Charter Announces Fourth Quarter 2018 Results

STAMFORD, Conn., Jan. 31, 2019 /PRNewswire/ -- Charter Communications, Inc. (along with its subsidiaries, the "Company" or "Charter") today reported financial and operating results for the three and twelve months ended December 31, 2018.

Key highlights:

• During the fourth quarter, Charter completed its all-digital and DOCSIS 3.1 initiatives. As of December 31, 2018, virtually all of Charter's national footprint was all-digital and Charter's Spectrum Internet Gig service is now available throughout Charter's footprint.
• Fourth quarter total residential and SMB customer relationships increased 248,000, compared to 209,000 during the fourth quarter of 2017. During the year ended December 31, 2018, total residential and SMB customer relationships grew by 3.5% to 28.1 million, and total residential and SMB Internet customers grew by 1.3 million, or 5.3% to 25.3 million, with 329,000 residential and SMB Internet customer net additions in the fourth quarter of 2018.
• Fourth quarter revenues of $11.2 billion grew 5.9%, as compared to the prior year period, driven by residential revenue growth of 3.9%, commercial revenue growth of 4.5%, and advertising revenue growth of 34.1%.
• Fourth quarter Adjusted EBITDA¹ of $4.2 billion grew 4.6% year-over-year, and 7.6% when excluding fourth quarter mobile revenue and operating expenses.
• For the year ended December 31, 2018, revenues rose to $43.6 billion, 4.9% higher than in 2017. Adjusted EBITDA totaled $16.1 billion for the year ended December 31, 2018, an increase of 5.0% compared to the prior year. Excluding mobile revenue and operating expenses in 2018, Adjusted EBITDA grew by 6.5% year-over-year.
• Net income attributable to Charter shareholders totaled $296 million in the fourth quarter, compared to $9.6 billion during the same period last year. For the year ended December 31, 2018, net income attributable to Charter shareholders totaled $1.2 billion, compared to $9.9 billion in 2017. The year-over-year decrease in net income in the fourth quarter and for the year ended December 31, 2018 was primarily driven by a GAAP tax benefit from a reduction in the deferred tax liability as a result of Federal tax reform in 2017.
• Fourth quarter capital expenditures totaled $2.4 billion and included $28 million of all-digital costs and $106 million of mobile-related capital expenditures. For the year ended December 31, 2018, capital expenditures totaled $9.1 billion, or $8.9 billion excluding mobile-related capital expenditures.
• During the fourth quarter, Charter purchased approximately 4.3 million shares of Charter Class A common stock and Charter Communications Holdings, LLC ("Charter Holdings") common units for approximately $1.4 billion. For the year ended December 31, 2018, Charter purchased approximately 16.2 million shares of Charter Class A common stock and Charter Holdings common units for approximately $5.0 billion.

"We performed well in 2018, growing our Internet customer base by 1.3 million, cable revenue by 4.7%, and cable Adjusted EBITDA by 6.5% -- very strong operating and financial performance, particularly in the midst of what we believe is the largest cable integration ever," said Tom Rutledge, Chairman and CEO of Charter Communications. "In 2019, we expect the operating and cash flow performance of our cable business will further demonstrate the superiority of our network, the returns of our recent investments, and the long-term value creation driven by our consumer-focused operating strategy."

 

Footnotes
In thousands, except per customer and penetration data. See footnotes to unaudited summary of operating statistics on page 5 of the addendum of this news release. The footnotes contain important disclosures regarding the definitions used for these operating statistics.

All percentages are calculated using whole numbers. Minor differences may exist due to rounding.  NM - Not meaningful

During the fourth quarter of 2018, Charter's residential customer relationships grew by 207,000, while fourth quarter 2017 residential customer relationships grew by 170,000. Residential PSUs increased by 170,000 in the fourth quarter of 2018, compared to fourth quarter 2017 residential PSU net additions of 288,000. The year-over-year decrease in PSU net additions was driven by a decline in voice and video net additions in the fourth quarter of 2018. As of December 31, 2018, Charter had 26.3 million residential customer relationships and 49.9 million residential PSUs.

Charter added 289,000 residential Internet customers in the fourth quarter of 2018, versus fourth quarter 2017 Internet customer net additions of 263,000. As of December 31, 2018, Charter had 23.6 million residential Internet customers, with over 80% of those residential Internet customers subscribing to tiers that provided 100 Mbps or more of speed. Currently, 100 Mbps is the slowest speed offered to new Internet customers in 99% of Charter's footprint. Additionally, Charter has doubled minimum Internet speeds to 200 Mbps in a number of markets at no additional cost to new and existing SpectrumInternet customers.

