Cable Operators

Charter Shares Dip on Higher Q3 Capex

Basic Subscriber Losses Rise to 73,000 in Period 11/06/2012 12:06 PM Eastern

An unexpected rise in capital expenditures in the third quarter helped drive Charter Communications stock down about 2% Tuesday, but analysts seemed optimistic that the St. Louis-based MSO was moving forward according to plan.

Charter reported somewhat sluggish 4% revenue growth to $1.9 billion and cash flow declined 0.5% to $651million, missing analysts’ consensus estimates of 4.2% revenue 2.8% cash flow growth, respectively. Basic-video losses of 73,000 in the period were above aggressive consensus of a loss of 45,000 video customers, while the company beat estimates by 10,000 subscribers on the high-speed data front, adding 78,000 commercial and residential customers.

But the real concern it appeared from investors was a 60% rise in capital expenditures to $488 million in the period, from $304 million in the prior year and well above consensus estimates of $412 million. While Charter said the spike was due to an increase in spending on customer premises equipment, it appeared to spook investors at least for a little while on Tuesday.

Charter stock was down as much as 4% ($2.93 per share) to $70.01 each on Tuesday before closing at $71.62 each, down 2% ($1.32 each).

On a conference call with analysts, Charter CEO Tom Rutledge said that his goal is to generate more cash flow per home passed and long-term shareholder returns. He added that in working towards those goals, Charter has revamped its products, beefing up its HDTV offerings and streamlining its high-speed data service, and reorganized its operations, including revamping regional teams and sales functions. While he said these changes will take time to fully implement, the company is making some “meaningful headway.”

For example, according to Rutledge, the percentage of new connects taking the Triple Play package increase 70% in the quarter and expanded basic subscriber losses improved by 30,000.  And commercial services revenue increased by at least 20% (it was up 21% in the most recent period) for the sixth consecutive quarter.

In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett said that Charter had warned that results would be mixed as it embarked on its growth mission and did not disappoint in the third quarter. He added that capital intensity – Charter’s capex was a full 26% of overall revenue – is nothing new in the cable industry, so long term investors weren’t likely to panic.

“Still, investors will demand to see subscriber results that demonstrate the money is being well-spent and generating attractive returns in relatively short order,” Moffett wrote.

September