News

Digital-Sub Gains Propel Charter in 2Q

8/05/2001 8:00 PM Eastern

Charter Communications Inc. showed surprisingly strong growth in the second quarter, fueled mainly by gains in digital subscribers.

The St. Louis-based MSO increased its revenue by 16 percent to $928.5 million in the second quarter ended June 30, while operating cash flow rose 14.1 percent to $428.1 million for that period.

Driving that growth was a rapid acceleration in digital-cable customers: Digital penetration rose by 241,000 subscribers in the period, to 1.6 million. High-speed data customers rose by 76,100 in the period, to 419,400 subscribers.

Charter raised its year-end guidance for high-speed-data subscribers to between 550,000 and 600,000 customers.

Digital penetration hit 25 percent in the second quarter Charter president Jerald Kent told analysts during a conference call, adding that the company was on track to reach 30 percent by the end of the year.

Basic customer growth was up 2.1 percent to 6.4 million in the quarter. Earlier this month, Cox Communications Inc. stock was hammered after the company reported a 0.5 basic-cable customer growth rate for its second quarter.

"This contrasts with the lower-than-expected second-quarter subscriber figures released by Cox last week, and should provide investors with comfort that Cox's results were not an indicator that the cable sector is more recession-prone than expected," UBS Warburg cable analyst Tom Eagan said in a research note.

Aside from keeping its cash-flow growth up, Charter also significantly increased its margins.

Cash-flow margins for the period were at 46 percent, with digital-cable margins rising two points to 65 percent and high-speed-data margins up eight points to 38 percent.

Charter completed its $2 billion acquisition of AT&T Broadband systems with about 563,000 subscribers during the period. Margins at those systems are below the company average, the MSO said, but Charter is already working to bring them up.

Charter expects to spend a total of about $350 million over the next two to three years to upgrade the former AT&T systems, Kent said. It would take about that same amount of time to bring the cash-flow margins to Charter levels from their current 30-percent range, he added.

"They [the former AT&T systems] offer some digital, but it was not a very robust offering," Kent said in a telephone interview. "We still need to upgrade a lot of the plant in order to give them a full, robust digital offering."

The company expects to spend about $163.5 million to upgrade the former AT&T systems in St. Louis, $83 million in Alabama and $104 million in Nevada, said Charter spokesman Andy Morgan.

The MSO also is continuing its successful dish buy-back program, through which it will purchase a potential customer's satellite dish for between $150 and $200 in cash in exchange for an agreement to subscribe to Charter digital cable for at least one year, usually at a discounted rate. Charter has repurchased about 30,000 satellite dishes so far this year and is on track to reach 50,000 by year-end.

The MSO has also initiated a new company-wide promotion to get more employees involved in the program. Called "Operation: Obsolete," the new incentive program is the first company-wide initiative for Charter, which in the past has done dish buy-backs on a system-by system basis.

According to Kent, Charter has created a motivational video — complete with a military theme — to rile up the troops. Kent himself is decked out in army fatigues in the video, as commander in chief of the operation, helped along by a Gen. George S. Patton look-alike leading the assault. The promotion runs through August.

"We give books and information to all of our employees," Kent said in a telephone interview. "We arm them with information, we give them some goodies, plus we give them incentives, sales commissions, and all to convert customers. This is to point out internally and to inform customers that frankly, satellite is becoming obsolete."

Morgan said those goodies include a $1 bounty for every address with a satellite dish a Charter employee turns in. That employee would receive $10 for each customer referred who switches to Charter digital cable. In addition, if an employee puts a door hanger on the address with the dish, he or she will receive $2. The bounty rises to $50 if that employee knocks on the door and convinces the resident to switch to Charter's digital service.

Kent also dispelled rumors that Charter was making moves to make a competing bid for AT&T Broadband.

"We're not currently in negotiations with AT&T Broadband," Kent said during the conference call. "We're keeping our options open. We have talked with others, but we have not partnered up for a potential transaction."

Charter was rumored last week to be close to forming a consortium with The Walt Disney Co. Inc. and Cox Communications Inc. to make a run for AT&T Broadband. Comcast Corp. made an unsolicited $52 billion bid for the cable unit last month, which was rejected by AT&T.

Later, in a telephone interview, Kent reiterated that Charter was talking with several parties about AT&T Broadband, but would not identify them. He added that he is more focused on Charter's results than on making a large acquisition.

"For seven straight quarters since we've been a public company, we continue to generate operating results that are head-and-shoulders above anyone else in the industry," Kent said in the interview. "Frankly, I think that's more important than just sheer size."

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