During the fourth quarter, Charter further expanded the availability of its Spectrum Internet Gig service to a number of new markets. The service, which uses DOCSIS 3.1 technology, is now available in 99% of Charter's footprint.

Residential video customers decreased by 36,000 in the fourth quarter of 2018, while fourth quarter 2017 video customers increased by 2,000. As of December 31, 2018, Charter had 16.1 million residential video customers.

During the fourth quarter of 2018, Charter completed its all-digital efforts in its Legacy TWC and Legacy Bright House footprints. As of December 31, 2018, virtually all of Charter's national footprint was all-digital. All-digital allows Charter to offer more advanced products and services, and provides residential customers with two-way digital set-top boxes, which offer better video picture quality, an interactive programming guide and video on demand on all TV outlets in the home.

During the fourth quarter of 2018, residential voice customers declined by 83,000, while fourth quarter 2017 voice customers grew by 23,000. As of December 31, 2018, Charter had 10.1 million residential voice customers.

Fourth quarter 2018 residential revenue per customer relationship (excluding mobile revenue) totaled $111.78, and grew by 0.9% compared to the prior year period, as promotional rate step-ups and modest rate adjustments, were partly offset by continued single play Internet sell-in.

In September of 2018, Charter completed the full market launch of its Spectrum Mobile^TM service to new and existing Spectrum Internet customers across its footprint. Spectrum Mobile runs on America's largest, most reliable LTE network and is combined with a nationwide network of Spectrum WiFi hotspots. Spectrum Mobile customers can choose one of two simple ways to pay for data, "Unlimited" for $45 a month (per line), or "By the Gig" at $14/GB. During the fourth quarter of 2018, Charter added 113,000 mobile lines, and as of December 31, 2018, Charter served a total of 134,000 mobile lines.

SMB customer relationships grew by 41,000 during the fourth quarter of 2018, compared to growth of 39,000 during the fourth quarter of 2017. SMB PSUs increased 81,000, compared to 85,000 during the fourth quarter of 2017. As of December 31, 2018, Charter had 1.8 million SMB customer relationships and 3.2 million SMB PSUs. Enterprise PSUs grew by 5,000 during the fourth quarter of 2018 compared to growth of 10,000 during the fourth quarter of 2017. As of December 31, 2018, Charter had 248,000 enterprise PSUs.

 

Revenue

Fourth quarter revenues rose 5.9% year-over-year to $11.2 billion, driven by growth in Internet, advertising, video and commercial revenues. Excluding advertising revenue, which benefited from political spend in the fourth quarter of 2018 and mobile, revenue grew 3.9% year-over-year.

Video revenues totaled $4.4 billion in the fourth quarter, an increase of 3.4% compared to prior year period. Video revenue growth was driven by annual rate adjustments, promotional rolloff and higher bundled revenue allocation relating to the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House.

Internet revenues grew 7.1%, compared to the year-ago quarter, to $3.9 billion, driven by growth in Internet customers during the last year, promotional rolloff and rate adjustments.

Voice revenues totaled $515 million in the fourth quarter, a decrease of 12.3% compared to the fourth quarter of 2017, driven by value-based pricing, lower bundled revenue allocation relating to the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House, and a decline in voice customers over the last twelve months.

Commercial revenues rose to $1.6 billion, an increase of 4.5% over the prior year period, driven by enterprise revenue growth of 5.7% and SMB revenue growth of 3.6%. Fourth quarter 2018 commercial revenue growth was lower than fourth quarter 2018 commercial customer relationship growth, given the migration of Legacy TWC and Legacy Bright House commercial customers to more attractively priced Spectrum pricing and packaging for both SMB and enterprise services.

Fourth quarter advertising sales revenues of $562 million increased 34.1% compared to the year-ago quarter, driven by higher political revenue. Fourth quarter mobile revenue totaled $89 million.

Operating Costs and Expenses

Fourth quarter total operating costs and expenses increased by $446 million, or 6.7% year-over-year, and 3.6% when excluding fourth quarter mobile costs.

Fourth quarter programming expense increased by $147 million, or 5.5% as compared to the fourth quarter of 2017, reflecting contractual programming increases and renewals, partly offset by lower video customers.

Regulatory, connectivity and produced content expenses increased by $60 million, or 11.8% year-over-year, primarily driven by higher franchise and regulatory fees, sports and news costs and the Company's adoption of FASB's ASU 2014-09 as of January 1, 2018.

