Charter Ramps Up Capex

Charter Communications
reported mixed second-quarter
results last week, with revenue
up by nearly 5% and cash flow
up only 1.3%. Capital expenses,
though, rose 25% as the company
invested in DOCSIS 3.0 and
switched digital video gear.

The St. Louis-based MSO also
had another quarter of basic subscriber
losses, losing 76,500 basic
video customers in the period
and ending with 5.3 million total

Despite those basic losses, total
revenue rose 4.8%, to $1.8 billion,
though, in line with its peers,
and digital, high-speed Internet
and telephony growth was at or
above expectations, keeping with
the industry trend toward an increased
focus on higher-margin,
multi-product customers.

Revenue-generating units increased
by about 6,000 in the
period, as the basic customer decline
was off set by an increase of
25,500 digital customers; 21,900
high-speed Internet subscribers;
and 35,200 telephony customers.

CEO Mike Lovett said “virtually
all” of the lost basic customers
were video-only subscribers.
Lovett blamed some of the losses
on increased competitive advertising
from satellite-TV companies
and a continued decline in
household growth.

“That did have a bit of an impact
on us,” Lovett said on an
Aug. 4 call with analysts.

He said Charter’s response is
to focus on bundled video, voice
and Internet services and driving
digital and advanced services
deeper into the household.
“We see retentive benefits associated
with that. There is customer
satisfaction and loyalty that that
comes from all of these products
being in the household.”

In the second quarter, 59.3% of
Charter’s residential customers
subscribed to bundled services,
up from 55.4% a year ago.

Pivotal Research Group principal
and media and communications
analyst Jeff Wlodarczak
called Charter’s results generally
in line with his expectations.
Cash-flow growth fell
short of his estimates — he had
predicted a 3.6% rise — but he
was comfortable with management’s
explanation that higher
capital expenditures t ied
to switched digital video and
DOCSIS 3.0 initiatives cut into

About 25% of Charter’s current
footprint is enabled for switched
digital, which would increase
channel capacity in those systems
enough to provide as many
as 100 HD channels. DOCSIS 3.0,
the ultra-high-speed Internet
standard, is available in about
one-third of Charter’s footprint
today, and is expected to increase
to half its homes passed
by year-end.

Capital expenditures rose
about 25% ($68 million) to $339
million in the quarter. Charter
expects capex for the year to be
about $1.2 billion, up about 9%
and mostly tied to the upgrades.

Lovett said the upgrades are
necessary to keep Charter competitive,
and the company should
start reaping rewards later in the
year and into 2011.

He also sees opportunity in
commercial phone service — revenue
was up about 10% in the second
quarter, to $121 million.

Charter is expanding its commercial
universe to include larger
enterprises; like most of the
cable industry, Charter had focused
on small-to-midsized

He was especially keen on
Charter’s entrance into the cellular
backhaul business, providing
landline connections between
cell towers.

“We continue to gain share in
this segment and we’re broadening
our business-solutions portfolio
as we move up-market into
the carrier and wholesale segment,”
Lovett said. “We’re prioritizing
our investments and
resources to leverage our infrastructure
to drive further commercial