Charter Sinks Despite Strong Growth at High End

The cable operator echoes Comcast's remarks about demand for video on demand.
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Hard times don't seem to be dampening people's enthusiasm for advanced cable services, according to

Charter Communications'

(CHTR) - Get Report

latest numbers.

But investors were selling the company's stock anyway on Thursday in reaction to downward guidance for the rest of the year.

Reporting financials for the third quarter ended Sept. 30, Charter, one of the nation's largest cable operators, said it added customers at a faster-than-expected pace for both high-speed Internet access and digital video programming.

Coming one day after

Comcast's

(CMCSK)

report of

equally heady advanced services growth, Charter's numbers indicate that demand for cable's new top-tier products isn't suffering despite a shrinking economy. Cable investors have always understood the basic cable business to be recession-resistant, but have been less sure about how well advance services stand up in tough economic times.

Charter, which has been especially aggressive in rolling out digital video -- enabling such services as expanded channel capacity and video on demand -- added 19,400 net new digital customers per week in the quarter, up from 18,500 per week in the second quarter of the year.

Cable modem growth jumped even higher, rising from a rate of about 6,000 net adds per week in the second quarter to 8,000 in the third.

Nevertheless, the company cut revenue and operating cash flow growth forecasts for full-year 2001. Revenue growth will be in the range of 12.5% to 13.5%, the company said, down from the 14% to 16% range suggested this summer. Operating cash flow growth will fall in the range of 10% to 11% growth, down from the prior forecast of 12% to 14%.

Investors looked mostly at the bad news, not the good, sending Charter's shares down as much as 14%. On Thursday afternoon, the stock was trading at $12.43, down $1.70, or 12%.

Aside from subcriber growth, Charter executives gave other reasons for investor optimism about the future performance of advanced services. The company's cable modem business, which had a 34% operating margin for the quarter, could conceivably hit an operating margin of more than 45% over the long run, Charter said.

Churn -- the percentage of users who drop a service in a given time period -- is still higher than it is for basic cable, Charter says, but digital video churn is lower in local systems where the service has been available the longest period of time. One feature that subscribers particularly are loath to drop, the company says, is video on demand, or the ability to pick a movie or other program out of the system's library, then start, stop, rewind or fast-forward it at will.