Charter Announces Third Quarter 2017 Results

STAMFORD, Conn., Oct. 26, 2017 /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, 2017. On May 18, 2016, Charter completed its transactions between the Company, Time Warner Cable Inc. ("Legacy TWC") and Charter Communications, Inc. ("Legacy Charter"), and Legacy Charter and Bright House Networks, LLC ("Legacy Bright House") (collectively, the "Transactions"). Pro forma¹ results give effect to the Transactions as if they had closed on January 1, 2015 and include the operations of Legacy Charter, Legacy TWC and Legacy Bright House for the nine months ended September 30, 2016.

Key highlights:

• Third quarter total customer relationships increased 212,000, compared to 275,000 during the third quarter of 2016, when excluding the impact of customer activity related to Legacy Bright House's seasonal customer plan in 2016.² Third quarter total residential and SMB primary service units ("PSUs") increased by 257,000, while third quarter 2016 PSUs grew by 395,000, when adjusted for the seasonal customer program changes at Legacy Bright House.
• Third quarter revenues of $10.5 billion grew 4.2%, as compared to the prior year period, driven by residential revenue growth of 4.4% and commercial revenue growth of 8.0%, partly offset by a decline in advertising revenue of 11.1%, due to lower political revenue.
• Third quarter Adjusted EBITDA³ of $3.8 billion grew 5.0% year-over-year, and 4.7% when excluding transition costs.
• Net income attributable to Charter shareholders in the third quarter declined to $48 million from $189 million during the same period last year. The decline was driven by an increase in depreciation and amortization in the third quarter of 2017, partly offset by a year-over-year increase in Adjusted EBITDA.
• Third quarter capital expenditures totaled $2.4 billion, and $2.3 billion when excluding transition capital expenditures.
• During the third quarter, Charter purchased approximately 10.9 million shares of Charter Class A common stock and Charter Holdings common units for approximately $4.0 billion.

"Our integration is going well and remains on schedule. And despite the complexity that comes with changing the way we do business in 75% of our footprint, we continue to generate solid customer, revenue and EBITDA growth," said Tom Rutledge, Chairman and CEO of Charter Communications, Inc. "Through our integration, we are creating one company, with a unified and centralized operating strategy, which will put Charter on a path to be able to grow quickly over a multi-year period."

During the third quarter, Charter continued its all-digital efforts in the approximately 35% of Legacy TWC's footprint and 60% of Legacy Bright House's footprint that are not yet 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 picture quality, an interactive programming guide and video on demand on all TV outlets in the home.

During the third quarter of 2017, Charter's residential customer relationships grew by 172,000, while third quarter 2016 customer relationships grew by 245,000, or 241,000 when adjusted for seasonal program changes made at Legacy Bright House.¹ Residential PSUs increased by 172,000 in the third quarter of 2017, while third quarter 2016 PSUs increased by 336,000, or 322,000 when adjusted for the seasonal program changes at Legacy Bright House. As of September 30, 2017, Charter had 25.5 million residential customer relationships and 49.2 million residential PSUs.

Residential video customers decreased by 104,000 in the third quarter of 2017, while third quarter 2016 video customers decreased by 47,000, or 51,000 when adjusted for seasonal program changes made at Legacy Bright House. As of September 30, 2017, Charter had 16.5 million residential video customers.

Charter added 249,000 residential Internet customers in the third quarter of 2017, while third quarter 2016 Internet customers grew by 350,000, or 344,000 when adjusted for seasonal program changes made at Legacy Bright House. Charter now offers minimum Internet speeds of at least 100 Mbps to over 75% of its total footprint, with nearly all of Charter's remaining footprint offering minimum Internet speeds of at least 60 Mbps. As of September 30, 2017, 93% of Legacy Charter's residential Internet customers subscribed to tiers that provided speeds of 60 Mbps or more compared to 73% at Legacy TWC and 80% at Legacy Bright House. The Company continues to see strong demand for its Internet service as consumers value the speed and reliability of Charter's Internet offering. As of September 30, 2017, Charter had 22.3 million residential Internet customers.

During the third quarter of 2017, the Company added 27,000 residential voice customers, while third quarter 2016 voice customers grew by 33,000, or 29,000 when adjusted for seasonal program changes made at Legacy Bright House. As of September 30, 2017, Charter had 10.4 million residential voice customers.

Third quarter residential revenue per customer relationship totaled $110.12, and grew by 0.4% compared to the prior year period, as promotional rate step-ups, modest rate adjustments, and pay-per-view event revenue were partially offset by continued single play Internet sell-in and the migration of Legacy TWC and Legacy Bright House customers to higher-value Spectrum pricing and packaging.

