Charter Third Quarter 2011 Results

ST. LOUIS, Nov. 1, 2011 /PRNewswire/ -- Charter Communications, Inc. (along with its subsidiaries, the "Company" or "Charter") today reported financial and operating results for the three and nine months ended September 30, 2011.

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Third quarter highlights:

• Total revenues grew 3.0% on a pro forma(1) basis and 2.3% on an actual basis due to growth in commercial, Internet and telephone sales.
• Adjusted EBITDA(2) grew 3.8% year-over-year on a pro forma basis and 3.3% on an actual basis, driven by revenue growth and a 30 basis point margin improvement, on a pro forma basis, to 36.1%. Net loss declined to $85 million in the third quarter of 2011.
• Commercial revenues grew 19.4% on a pro forma basis, and 17.5% on an actual basis, fueled by new relationships with small and medium businesses and carrier customers.
• Non-video residential customer relationships increased by approximately 54,900 for the quarter, more than double prior-year third quarter growth.
• Free cash flow(2) was $90 million and cash flows from operating activities were $405 million.
• Continued execution of disciplined financial strategy with the completion of several acquisitions and share and debt repurchases within the quarter.

 

"Charter delivered solid results in the third quarter, and I believe we have the right building blocks in place for long-term success. We are seeing the early benefits of delivering on our strategic priorities as evidenced by growth in Internet, acceleration in our commercial business and an improved customer relationship trend," said Mike Lovett, President and Chief Executive Officer. "The foundation of our strategy is to enhance the customer experience and increase awareness of Charter as the leading Internet service provider within our footprint. While we are making fundamental improvements to our video offering, our leadership team is confident that leveraging the strength of our Internet and commercial businesses will benefit all product lines over time. I am pleased with our near-term momentum in what remains a challenging macro-economic environment, and continue to be confident about our future."

During the third quarter, we continued to lay the foundation for future growth by focusing on our strategic priorities which include simplifying and enhancing the customer experience, leveraging our Internet advantage, aggressively driving growth in our commercial business, and changing the dynamic in video.

We are gaining traction in improving the ways in which customers interact with and perceive Charter and in leveraging the strength of our residential and commercial IP platforms which will ultimately serve our video business well. We are continuing to expand our commercial product offerings to our business and carrier customers consistent with our plans to gain share and accelerate growth in this area.

We recently added compelling new content and features for our video customers, including NFL Network, NFL Red Zone, HBO GO®, MAX GO® and BTN2Go, in addition to continued expansion of our HD channel lineup. We also launched our TiVo pilot, a key component in our next generation TV strategy, which we believe will meaningfully improve our video experience. Today we announced an upcoming unique enhancement to our online video capabilities that organizes video content already available online through Charter.net with content from sites such as Netflix, Amazon and Hulu into a single on-line directory.

We continue to invest in our infrastructure to strengthen our competitive position. Our key bandwidth initiatives, DOCSIS 3.0, which allows Internet speeds of 100 Mbps or higher, and switched digital video (SDV), which enables more HD channels, are nearing completion. This will further enable us to deliver better products and service to our residential and commercial customers.

Key Operating Results

Residential primary service units (PSUs) decreased by 700 in the third quarter of 2011 as gains in Internet and phone PSUs were more than offset by video losses. Non-video customer relationships grew by 54,900, more than double the growth during last year's third quarter. Approximately 61.9% of our residential customers subscribe to more than one product, as we up-sell single product customers to higher-value bundles to maximize retention and penetration.

In the third quarter, residential video customers decreased by 64,800, a slight improvement compared to a decrease of 66,100 in the third quarter of 2010. Basic analog customer relationships decreased by approximately 63,000, nearly all of the video decline. Our disciplined approach to customer acquisition resulted in higher retention levels; however, we continued to be impacted by generally weak economic conditions and competition. Digital video customers increased by 4,800 in the quarter compared to a 42,500 increase in the prior-year period. Digital growth slowed significantly compared to last year's third quarter as Charter completed fewer analog channel migrations in the 2011 third quarter, which traditionally drive digital upgrades. While Internet and commercial services are the primary growth engines and are becoming a larger part of our revenues, video still represents approximately 50% of our total revenue and remains an important part of the business. We're focused on enhancing our video product offering, improving our customer service and providing attractive offers targeted at improving video customer trends. At the end of September, 55.0% of our digital customers subscribed to HD and/or DVR services, up from 50.3% in the prior year quarter. Video ARPU was $72.21 for the third quarter of 2011, up 4.3% year-over-year driven by recent targeted price adjustments and higher advanced services penetration.

We delivered strong growth in high-speed Internet as we continue to capture share with product superiority. We added 53,200 residential Internet customers in the third quarter compared to 51,600 last year. Nearly 95% of our Internet customers have a broadband plan of 12Mbps or higher with approximately 23% of them relying on our home networking service. Internet ARPU of $42.67 increased 1.8% compared to the year-ago quarter primarily due to the growth in home networking revenues and recent price adjustments.

