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Second-Quarter Caution Flag Over Charter

7/25/2004 8:00 PM Eastern

The departure of two former Charter Communications Inc. senior executives could be a signal that the under-pressure cable company expects second-quarter subscriber losses that are well above analysts’ previous predictions.

On July 16, Lee Clayton, Charter’s senior vice president of Midwest operations, resigned. She was replaced by Mike Lovett, who had previously served as senior vice president of operations support.

Charter’s Quarters
2Q03A 1Q04A 2Q04E
Source: UBS Warburg estimates and company reports
Basic Subscriber Adds (Loss) (41,300) (8,500) (45,529)
Digital Subscriber Adds (Loss) (47,200) (14,500) 20,446
Cable-Modem Subscriber Adds 76,700 125,200 69,475
Revenue $1.217 billion $1.214 billion $1.249 billion
Cash Flow $497 million $463 million 479.1 million

Clayton was the second senior-level executive to leave Charter in less than a month. On July 12, senior vice president of marketing and advertising sales Kip Simonson resigned and was replaced by Jim Heneghan.

Heneghan had been senior vice president of Charter Media, the ad sales and production services unit that he continues to oversee.

BOURKOFF: 'CONCERN’

“Aside from the standard disclosure on leaving for personal reasons, Charter did not offer any reason for the resignations,” UBS Warburg cable debt and equity analyst Aryeh Bourkoff wrote in a research report. “In our view, the resignations are cause for some concern, given that these two executives were only recently placed in their positions, and may not bode well for [second-quarter] 2004 results.”

Charter spokesman Dave Andersen declined to comment on Bourkoff’s report, adding that the company does not comment on speculation.

Bourkoff had already raised his estimates for second-quarter subscriber losses to 46,000 from 33,000, largely because of increased competition. With the resignations, even that higher number could be off.

Although Charter has not yet announced a date for releasing its second-quarter results, most observers expect them to come out around Aug. 9.

Both Clayton and Simonson were high-profile Charter executives who joined the company as part of CEO Carl Vogel’s management restructuring last year. Simonson took some heat last year after Charter revealed a sweeping discount program that fueled analyst fears that the company was giving away service to bolster its subscriber numbers.

That ended up being far from the case. The discounts were for short terms, offered only to new subscribers. Although Charter got an initial subscriber boost from the programs — basic subscribers were up by 11,200 customers in the third quarter of 2003, the first period of positive basic-customer growth since the second quarter of 2001 — the basic rolls have continued to decline ever since.

Simonson came to Charter in April 2003 from Cox Communications Inc.’s San Diego system, where as vice president of marketing and sales he was responsible for growing subscribers in Southern California rapidly. And while it was hoped that he could do the same for Charter, that wasn’t in the cards.

Clayton had been managing director and executive vice president at United Pan Europe Communications N.V., the Dutch cable subsidiary of Liberty Media Corp. and was Charter chief operating officer Maggie Bellville’s first hire after joining the company in March 2003.

Basic-subscriber losses haven’t been Charter’s biggest problem. Analysts and investors have dogged the company to reduce its $19 billion debt load.

While CEO Carl Vogel has made a dent in Charter’s debt through several initiatives, including selling off non-strategic systems — Charter has raised about $824 million through the sale of systems with 254,000 subscribers between October 2003 and March 2004 — it hasn’t been enough for investors.

Charter has done as much as it could. Last year, it exchanged $1.9 billion in debt for $1.6 billion in new notes, issued $500 million in senior notes and refinanced about $9 billion in credit facility commitments.

While those moves extended maturities, improved liquidity somewhat, and simplified Charter’s financial structure, they have fallen short of the bold move for which analysts have pushed for months — an equity offering.

And now Bourkoff, in his report, said it might be getting too late.

Bourkoff, who lowered his rating on Charter stock to “reduce” from “neutral” last week, estimated Charter is fully funded through 2005.

CAN’T CUT SPENDING

While he doesn’t expect the St. Louis-based MSO to default on any bank covenants, he said that Charter is going to have to do something within the next six to 12 months because it can’t afford to cut back on capital expenditures in a time of increasing competition.

Bourkoff also lowered his second-quarter estimates for Charter, projecting revenue growth will be about 6.9% and cash flow will rise a paltry 1.3%.

“We believe Charter is at risk of waiting too long to raise equity and fix its longer-term liquidity issues,” Bourkoff wrote. “We continue to believe that Charter’s strategy should be to focus on the buildup of financial flexibility, and ultimately deleveraging through an equity issuance of some form.

“However, given the weakness we expect in 2Q04 and likely in 3Q04 in terms of unit growth, we do not expect any imminent equity transaction from Charter at this point.”

 

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