Charter’s Mixed Bag

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Charter Communications reported its fifth consecutive quarter of double-digit revenue and cash-flow growth in the fourth quarter of 2007, but rising basic subscriber losses and fears that increased capital expenditures could affect free cash flow generation put a damper on what was overall a better-than-expected quarter.

Charter reported revenue of $1.55 billion in the period, a 10.3% increase, while cash flow rose 12.6% to $563 million. The St. Louis-based cable operator also added 155,000 telephony customers in the period, its best quarter ever for phone subscriber growth. Charter also said that it crossed the 1 million-subscriber mark for its telephony service in January.

But the company lost 66,400 basic subscribers in the period, ending the year down 116,300 customers. Charter also said that capital expenditures were $1.2 billion for the year, higher than many analysts expected.

That higher capex and other charges also led to a $305 million free cash flow deficit for the period, which surprised some analysts.

Miller Tabak media analyst David Joyce wrote that while Charter was ahead of pace on the customer and margin front, “their precarious cash burn position is not being mitigated — capital spending continues apace, ahead of our estimates, leading to greater negative cash flow than expected.”

Joyce had expected Charter to report about $49 million in negative free cash flow for the period.

On a conference call with analysts, Charter CEO Neil Smit said that while basic customer losses were disappointing, the cable company was encouraged by strong growth in advanced services.

In addition to the 155,000 telephony adds, Charter added 50,500 high-speed Internet customers in and 59,700 digital-cable households in the period.

Smit said on the call that the operational results are an indication that Charter’s strategy to focus on the bundle of video, voice and data services is working. At the end of the quarter, about 47% of Charter’s customers subscribed to at least two products.

Smit said that the focus will continue to be on the bundle, adding that Charter plans to begin testing DOCSIS 3.0 service this year — with deployment expected to begin in 2009 — substantially increasing the speeds of its data service. DOCSIS 3.0 allows for high-speed data speeds of up to 160 megabits per second, about 10 times faster than Charter’s current fastest service.

Smit said that in addition to new services, Charter also is concentrating on growing its telephony service. It expects that 85% of its footprint will be ready for telephony by the end of this year. In addition, it also is rolling out a commercial telephony service, which is available in all of Charter’s residential telephone markets.

Charter already has about 10.6% residential telephony penetration. Smit said that there is no reason the company cannot achieve phone penetration levels of 20% to 25% in the next few years.

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