Charter Video Subs Continue to Slide in 2Q11

Cableco Reports $107m Loss as Cable TV Subs Down 84k

If you were to plot the number of Charter Communication's (Nasdaq:CHTR) video customers on a graph from 1Q06 through 1Q11, then connect the dots, you’d end up with a shape resembling a ski slope. Perhaps the description of a bunny hill fits Charter’s video losses best: a gentle but consistent downward slope, with no real bumps in the road. Today, the New York based cable provider once again reported video losses for 2Q11, along with an overall loss of $107m for the quarter.

Despite some grim news, Charter did its best to put a positive spin on the quarter. In areas where direct financial comparisons provided underwhelming results, Charter emphasized more flattering stats or metrics. Take Mike Lovett’s opening comments to the 2Q11 earnings release for example.

"We delivered another solid quarter of adjusted EBITDA growth and substantial free cash flow," said Lovett, Charter’s president and ceo, touting Charter’s near 5% growth in adjusted EBITDA. After accounting for various items such as losses for extinguishment of debt, stock compensation, and other losses, actual EBITDA ticked up less than 2%.

On a positive note, Charter did increase its Internet and voice customers in 2Q11. Internet and voice revenue grew moderately at 4% and 3% YoY while Charter’s commercial revenue jumped a sizable 16% YoY to $141m. Overall, cable television declines offset these areas of growth and Charter’s topline remained relatively flat at around $1.8b.

Charter’s loss of near 84k video customers came during a quarter in which it actively sought deals to buy cable networks. Yesterday Charter finalized its acquisition of Windjammer’s cable assets and 17k customers. Later in 3Q11, after the completion of its James Cable system swap and its purchase of cable systems from US Cable, Charter will net 20k more customers. The customer gains from these deals are not reflected in 2Q11, but the adds do not appear sufficient to stabilize its trend of cable television losses.

To complement its recent M&A activity, Charter’s customer retention/acquisition strategy includes  service upgrades and efforts to target business customers. Currently it is in the middle of initiatives to provide faster Internet and better video quality through distributing DOCSIS 3.0 modems and upgrading cable customers to switched digital video. In June Charter announced the deployment of its long-haul Ethernet service aimed at attracting enterprise customers looking to connect multiple business locations within Charter’s network.

Regardless of its success in expanding its customer base, part of the solution to Charter’s financial problems must be to address borrowing costs. Interest expense continues to grow faster than revenue in each quarter and refinancing efforts have led to large losses for retiring the debt early. If the recent U.S. debt crisis taught us anything, it’s that the solution to any financial problem must address revenues and debt. 

SureWest Continues to Focus on Broadband in 2Q11

Broadband Now Accounts for 75% of Revenues

SureWest was one ILEC to realize early on that its traditional business model was facing some serious headwinds, and by focusing early on broadband expansion—primarily fiber to the home and fiber to the node—the company has been able to offset revenue declines associated with access line losses. During 2Q11, 75% of revenues were attributable to the company’s broadband segment compared to 71% in the year earlier quarter.

Yet the company isn’t content to sit back and relax. Capital expenditures increased $6.8m during 2Q11 over 2Q10 to reach $20.7m for the quarter.  SureWest added an additional 5,400 new marketable homes to its fiber to the home network–part of a scheduled 15,500 additional fiber homes expansion planned for Kansas City throughout 2011. Additionally, the company upgraded 2,800 of the planned 6,800 homes in its ILEC territory with Advanced Digital TV (ADTV) service, increasing the percentage of triple-play marketable homes in the ILEC service area to 61% from 50% during 2Q10.

SureWest is having success with its triple play bundle–of approximately 105,100 residential broadband subscribers, 82% subscribed to two or more services, including 47% that subscribed to all three services. In addition to broadband, bundles include video and voice service. Video service ranges from basic service to ADTV, and customers can choose from a range of video features including video on demand, DVR and HDTV, among others. Also included in the broadband segment, VoIP phone service is available in the Sacramento market, including to customers residing in the telecom segment service territory. Of the 7,200 residential access lines lost during the year ended June 30, 2011, 2,900 have switched to SureWest’s VoIP product. As of June 30, 2011, approximately 19% of homes in the Sacramento market have subscribed to VoIP service, and total voice penetration was approximately 24%.

