While the rest of the industry girds for another outcome, last week Charter Communications gave analysts and investors a taste of what it would be like if it wasn’t the chief cable consolidator, reporting third quarter results that reflected strong organic growth.
Speculation that Charter is gearing up for a TWC bid before the end of the year continues to gain steam but Charter CEO Tom Rutledge, speaking on a conference call with analysts on Nov. 5, stuck to the fundamentals.
From all sides it was a strong quarter for Charter — basic video subscriber losses were cut drastically, revenue and cash flow were up by a strong 5% and high-speed data and phone growth outpaced last year’s performance. The results were in sharp contrast to Time Warner Cable, which reported its biggest quarterly video subscriber loss ever on Oct. 31 — 306,000 residential video customers in Q3, largely due to the month long CBS retransmission consent dispute that blacked out the network to more than 3.2 million TWC subscribers.
The results seemed to justify Rutledge’s moves last year to revamp product offerings and packaging, upgrade the plant to all-digital and revitalize the brand.
Charter lost about 27,000 basic video customers in the period, 62% better than the 71,000 it lost in the same period last year. High speed data subscriber additions at 86,000 outpaced the 76,000 added in the prior year while phone additions at 41,000 lagged last year’s 54,000 additions.
“The fundamental Charter story appears to be developing nicely,” wrote Pivotal Research Group principal and media & communications analyst Jeff Wlodarczak in a note to clients, adding that the first step was leverage improved products and customer service to drive revenue generating units, which were up by x in the period. Wlodarczak revised his RGU forecast for 2014 for and raised his year-end 2014 price target on the stock by $5 per share to $160, adding that the price increase “does not include any benefit from a potential TWC transaction.”
On the conference call, Rutledge said the video gains were a result of Charter’s focus on customer service it reduced truck rolls by 16% in the period — and it continued all-digital upgrade, which should be completed by the end of 2014. And to further stress the importance of the all-digital initiative, he added that Charter is actually adding subscribers in markets that have finished the upgrade.
“Our video product has been challenged,” Rutledge said, adding the strategy over the past 18 months has been to invest in the video product, transforming what had been an inferior offering to a superior one. “And on the increment, it is [superior]. We still have existing customers though who have an inferior product set and we’re in the process of upgrading them to all digital and to our price and packaging combination. As a result of that, we expect to begin to grow video, as well as broadband and voice.”
But the Charter CEO also realizes that convincing potential customers that the overall product has improved is not easy. That is evident, he said, in the continued growth of Charter’s broadband only customers. Charter ended the period with 1.3 million residential non-video customers, up 26% from 1.04 million in the same period last year. Nonvideo customers now make up about 24% of Charter’s total customer base.
That surprised Rutledge, who said it was due in part to changes in the way customers consume entertainment.
“But the bigger part of it is that Charter’s video product was inferior, and we had brand issues around that,” Rutledge said.
Charter has made moves to improve the brand — he said customer perception of Charter has risen from worst in the industry to above average — but there is more to be done.
“I think we need to be more than above average,” he added. “Our new customers have very high opinions of their service levels with us. So the time has come, I think, for us to begin to rebrand Charter and to go forward with a more aggressive push into the marketplace with our video product and our triple-play.”