Charter Announces Second Quarter 2019 Results

STAMFORD, Conn., July 26, 2019 /PRNewswire/ -- Charter Communications, Inc. (along with its subsidiaries, the "Company" or "Charter") today reported financial and operating results for the three and six months ended June 30, 2019.

Key highlights:

• Second quarter total residential and SMB customer relationships increased 203,000, compared to 196,000 during the second quarter of 2018. As of June 30, 2019, Charter had 28.7 million total customer relationships, with growth of over 1.0 million year-over-year.
• During the second quarter, Charter generated residential and SMB Internet net additions of 258,000, video net losses of 141,000 and wireline voice net losses of 182,000.
• Charter added 208,000 mobile lines in the second quarter, compared to 176,000 mobile line net additions in the first quarter of 2019. Late in the second quarter, our Bring Your Own Device (BYOD) program was expanded to all sales channels. As of June 30, 2019, Charter served a total of 518,000 mobile lines.
• Second quarter revenues of $11.3 billion grew 4.5%, as compared to the prior year period, driven by residential revenue growth of 3.7%, commercial revenue growth of 4.7% and mobile revenue of $158 million.
• Second quarter Adjusted EBITDA¹ of $4.2 billion grew 3.3% year-over-year, while second quarter cable Adjusted EBITDA¹ of $4.3 billion grew 5.4% year-over-year.
• Net income attributable to Charter shareholders totaled $314 million in the second quarter, compared to $273 million during the same period last year. The year-over-year increase in net income attributable to Charter shareholders in the second quarter was primarily driven by higher Adjusted EBITDA.
• Second quarter capital expenditures totaled $1.6 billion compared to $2.4 billion during the second quarter of 2018. Second quarter capital expenditures included $93 million of mobile-related capital expenditures.
• Consolidated free cash flow¹ for the second quarter of 2019 totaled $1.1 billion, compared to $804 million during the same period last year. Cable free cash flow¹ for the second quarter totaled $1.4 billion, compared to $920 million during the same period last year.
• During the second quarter, Charter purchased approximately 2.7 million shares of Charter Class A common stock and Charter Communications Holdings, LLC ("Charter Holdings") common units for approximately $998 million.

"We are realizing the benefits of consolidating three large cable operators under one centralized operating strategy, with lower customer churn, fewer service transactions per customer and improving customer satisfaction resulting in growth of over 1 million customer relationships year-over-year," said Tom Rutledge, Chairman and CEO of Charter Communications. "In the second quarter, free cash flow grew nearly 40% year-over-year. Our core business is strong and we are positioned to be the network of choice today and in the future."

Key Operating Results

During the second quarter of 2019, Charter's residential customer relationships grew by 164,000, while second quarter 2018 residential customer relationships grew by 141,000. As of June 30, 2019, Charter had 26.8 million residential customer relationships, with year-over-year growth of 3.4%.

Charter added 221,000 residential Internet customers in the second quarter of 2019, versus second quarter 2018 residential Internet customer net additions of 218,000. As of June 30, 2019, Charter had 24.2 million residential Internet customers, with nearly 85% 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.

Residential video customers decreased by 150,000 in the second quarter of 2019, while second quarter 2018 video customers decreased by 73,000. As of June 30, 2019, Charter had 15.8 million residential video customers.

During the second quarter of 2019, residential wireline voice customers declined by 207,000, while second quarter 2018 voice customers declined by 45,000. As of June 30, 2019, Charter had 9.8 million residential wireline voice customers.

Second quarter 2019 residential revenue per residential customer (excluding mobile) totaled $112.20, and grew by 0.3% compared to the prior year period, as promotional rate step-ups and rate adjustments were partly offset by a higher percentage of non-video customers, a higher mix of Choice and Stream customers within our video base and lower pay-per-view and video on demand revenues.

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 most awarded LTE network and is combined with Spectrum WiFi. 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, in both cases including applicable fees and taxes. Late in the second quarter, BYOD was expanded to all sales channels. Previously, our BYOD program was only available by visiting select Spectrum Mobile stores. During the second quarter of 2019, Charter added 208,000 mobile lines, and as of June 30, 2019, Charter served a total of 518,000 mobile lines.