But, as much as SureWest’s early shift into broadband has paved the way for long-term sustainability, it’s still the telecom segment that’s generating positive free cash flow ($9.1m during the six months ended June 30, 2011), while the broadband segment turned in negative $7.9m free cash flow over the same period– largely the result of capital expenditures related to fiber network expansion. Thus, while SureWest’s focus on broadband is paving the way for the future, it’s not cheap, and in the interim, the traditional telecom business keeps pushing onward.

Alaska Communication's 2Q11 Results Validate Wireless Expansion Strategy

Enterprise and Data Revenue Grow in 2Q11

Alaska Communications (Nasdaq:ALSK) headed into 2Q11 armed with a new ceo and cfo tandem, and a streak of quarterly wireline and wireless connection losses dating back to 3Q08. If there was any uncertainty regarding the new team's growth strategy for ACS going forward, recent announcements and the presentation of its 2Q11 results put all questions to bed. The company is betting on its wireless and enterprise segments to get it out of the red.

While ACS operated at a loss in 2Q11, revenue ticked up slightly to near $85m in the quarter and the highlights presented were concentrated in its wireless and enterprise units.  Wireless churn was down a half percent to 2.1%, and postpaid data revenue jumped 49%, or $16m, YoY—likely a byproduct of its efforts to brand its wireless sales force as “the Smartphone experts.”  ACS was also able to post wireless customer gains in 2Q11 for the first time in nearly three years. Elsewhere, strong performances in data hosting, video conferencing and managed services drove enterprise revenue up 7% YoY to $12.6m, while retail, wholesale and access wireline revenues declined nearly 6%.

Prior to reporting a solid performance from its wireless business in 2Q11, ACS made distinct moves to strengthen the segment. It announced new prepaid wireless plans, and a more flexible set of tiered postpaid data plans in an effort to further reduce churn and attract new customers. Also representative of ACS’s wireless-centric strategy was its announcement that it will invest $20m in building Alaska’s first 4G LTE network.  The $20m investment comes on top of the $12m ACS will spend on building the necessary backhaul infrastructure for network. After losing 12% of its customers in 2010, ACS management is committing to grow its wireless business.

Any guesses as to where ceo Anand Vadapalli focused his comments on ACS' second quarter results?  If you picked residential wireline customers, you’d be wrong.

"With sales and retention efforts (for wireless) showing results during the quarter, we also launched tiered data plans repositioning our postpaid offering, and completely refreshed our prepaid plans. With our announcement to build a 4G LTE wireless network in Alaska, we build on our track record of providing advanced and differentiated wireless service for Alaskans," said Vadapalli, adding “We remain focused on driving top line growth for our Enterprise business.”

Frequently, companies will force you to read between the lines with regards to performance, outlook or corporate strategy, but ACS did not pull any punches while discussing its 2Q11 results. There was no half-hearted praise for its traditional wireline segment, and no question about the provider’s future. It’s doubling down on wireless and growing its enterprise business—straight and simple.

Sprint’s 2Q11 Results Pinched by iPhone Competitors

And Where Does the LightSquared Announcement Leave Clearwire?

While the debt crisis in Washington has had its way with Wall Streeters in general this past week, shares in both Sprint (NYSE:S) and Clearwire (Nasdaq:CLWR) tanked 20% or more yesterday—and it had nothing to do with President Obama or the Tea Party…

Sprint’s second quarter results disappointed the Street; in particular, the fact that the company lost more than 100k of its most profitable, postpaid subscribers was bemoaned by analysts who had expected a decline of just 25k. iPhone competition from both AT&T and Verizon was the obvious culprit—combined AT&T and Verizon added 1.6m postpaid subs in 2Q11 and activated nearly 6m iPhones.

Sprint’s operating cash flow also took a hit as it took aggressive measures to stop the subscriber bloodbath.  The company said it incurred $120m in expenses related to a change to its rebate policy—rather than requiring customers to mail in for rebates, they are now paid instantly.  Also, Sprint now covers the costs for customers who come over from another carrier.  Despite the lower than expected cash flow in the quarter, the company maintained its guidance for the full year—that operating cash flow will be on par with 2010 levels.

