Charter Announces Third Quarter 2015 Results

STAMFORD, Conn., Oct. 29, 2015 /PRNewswire/ -- Charter Communications, Inc. (NASDAQ: CHTR) (along with its subsidiaries, the "Company" or "Charter") today reported financial and operating results for the three and nine months ended September 30, 2015.

Key highlights:

• Residential customer relationships increased by 97,000 during the third quarter, versus 68,000 during the third quarter of 2014. For the twelve months ending September 30, 2015, residential customer relationships grew by 5.0%, or 290,000.
• Residential primary service units ("PSUs") increased by 180,000 during the third quarter versus a gain of 114,000 in the prior-year period, including residential video net additions of 12,000.
• Following the launch of Spectrum Business pricing and packaging to the small and medium business segment in March 2015, commercial customer relationships grew by 17,000 during the third quarter of 2015, including commercial video customers net additions of 4,000.
• Third quarter revenues of $2.5 billion grew 7.2%¹ as compared to the prior-year period, driven by residential revenue growth of 7.3% and commercial revenue growth of 13.2%.
• Third quarter Adjusted EBITDA² grew by 8.5% year-over-year. Excluding third quarter transactions transition costs of $12 million, third quarter Adjusted EBITDA grew by 9.7% year-over-year.
• Capital expenditures totaled $509 million in the third quarter of 2015, compared to $569 million during the third quarter of 2014. Excluding transactions transition capital expenditures, third quarter capital expenditures totaled $485 million.
• Third quarter free cash flow was $208 million, compared to negative free cash flow of $62 million during the prior-year period, driven by higher Adjusted EBITDA, lower capital expenditures and a positive working capital contribution.

"Our accelerating customer and PSU growth is being driven by our successful efforts to transform Charter into an organization that delivers outstanding products, service and customer value," said Tom Rutledge, President and CEO of Charter Communications. "Our operating strategy, which includes continued investment in superior products at attractive price points, with a highly-skilled US-based labor force, has accelerated our customer growth, leading to faster EBITDA growth and free cash flow generation. We look forward to applying the same strategy across our larger footprint, following the close of our Time Warner Cable and Bright House transactions, driving greater value for customers and shareholders."

Key Operating Results

During the third quarter of 2015, Charter's residential customer relationships grew by 97,000, with triple play sell-in improving year-over-year to 63% of total residential video sales. Residential PSUs increased by 180,000 versus a gain of 114,000 in the prior-year period, driven by Charter Spectrum, an industry-leading suite of video, Internet, and voice services launched in 2014. Charter Spectrum includes over 200 HD channels, in addition to minimum offered Internet speeds of 60 Mbps, and a fully-featured voice service, delivered at a highly competitive price. As of the end of the third quarter of 2015, 89% of Charter's residential customers received Charter Spectrum products.

Residential video customers increased by 12,000 in the third quarter of 2015, versus a loss of 9,000 in the year-ago period. Excluding the impact of bulk digital upgrades, Charter's residential video customers grew by 11,000 during the third quarter, versus a loss of 29,000 during the prior-year period.

For the past three years, Charter has significantly increased the competitiveness of its video product, by including more HD channels and video on demand offerings, attractive packaging of advanced services, improved selling methods, and enhanced service quality. Today, virtually all of Charter's passings are fully digitized, with access to more HD channels than satellite TV offers, and as of September 30, 2015, 97% of video customers subscribed to the Company's expanded basic video service.

Charter has introduced its new cloud-based user interface, Spectrum Guide, to its video customers in certain markets. Spectrum Guide  dramatically improves video content search and discovery, and fully enables Charter's on-demand offering. In addition, Spectrum Guide can function on nearly all of Charter's deployed set-tops. Charter is also poised to launch its new set-top box, World Box, which features downloadable security along with other advanced functionality, driving an enhanced customer experience and reducing incremental set-top box costs.

Charter added 131,000 residential Internet customers in the third quarter of 2015, compared to 94,000 a year ago. As of September 30, 2015, 88% of Charter's residential Internet customers subscribed to tiers that provided speeds of 60 Mbps or more. The Company continues to see strong demand for its Internet service as consumers value the speed and reliability of Charter's Internet offering.

During the third quarter, the Company added 37,000 residential voice customers, versus a gain of 29,000 during the third quarter of 2014.

Third quarter residential revenue per customer relationship totaled $113.39, and grew by 2.3% as compared to the prior-year period, driven by rate adjustments, higher product sell-in and promotional rate step-ups, partially offset by continued single play Internet sell-in.

During the third quarter of 2015, commercial customer relationships grew by 17,000 versus a loss of 5,000 during the third quarter of 2014. Commercial PSUs increased 31,000, compared to 5,000 during the third quarter of 2014. Charter's accelerating commercial customer and PSU growth is being driven by the launch of the Spectrum Business product suite to the small and medium business segments during the first quarter of 2015. This competitive new offering is intended to provide better products and greater value to small and medium business customers.