We continued to grow residential phone customers, although at a slower pace than in 2010. We added 10,900 phone customers during the 2011 third quarter compared to a gain of 30,600 a year ago due primarily to fewer upgrades from our existing customer base driven by a higher mix of brand as compared to direct response marketing in the first part of 2011, weak economic conditions and the impact of more customers replacing traditional phone service with wireless service. Phone penetration was 16.3% as of September 30, 2011. Phone remains key to bundle value in terms of retention and penetration, and we continue to promote phone up-sell to both video and non-video Internet customers. Phone ARPU of $40.96 decreased approximately 1.1% year-over-year due to increased value-based packages and bundling.

Third-quarter commercial PSUs increased 7,900 to 464,900 and were up 6.9% compared to the third quarter of 2010. Commercial Internet and phone PSUs increased year-over-year by more than 20%. We are well positioned to further leverage our network to provide an expanding portfolio of products and services to our business customers to accelerate our growth in our commercial footprint.

Total ARPU for the third quarter of 2011 was $137.41, an increase of 8.6% over the 2010 third quarter, primarily as a result of continued growth in our commercial business, the previously mentioned price adjustments and higher bundle and advanced services penetration. For the nine months ended September 30, 2011, we lost 20,800 total customer relationships as compared to 80,800 in 2010, reflecting improvements in customer experience, enhanced services and products, and benefits from our strategic investments, partially offset by disciplined customer acquisition.

Third Quarter Financial Results

Revenue

Third quarter 2011 pro forma revenues rose to $1.813 billion, up 3.0% compared to the year-ago quarter as we continued to grow our commercial, Internet and phone businesses and increase sales of bundled services. On an actual basis revenues grew 2.3% to $1.809 billion.

Third quarter 2011 pro forma video revenues totaled $902 million, or $899 million on an actual basis, a decrease of 1.2% on a pro forma basis and 2.1% on an actual basis compared to the prior-year period. Video revenues declined as a result of our video customer losses, partially offset by price adjustments and growth in revenues from DVR and high-definition television services. Third quarter pro forma Internet revenues were $434 million or $433 million on an actual basis, up 8.0% on a pro forma basis and 7.2% on an actual basis year-over-year driven by the addition of 193,600 Internet customers. Telephone revenues totaled $216 million on a pro forma and actual basis, up 3.8% on a pro forma and an actual basis over third quarter 2010 as we added 73,400 phone customers.

Commercial revenues grew to $148 million, a 19.4% year-over-year increase on a pro forma basis and 17.5% on an actual basis, supported by improved sales productivity and line extensions for carrier and small and medium business customers.

Advertising sales revenues were $73 million for the third quarter of 2011, a 2.7% decrease compared to the third quarter of 2010, primarily due to higher political spend in the year ago quarter offset by a $3 million change versus the prior year to reflect certain revenues on a gross basis, thus increasing both revenues and expenses by the same amount.

Operating Costs and Expenses

Pro forma operating costs and expenses totaled $1.159 billion in the third quarter of 2011, an increase of 2.6% compared to the year-ago period, primarily related to increases in marketing and programming expenses, partially offset by lower bad debt. On an actual basis, operating costs and expenses totaled $1.156 billion, an increase of 1.7% compared to the year-ago period. Marketing expenses increased by $15 million on a pro forma basis in the third quarter of 2011 compared to the year-ago quarter reflecting higher brand and media investment, channel development and increased marketing efforts for commercial. Programming expenses rose as a result of contractual programming increases, partially offset by customer losses. Bad debt expense was $5 million lower in the third quarter as we continue to derive benefits from our customer acquisition and retention strategies.

Adjusted EBITDA

Adjusted EBITDA on a pro forma basis was $654 million for the third quarter of 2011, an increase of 3.8%. Adjusted EBITDA grew 3.3% on an actual basis to $653 million. Adjusted EBITDA margin improved to 36.1% on a pro forma and actual basis for the third quarter of 2011 compared to adjusted EBITDA margin of 35.8% on a pro forma basis and 35.7% on an actual basis in the year-ago quarter. Sustained adjusted EBITDA growth was driven by increases in our higher margin Internet, commercial and phone products, continued disciplined customer acquisition, and improving customer service levels.

Net Loss

Net loss on a pro forma and actual basis was $85 million in the third quarter of 2011, compared to $99 million on a pro forma basis and $95 million on an actual basis in the prior-year third quarter. The improvement was primarily due to adjusted EBITDA growth and lower income tax expense partially offset by higher interest expense due to 2010 and 2011 refinancings, as well as an increase in depreciation and amortization in the quarter-to-quarter comparison. Net loss per common share was $0.79 in the third quarter of 2011 compared to $0.87 on a pro forma and $0.84 on an actual basis during the same period last year.

Capital Expenditures

Property, plant and equipment expenditures for the third quarter of 2011 were $304 million compared to third quarter 2010 expenditures of $297 million on a pro forma basis and $299 million on an actual basis. The increase was primarily due to a higher spending for line extensions driven by commercial construction and for customer premise equipment, partially offset by lower spending on scalable infrastructure due to timing within the year. Our estimate for capital expenditures for 2011 remains approximately $1.3 billion to $1.4 billion.

