Charter Announces Fourth Quarter and Full Year 2014 Results

STAMFORD, Conn., Feb. 5, 2015 /PRNewswire/ -- Charter Communications, Inc. (along with its subsidiaries, the "Company" or "Charter") today reported financial and operating results for the three and twelve months ended December 31, 2014.

Key highlights:

• During the fourth quarter, Charter completed its all-digital initiative and the rollout of Charter Spectrum, the Company's new and more advanced product suite.
  
• Fourth quarter revenues of $2.4 billion grew 9.9%¹ as compared to the prior-year period, driven by residential revenue growth of 8.3%, commercial revenue growth of 16.1% and advertising revenue growth of 28.9%.
  
• Fourth quarter Adjusted EBITDA² grew by 10.5% year-over-year.
  
• Residential customer relationships increased by 73,000 during the fourth quarter and have grown by 5.0%, or 280,000, since the end of 2013.
  
• Residential primary service units ("PSUs") increased by 157,000 during the fourth quarter. In 2014, Charter added 532,000 total residential PSUs versus a pro forma³ gain of 415,000 in 2013, with 2014 residential video customer losses declining to 17,000 from 109,000 in 2013.
  
• Full year 2014 revenues and Adjusted EBITDA each rose 8.2% on a pro forma basis, with capital expenditures totaling $2.2 billion.

"We recently completed our all-digital transition and the rollout of our more advanced product suite, Charter Spectrum, on plan. We have now unleashed the capabilities of our high capacity two-way interactive network, freeing network capacity we can utilize for years to come," said Tom Rutledge, President and CEO of Charter Communications. "Our fourth quarter and full year 2014 results demonstrate that our new products, combined with our improving service levels, are generating strong market share growth across all of our businesses. Customer growth continues to drive improving financial performance, with reduced capital intensity going forward."

¹All percentages are calculated using actual amounts. Minor differences may exist due to rounding.
²Adjusted EBITDA and free cash flow are defined in the "Use of Non-GAAP Financial Metrics" section and are reconciled to net income (loss) and net cash flows from operating activities, respectively, in the addendum of this news release.
³All customer data and results, unless otherwise noted, are pro forma for the Bresnan transaction, as if it had occurred on January 1, 2012, and are provided in the addendum of this news release.

During the fourth quarter of 2014, Charter's residential customer relationships grew by 73,000, with triple play sell-in improving year-over-year, to 62% of total residential video sales. Commercial customer relationships grew by 6,000 in the fourth quarter of 2014. Residential PSUs increased by 157,000, while commercial PSUs increased 14,000 during the fourth quarter.

As of the end of the fourth quarter of 2014, Charter had completed its all-digital initiative. All-digital allows Charter to offer more advanced products and services, and provides residential customers with two-way digital set-tops, which offer higher picture quality, an interactive programming guide and video on demand on all TV outlets in the home.

During the fourth quarter, Charter continued to introduce its new product suite, Charter Spectrum, in markets that were recently converted to all-digital. Charter customers in these markets now have access to an industry-leading suite of video, data, and voice services that 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. Charter Spectrum is available to new Charter customers, and to existing customers within the Company's new pricing and packaging structure launched in 2012. As of the end of the fourth quarter of 2014, 86% of residential customers were in Charter's new pricing and packaging, excluding customers in the former Bresnan properties.

Residential video customers increased by 3,000 in the fourth quarter of 2014, versus a loss of 2,000 in the year-ago period. For the past two 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.

Charter added 104,000 residential Internet customers in the fourth quarter of 2014, compared to 93,000 a year ago. As of December 31, 2014, 80% 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 fourth quarter, the Company added 50,000 residential voice customers, versus a gain of 56,000 during the fourth quarter of 2013.

Fourth quarter residential revenue per customer relationship totaled $111.52, and grew by 3.1% 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 and bulk digital upgrades. In September 2014, Charter increased its broadcast TV surcharge. Excluding this rate adjustment, residential revenue per customer relationship grew by 2.2% year-over-year.

Revenue

Fourth quarter 2014 revenues rose to $2.4 billion, 9.9% higher than the year-ago quarter, driven primarily by growth in Internet, video and commercial revenues.

Video revenues totaled $1.1 billion in the fourth quarter, an increase of 8.1% compared to the prior-year period. Video revenue growth was driven by higher expanded basic and digital penetration, annual and promotional rate adjustments, higher advanced services penetration, and revenue allocation from higher bundling, partially offset by a decrease in residential limited basic video customers.

Internet revenues grew 13.5% compared to the year-ago quarter to $670 million, driven by an increase of 383,000 Internet customers during the last year and by promotional rolloff, legacy price adjustments and revenue allocation from higher bundling.