Third Quarter Financial Results 

Revenue

Third quarter 2015 revenues rose to $2.5 billion, 7.2% higher than the year-ago quarter, driven primarily by growth in Internet, commercial and video revenues.

Video revenues totaled $1.1 billion in the third quarter, an increase of 3.1% compared to the prior-year period. Video revenue growth was driven by higher advanced services penetration, annual and promotional rate adjustments and an increase in expanded basic and digital customers, partially offset by a decrease in residential limited basic video customers.

Internet revenues grew 16.9% compared to the year-ago quarter to $762 million, driven by an increase of 430,000 Internet customers during the last year and by promotional rolloff, price adjustments and revenue allocation from higher bundling.

Voice revenues totaled $135 million, a decline of 4.8% versus the third quarter of 2014, due to value-based pricing and revenue allocation from higher bundling, partially offset by the addition of 162,000 voice customers in the last twelve months.

Commercial revenues rose to $286 million an increase of 13.2% over the prior-year period, and was driven by higher sales to small and medium business customers and to carrier customers.

Third quarter advertising sales revenues of $77 million decreased 11.8% compared to the year-ago quarter primarily driven by a decrease in political advertising revenue of $7 million.

Operating Costs and Expenses

Third quarter total operating costs and expenses increased by $96 million, or 6.5%, compared to the year-ago period, reflecting increases in programming costs, other expenses and transition costs related to Charter's pending transactions with Time Warner Cable Inc. ("Time Warner Cable") and Bright House Networks, LLC ("Bright House"). Transition costs accounted for $12 million of total third quarter operating costs. Excluding these transition costs, third quarter total operating expenses increased by $87 million, or 5.8% year over year.

Third quarter programming expense increased by $46 million, or 7.4%, as compared to the third quarter of 2014, reflecting contractual programming increases and a higher number of expanded basic package customers, broader carriage of certain networks as a result of all-digital and the introduction of new networks to Charter's video offering.

Costs to service customers increased by 1.9% year-over-year versus year-over-year residential customer relationship growth of 5.0%, given improved service metrics. Other expenses grew by $29 million, or 13.7%, as compared to the third quarter of 2014, reflecting higher corporate and administrative labor costs, bad debt expense, property tax and insurance costs and commercial labor costs.

Adjusted EBITDA

Third quarter Adjusted EBITDA of $850 million grew by 8.5% year-over-year, reflecting revenue growth and operating costs and expenses growth of 7.2% and 6.5%, respectively. Excluding transition-related expenses of $12 million, third quarter Adjusted EBITDA grew by 9.7% year-over-year.

Net Income (Loss)

Net income totaled $54 million in the third quarter of 2015, compared to a net loss of $53 million in the third quarter of 2014. The year-over-year increase in net income was driven by a $142 million tax benefit in the third quarter of 2015 versus a $59 million tax expense in the third quarter of 2014, and higher income from operations, offset by $163 million of interest expense related to the financing of Charter's pending transactions with Time Warner Cable and Bright House. The tax benefit was primarily related to a partnership restructuring in the third quarter of 2015. Basic and diluted earnings per common share was $0.48 in the third quarter of 2015 compared to basic and diluted net loss per common share of $0.49 during the same period last year. The increase in earnings per common share was primarily the result of the factors described above, partially offset by a 2.9% increase in weighted average shares outstanding versus the prior-year period.

Capital Expenditures

Property, plant and equipment expenditures totaled $509 million in the third quarter of 2015, compared to $569 million during the third quarter of 2014. The decrease was the result of a decline in customer premise equipment ("CPE") spending, partially offset by higher product development investments and transition capital expenditures related to Charter's planned and pending acquisitions. CPE spending declined versus the prior-year period as Charter completed its all-digital initiative in the fourth quarter of 2014. Transition-related capital expenditures accounted for $24 million of capital expenditures in the third quarter.

Charter currently expects 2015 capital expenditures to be approximately $1.7 billion, excluding transition expenditures related to acquisitions. Charter expects its 2015 capital expenditures to be driven by growth in residential and commercial customers along with further investment related to product development.

Cash Flow

During the third quarter of 2015, net cash flows from operating activities totaled $689 million, compared to $520 million in the third quarter of 2014. The year-over-year increase in net cash flow from operating activities was primarily due to an increase in Adjusted EBITDA and a positive working capital contribution.

Free cash flow for the third quarter of 2015 was $208 million, compared to negative free cash flow of $62 million during the same period last year. The increase was primarily due to higher net cash flows from operating activities and lower capital expenditures.

Liquidity & Financing

Total principal amount of debt was approximately $33.3 billion as of September 30, 2015, of which $19.3 billion was being held in escrow for Charter's pending transactions with Time Warner Cable and  Bright House Networks, described below. At the end of the quarter, Charter's credit facilities provided approximately $1.0 billion of additional liquidity.

