Charter: Sub Bleeding Will Slow in Q4


Charter Communications Inc.'s subscriber losses will continue in the fourth quarter, but at a slower pace, MSO officials told analysts on a Nov. 5 conference call.

Charter, which pre-released its third-quarter results on Oct. 24, offered few surprises. Revenue in the period was ahead 13 percent and cash flow up 9 percent, as expected.

But during the call, Charter CEO Carl Vogel said subscriber losses — which stood at 86,000 in the third quarter — would continue in the fourth quarter, to the tune of 30,000 to 40,000 customers.

Fourth-quarter revenue growth would be between 8 percent and 9 percent, Vogel added, with cash flow expected to rise between 4 percent and 5 percent — well below analysts' estimates.

CS First Boston Corp. cable analyst Lara Warner said she was disappointed with the fourth-quarter guidance, and lowered her rating on Charter to "underperform" from "neutral."

$500M drawdown

Warner also lowered her 12-month price target on the stock from $8 per share to $1.

"Charter's high leverage makes the slowing of its business particularly troublesome as a result of its need to grow into its debt," Warner wrote in a research report. "Given the difficulty we believe the company will have in deleveraging through growth, we believe that a balance sheet restructuring is required and will likely dilute current shareholders.

"Interestingly, Charter recently drew down $500 million from its credit facilities, perhaps an indication that something is in the works," she added.

That $500 million drawdown raised some eyebrows in the investment community. According to one analyst who asked not to be named, the borrowing indicated that Charter may believe it's in danger of triggering some of its bank covenants later next year.

"If you think you're going to have trouble with your banks, you draw down what is available today," said the analyst.

Charter's current bank covenants require that the company keep its bank-debt leverage ratio — total bank debt divided by adjusted cash flow — at about 4.5 times, a mark the company can easily maintain. But those covenants drop to 4 times cash flow by third-quarter 2003.

Failure to meet those covenants could result in a default, which in turn would make Charter's entire bank debt due and payable. However, given the size of Charter's bank debt — about $6.9 billion — it is more likely that the MSO would renegotiate the terms with its lenders.

"It's going to get tight," the analyst said, adding that Charter's current bank leverage ratio is about 3.6 times cash flow. "It [the $500 million drawdown] is unusual. But at the four-times level, they would have to have discussions with their banks.

"If they do trip their covenants, they've got a year to negotiate with the banks."

More distressing, the analyst said, is the fact that Charter continues to bleed subscribers.

With the expected fourth-quarter subscriber losses, the operator is on track to end the year with nearly 300,000 fewer customers. Of those subscribers that have fallen from the ranks this year, Vogel said, only about 150,000 of them were due to non-payment of service.

The rest were likely lured by aggressive discounts from direct-broadcast satellite competitors. And Vogel said the company is putting together a package to win those customers back.

Promo pricing ploys

Charter will add promotional pricing to its suite of products, including a $29.95 basic package for three to six months, said Vogel. It's also testing some packages that offer less content at a lower price in markets where it faces the most DBS competition.

Although Vogel has talked about a low-priced offering before, he offered analysts a little more detail this time. It's likely would be a 50-to-60-channel analog offering, including local channels and some national networks, for between $35 and $37 per month, he said.

Charter's average price point is between $42 and $45 per month, according to Vogel.

The St. Louis-based MSO's digital and high-speed data service continued to gain momentum, with digital customers up by 147,000 in the period. High-speed data subscribership rose by 150,000 in the third quarter.

However, although Charter's 38 percent digital-penetration rate is impressive, Vogel said churn rates — at about 4 percent to 5 percent per month — remain too high. As a result, Charter "will likely slow our digital growth in some markets until we see the necessary improvements in retention," Vogel said.

Efforts to keep costs down continue, said Vogel. Capital expenditures for 2003 will be between $1.1 billion and $1.3 billion, he said, compared to $2.4 billion for 2002.

Vogel also hinted at possible headcount reductions as the company looks to further slash costs. Charter presently has about 18,700 employees, or about one employee for every 358 customers.

Although Vogel said that that ratio is less than at many of Charter's peers, "it is a significant cost of our business that may provide an opportunity for improvement over time as we complete our rebuilds, consolidate headends and operational centers and complete our billing conversions throughout 2003."

Asset sales update

On the asset-sales front, Vogel said the company has received interest in its non-strategic systems from several different parties. Charter would like to maintain a minority interest in those operations, as well as management control, he added.

Vogel said he hoped to have final bids on those properties — which represent between 400,000 and 600,000 subscribers — by the end of the month.

Charter shares fell to $1.18 each, down 27 cents per share, on Nov. 5. The stock rose slightly on Nov. 6 to $1.20 per share in 4 p.m. trading.