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Knology Cites Business Gains

8/15/2008 8:00 PM Eastern

Georgia-based overbuilder Knology reported strong revenue and cash-flow growth in the second quarter, even as basic subscribers declined slightly in the typically weak period.

Revenue rose 11.5% to $102.1 million and cash flow increased 17.6% to $33.5 million, fueled mainly by a strong increase in business customers.

That strong growth was despite losing nearly 4,000 basic video customers and about 2,587 voice customers in the period. High-speed Internet subscribers rose by 1,069 subscribers to 189,171 in the quarter.

Knology By the Numbers
($ in millions)
2Q ’08 2Q ’07 % Change
SOURCE: Company reports
Revenue $102.1 $91.6 11.5%
Cash Flow $33.5 $28.5 10.5%
Free Cash Flow $9.5 $13.3 -28.6%
Operating Income $7.6 $5.4 28.95%

Knology crossed the 100,000-customer threshold for its business services in the second quarter, ending the period with 102,163 business subscribers. That was up 21% from the same time last year and a nearly 3,500-susbcriber increase from the first quarter of this year.

It was the addition of those higher-margin business customers that appeared to drive the quarterly increases for Knology.

On a conference call with analysts Aug. 11, Knology chairman and CEO Rodger Johnson said as an example of the business segment’s impact on results, one customer is generating revenue of $13,000 per month (average revenue per residential customer is $50.91 per month), but is counted as just one revenue generating unit.

“The growing impact of business sales is rendering RGUs less and less meaningful as a measure of growth and future profitability at our company,” Johnson said on the call.

Johnson added that the subscriber declines were due to traditional weakness in the period as college students and snowbirds disconnect service as they move to summer residences, not because of churn, which has improved during the first half of the year — churn was 2.4% in the first quarter and 2.7% in the second quarter, compared to 2.5% and 3.1% in the same periods last year.

Johnson also noted that Knology has held back on new promotional campaigns as it evaluates the success of recent campaigns that have expired, which also affected subscriber growth.

“We have not seen an increase in competitive losses,” Johnson said. “What we have seen is a slowing in the acquisition of new residential customers.”

In a research note, Miller Tabak media analyst David Joyce said that he was unconcerned about the subscriber declines and the suspension of new promotions, calling them “timing-related in nature and not competitive.”

Johnson also tried to quash any speculation that he was considering stepping back from his CEO role now that he added chairman of the board to his title in July.

“I still feel like we have a lot of wood to chop here at Knology,” Johnson said. “Our future is very bright, our market space is dynamic and ever-changing and I love working with the people at Knology. I am not going anywhere.”

September