Good News for Overbuilds

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While most of the attention has been on ability of the traditional MSOs to weather the economic downturn, the two largest publicly traded overbuilders have proven that they too are performing well despite the prospects of a deep recession.

RCN and Knology, the two largest so-called overbuilders, reported strong third-quarter earnings last week, with healthy revenue and cash-flow growth and, unlike their MSO competitors, increases in basic video subscribers.

At RCN, pro forma revenue — not including recent acquisition NEON Communications — was up 7% to $187 million in the third quarter. Cash flow rose a strong 17% in the period, with gains in basic and high-speed-data customers.

Basic video subscribers rose by 3,000 in the period to 366,000 and the overbuilder added about 6,000 high-speed data customers, ending the period with 301,000. Phone customers were off by about 3,000, to 247,000, in the period.

In a statement, CEO Peter Aquino said RCN initiatives like “Analog Crush”— its all-digital network push — are moving forward. Recapturing that bandwidth in additional markets — New York City, Washington, D.C. and Philadelphia —increased the overbuilder's capacity to provide HD channels, introduce an international tier (called RCN Global Passport, slated for launch shortly) and enhance, in future, the high-speed-data platform.

RCN also tweaked revenue and cash-flow guidance for the full year. Now it expects revenue to be $738 million to $742 million, up from previous estimates of $730 million to $740 million. Cash flow for the full year is now expected to be $191 million to $195 million, in the middle of the previously stated range of $190 million to $200 million.

“We continue to see growth opportunities in all markets and business units, and remain focused on delivering on our record of consistent performance,” Aquino said.

At Knology, the outlook was even stronger. Revenue at the West Point, Ga.-based overbuilder rose 11.8% to $103.2 million and cash flow increased 20.6% to $34.6 million.

Knology reported a slight gain in basic customers — it finished the quarter with 231,465 basic video subscribers, vs. 230,086 in the second quarter — but the strongest growth was again in high-speed data customers. Knology added about 4,000 high-speed data subscribers in the period, ending with 193,293. Phone customers were down slightly in the period to 238,292 from 238,431 at June 30.

In contrast, most of the major MSOs reported basic customer losses in the third quarter, with Comcast shedding 147,000 such subscribers. Time Warner Cable, the second largest U.S. MSO, lost 31,000 basic customers in the quarter.

The gain in basic video customers at Knology comes after a loss of about 3,000 in the second quarter.

On a conference call, CEO Rodger Johnson cited a resurgence of marketing promotions in the third quarter. He explained that the company held off on those promotions in the second quarter until it could determine whether customers who signed up for a $99 triple play promotion last year churned off once the price went up. Knology found that retention rates after the promotion period expired were about 70%, just slightly below the 74% retention rate for non-promotional customers after one year.

“If we had known our retention rate was going to be as strong as it had been, we would have moved sooner than we did on our '08 promotions,” Johnson said on the call.

On the data side, Knology expects to make DOCSIS 3.0 technology — which will allow it to boost data speeds even further — to about 20% of its footprint by the end of the year. The overbuilder plans to roll out the technology to another 50% of its territory in 2009, with the rest added in 2010.

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