Costs to service customers decreased by $15 million, or 0.8% year-over-year, despite year-over-year residential and SMB customer growth of 3.5%. The year-over-year decrease in costs to service customers was primarily the result of a decrease in bad debt.

Marketing expenses decreased by $18 million, or 2.3% year-over-year.

Other expenses increased by $61 million, or 7.0% as compared to the fourth quarter of 2017 driven by higher advertising sales, software costs, property tax and insurance costs and costs related to the launch of Charter's Spectrum 1 News channel in Los Angeles.

In the fourth quarter of 2018, mobile costs were comprised of launch costs, device costs and service and operating costs totaling $211 million.

Adjusted EBITDA

Fourth quarter Adjusted EBITDA of $4.2 billion grew by 4.6% year-over-year, reflecting revenue growth and operating expense growth of 5.9% and 6.7%, respectively. Excluding mobile revenue and mobile operating expenses in the fourth quarter of 2018, Adjusted EBITDA grew by 7.6% year-over-year.

Net Income Attributable to Charter Shareholders

Net income attributable to Charter shareholders totaled $296 million in the fourth quarter of 2018, compared to $9.6 billion in the fourth quarter of 2017. The year-over-year decrease in net income was primarily driven by a GAAP tax benefit from a reduction in the deferred tax liability as a result of Federal tax reform in 2017 offset by higher Adjusted EBITDA and lower deprecation and amortization costs.

Net income per basic common share attributable to Charter shareholders totaled $1.31 in the fourth quarter of 2018 compared to $39.66 during the same period last year. The decrease was primarily the result of the factors described above offset by a 5.7% decrease in weighted average common shares outstanding versus the prior year period.

Capital Expenditures

Property, plant and equipment expenditures totaled $2.4 billion in the fourth quarter of 2018, compared to $2.6 billion during the fourth quarter of 2017, primarily driven by a decline in CPE and scalable infrastructure spending. The decrease in CPE spending was mostly driven by lower set-top box purchases given a year-over-year decline in the pace of migration of Legacy TWC and Legacy Bright House customers to Spectrum pricing and packaging and a decline in all-digital activity. The decrease in scalable infrastructure spending was related to more consistent timing of in-year spend. Support capital declined due to lower back office systems spend, timing of vehicle purchases and lower facilities improvement, partly offset by $99 million of support capital spending related to Spectrum Mobile. Fourth quarter capital expenditures included $28 million of all-digital costs and $106 million of mobile costs.  

Cash Flow and Free Cash Flow

During the fourth quarter of 2018, net cash flows from operating activities totaled $3.2 billion, compared to $3.3 billion in the fourth quarter of 2017. The year-over-year decline in net cash flows from operating activities was primarily due to a smaller working capital benefit and higher cash interest, partly offset by higher Adjusted EBITDA and lower severance-related expenses.

Consolidated free cash flow for the fourth quarter of 2018 totaled $885 million, compared to $1.2 billion during the same period last year. The decrease was driven by lower net cash flows from operating activities and a smaller increase in accrued capital expenditures in the fourth quarter of 2018 versus the prior year quarter, partly offset by lower capital expenditures. Excluding the impact of mobile revenue, expenses, capital expenditures and working capital from devices, fourth quarter 2018 free cash flow totaled $1.2 billion.

Liquidity & Financing

As of December 31, 2018, total principal amount of debt was $72.0 billion and Charter's credit facilities provided approximately $2.8 billion of additional liquidity in excess of Charter's $551 million cash position.

In January 2019, Charter Communications Operating, LLC ("CCO") and Charter Communications Operating Capital Corp. issued $1.25 billion of 5.050% senior secured notes due 2029 and $750 million of 5.750% senior secured notes due 2048 (collectively, the "Notes"). Charter intends to use the net proceeds from the sale of the Notes for general corporate purposes, including to fund potential buybacks of Class A common stock of Charter or common units of Charter Holdings and to repay certain indebtedness, including to repurchase, redeem or repay at maturity Time Warner Cable, LLC's 8.750% senior notes due 2019 and/or to repay a portion of the outstanding balance under CCO's revolving credit facility.

In January 2019, Charter Operating entered into an amendment to its Credit Agreement raising an additional $1.7 billion term loan A-3 and increasing revolving loan capacity to $4.75 billion from $4.0 billion, as well as extending the maturities on a portion of the term loan A-2 and a portion of the revolving loan to 2024.

Share Repurchases

During the three months ended December 31, 2018, Charter purchased approximately 4.3 million shares of Charter Class A common stock and Charter Holdings common units for approximately $1.4 billion.