Cable Operators

Slow Growth at Rural Ops

8/05/2005 8:00 PM Eastern

Small-market cable operators had it rough this spring, with second-quarter declines in basic subscriber losses but continued sub-par revenue and cash-flow growth.

At Charter Communications Inc. — which, despite its presence in big cities like Los Angeles, still has a significant rural footprint — pared its basic subscriber losses to 41,700 in the second quarter (down from losses of 58,800 in the previous year). But it showed signs of losing momentum in digital-cable and high-speed Internet additions.

2nd Quarter at a Glance
How the period shaped up for the two largest mainly rural MSOs:
Charter Mediacom
Basic Subscriber Losses 41,700 15,000
Revenue Growth 7% 3.7%
Cash Flow Growth (Decline) 3.7% (2.7%)
Source: Company reports

Digital subscribers declined by 9,000 in the period (compared to a loss of 7,200 a year ago), and high-speed Internet additions were 43,800 in the second quarter, down from a gain of 58,400 in the same period last year.

DISCOUNT DROP-OUTS

Charter chief operating officer Mike Lovett attributed the digital losses to customers rolling off earlier deep-discount promotions.

Charter has been migrating deep-discount customers to its current rate card, Lovett said, adding that the “second quarter was the last wave of that impact.”

Revenue rose 7% in the period to $1.3 billion and cash flow rose 3.7% to $498 million. Most other large cable operators — Charter is the fourth-largest MSO, with 5.9 million customers — reported double-digit revenue and cash-flow growth in the period.

That prompted Oppenheimer & Co. cable analyst Tom Eagan to write in a research report that he was losing faith in the MSO’s ability to turn itself around quickly.

“Continued operational challenges and the continued management turnover lead us to believe that an operational turnaround at Charter and the subsequent improvement in capital structure may be pushed back beyond [the second half of 2005],” Eagan wrote in his report.

That is especially disconcerting given that Charter had given hope to the analyst community after it reported its first-quarter results in May.

Back then, Charter lost 6,700 basic subscribers, its lowest decline in more than a year, and appeared to have stemmed the bleeding of past quarters. Perhaps more importantly, digital subscribers — which had also been on the decline — were up by 20,000 customers in the first quarter and high-speed Internet additions were strong at 94,000.

Charter has also been weighed down by a heavy debt load — at $19.2 billion, Charter is the most highly leveraged MSO in the industry. But analysts had hoped that improved operating results could prompt its chairman Paul Allen to reduce some of that leverage through an equity infusion.

Fulcrum Global Partners media analyst Richard Greenfield wrote last week that he has grown increasingly frustrated with Charter’s continued subscriber losses, its high management turnover and what seems like Allen’s unwillingness to come to its rescue.

“We see no reason to own Charter stock,” Greenfield, who has a “neutral” rating on the shares, wrote in a research report.

While Greenfield has all but given up on Charter, one analyst saw some hope in the second quarter results.

NO NEW CEO YET

Charter has been searching for a permanent CEO, chief financial officer, general counsel and chief marketing officer since January. The rumor mill was hot last week that the company may be close to picking a CEO — some had expected an announcement in conjunction with second-quarter results — but the search continues.

On a conference call with analysts to discuss second quarter results, Charter’s interim president and CEO Robert May declined to say when those hires would be made, but added the search is moving forward.

“We’re especially pleased with the caliber of individuals we’re considering for these open positions,” May said.

Mediacom Communications Corp. isn’t looking for a CEO, but it has weathered heavy subscriber losses over the past two years. And like Charter, Mediacom saw some reduction in basic subscriber losses in the second quarter.

Mediacom lost about 15,000 basic customers in the period — compared to losses of 42,000 basic subscribers in the same period last year. Digital subscribers grew by 82,000 year-over-year (or 25,000 sequentially), while high-speed Internet additions were 19,000 sequentially (99,000 year over year), below most analysts expectations.

Mediacom launched its telephony service in June and did not release subscriber figures. However, executive vice president of operations John Pascarelli said that the company has high expectations for phone service.

TWO PHONE MARKETS

Pascarelli said that phone service is currently launched in two markets and the company is in active pre-launch testing in 10 additional areas. He added that early results are positive and that service will be available to nearly 1.5 million households by the end of the year.

Revenue for the period rose 3.6% to $277.3 million. Cash flow declined 2.7% to $105.5 million.

Mediacom also raised its capital expenditure guidance for the year from $200 million to $210 million to between $215 million and $225 million, mainly to account for greater than expected demand for digital video recorders and HDTV.

November

Next TV

Affinia Manhattan, New York, NY