In May 2015, Charter entered into a merger agreement with Time Warner Cable and, CCH I, LLC ("New Charter"), pursuant to which the parties to the agreement will engage in a series of transactions that will result in Charter and Time Warner Cable becoming wholly owned subsidiaries of New Charter (the "TWC Transaction"). After giving effect to the TWC Transaction, New Charter will be the new public company parent that will hold the operations of the combined companies.

In May 2015, in connection with the execution of the merger agreement with Time Warner Cable, Charter's contribution agreement with Advance/Newhouse Partnership was amended pursuant to which Charter would become the owner of the membership interests in Bright House and any other assets primarily related to Bright House.

In July 2015, Charter issued $15.5 billion in aggregate principal amount of senior secured notes comprised of $2.0 billion of 3.579% senior secured notes due 2020, $3.0 billion of 4.464% senior secured notes due 2022, $4.5 billion of 4.908% senior secured notes due 2025, $2.0 billion of 6.384% senior secured notes due 2035, $3.5 billion of 6.484% senior secured notes due 2045 and $500 million of 6.834% senior notes due 2055. The net proceeds were deposited into an escrow account and will be used to partially finance the TWC Transaction as well as for general corporate purposes.

In August 2015, Charter closed on a new term loan H facility and a new term loan I facility totaling an aggregate principal amount of $3.8 billion. The new term loan H facility was issued at a principal amount of $1.0 billion and matures in 2021. Pricing on the new term loan H facility was set at LIBOR plus 2.50% with a LIBOR floor of 0.75% and issued at a price of 99.75% of the aggregate principal amount. The new term loan I facility was issued at a principal amount of $2.8 billion and matures in 2023. Pricing on the new term loan I facility was set at LIBOR plus 2.75% with a LIBOR floor of 0.75% and issued at a price of 99.75% of the aggregate principal amount. The net proceeds were deposited into an escrow account and will be used to partially finance the TWC Transaction as well as for general corporate purposes.

Conference Call

Charter will host a conference call on Thursday, October 29, 2015 at 10:00 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 46580011.

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 29, 2015. The conference ID code for the replay is 46580011.

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 Form 10-Q for the three and nine months ended September 30, 2015 which will be posted on the "Financial Information" section of our investor relations website at ir.charter.com, when it is filed with the United States Securities and Exchange Commission. 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 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 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 income (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 income (loss) plus net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, (gain) loss on derivative instruments, net and other operating expenses, such as merger and acquisition costs, 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 purchases of property, plant and equipment and changes in accrued expenses related to capital expenditures.

Management and the Company'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 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 $79 million and $62 million for the three months ended September 30, 2015 and 2014, respectively, and $231 million and $184 million for the nine months ended September 30, 2015 and 2014, respectively.

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 Spectrum TV® video entertainment programming, Charter Spectrum Internet® access, and Charter Spectrum Voice®. Spectrum 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 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 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", "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, our definitive proxy statement filed with the SEC on August 20, 2015, and other reports or documents that we file from time to time with the SEC, and include, but are not limited to:

Risks Related to the TWC Transaction and Bright House Transaction (collectively, the "Transactions")

• delays in the completion of the Transactions;
• the risk that a condition to completion of the Transactions may not be satisfied;
• the risk that regulatory or other approvals that may be required for the Transactions is delayed, is not obtained or is obtained subject to conditions that are not anticipated;
• New Charter's ability to achieve the synergies and value creation contemplated by the TWC Transaction and/or the Bright House Transaction;
• New Charter's ability to promptly, efficiently and effectively integrate acquired operations into its own operations;
• managing a significantly larger company than before the completion of the Transactions;
• diversion of management time on issues related to the Transactions;
• changes in Charter's, TWC's or Bright House's businesses, future cash requirements, capital requirements, results of operations, revenues, financial condition and/or cash flows;
• disruption in the existing business relationships of Charter, TWC and Bright House as a result of the TWC Transaction and/or the Bright House Transaction;
• the increase in indebtedness as a result of the Transactions, which will increase interest expense and may decrease Charter's operating flexibility;
• changes in transaction costs, the amount of fees paid to financial advisors, potential termination fees and the potential payments to TWC's and Bright House's executive officers in connection with the Transactions;
• operating costs and business disruption that may be greater than expected;
• the ability to retain and hire key personnel and maintain relationships with providers or other business partners pending completion of the Transactions; and
• the impact of competition.

Risks Related to Our Business

• our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, 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;
• 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, digital subscriber line ("DSL") providers, video provided over the Internet and providers of advertising 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 development and deployment of new products and technologies including our cloud-based user interface, Spectrum Guide®, and downloadable security for set-top boxes;
• the effects of governmental regulation on our business or potential business combination transactions;
• any events that disrupt our networks, information systems or properties and impair our operating activities and negatively impact our reputation;
• 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.               

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SOURCE Charter Communications, Inc.

Related Links

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