SMB customer relationships grew by 39,000 during the second quarter of 2019, compared to growth of 55,000 during the second quarter of 2018. As of June 30, 2019, Charter had 1.9 million SMB customer relationships, with year-over-year growth of 8.7%. Enterprise PSUs grew by 5,000 during the second quarter of 2019 compared to growth of 7,000 during the second quarter of 2018. As of June 30, 2019, Charter had 258,000 enterprise PSUs, with growth of 9.5% year-over-year.

Second Quarter Financial Results

Revenue

Second quarter revenues rose 4.5% year-over-year to $11.3 billion, driven by growth in Internet, mobile, commercial and video revenues. Excluding advertising revenue, which benefited from political spend in the second quarter of 2018, and mobile revenue, revenue grew 3.5% year-over-year.

Video revenues totaled $4.4 billion in the second quarter, an increase of 0.6% compared to the prior year period. Video revenue growth was driven by annual rate adjustments and promotional rolloff, partly offset by a decline in video customers during the last year, a higher mix of Choice and Stream customers within our video base and lower pay-per-view and video on demand revenues.

Internet revenues grew 8.8%, compared to the year-ago quarter, to $4.1 billion, driven by growth in Internet customers during the last year, promotional rolloff and rate adjustments.

Voice revenues totaled $489 million in the second quarter, a decrease of 7.8% compared to the second quarter of 2018, driven by value-based pricing and a decline in wireline voice customers over the last twelve months.

Commercial revenues rose to $1.6 billion, an increase of 4.7% over the prior year period, driven by SMB revenue growth of 5.3% and enterprise revenue growth of 4.0%. Second quarter 2019 commercial revenue growth was lower than second quarter 2019 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.

Second quarter advertising sales revenues of $395 million declined 7.5% compared to the year-ago quarter, driven by lower political revenue. Second quarter mobile revenue totaled $158 million.

Other revenues totaled $196 million in the second quarter, a decrease of 11.3% year-over-year, driven by lower processing fees and home shopping revenues, partly offset by video customer premise equipment ("CPE") sold to customers.

Operating Costs and Expenses

Second quarter total operating costs and expenses increased by $359 million, or 5.3% year-over-year, and 1.7% when excluding second quarter mobile costs.

Second quarter programming expense increased by $24 million, or 0.9% as compared to the second quarter of 2018, reflecting contractual programming increases and renewals, partly offset by lower video customers, a higher mix of Choice and Stream customers within our video base and lower pay-per-view expenses.

Regulatory, connectivity and produced content expenses increased by $37 million, or 6.7% year-over-year, primarily driven by costs of video CPE sold to customers, higher regulatory and franchise pass-through fees and original programming costs.

Costs to service customers decreased by $17 million, or 0.9% year-over-year, despite year-over-year residential and SMB customer growth of 3.8%. The year-over-year decrease in costs to service customers was primarily the result of a decline in bad debt. In addition, we have lowered our per relationship cost to service customers with lower service calls and truck rolls per customer and lower churn.

Marketing expenses decreased by $1 million, or 0.1% year-over-year.

Other expenses increased by $72 million, or 8.4% as compared to the second quarter of 2018 primarily driven by software costs, insurance costs, property taxes and enterprise costs.

In the second quarter of 2019, mobile costs totaled $277 million and were comprised of device costs, service and operating costs and launch costs.

Adjusted EBITDA

Second quarter Adjusted EBITDA of $4.2 billion grew by 3.3% year-over-year, reflecting revenue growth and operating expense growth of 4.5% and 5.3%, respectively. Second quarter cable Adjusted EBITDA grew by 5.4% year-over-year reflecting cable revenue growth and cable operating expense growth of 3.1% and 1.7%, respectively.

Net Income Attributable to Charter Shareholders

Net income attributable to Charter shareholders totaled $314 million in the second quarter of 2019, compared to $273 million in the second quarter of 2018. The year-over-year increase in net income attributable to Charter shareholders was primarily driven by higher Adjusted EBITDA and lower depreciation and amortization costs, partly offset by higher interest expense, a greater non-cash loss on financial instruments and higher income tax expense.

Net income per basic common share attributable to Charter shareholders totaled $1.41 in the second quarter of 2019 compared to $1.17 during the same period last year. The increase was primarily the result of the factors described above in addition to a 5.1% decrease in weighted average common shares outstanding versus the prior year period.