During the third quarter of 2017, SMB customer relationships grew by 40,000, versus customer growth of 34,000 during the third quarter of 2016. SMB PSUs increased 85,000, compared to 73,000 during the third quarter of 2016. As of September 30, 2017, Charter had 1.5 million SMB customer relationships and 2.6 million SMB PSUs.

Revenue

Third quarter revenues rose 4.2% year-over-year to $10.5 billion, driven by growth in Internet, video and commercial revenues. Excluding advertising, third quarter revenues increased 4.9% year-over-year.

Video revenues totaled $4.2 billion in the third quarter, an increase of 2.9% compared to prior-year period. Video revenue growth was driven by annual and promotional rate adjustments, pay-per-view events,  and revenue allocation relating to the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House, partially offset by a decrease in video customers over the last 12 months.

Internet revenues grew 10.9%, compared to the year-ago quarter, to $3.6 billion, driven by growth in Internet customers during the last year, promotional rolloff and revenue allocation relating to the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House.

Voice revenues totaled $611 million in the third quarter, a decrease of 16.1% compared to the third quarter of 2016, as value-based pricing and revenue allocation relating to the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House, more than offset voice customer growth over the last twelve months.

Commercial revenues rose to $1.5 billion, an increase of 8.0% over the prior year period, driven by SMB revenue growth of 7.4% and enterprise revenue growth of 8.9%.

Third quarter advertising sales revenues of $373 million decreased 11.1% compared to the year-ago quarter, driven by a decrease in political, as well as barter and local advertising revenue.

Operating Costs and Expenses

Third quarter total operating costs and expenses increased by $238 million, or 3.7%, compared to the year-ago period.

Third quarter programming expense increased by $295 million, or 12.3% as compared to the third quarter of 2016, reflecting contractual programming increases, renewals, improving expanded basic video sell-in at Legacy TWC and higher pay-per-view expenses.

Costs to service customers decreased by $73 million or 3.6% year-over-year, as a result of benefits from the combination of the three companies and improved productivity.

Marketing expenses increased by $33 million, or 5.6% year-over-year due to higher sales and the implementation of Charter's selling tactics in the acquired footprints. Other expenses decreased by $16 million, or 2.0% as compared to the third quarter of 2016, driven primarily by Transactions synergies.

Adjusted EBITDA

Third quarter Adjusted EBITDA of $3.8 billion grew by 5.0% year-over-year reflecting revenue growth and operating expense growth of 4.2% and 3.7%, respectively. Excluding transition costs of $23 million in the third quarter of 2017 and $32 million in the prior year period, Adjusted EBITDA grew by 4.7% year-over-year.

Net Income Attributable to Charter Shareholders

Net income attributable to Charter shareholders totaled $48 million in the third quarter of 2017, compared to $189 million in the third quarter of 2016. The year-over-year decrease in net income was primarily driven by higher depreciation and amortization in the third quarter of 2017, higher interest expense and a decrease in gain on financial instruments, partly offset by higher Adjusted EBITDA and lower severance-related and transactions expenses.

Net income per basic common share attributable to Charter shareholders totaled $0.19 in the third quarter of 2017 compared to $0.70 during the same period last year. The decrease was primarily the result of the factors described above, partially offset by a 6.4% decrease in weighted average shares outstanding versus the prior year period.

Capital Expenditures

Property, plant and equipment expenditures totaled $2.4 billion in the third quarter of 2017, compared to $1.7 billion during the third quarter of September 30, 2016. The year-over-year increase in capital expenditures was driven by an increase in CPE spending related to higher customer connect volumes driven by the launch of Spectrum pricing and packaging in Legacy TWC and Legacy Bright House and the related higher set-top box placement rate per Spectrum connect, and CPE related to Charter's all-digital initiative. The increase in scalable infrastructure was related to the timing of in-year spend and planned product improvements for video and Internet. Support capital increased due to the in-year timing of vehicle purchases and capitalized labor associated with software development. Transition capital expenditures accounted for $125 million of capital expenditures in the third quarter of 2017, versus $109 million in the third quarter of 2016. Excluding transition-related expenditures, third quarter 2017 capital expenditures totaled $2.3 billion, compared to $1.6 billion during the same period last year.

Cash Flow and Free Cash Flow

During the third quarter of 2017, net cash flows from operating activities totaled $2.9 billion, compared to $2.8 billion in the third quarter of 2016. The year-over-year increase in net cash flows from operating activities was primarily due to higher Adjusted EBITDA, partly offset by a smaller working capital benefit in the third quarter of 2017 versus the third quarter of 2016.

