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Charter Suffers More Losses

Alan Breznick
2/28/2007

Charter Communications Inc. continues to wallow in big pools of red ink despite strong subscriber, revenue, and adjusted earnings growth last year.

Charter, the nation's third largest cable operator, reported earlier today that it lost $396 million in the fourth quarter, widening its loss of $336 million from the year-ago period, even though its revenues rose almost 12 percent on a pro forma basis to $1.41 billion. The company attributed much of the increased loss to a nearly 13 percent surge in operating costs and expenses, particularly greater programming fees, marketing costs, and general and administrative expenses.

Similarly, Charter recorded a higher annual net loss for the entire year, losing $1.37 billion in 2006, up from $943 million on a pro forma basis in 2005.

In its fourth-quarter earnings conference call with analysts this morning, Charter executives shrugged off the latest set of heavy losses and the higher operating expenses. "We think there are a lot of opportunities in this business," Charter president and CEO Neil Smit said. "We're making success-based investments."

The St. Louis-based cable operator released preliminary quarterly and annual results almost three weeks ago. But, concentrating mainly on its subscriber, revenue, and adjusted earnings gains as it negotiated to refinance and expand some of its long-term debt, the company disclosed little about its operating expenses and losses then. (See Charter Boasts of Big VOIP Gains .)

Analysts pressed Charter executives on the company's operating revenues and adjusted earnings margins, which, while improving, still lag behind such MSO peers as Comcast Corp. (Nasdaq: CMCSA, CMCSK). Company officials said the margins should improve as they roll out VOIP service to more markets. Charter, which began 2006 with IP phone service available to just 2.9 million of its 11.8 million homes passed, more than doubled that total to 6.8 million homes by the end of December and plans to extend its reach to the rest of its markets this year.

"We're still in the early stages of our phone rollout," Smit said, noting that only 43 percent of Charter's markets have offered VOIP for more than a year. "As our penetration reaches double-digit [percentages], our EBITDA goes up."

Charter reported losing 43,300 analog video customers in the fall quarter, more than double its pro forma loss of 16,700 basic customers in the year-earlier period. For the entire year, it shed 73,500 basic customers.

Charter executives blamed the bigger fourth-quarter loss on basic rate increases and digital tier repackaging. They also blamed increased marketing by such competitors as DirecTV Group Inc. (NYSE: DTV) and EchoStar Satellite LLC in its territories.

Calling it "a double whammy," Smit said the basic sub losses should subside as Charter rolls out its $99 triple-play bundle across the country. (See Bundles of Joy: Playing Lowball.) About 6 percent of the company's customers now subscribe to three products, up from perhaps 1 percent a year ago. Smit also noted that the basic rate increases and digital repackaging helped nudge the company's video revenues to $829 million, up 4 percent on a pro forma basis.

Nearly a year and a half after Verizon Communications Inc. (NYSE: VZ) launched its FiOS TV service in Charter's Keller, Texas, market with great fanfare, MSO officials insisted that they have all but stopped Verizon's subscriber gains by rolling out VOIP service. "We are seeing some win-back opportunities there," Smit said.

Unlike its counterparts at Comcast, Cablevision Systems Corp. (NYSE: CVC), and Time Warner Cable Inc. (NYSE: TWC), Charter officials said they have knocked heads with Verizon in only two other small communities in California and New England so far. And they haven't seen any telco TV deployments by AT&T Inc. (NYSE: T) in their markets yet.

— Alan Breznick, Site Editor, Cable Digital News

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