Capital Expenditures

Property, plant and equipment expenditures totaled $1.6 billion in the second quarter of 2019, compared to $2.4 billion during the second quarter of 2018, primarily driven by declines in scalable infrastructure, CPE and support spending. The decrease in scalable infrastructure spending was primarily driven by the completion of the rollout of DOCSIS 3.1 technology in 2018 and the associated bandwidth benefit in 2019. The year-over-year decrease in CPE spending was primarily driven by a decline in the pace of migration of Legacy TWC and Legacy Bright House customers to Spectrum pricing and packaging, the completion of Charter's all-digital initiative in 2018, increasing customer self-installations and a higher mix of boxless video outlets. The decrease in support capital was due to lower insourcing and integration-related spend, partly offset by higher mobile capital spending. Second quarter capital expenditures included $93 million of mobile costs, of which $71 million were included in support capital.

We currently expect capital expenditures, excluding capital expenditures related to mobile, to be approximately $7 billion in 2019, versus $8.9 billion in 2018.

Cash Flow and Free Cash Flow

During the second quarter of 2019, net cash flows from operating activities totaled $2.8 billion, compared to $3.1 billion in the prior year quarter. The year-over-year decline in net cash flows from operating activities was primarily due to a higher year-over-year negative cash contribution from working capital resulting from lower payables and a one-time impact from bill cycle standardization efforts as well as higher cash interest, partly offset by higher Adjusted EBITDA.

Consolidated free cash flow for the second quarter of 2019 totaled $1.1 billion, compared to $804 million during the same period last year. Cable free cash flow for the second quarter of 2019 totaled $1.4 billion, compared to $920 million during the same period last year. The year-over-year increases in consolidated free cash flow and cable free cash flow were driven by a decline in capital expenditures versus the prior year quarter, partly offset by a decline in net cash flows from operating activities and accrued capital expenditures.

Liquidity & Financing

As of June 30, 2019, total principal amount of debt was $72.6 billion. Charter's credit facilities provided approximately $4.1 billion of additional liquidity in excess of Charter's $696 million cash position.

In May 2019, CCO Holdings, LLC and CCO Holdings Capital Corp. issued $750 million of 5.375% senior unsecured notes due 2029 and in July 2019, an additional $750 million of the same series of notes were issued. Charter used the net proceeds for general corporate purposes, including funding buybacks of Charter Class A common stock and/or Charter Holdings common units and for repaying certain indebtedness.

In July 2019, Charter Communications Operating, LLC  and Charter Communications Operating Capital Corp. issued $1.25 billion of 5.125% senior secured notes due 2049. The net proceeds will be used to repay certain indebtedness, which may include the 5.000% Senior Notes due 2020 issued by Time Warner Cable, LLC, with any remaining proceeds used for general corporate purposes, including to fund potential buybacks of Charter Class A common stock or Charter Holdings common units.

Share Repurchases

During the three months ended June 30, 2019, Charter purchased approximately 2.7 million shares of Charter Class A common stock and Charter Holdings common units for approximately $998 million.

Conference Call

Charter will host a conference call on Friday, July 26, 2019 at 8:30 a.m. Eastern Time (ET) related to the contents of this release.

The conference call will be webcast live via the Company's investor relations website at ir.charter.com. The call will be archived under the "Financial Information" section two hours after completion of the call. Participants should go to the webcast link no later than 10 minutes prior to the start time to register.

Those participating via telephone should dial 866-919-0894 no later than 10 minutes prior to the call. International participants should dial 706-679-9379. The conference ID code for the call is 9656479.

A replay of the call will be available at 855-859-2056 or 404-537-3406 beginning two hours after the completion of the call through the end of business on August 9, 2019. The conference ID code for the replay is 9656479.

Additional Information Available on Website

The information in this press release should be read in conjunction with the financial statements and footnotes contained in the Company's Quarterly Report on Form 10-Q for the three and six months ended June 30, 2019, which will be posted on the "Financial Information" section of our investor relations website at ir.charter.com, when it is filed with the Securities and Exchange Commission (the "SEC"). A slide presentation to accompany the conference call and a trending schedule containing historical customer and financial data will also be available in the "Financial Information" section.