Free cash flow for the third quarter of 2017 totaled $594 million, compared to $1.0 billion during the same period last year. The decrease was driven by higher capital expenditures in the third quarter of 2017 versus the third quarter of 2016, partly offset by higher net cash flows from operating activities.

Liquidity & Financing

As of September 30, 2017, total principal amount of debt was $66.8 billion and Charter's credit facilities provided approximately $2.9 billion of additional liquidity in excess of Charter's $2.2 billion cash position.

In July, Charter Operating and Charter Communications Operating Capital Corp. issued $1.0 billion of 3.750% senior secured notes due 2028 and an additional $500 million of 5.375% senior secured notes due 2047. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including buybacks of Charter Class A common stock or common units of Charter Communications Holdings, LLC.

In August, CCO Holdings, LLC and CCO Holdings Capital Corp. issued $1.5 billion of 5.000% senior unsecured notes due 2028. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including buybacks of Charter Class A common stock or common units of Charter Communications Holdings, LLC.

In September, Charter Communications Operating, LLC and Charter Communications Operating Capital Corp. issued $1.25 billion of 4.200% senior secured notes due 2028, and an additional $750 million of 5.375% senior secured notes due 2047. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including buybacks of Charter Class A common stock or common units of Charter Communications Holdings, LLC.

In October, CCO Holdings, LLC and CCO Holdings Capital Corp. issued $500 million of 4.000% senior unsecured notes due 2023, and an additional $1.0 billion of 5.000% senior unsecured notes due 2028. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including buybacks of Charter Class A common stock or common units of Charter Communications Holdings, LLC.

Share Repurchases

During the three months ended September 30, 2017, Charter purchased approximately 10.9 million shares of Charter Class A common stock and Charter Holdings common units for approximately $4.0 billion.

Conference Call

Charter will host a conference call on Thursday, October 26, 2017 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 79481864.

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 8, 2017. The conference ID code for the replay is 79481864.

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 nine months ended September 30, 2017, 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,Free Cash Flow and Pro Forma 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 consolidated net income and net cash flows from operating activities, respectively, in the Addendum to this release.

Adjusted EBITDA is defined as consolidated net income plus net interest expense, income taxes, depreciation and amortization, stock compensation expense, loss on extinguishment of debt, (gain) loss on financial instruments, other pension (benefits) costs, other (income) expense, net and other operating (income) expenses, such as merger and restructuring 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 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 $262 million and $231 million for the three months ended September 30, 2017 and 2016, respectively, and were $791 million and $535 million for the nine months ended September 30, 2017 and 2016, respectively.

Pro forma results give effect to the Transactions as if they had closed on January 1, 2015 and include the operations of Legacy Charter, Legacy TWC and Legacy Bright House for the nine months ended September 30, 2016. Due to the transformative nature of the Transactions, the Company believes that providing a discussion of its results of operations on a pro forma basis provides management and investors a more meaningful perspective on the Company's financial and operational performance and trends. The results of operations data on a pro forma basis are provided for illustrative purposes only and are based on available information and assumptions that Charter believes are reasonable and do not purport to represent what the actual consolidated results of operations of Charter would have been had the Transactions occurred on January 1, 2015, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. Exhibit 99.1 in the Company's Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016 filed with the SEC on November 3, 2016 provides pro forma financial information for each quarter of 2015 and the first and second quarters of 2016 and a reconciliation of the pro forma financial information to the actual results of operations of the Company.

About Charter

Charter (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 broadband services, including Spectrum TV™ video entertainment programming, Spectrum Internet™ access, and 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 Spectrum Reach™ 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 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 promptly, efficiently and effectively integrate acquired operations;
• 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, 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;
• 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 wireless products, our cloud-based user interface, Spectrum Guide^®, and downloadable security for set-top boxes, and any other cloud-based consumer services and service platforms;
• the effects of governmental regulation on our business or potential business combination transactions 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 Inc. and Bright House Networks, LLC Transactions;
• 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.

Adjusted EBITDA is a non-GAAP term.  See page 7 of this addendum for the reconciliation of Adjusted EBITDA to consolidated net income as defined by GAAP.  All percentages are calculated using whole numbers. Minor differences may exist due to rounding.

Pro forma results reflect certain acquisitions of cable systems in 2016 as if they occurred as of January 1, 2015.  Adjusted EBITDA is a non-GAAP term.  See page 7 of this addendum for the reconciliation of Adjusted EBITDA to consolidated net income as defined by GAAP.  All percentages are calculated using whole numbers. Minor differences may exist due to rounding.