Voice revenues totaled $139 million, a decline of 9.7% versus the fourth quarter of 2013, due to value-based pricing and revenue allocation from higher bundling, partially offset by the addition of 166,000 voice customers in the last twelve months.

Commercial revenues rose to $262 million, an increase of 16.1% over the prior-year period, and was driven by higher sales to small and medium business customers and to carrier customers.

Fourth quarter advertising sales revenues of $107 million increased 28.9% compared to the year-ago quarter, primarily driven by an increase in political advertising revenue. Excluding the benefit of political advertising revenue generated in the fourth quarter of 2014, and during the corresponding prior-year period, total fourth quarter advertising sales revenues grew by approximately 8.9% year-over-year.

Operating Costs and Expenses

Fourth quarter total operating costs and expenses increased by $131 million, or 9.6%, compared to the year-ago period, reflecting increases in programming costs, costs to service customers, and other expenses. Transition costs related to Charter's previously-announced transactions with Comcast accounted for $11 million of total fourth quarter operating costs.

Fourth quarter programming expense increased by $64 million, or 11.6%, as compared to the fourth quarter of 2013, reflecting contractual programming increases, a 1.9% increase in expanded basic package customers over the last twelve months, 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 grew by $28 million, or 6.6% as compared to the fourth quarter of last year, driven primarily by higher labor costs to deliver higher quality products and service levels, and transition expenses associated with the Comcast transactions. Other expenses grew by $37 million, or 20.4%, as compared to the fourth quarter of 2013, reflecting higher administrative labor and commercial costs, advertising sales expenses, and transition expenses associated with the Comcast transactions.

Adjusted EBITDA

Fourth quarter Adjusted EBITDA of $845 million grew by 10.5% year-over-year, reflecting revenue growth and operating costs and expenses growth of 9.9% and 9.6%, respectively.

Net Loss

Net loss totaled $48 million in the fourth quarter of 2014, compared to net income of $39 million in the fourth quarter of 2013. Fourth quarter 2013 net income reflected a $36 million tax benefit related to a partnership restructuring. In addition, fourth quarter 2014 net income reflects $67 million of interest expense related to the Comcast transactions financing, $9 million of transactions costs related to the Comcast transactions in other operating expenses, and higher depreciation and amortization charges, partly offset by higher Adjusted EBITDA. Basic and diluted net loss per common share was $0.44 in the fourth quarter of 2014 compared to net income per basic and diluted share of $0.38 and $0.35, respectively, during the same period last year. The increase in net loss per common share was primarily the result of the factors described above.

Capital Expenditures

Property, plant and equipment expenditures were $543 million in the fourth quarter of 2014, compared to $566 million, during the fourth quarter of 2013. The decrease was the result of a decline in customer premise equipment ("CPE") spending, partly offset by higher support capital expenditures. CPE spending declined versus the prior-year period as Charter completed its all-digital initiative during the fourth quarter. The year-over-year increase in support capital expenditures was driven by Charter's ongoing insourcing initiatives. Transition capital expenditures related to Charter's previously-announced transactions with Comcast accounted for $26 million of capital expenditures in the fourth quarter.

Cash Flow

During the fourth quarter of 2014, net cash flows from operating activities totaled $630 million, compared to $595 million in the fourth quarter of 2013. The increase in net cash flows from operating activities was primarily related to higher Adjusted EBITDA partly offset by higher cash interest payments, including $52 million of cash payments associated with the $7 billion of debt, proceeds of which are currently in escrow, that will be used to finance the previously-announced transactions with Comcast.

Free cash flow for the fourth quarter of 2014 was $89 million, compared to $84 million during the same period last year. The increase was primarily due to higher net cash flow from operating activities and lower capital expenditures, partly offset by a smaller increase in accrued expenses related to capital expenditures versus the prior-year period.

Revenue

For the year ended December 31, 2014, revenues rose to $9.1 billion, 8.2% higher on a pro forma basis than in 2013, driven by continued growth in Internet, video and commercial revenues. On an actual basis, full year 2014 revenues rose 11.7% year-over-year.

Operating Costs and Expenses

Operating costs and expenses totaled $5.9 billion in 2014, an increase of $447 million, or 8.2%, on a pro forma basis compared to the year-ago period, reflecting increases in programming costs and other expenses. On an actual basis, total operating costs and expenses grew by 11.7% year-over-year. Transition costs related to the previously-announced transactions with Comcast accounted for $14 million of total 2014 operating costs.

