Charter Announces Third Quarter 2014 Results

STAMFORD, Conn., Oct. 29, 2014 /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, 2014.

Key highlights:

• Third quarter revenues of $2.3 billion grew 8.0% as compared to the prior-year period, led by residential revenue growth of 6.7%, and commercial revenue growth of 17.7%.
• Third quarter Adjusted EBITDA¹ grew by 7.0% year-over-year. Net loss totaled $53 million in the third quarter of 2014, an improvement compared to a $70 million net loss in the year-ago period.
• Total residential customer relationships grew by 4.9% over the last twelve months, with third quarter residential revenue per customer growing 2.0% compared to the prior-year period.
• Residential customer relationships increased 68,000 during the third quarter, versus 46,000 during the third quarter of 2013. Residential primary service units ("PSUs") increased by 114,000 during the period, versus 100,000 in the year-ago quarter, including continued improvement in year-over-year Internet and video customer trends.
• As of the end of the third quarter of 2014, Charter had completed over 80% of its all-digital initiative, having deployed over 2 million set top boxes since the start of Charter's all-digital transition in 2013. Charter remains on schedule to complete its all-digital initiative by year-end 2014.

"Charter's strategy to create value by delivering superior products and service, at highly competitive prices, is working. As a result, our customer growth continues to accelerate," said Tom Rutledge, President and CEO of Charter Communications. "Our growing levels of customer and product penetration, and revenue per household, are generating faster revenue and EBITDA growth. Our new product suite, Charter Spectrum, has been deployed and is designed to further build that operating and financial momentum, delivering greater value to both customers and shareholders."

¹  Adjusted EBITDA and free cash flow are defined in the "Use of Non-GAAP Financial Metrics" section and are reconciled to net loss and net cash flows from operating activities, respectively, in the addendum of this news release.

Footnotes

In thousands, except per customer and penetration data. See footnotes to unaudited summary of operating statistics on page 6 of the addendum of this news release. The footnotes contain important disclosures regarding the definitions used for these operating statistics.

NM - Not meaningful

During the third quarter of 2014, Charter's residential customer relationship and PSU growth  improved year-over-year. Residential customer relationships grew by 68,000, up from 46,000 in the third quarter of 2013, with triple play sell-in improving year-over-year, to 57% of total residential video sales. Commercial customer relationships declined by 5,000 in the third quarter of 2014, compared to a gain of 12,000 customers in the prior-year period. The year-over-year decline in net commercial customer relationship growth was primarily driven by digitization and by a higher video rate when counting Charter's commercial equivalent bulk units ("EBU") for the third quarter of 2014.

Residential PSUs increased by 114,000 versus 100,000 in the year-ago quarter, while commercial PSUs increased 5,000 during the third quarter versus a gain of 21,000 in the year-ago quarter.

As of the end of the third quarter of 2014, Charter had completed over 80% of 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. Charter expects to complete its all-digital initiative by year-end 2014.

During the third quarter, Charter continued to introduce its new product suite, Charter Spectrum, in markets that were recently converted to all-digital, including portions of Charter's Michigan, Wisconsin, Georgia and California footprints, and other areas. 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 being introduced across Charter's markets in 2014, in conjunction with the Company's all-digital initiative. 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 third quarter of 2014, 84% of residential customers were in Charter's new pricing and packaging, excluding customers in the former Bresnan properties.

Residential video customers decreased by 9,000 in the third quarter of 2014, versus a loss of 27,000 in the year-ago period. The improvement in video customer performance was driven by digital bulk upgrades and Charter's increasingly competitive video product, including more HD channels and video on demand offerings, attractive packaging of advanced services, improved selling methods, and enhanced service quality.

Charter added 94,000 residential Internet customers in the third quarter of 2014, compared to 86,000 a year-ago. As of September 30, 2014, 85% of Charter's residential Internet customers subscribed to tiers that provided speeds of 30 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 29,000 residential voice customers, versus a gain of 41,000 during the third quarter of 2013.       

Third quarter residential revenue per customer relationship totaled $110.81, and grew by 2.0% 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.

Revenue

Third quarter 2014 revenues rose to $2.3 billion, 8.0% higher than the year-ago quarter, due to growth in Internet, video and commercial revenues.

Video revenues totaled $1.1 billion in the third quarter, an increase of 5.9% 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 13.4% compared to the year-ago quarter to $652 million, driven by an increase of 372,000 Internet customers during the last year and by promotional rolloff, legacy price adjustments and revenue allocation from higher bundling.

Voice revenues totaled $141 million, a decline of 12.4% versus the third quarter of 2013, due to value-based pricing and revenue allocation from higher bundling, partially offset by the addition of 172,000 voice customers in the last twelve months.

Commercial revenues rose to $253 million, an increase of 17.7% 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 $87 million increased 16.0% 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 third quarter of 2014, and during the corresponding prior-year period, total third quarter 2014 advertising sales revenues grew by approximately 6% year-over-year.

