Strategy Shifts Pay Off

Charter, DirecTV Hit All-Time Highs Off Strong Q1
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Strong first-quarter earnings reports from Charter Communications and DirecTV last week sent their stocks to new all-time highs, as evidence that new strategies from both companies were gaining steam sent investors into buy mode.

Charter stock hit a new benchmark of $111.44 per share on May 7 after reporting strong results — revenue rose 5% and cash flow was up nearly 3% — but investors and analysts were more interested in what seemed to be a shift in the mid-market MSO’s subscriber makeup. While Charter lost about 24,000 residential video customers in the quarter, compared to a gain of 20,000 video customers in the year-ago period, most of those losses were contained to its lowest service tier.

Charter lost about 28,000 “limited basic” video customers in the period, while expanded basic video subscribers rose by 4,000, CEO Tom Rutledge said on a conference call with analysts last Tuesday (May 7). Charter no longer markets the “limited basic package, which consists of broadcast channels and some cable networks, including home-shopping channels,” Rutledge said.

“We are essentially selling and providing a different service than we were a year ago,” Rutledge said on the conference call, adding that triple-play sell-in of new customers increased by 75% in the period. At the end of the quarter, Charter added 47,000 triple-play customers, its strongest increase in three years.

After joining as CEO in 2011, Rutledge revamped Charter’s video packages, beefing up HD offerings and eliminating its entry-level HSD tier. Rutledge said on the call that Charter is continuing to invest in plant upgrades — it is in the process of going all-digital, which should free up even more capacity for HD and other services.

In a research note, ISI Group media analysts Vijay Jayant and David Joyce wrote Charter’s results show “the profitable shift toward bundle sales and longer-term customer relationships is starting to show through.”

The analysts pointed to Charter’s 9.8 million total residential customer relationships (up by about 134,000 in the period), driven by a rise in high-speed data and phone customers. Charter added about 99,000 residential high-speed Internet customers in the period, compared to about 141,000 additions a year ago. The MSO added 59,000 telephone customers in the period, up from the 31,000 added in first-quarter 2012.

Morgan Stanley media analyst Ben Swinburne wrote in a note to clients last Tuesday that increases in triple-play penetration (up 60 basis points), a rise in average revenue per customer and stabilizing video customer losses indicate the MSO’s new packaging, pricing and sales methods “are gaining traction with customers.”

Charter stock soared on the news, reaching $111.44 per share by midday on May 7, up 6.1% or $6.38. The stock settled down later in the day and closed at $109.69, up $4.66 each or 4.4% It was the highest level for the stock since Charter emerged from bankruptcy protection in 2009.

At DirecTV, investors were encouraged by continued strong performance in Latin America while U.S. operations remained stable. DirecTV added 21,000 net new subscribers in the U.S. in the first quarter, a quarter of the 81,000 additions in the prior year, but revenue and cash flow growth of 5.5% and 8%, respectively, suggested that the satellite giant’s plan to attract higher margin customers is working. Average revenue per unit (ARPU) rose 4.4% in the U.S. during the period to $96.05 from $91.99.

DirecTV hit its new all-time high of $62.07 on May 7 and continued to raise the bar the next day — it was priced as high as $63 each in afternoon trading on May 8 before closing at $61.90 each, down five cents or 1%.

DirecTV chairman and CEO Mike White said the results reflect the changes the satellite-TV provider has made to focus on more-profitable customers.

“It’s clear that our enhanced focus on the quality, loyalty and profitability of subscribers is having an important positive effect on our financial results,” White said on a conference call with analysts.

Most analysts were encouraged by the results, with Swinburne noting that the strong first quarter “helped push out the bear case by driving stronger than expected ARPU growth and margins.” He noted that margins were also strong in Latin America, suggesting that full year guidance of fl at cash flow growth for that segment may be conservative.

“By moderating its discounts, focusing on high-value customers and balancing rate and volume, it appears poised to pull off another 5%-plus EBITDA growth year in the U.S., despite zero industry growth and 8% programming cost /sub growth,” Swinburne wrote.

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