Forget about Time Warner Cable. Who needs it, anyway?
Charter Communications Inc. executives drilled home that message Friday morning as they unveiled the company's fourth-quarter financial results. A week after losing out to Comcast Corp. (Nasdaq: CMCSA, CMCSK) in the contest for Time Warner Cable Inc. (NYSE: TWC), Charter shifted the focus back to its own operations as it highlighted 2013 accomplishments and outlined its 2014 strategy. (See Comcast Strikes $45B Deal for TWC.)
During its earnings call, Charter president and CEO Tom Rutledge disputed the notion that the MSO had pursued TW Cable so avidly for the past eight months at least partly because it wanted to cut its programming expenses by tripling its size. That was not the "main motivation" in courting TWC, he said, and merging the second- and fourth-biggest US MSOs would not have "meaningfully changed" Charter's programming costs.
Rutledge said he hasn't taken a position on Comcast's proposed $45.2 billion acquisition of TWC, but he indicated that his MSO remains interested in "wisely acquiring subs" from other cable operators if the right opportunity emerges. But he downplayed the likelihood of Charter pursuing other big takeover candidates; he said the cable competitive landscape will probably not produce any good possibilities in the near term. (See What's Next for Charter?)
Instead, Rutledge and Chris Winfrey, Charter's executive vice president and chief financial officer, emphasized the growth opportunities offered by the company's own sprawling footprint. Though that footprint contains 12.8 million homes, Charter has slightly fewer than 4.2 million video subscribers. Its 33.9% penetration rate is one of the lowest in the cable industry. At the end of last year, it had nearly 1.4 million nonvideo customers -- one of the highest numbers in the industry.
"The biggest opportunity for us is to grow penetration against the 7 million passings with no subscriber relationship," Rutledge said. "That's where the biggest ROI is."
With that operational focus in mind, Charter plans to boost its capital spending by about $400 million to $2.2 billion this year. Having spent up to $100 million last year to upgrade 15% of its cable systems to all-digital service, the company intends to spend another $400 million to upgrade the rest of its systems to all-digital this year. Among other things, those upgrades will enable the MSO to offer more than 200 HD channels in each market and hike maximum broadband speeds to at least 60 Mbit/s with improved WiFi service.
Charter also plans to spend $100 million on "insourcing" -- rebuilding its fleet of trucks, equipment, technicians, and customer call centers to handle service requests. For the past few years, the company has largely outsourced these functions to contractors. This kept operating expenses down but led to more complaints about poor customer service and high churn rates.
Under questioning from analysts, Rutledge and Winfrey defended these planned onetime capex items as smart business moves to lure more customers, keep them happier, and retain them longer. The executives also said most of the $400 million in all-digital upgrades will be spent on putting advanced digital set-top boxes in subscriber homes, generating more revenue and cutting outlay per box.
"We do think we can grow faster than the rest of the industry," Rutledge said. "Growth capital will be a function of how fast we grow."
Charter's fourth quarter wrapped up a year in which it cut its basic video subscriber losses, boosted its digital video take rate, increased its broadband and voice subscriber gains, and hiked its overall residential customer count. The fourth-largest US MSO also made strong gains on the business services front, boosting its commercial revenue by nearly 20% for both the quarter and the year.
Specifically, it shed 2,000 basic video subscribers in the fourth quarter while adding 93,000 broadband and 56,000 voice customers -- all improvements over a year earlier. For the year, the MSO added 172,000 residential customers, up from 120,000 in 2012.
— Alan Breznick, Cable/Video Practice Leader, Light Reading