Charter Says Better Days Are Ahead

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Bankruptcy behind it — along
with about half of its former debt load —
Charter Communications
is striding
toward what
has been unfamiliar
territory for
the fourth-largest
U.S. cable operator:

When it was the
most highly leveraged
in cable — with a
debt-to-cash flow
ratio of about 10
times — Charter
had to tread cautiously.

Now, with a stronger balance sheet — a 5
times leverage ratio and positive free cash flow
of $135 million in the third quarter alone —
Charter can focus (and spend) on new products
and services.

St. Louis-based Charter emerged from a
bankruptcy reorganization on Nov. 30, 2009,
having shaved about $8 billion of debt and
pumping in $3 billion in new equity.

“If you think about the narrow margin for
error with that type of leverage, it doesn’t give
you a lot of wiggle room,” CEO Mike Lovett
said. “We feel like we’ve done all the right
things to get through that phase successfully.
And the things that we’ve done were with the
thought in mind that we would get through
that phase successfully: to come out on the
other end, as we have this year, in a position
to be much more competitive and much more

Charter has accelerated its rollout of DOCSIS
3.0 technology, stepped up switched digital
video deployment and is closing the gap
in digital and telephone-service penetration.
About 35% of Charter’s footprint is DOCSIS 3.0-enabled (growing to 50% by yearend);
44% of the footprint is switched digital
(expected to grow to 60% by the end of the
year); and digital and phone penetration has
reached 75% and 16%, respectively.

Miler Tabak media analyst David Joyce,
who has a “buy” rating on Charter, said with
its newly solid balance sheet, Charter is finally
able to join its peers and target businesses with
data and communications products.

“They’ve really stuck to their knitting,” Joyce

Commercial revenue should reach about
$500 million this year (up 12% from $446 million
last year) and free cash flow should top
about $665 million in 2010, compared to a
$552 million free-cash-flow deficit in 2009,
Joyce figured.

Charter estimates the addressable spend
for small and medium-sized businesses in its
footprint at about $5.5 billion a year.

Add on an estimated $3 billion in carrier
and cellular-backhaul opportunities, and the
market for commercial services balloons to
about $8.5 billion.

Lovett believes Charter is uniquely positioned
on the commercial side because it faces
less competition from the major phone companies
in this segment.

“Being in Tier 2 and rural markets serves us
well from two aspects: [regional Bell operating
company] video overbuild is lower than a
lot of our industry peers and there is less of a
competitive aspect between the existing [local-
exchange carrier] and the commercial
space,” he said.

Charter’s footprint is decidedly more rural
than some of the other publicly traded MSOs.
Financially, Charter has managed to keep up
with its peers. In the third quarter, revenue
was up 4.6%, to $1.8 billion and operating cash flow rose 4.5%, to $632 million, in line with expectations.

Charter lost about 64,000 basic customers
in the period, in keeping with trends throughout
the industry.

Lovett and company are gaining ground
with non-video customers — those who take
phone and/or high-speed data, but not video
service. Charter was an early adopter in targeting
non-video customers (primarily those
who already have satellite TV) and in the third
quarter about 564,000 customers were nonvideo.

“We’ve got [more than] 500,000 nonvideo
relationships,” Lovett said. “We see the
12 million homes we pass as an opportunity.”

Charter executive vice president and chief
marketing officer Ted Schremp pointed to
Charter’s home-networking product, which
has about 19% penetration of data customers.
Penetration is even higher with new customers
— about one-third of new connects take
the service, for which Charter charges about
$10 per month.

The rise of devices in the home — such as
iPads, iPhones and high-defi nition DVRs —
have put home networks almost on equal footing
with faster download speeds, in terms of
consumer demand.

Charter has been subject to intense speculation
regarding the possibility of its selling or
swapping large swaths of its footprint. While
Charter has made some smaller deals — such
as selling about 65,000 customers to Cobridge
Communications in October — Lovett said
has no interest in shrinking.

“Scale counts,” Lovett said. “We are happy
with the size we are today.” Charter would
consider growing through acquisitions, further
investing in commercial services and
even making some nontraditional acquisitions,
as Comcast did earlier this year by buying
a competitive local-exchange carrier, he

“It’s a luxury we have today that we certainly
didn’t have in the last phase,” Lovett said.