Use of Adjusted EBITDA and Free Cash Flow Information

The company uses certain measures that are not defined by U.S. generally accepted accounting principles ("GAAP") to evaluate various aspects of its business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, consolidated net income and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by Charter, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, in the Addendum to this release.

Adjusted EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, net interest expense, income taxes, depreciation and amortization, stock compensation expense, (gain) loss on financial instruments, other (income) expense, net and other operating (income) expenses, such as special charges and (gain) loss on sale or retirement of assets. As such, it eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of the Company's businesses as well as other non-cash or special items, and is unaffected by the Company's capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and the cash cost of financing. These costs are evaluated through other financial measures.

Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.

Management and Charter's board of directors use Adjusted EBITDA and free cash flow to assess Charter's performance and its ability to service its debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under the Company's credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the the SEC). For the purpose of calculating compliance with leverage covenants, the Company uses Adjusted EBITDA, as presented, excluding certain expenses paid by its operating subsidiaries to other Charter entities. The Company's debt covenants refer to these expenses as management fees, which were $299 million and $599 million for the three and six months ended June 30, 2019, respectively, and $265 million and $538 million for the three and six months ended June 30, 2018, respectively.

Cable Adjusted EBITDA is defined as Adjusted EBITDA less mobile revenues plus mobile operating costs and expenses. Cable free cash flow is defined as free cash flow plus mobile net cash outflows from operating activities and mobile capital expenditures. Management and Charter's board of directors use cable Adjusted EBITDA and cable free cash flow to provide management and investors a more meaningful year-over-year perspective on the financial and operational performance and trends of our core cable business without the impact of the revenue, costs and capital expenditures in the initial funding period to grow a new product line as well as the negative working capital impacts from the timing of device-related cash flows when we provide the handset or tablet to customers pursuant to equipment installment plans.

About Charter

Charter Communications, Inc. (NASDAQ:CHTR) is a leading broadband communications company and the second largest cable operator in the United States. Charter provides a full range of advanced residential broadband services, including Spectrum TV^® programming, Spectrum Internet^®, Spectrum Voice^®, and Spectrum Mobile™. Under the Spectrum Business^® brand, Charter provides scalable, and cost-effective broadband communications solutions to small and medium-sized business organizations, including Internet access, business telephone, and TV services. Through the Spectrum Enterprise brand, Charter is a national provider of scalable, fiber-based technology solutions serving many of America's largest businesses and communications service providers. Charter's advertising sales and production services are sold under the Spectrum Reach^® brand. Charter's news and sports networks are operated under the Spectrum Networks brand. More information about Charter can be found at newsroom.charter.com.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This communication includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial.  Although we believe that our plans, intentions and expectations as reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations.  Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under "Risk Factors" from time to time in our filings with the SEC.  Many of the forward-looking statements contained in this communication may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "will," "may," "intend," "estimated," "aim," "on track," "target," "opportunity," "tentative," "positioning," "designed," "create," "predict," "project," "initiatives," "seek," "would," "could," "continue," "ongoing," "upside," "increases" and "potential," among others.  Important factors that could cause actual results to differ materially from the forward-looking statements we make in this communication are set forth in our annual report on Form 10-K, and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

• our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our service areas and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures;
• the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite ("DBS") operators, wireless broadband and telephone providers, digital subscriber line ("DSL") providers, fiber to the home providers, video provided over the Internet by (i) market participants that have not historically competed in the multichannel video business, (ii) traditional multichannel video distributors, and (iii) content providers that have historically licensed cable networks to multichannel video distributors, and providers of advertising over the Internet;
• our ability to efficiently and effectively integrate acquired operations;
• the effects of governmental regulation on our business including costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us as a result of the Time Warner Cable Inc. and Bright House Networks, LLC Transactions;
• general business conditions, economic uncertainty or downturn, unemployment levels and the level of activity in the housing sector;
• our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents);
• our ability to develop and deploy new products and technologies including mobile products and any other consumer services and service platforms;
• any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation;
• the ability to retain and hire key personnel;
• the availability and access, in general, of funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and
• our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions.

All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement.  We are under no duty or obligation to update any of the forward-looking statements after the date of this communication.