News

Vogel Eyes ’04 Growth

5/16/2004 8:00 PM Eastern

Calling 2003 a transition year, Charter Communications Inc. CEO Carl Vogel vowed to make 2004 the year of growth after reporting first-quarter results that met analyst expectations, but still lagged far behind the rest of the cable industry.

Revenue rose 5% in the quarter, to $1.185 billion, and cash flow was up 3% to $450 million. Other cable operators that have already reported first-quarter financial results averaged 11.9% revenue and 13.3% cash-flow growth.

Added Up
Charter’s first-quarter sub additions:
Basic Subscribers -8,500
Digital Subscribers 68,800
High-Speed Internet Subscribers 125,000

On a conference call with analysts, Vogel said that Charter has lagged its peers in terms of deploying new services like digital video recorders, HDTV and cable telephony because of its focus on restructuring its debt, still the highest in the industry.

'REGAIN MOMENTUM’

“We took this approach because 2003 was a year of transition operationally and we had some constraints on what could be done as a result of our capital structure,” Vogel said on a conference call with analysts. “This will be a year in which we look to regain our operational momentum, accelerate the deployment of advanced services and close the gap in terms of growth rates in revenue and [cash flow] relative to our peers in the second half of 2004.”

Charter is beginning to build that momentum, adding 68,800 digital-cable subscribers and 125,000 high-speed Internet customers during the quarter. Basic subscribers declined by 8,500 customers in the period, but were an improvement of the 41,000 basic customers Charter lost in the fourth quarter.

Charter’s capital expenditures in the first quarter rose 83% from the prior year to $190 million, mainly for success-based customer premises equipment for advanced services.

Marketing spending also was up in the period, by about $12 million — an indication that Charter is gearing up to heavily market those new services as they become available.

Charter said it has significantly increased the number of data-only customers on its rolls. The MSO added 37,000 data-only customers in the first quarter, a move senior vice president of sales and marketing Kip Simonson said would help the company sell the entire service bundle to those subscribers in the future.

“The long-term strategy is actually just building the bundle from a different direction,” Simonson said on the conference call.

Unlike other MSOs, Charter is not charging non-video high-speed Internet customers an additional fee to take the service. That was a move Citigroup Smith Barney analyst Niraj Gupta said other MSOs should take note of.

In a research report, Gupta estimated that roughly 2.5% of Charter’s total non-video homes passed are taking the high-speed service, which leaves a huge upside potential.

“The company’s first-quarter results suggest that Charter’s strategy of targeting non-video homes is having a noticeable impact,” Gupta wrote. “We continue to believe that the cable industry is missing a big opportunity in not actively targeting non-video homes with high-speed Internet service. We expect other MSOs to follow Charter’s lead in this regard.”

DATA ARPU UP

Average monthly revenue per subscriber rose during the period for the high-speed Internet product to $34.58 from $33.45, despite the fact that Charter began to offer a lower-priced lower speed tier during the quarter. Charter introduced a $29.95 per month low speed product earlier in the quarter and raised prices on its top data tier, a 3 megabits per second service, to $39.95 per month.

Charter stock was up 5.5% (20 cents) to $3.81 on May 11.

Charter also made some modest moves to pare down its debt through selling equity. According to a report by UBS Warburg cable debt and equity analyst Aryeh Bourkoff, Charter exchanged about $10 million in debt for equity in the first quarter. Bourkoff wrote that could be a signal for larger debt-for-equity swaps in the future.

“We expect Charter to take additional steps to deleverage the balance sheet in coming months,” Bourkoff wrote.

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