Charter Communications

(CHTR) - Get Report

exceeded expectations for subscriber growth in the third quarter, but paid the price with promotional giveaways that resulted in worse-than-expected financial performance.

The weak revenue and cash flow numbers for the St. Louis-based cable operator illustrate the continuing challenges that Charter faces after recovering from a near-bankruptcy experience earlier this year.

Although investors were initially heartened Monday by Charter's results -- the cable operator swung to a net profit in the quarter, thanks to a $267 million gain recognized from a September debt exchange -- Charter's shares slid once the operational numbers sank in.

Charter's shares, which have climbed from 77 cents to as high as $5.50 over the past year, traded at $4.24 at midday, down 3 cents.

For the third quarter ended Sept. 30, Charter reported revenue of $1.21 billion, up from $1.17 billion in the third quarter of 2002, but below the Thomson First Call estimate of $1.26 billion.

Adjusted EBITDA -- or operating income before special charges, depreciation and amortization, and option compensation expense -- amounted to $488 million, up from $466 million one year earlier but below expectations of about $520 million.

"We offered free periods of service for all of our products in September, and introduced new pricing and marketing strategies in many markets," explained Charter CEO Carl Vogel in a statement Monday. "The introduction of free periods, and increased marketing costs as compared to prior periods, has put some downward pressure on third quarter revenues, net cash flows from operating activities, and free cash flow. However, we believe this strategy will reposition Charter's services to consumers and build a foundation for potential increases in revenue and free cash flow in the future."

The short-term payoff for Charter is in across-the-board subscriber increases. The company added 11,000 basic video customers in the quarter, in contrast to expectations of subscriber losses in the tens of thousands. The company shed more than 90,000 customers in the year-ago quarter. Charter, one of the top five cable TV operators in the U.S., has 6.5 million basic video customers.

Charter added 141,000 high-speed data customers, ahead of analysts' expectations such as 124,000 from Smith Barney and 136,000 from Credit Suisse First Boston.

Whether the short-term subscriber gains will pan out over the long run remains an uncertainty. Smith Barney analyst Niraj Gupta, who rates Charter a sell, wrote in a brief note Monday morning that he is concerned about churn -- the percentage of subscribers who cancel their service each month -- and quality of subscription growth. Gupta's firm has done recent underwriting for Charter, and the firm, or an affiliate, holds more than 1% of a class of Charter's shares.