Charter cuts losses, defends financial strategy

In another sign of the times, Charter Communications executives used today’s second-quarter earnings announcement as a platform to defend the company’s financial strategy.

Charter, the fourth-largest cable operator, posted a net loss of $202.7 million compared with $273.9 million a year ago. It said operating cash flow rose 17.1% to $501.1 million, up from $428.1 million last year, and revenue was up 25% to $1.16 billion from $928.5 million.

Additionally, the company said it was cutting its 2002 capital expenditure projections by $100 million to $2.35 billion as it strives to reach free cash flow. All things considered, the company is on the right course and should be analyzed for its unique characteristics rather than being lumped wholesale into the cable space, said President and CEO Carl Vogel.

“Comparisons of one MSO to another are inevitable and appropriate. However, one needs to consider the fact of circumstances of each MSO in the comparison rather than assume or expect all operators are the same,” said Vogel, pointing to differentiators like rebuild schedules, density of homes passed, system design, geography and location. “Charter is a roll-up of a number of smaller cable companies [that] require significant capital expenditures to provide the advanced infrastructure necessary to maximize the market opportunity for our next-generation product.”

Despite positive results, Vogel said, “the market value of our various public securities continue to decline. Nevertheless, we will continue to press on and meet the financial goals for 2002 that we set in February.”

That will probably be accomplished with fewer basic subscribers on hand as part of the 6.8 million Charter customer universe. Basic subs declined 42,500 in the second quarter, due partially to seasonal factors, but also due to Charter’s emphasis on attracting and keeping high-end customers with bundled services, rather than competing head-to-head with discounted satellite programs, Vogel said.

“Since I've been here, we’ve focused on revenue and cash flow and free cash flow, and we’re going to stick with at plan through 2002,” he said. “We need to have our VOD [video-on-demand] business, our SVOD [subscription video-on-demand] business and our advanced set-tops. We need to have our operational metrics all lined up to aggressively go after the competition with anything but a price offer.”

This contradicts the normal cable path and indicates the new approach cable operators are taking to growth, even in light of increased satellite competition.

“Our business is to drive revenue and cash flow, and that is driven by sustaining good customers and being disciplined in our financial approach,” Vogel said “We expect to end the year with more than 6.8 million subs, so backing out the 150,000 customers that we wrote off in the first quarter, we pretty much sustained our business.”

That business has money to continue, emphasized Kent Kwalkwarf, Charter’s CFO. At the end of the second quarter, Charter had $.23 billion of funds available in credit facilities and projects to have $1.5 billion o $1.6 billion unused and with the ability to full draw down by the end of the year.

“We are fully funded until we are cash flow positive,” Kwalkwarf said. “We have access to bank facilities, and we continue to use leverage prudently to maximize shareholder value.”

Charter is also looking at, but not committed to, divesting some “non-strategic assets” in communities where it has limited geographic presence as a way to de-leverage its balance sheet and increase liquidity, Vogel said.

“If we don’t receive a fair price, we have no obligation or pressing financial need to sell, and therefore we would not move forward,” he said.

Vogel emphasized that Charter’s debt – considered high even for the cable industry – came about honestly through the acquisition and roll-up of smaller operations that needed to be upgraded.

“This level of debt was designed to enhance our equity returns over time, a strategy that is now out of favor,” he said. “We will take very opportunity going forward to reduce debt as we proceed toward cash flow.”

”Our financial results demonstrate the strong fundamentals of our business,” Vogel said. “Revenues continue to increase at double-digit rates, products continue to satisfy customer demand, we’re achieving operating efficiencies, and we expect a decline in future capital expenditures as we complete the rebuild of our broadband infrastructure.”