • 5Operating costs and expenses rose significantly by 61.7% to $9.31 billion, mainly due to the inclusion of acquired operations and increased programming costs.
  • 6Capital expenditures increased substantially to $3.70 billion for the six months ended June 30, 2017, reflecting investments in network upgrades and customer premise equipment following the acquisitions.
  • 7Charter continued its share repurchase program, acquiring approximately 10.0 million shares for $3.3 billion during the quarter, with $3.0 billion remaining under board authorization.

Frequently Asked Questions

The substantial increase in revenue is primarily driven by the acquisition of Time Warner Cable (TWC) and Bright House Networks, which were completed in May 2016. The financial results for the current period include the full impact of these acquired businesses, whereas the prior year's comparable period only included TWC and Bright House for a portion of the quarter after the transaction closing.

The significant decrease in net income is largely due to a one-time, substantial income tax benefit of $3.2 billion recognized in the second quarter of 2016. This benefit arose from the reduction of a valuation allowance on deferred tax assets. Excluding this one-time item, the underlying operational performance, as reflected by Adjusted EBITDA, shows robust growth.

Charter is actively integrating the TWC and Bright House operations by rolling out its 'Spectrum pricing and packaging' (SPP) strategy across the newly acquired markets. They are also transitioning these markets to an all-digital platform, standardizing customer service models with U.S.-based in-house call centers, and centralizing corporate functions. The goal is to achieve operational efficiencies and a consistent customer experience across all regions.

Charter has a significant amount of debt, but management believes it has sufficient liquidity from free cash flow, cash on hand, and available credit facilities to manage its obligations. The company aims to maintain a target leverage ratio between 4 to 4.5 times at the consolidated level. They are also actively engaged in share repurchases and may consider future refinancing transactions to extend debt maturities and manage their capital structure.