Cash Flow

Net cash flows from operating activities were $406 million on a pro forma basis, compared to $439 million on a pro forma basis in the third quarter of 2010. Net cash flows from operating activities were $405 million on an actual basis, compared to $441 million on an actual basis in the third quarter of 2010. The decrease in net cash flows from operating activities was primarily due to changes in working capital that provided $36 million less cash in quarter-to-quarter comparisons and an increase in cash interest payments, offset by higher adjusted EBITDA.

Free cash flow for the third quarter of 2011 was $91 million on a pro forma basis and $90 million on an actual basis, compared to $135 million on a pro forma basis and an actual basis in the same period last year. The decrease was driven by lower net cash flows from operating activities and higher capital expenditures.

Total principal amount of debt was approximately $12.5 billion as of September 30, 2011. At the end of the third quarter, we had $32 million of cash and cash equivalents (including restricted cash and cash equivalents of $27 million) and availability under our revolving credit facility of approximately $1.1 billion.

During the third quarter of 2011, we repurchased approximately 2.4 million shares of Class A common stock for approximately $116 million in open market transactions and purchased $193 million principal amount of 8% 2nd lien notes.

Conference Call

Charter will host a conference call on Tuesday, November 1, 2011 at 9:00 a.m. Eastern Time (ET) related to the contents of this release.

The conference call will be webcast live via the Company's website at charter.com. The webcast can be accessed by selecting "Investor & News Center" from the lower menu on the home page. The call will be archived in the "Investor & News Center" in the "Financial Information" section on the left beginning 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 866-726-7983 no later than 10 minutes prior to the call. International participants should dial 706-758-7055. The conference ID code for the call is 16801546.

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 November 15, 2011. The conference ID code for the replay is 16801546.

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 for the quarter ended September 30, 2011 available on the "Investor & News Center" of our website at charter.com in the "Financial Information" section. A slide presentation to accompany the conference call and a trending schedule containing historical customer and financial data can also be found in the "Financial Information" section.

Use of Non-GAAP Financial Metrics

The Company uses certain measures that are not defined by Generally Accepted Accounting Principles ("GAAP") to evaluate various aspects of its business. Adjusted EBITDA, adjusted EBITDA less capital expenditures and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net loss or 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 is reconciled to net loss and free cash flow is reconciled to net cash flows from operating activities in the addendum of this news release.  

Adjusted EBITDA is defined as net loss plus net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, and other expenses, such as special charges, reorganization items and 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. Adjusted EBITDA less capital expenditures is defined as Adjusted EBITDA minus purchases of property, plant and equipment. Adjusted EBITDA and adjusted EBITDA less capital expenditures are used by management and the Company's Board to evaluate the performance of the Company's business. For this reason, they are significant components of Charter's annual incentive compensation program. However, these measures are limited in that they do not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and the cash cost of financing. Management evaluates these costs through other financial measures.    

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

The Company believes that adjusted EBITDA and free cash flow provide information useful to investors in assessing 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 credit facilities and notes (all such documents have been previously filed with the United States Securities and Exchange Commission). For the purpose of calculating compliance with leverage covenants, we use adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees which fees were in the amount of $40 million and $34 million for the three months ended September 30, 2011 and 2010, respectively, and $110 million and $105 million for the nine months ended September 30, 2011 and 2010, respectively.

In addition to the actual results for the three and nine months ended September 30, 2011 and 2010, we have provided pro forma results in this release for the three and nine months ended September 30, 2011 and 2010. We believe these pro forma results facilitate meaningful analysis of the results of operations. Pro forma results in this release reflect certain acquisitions and sales of cable systems in 2010 and 2011 as if they occurred as of January 1, 2010. Pro forma statements of operations for the three and nine months ended September 30, 2011 and 2010; and pro forma customer statistics as of September 30, 2010; are provided in the addendum of this news release.

About Charter

Charter (NASDAQ: CHTR) is a leading broadband communications company and the fourth-largest cable operator in the United States. Charter provides a full range of advanced broadband services, including advanced Charter TV® video entertainment programming, Charter Internet® access, and Charter Phone®. Charter Business® similarly provides scalable, tailored, and cost-effective broadband communications solutions to business organizations, such as business-to-business Internet access, data networking, business telephone, video and music entertainment services, and wireless backhaul. Charter's advertising sales and production services are sold under the Charter Media® brand. More information about Charter can be found at charter.com.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations 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 Securities and Exchange Commission ("SEC"). Many of the forward-looking statements contained in this release 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" and "potential," among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this release are set forth 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 free cash flow by offering video, Internet, telephone, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets 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 and the difficult economic conditions in the United States;
• the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, and digital subscriber line ("DSL") providers and competition from video provided over the Internet;
• general business conditions, economic uncertainty or downturn, high 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);
• the effects of governmental regulation on our business;
• 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 release.

SOURCE Charter Communications, Inc.