Operating Costs and Expenses

Third quarter total operating costs and expenses increased 8.5% compared to the year-ago period, reflecting increases in programming costs, costs to service customers, and other expenses.

Third quarter programming expense increased by $67 million, or 12.1%, as compared to the third quarter of 2013, reflecting contractual programming increases, a 1.9% increase in expanded basic package customers over the last twelve months and a one-time programming expense benefit in the third quarter of 2013. Costs to service customers grew by $17 million, or 4.1% as compared to the third quarter of last year, driven primarily by higher labor costs to deliver higher quality products and service levels. Other expenses grew by $28 million, or 15.1%, as compared to the third quarter of 2013, reflecting higher commercial and administrative labor costs.

Adjusted EBITDA

Third quarter Adjusted EBITDA of $783 million grew by 7.0% year-over-year, reflecting revenue growth and operating costs and expenses growth of 8.0% and 8.5%, respectively. Excluding the impact of non-recurring items included in Charter's third quarter 2013 and 2014 results, transition expenses associated with the Comcast transactions and political advertising, Charter's third quarter 2014 Adjusted EBITDA grew by just over 8% year-over-year.

Net Loss

Net loss totaled $53 million in the third quarter of 2014, an improvement compared to a $70 million net loss in the year-ago period, reflecting higher Adjusted EBITDA, partly offset by higher depreciation and amortization. Basic and diluted net loss per common share was $0.49 in the third quarter of 2014 compared to $0.68 during the same period last year. The decrease in net loss per common share was primarily the result of the factors described above.

Capital Expenditures

Property, plant and equipment expenditures were $569 million in the third quarter of 2014, compared to $425 million, during the third quarter of 2013. The increase was the result of greater investments in customer premise equipment ("CPE"), scalable infrastructure and support capital. The increase in CPE spending was driven by Charter's all-digital initiative. Third quarter scalable infrastructure spending included higher product development investments related to the continuing rollout of Charter Spectrum, including faster Internet. The increase in support capital expenditures was driven by Charter's ongoing insourcing initiatives.

Excluding 2014 potential expenditures specifically related to the transactions announced with Comcast on April 28, Charter expects 2014 capital expenditures to be approximately $2.2 billion, including approximately $500 million for Charter's all-digital transition and spend related to efforts to insource service operations as well as product development. The actual amount of our capital expenditures will depend on the pace of transition planning to service a larger customer base upon closing of the previously-announced transactions with Comcast.

Cash Flow

During the third quarter of 2014, net cash flows from operating activities totaled $520 million, compared to $538 million in the third quarter of 2013. The decline in net cash flows from operating activities was primarily related to an increase in working capital partly offset by higher Adjusted EBITDA.

Negative free cash flow for the third quarter of 2014 was $62 million, compared to free cash flow of $132 million during the same period last year. The decrease was primarily due to higher capital expenditures, and to lower net cash flow from operating activities.

In the third quarter of 2014, Charter secured committed financing of $8.4 billion including $1 billion of term loan A maturing in 2020. Subsequently, Charter entered into a $3.5 billion term loan G maturing in 2021. The net proceeds from the new term loans will be used to finance Charter's acquisition, from Comcast, of cable systems serving approximately 1.5 million Time Warner Cable Inc. ("TWC") video customers. The net proceeds may also be used for any "true up" payment made by Charter to Comcast associated with the previously announced asset transfer between Charter and Comcast of cable systems serving approximately 1.5 million TWC video customers and approximately 1.6 million Charter video customers, and transaction and financing expenses.

Liquidity

Total principal amount of debt was approximately $17.7 billion as of September 30, 2014, including the $3.5 billion new term loan G. Proceeds from the new term loan G are being held in escrow at Charter's unrestricted subsidiary, CCO Safari, LLC and recorded as noncurrent restricted cash and cash equivalents. At the end of the quarter, Charter held $10 million of unrestricted cash and cash equivalents, and its credit facilities provided approximately $774 million of additional liquidity.

Conference Call

Charter will host a conference call on Friday, October 31, 2014 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 11295259.

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 December 1, 2014. The conference ID code for the replay is 11295259.

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, 2014 which will be posted on the "Financial Information" section of our investor relations website at ir.charter.com, on October 31, 2014. 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 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, (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 $62 million and $49 million for the three months ended September 30, 2014 and 2013, respectively and $184 million and $147 million for the nine months ended September 30, 2014 and 2013, respectively.

In addition to the actual results for the three and nine months ended September 30, 2014 and 2013, we have provided pro forma results in this release for the nine months ended September 30, 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 nine months ended September 30, 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 transaction 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 transaction 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 transaction;
• 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 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, digital subscriber line ("DSL") providers, and 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 development and deployment of new products and technologies, including in connection with our plan to make our systems all-digital in 2014;
• 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.

Logo - http://photos.prnewswire.com/prnh/20110526/AQ10195LOGO

SOURCE Charter Communications, Inc.