Adjusted EBITDA

Adjusted EBITDA was $3.2 billion for the year ended December 31, 2014, an increase of 8.2% compared to 2013, on a pro forma basis. On an actual basis, Adjusted EBITDA grew by 11.6% compared to the year-ago period, driven by higher organic revenue growth and the acquisition of Bresnan. Charter's Adjusted EBITDA margin remained unchanged, on both a pro forma and actual basis, at 35.0%.

Net Loss

For the year ended December 31, 2014, net loss was $183 million, compared to $194 million on a pro forma basis, in 2013, driven by higher Adjusted EBITDA and a decline in loss on extinguishment of debt, partly offset by higher depreciation and amortization charges, higher interest expense related to the Comcast transactions financing and higher income tax expense. Net loss per common share was $1.70 for the year ended December 31, 2014, compared to $1.90 on a pro forma basis in 2013. The decrease was primarily the result of the factors described above.

Capital Expenditures

Capital expenditures for the year ended December 31, 2014, totaled $2.2 billion compared to pro forma capital expenditures of $1.9 billion in 2013. The year-over-year increase was primarily driven by Charter's all-digital initiative, investment in CPE to support customer growth, higher product development investment and the Company's ongoing insourcing initiative. Transition capital expenditures related to Charter's previously-announced transactions with Comcast accounted for $27 million of total 2014 capital expenditures.

Charter expects 2015 capital expenditures to be approximately $1.7 billion, excluding potential expenditures related to the previously-announced transactions with Comcast. Charter expects its 2015 capital expenditures to be driven by continued growth in residential and commercial customers along with further spend related to product development. The actual amount of capital expenditures in 2015 will depend on a number of factors including the pace of transition planning to service a larger customer base upon closing of the previously-announced transactions with Comcast.

Cash Flow

In 2014, net cash flows from operating activities totaled $2.4 billion compared to $2.2 billion in 2013. The increase in net cash flows from operating activities was primarily related to an increase in Adjusted EBITDA partly offset by an increase in cash interest payments.

Free cash flow for the year ended December 31, 2014 was $171 million, compared to $409 million during the same period last year. The decrease was primarily due to higher capital expenditures related to Charter's all-digital initiative, and expenditures related to the previously-announced Comcast transactions, including operating and other expenses, interest expense, and capital expenditures, partly offset by higher cash flow from operating activities.

Liquidity

Total principal amount of debt was approximately $21.1 billion as of December 31, 2014, including the $3.5 billion borrowed under CCO Safari Term Loan G issued in September 2014, and the $3.5 billion CCOH Safari notes issued in November 2014. Proceeds from the CCO Safari Term Loan G and CCOH Safari notes are being held in escrow and recorded as noncurrent restricted cash and cash equivalents. As of December 31, 2014, Charter held $3 million of unrestricted cash and cash equivalents, and its credit facilities provided approximately $817 million of additional liquidity. In addition, a $500 million revolver extension is currently committed and available to Charter. The availability of this revolver is not contingent or related to the closing of the previously-announced Comcast transactions.

Conference Call

Charter will host a conference call on Thursday, February 5, 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 54499873.

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 March 5, 2015. The conference ID code for the replay is 54499873.

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-K for the twelve months ended December 31, 2014 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 $69 million and $54 million for the three months ended December 31, 2014 and 2013, respectively and $253 million and $201 million for the twelve months ended December 31, 2014 and 2013, respectively.

In addition to the actual results for the three and twelve months ended December 31, 2014 and 2013, we have provided pro forma results in this release for the twelve months ended December 31, 2013. We believe these pro forma results facilitate meaningful analysis of the results of operations. Pro forma results in this release reflect certain acquisitions of cable systems in 2013 as if they occurred as of January 1, 2012. Pro forma statements of operations for the twelve months ended December 31, 2013 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 communication 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 SEC.  Many of the forward-looking statements contained in this presentation 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 presentation 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:

Risks Related to Comcast Corporation ("Comcast") Transactions

• the ultimate outcome of the proposed transactions between Charter and Comcast including the possibility that such transactions may not occur if closing conditions are not satisfied;
• if any such transactions were to occur, the ultimate outcome and results of integrating operations and application of our operating strategies to the acquired assets and the ultimate ability to realize synergies at the levels currently expected as well as potential programming dis-synergies;
• the impact of the proposed transactions on our stock price and future operating results, including due to transaction and integration costs, increased interest expense, business disruption, and diversion of management time and attention;
• the reduction in our current stockholders' percentage ownership and voting interest as a result of the proposed transactions;
• the increase in indebtedness as a result of the proposed transactions, which will increase interest expense and may decrease our operating flexibility;

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;
• the effects of governmental regulation on our business or potential business combination transactions;
• 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;
• 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.