Charter Communications, Inc. (NASDAQ:CHTR) (along with its subsidiaries, the “Company” or “Charter”) 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.”

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.

Key Operating Results

Approximate as of
September 30, 2015 (a) September 30, 2014 (a) Y/Y Change
Footprint (b)
Estimated Video Passings 13,008 12,877 1 %
Estimated Internet Passings 12,728 12,548 1 %
Estimated Voice Passings 12,252 12,043 2 %
Penetration Statistics (c)
Video Penetration of Estimated Video Passings 32.9 % 33.4 %  -0.5 ppts 
Internet Penetration of Estimated Internet Passings 42.7 % 39.5 %  3.2 ppts 
Voice Penetration of Estimated Voice Passings 22.5 % 21.3 %  1.2 ppts 
Residential
Residential Customer Relationships (d) 6,058 5,768 5 %
Residential Non-Video Customers 1,926 1,611 20 %
% Non-Video 31.8 % 27.9 %  3.9 ppts 
Residential Primary Service Units (“PSU”)
Video 4,132 4,157 (1)%
Internet 5,092 4,662 9 %
Voice 2,551 2,389 7 %
11,775 11,208 5 %
Residential PSU / Customer Relationships (d) 1.94 1.94
Quarterly Net Additions/(Losses)
Video 12 (9) NM
Internet 131 94 39 %
Voice 37 29 28 %
180 114 58 %
Bulk Digital Upgrade Net Additions/(Losses) (e) 1 20 NM
Single Play Penetration (f) 38.5 % 38.1 %  0.4 ppts 
Double Play Penetration (f) 28.6 % 29.3 %  -0.7 ppts 
Triple Play Penetration (f) 32.9 % 32.6 %  0.3 ppts 
Monthly Residential Revenue per Residential Customer (d)(g) $113.39 $110.81 2 %
Commercial
Commercial Customer Relationships (d)(h) 433 380 14 %
Commercial PSUs
Video (h) 142 139 2 %
Internet 349 294 19 %
Voice 211 172 23 %
702 605 16 %
Quarterly Net Additions/(Losses)
Video (h) 4 (15) NM
Internet 16 12 33 %
Voice 11 8 38 %
31 5 520 %
Footnotes
In thousands, except per customer and penetration data. See footnotes to unaudited summary of operating statistics on page 5 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 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 

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND OPERATING DATA
(dollars in millions, except per share data)
Three Months Ended September 30,
2015 2014 % Change
REVENUES:
Video $   1,143 $     1,109 3.1 %
Internet 762 652 16.9 %
Voice 135 141 (4.8)%
Commercial 286 253 13.2 %
Advertising sales 77 87 (11.8)%
Other 47 45 5.3 %
Total Revenues 2,450 2,287 7.2 %
COSTS AND EXPENSES:
Total operating costs and expenses 1,600 1,504 6.5 %
Adjusted EBITDA $      850 $        783 8.5 %
Adjusted EBITDA margin 34.7 % 34.2 %
Capital Expenditures $      509 $        569
% Total Revenues 20.8 % 24.9 %
Net income (loss) $        54 $        (53)
Income (loss) per common share, basic $     0.48 $     (0.49)
Net cash flows from operating activities $      689 $       520
Free cash flow $      208 $       (62)

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 withTime 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 $0.49during 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. (Original Source)

Shares of Charter Communications closed yesterday at $184.10. CHTR has a 1-year high of $199 and a 1-year low of $142.37. The stock’s 50-day moving average is $184.59 and its 200-day moving average is $181.12.

On the ratings front, Charter has been the subject of a number of recent research reports. In a report issued on August 19, MoffettNathanson LLC. analyst Craig Moffett upgraded CHTR to Buy, with a price target of $210, which implies an upside of 14.1% from current levels. Separately, on August 5, Canaccord Genuity’s Gregory Miller reiterated a Buy rating on the stock and has a price target of $210.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Craig Moffett and Gregory Miller have a total average return of 0.5% and 7.7% respectively. Moffett has a success rate of 50.0% and is ranked #2262 out of 3808 analysts, while Miller has a success rate of 68.3% and is ranked #276.

Charter Communications Inc is a cable operator providing services in the United States. It offers cable video programming, Internet services, and voice services, as well as video services such as video on demand, HD television and DVR service.