Charter Defends 3Q Free-Service Promo - Multichannel

Charter Defends 3Q Free-Service Promo

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Charter Communications Inc. goosed its digital-cable and high-speed-data subscribers in the third quarter through a two-month free-service promotion started in September, but company officials insisted that it was not a defensive move.

Charter added 60,900 digital subscribers and 140,700 high-speed-data customers in the quarter. But in a press release, the company explained that 121,000 gross additions on the digital side and 103,800 on the data side were due to a promotion that gave new customers free service for two months.

On a conference call with analysts discussing its third-quarter results, Charter vice president of sales and marketing Kip Simonson said that during the quarter, direct-broadcast satellite service DirecTV Inc. offered free service for four months and EchoStar Communications Corp.’s Dish Network DBS service offered free service for three months.

"Our [free period] was significantly less than theirs," Simonson said on the call. "[The promotion] was used as an acquisition tool and was exceedingly successful."

While the MSO said it has retention plans in place to keep those customers on the rolls, analysts worried that digital and high-speed-data churn could increase once the promotion ends.

"We believe there is a risk that these customers will roll off in [the fourth quarter of 2003]," UBS Warburg LLC cable analyst Aryeh Bourkoff said in a research note.

The move toward deep discounting also appeared to contradict Charter’s earlier stance to not compete on price.

In a research note, Fulcrum Global Partners LLC cable analyst Richard Greenfield said Charter’s past focus has been to slash discounting programs. "This September promotion appears to do just the opposite," he wrote.

Greenfield also wondered how Charter could effectively market the free-service promotion when its marketing costs were 26% lower in the third quarter. "We find it difficult to understand how Charter drove high levels of promotional sign-ups without increasing marketing spending notably, on either a sequential (up 7%, or $2 million) or year-over-year basis (down 26%, or $11 million)," he wrote.

Subscriber losses have haunted Charter for more than two years. In the third quarter, the MSO said it added 11,200 analog customers -- its first positive additions since the second quarter of 2001. But the company still has a long way to go: It said it has lost a total of 149,500 subscribers in the past 12 months.

For the quarter, revenue rose 3.5% to $1.2 billion and cash flow was up 5% to $488 million, well below analysts’ estimates.

During the conference call, CEO Carl Vogel said the company has achieved many of its goals toward restructuring its balance sheet and keeping costs in line, pointing to its strong free-cash-flow growth this year.

While free cash flow (cash flow after interest payments and capital expenditures are made) was negative $30 million in the quarter, it was positive $96 million in the first nine months of the year, versus negative free cash flow of $1.07 billion in the first nine months of 2002.

Vogel said the main drivers for that reversal were significant reductions in capital expenditures and operating costs and lower programming-cost increases.

Charter stock, down as much as 22 cents during the day, was priced at $4.17 per share in afternoon trading Monday, down 10 cents, before stumbling back to tie its low point at $4.05 each, down 22 cents, or 5.15%.

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