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Cable Operators

Charter Exceeds Expectations

11/03/2006 7:00 PM Eastern

Charter Communications reported strong third-quarter results last Tuesday, driven mainly by better-than-expected growth in its voice-over-Internet Protocol telephony service and high-speed Internet customer additions.

Charter reported revenue growth of nearly 11%, to $1.38 billion, and cash-flow growth of nearly 7%, to $463 million. Driving those increases was the addition of 82,000 telephony customers in the period (besting analyst projections of 77,000 additions) and the addition of 88,000 high-speed Internet customers.

Charter Run
Charter stock surged to a new 52-week high on Nov. 1 – its fourth 52-week high this year.
Date Price
10/26 $2.12
10/27 $2.29
10/30 $2.30
10/31 $2.30
11/1 $2.66
SOURCE: Nasdaq Web Site

The St. Louis-based cable operator also added about 49,000 digital-cable subscribers, ending the quarter with 2.8 million digital-video customers, or 51% penetration of basic subscribers. Basic customers declined by about 9,200 in the period to about 5.5 million.

“We are building momentum and I’m pleased with the direction we’re headed, but we still have work to do,” Charter CEO Neil Smit said on a conference call with analysts. He added that his four strategic priorities — improving the customer experience, increasing sales and retention, focusing resources on high-return investments and improving the balance sheet — remain unchanged.

Charter stock has been on a run lately and has more than doubled (up $1.41 apiece) since Jan. 3. Shares surged to another 52-week high on Nov. 1 — its fourth 52-week high in a week — rising 45 cents per share to $2.75 each in afternoon trading, before closing at $2.66 per share, up 36 cents each.

While the results were encouraging, Charter shares may also be getting a boost from speculation that the company could either go private, since chairman Paul Allen controls 98% of Charter’s voting shares, or sell its flagship Los Angeles cable system, with about 500,000 subscribers, to Time Warner Cable or Cox Communications. On the conference call, Smit tried to squelch that speculation.

“I can’t speak for Paul [Allen],” Smit said on the call. “We continue to assess all possibilities.” He added that while Charter continues to assess its asset portfolio, there are no deals on the horizon to report.

In a research report, UBS Securities cable analyst Aryeh Bourkoff — the only analyst to have a “buy” rating on Charter stock and one of its biggest proponents — was encouraged by the results.

Bourkoff wrote that Charter’s revenue and cash-flow growth beat his expectations and are “a clear sign of recovery as the early stages of the VoIP rollout progress.”

Charter said it ended the quarter with 339,600 telephone customers, a 30% quarterly increase. Its telephony service is now available to about 6 million homes passed. The operator expects to end the year with phone service available to between 6.5 million and 7 million homes passed in its 11.8 million-subscriber footprint, it added.

Smit said that the VoIP rollout is also helping Charter beat back some of its more aggressive telco competition.

In May, Charter began offering phone service in Keller, Texas — one of Verizon Communications’ first FiOS video markets — and it is already beginning to show some results.

“The losses have slowed considerably,” Smit said of the Keller market, although he added that Charter is also beginning to see some additional competition from the phone company in other parts of Texas and California.

However, those areas either have the triple play or will soon, which should strengthen Charter’s competitive position.

September