What really leaves me scratching my head, though, is the announcement (also made yesterday) that Sprint has formalized its long-rumored deal with LightSquared.  Sprint said it will receive $9b over 11 years to construct a network for LightSquared—this will be done in conjunction with the Network Vision overhaul currently ongoing.  In addition to the $9b in fees the company expects to collect, it will also receive $4.5b in credits for airtime and capacity on the resulting LTE network.

Problem is, LightSquared still hasn’t resolved its GPS interference problem—Sprint can back out of the deal is that issue isn’t fixed by the end of this year.  My understanding, however, is that LightSquared is still quite a ways off from solving that issue.

And then there’s still the Clearwire problem…Sprint and Clearwire did reach a new wholesale agreement earlier this year, but it only commits Sprint through the end of 2012.  Meanwhile, Sprint added 1.7m new 4G customers last quarter…on the Clearwire network.  But it has also reduced its voting control of the company to less than 50%...

It looks to me like a serious game of chicken is going on between the two, and neither company stands to win.  Could be, however, that Clearwire comes out the relative winner in the end…here’s why: 

Clearwire needs cash and Sprint has refused to provide it, though it does keep adding customers to the Clearwire network, and even if LightSquared resolves its GPS interference issues, Sprint will need Clearwire for some time.  But without a cash injection, Clearwire might just have to file for Chapter 11 protection and restructure…and then what happens?

It continues to operate and serve its customers, but its equity holders (i.e. Sprint) will see their investment wiped out, and debt will be reduced to a manageable level.  With a dramatically higher subscriber base and recapitalized balance sheet, Clearwire keeps on trucking…perhaps it can even afford an LTE overlay to bring its network quality up to that of the competition.  And those cable operators that have been working with Clearwire still need a viable wireless strategy…

It’s probably too early to make these types of predictions with any certainty but it still seems to me that if Sprint and Clearwire had gotten their act together and resolved their issues a year or more ago, they might both be in a better position to fight the AT&T/Verizon duopoly.

Time Warner Cable 2Q11 Results

Triple Play Customer Adds and Investment in Business Services Drive Growth 

Earnings season is squarely upon us, as ILECs, cablecos and wireless providers schedule conference calls, draft press releases and report their 2Q11 results. Yesterday Time Warner Cable (NYSE:TWC) reported revenue and net income growth in 2Q11 even as it withstood continuing video sub losses.  Its key performance drivers in 2Q11 signal a strategy to maximize revenues from its current residential subscribers, while expanding its business services.

The cableco reported moderate revenue increases in nearly all segments, except for its traditional money maker, video services.  Time Warner’s 2Q11 revenues of $4.9b rose YoY thanks to voice and data customer adds, a 95% increase in cell tower backhaul revenue and a jump in advertising revenue.  It even saw top line growth as a result of its new venture into managed services--the acquisition of cloud-services provider Navisite in 2Q11.

So, cable television giant Time Warner grew revenues in all areas during 2Q11, except for, well…cable television.

That video subs were down 130k for the provider should come as no surprise. Time Warner has lost video customers in every quarter since 1Q09, and at JSI we recently documented the cablecos’ overall loss in video market share to ILECs and DBS providers. The real news from its 2Q11 results is that Time Warner shed 640k video subscribers and 44k overall customers YoY, yet still managed to increase revenue 5.8% and operating income 15.8%.

Time Warner’s growth has been derived by generating more revenue from its existing subscribers, in order to compensate for its shrinking customer base.  Consider this, over the past year Time Warner lost 44k customers overall, but added 143k triple play subscribers.  It has been able to generate more revenue through selling voice and data services to its video subscribers than it has lost due to video sub attrition. Price increases in 2Q11 logically drove some single service users to seek cheaper video options, but also pushed more customers towards its discounted triple play packages, and Time Warner’s top and bottom lines benefited.

The acquisition of Navisite, a managed cloud services provider, is consistent with Time Warner’s efforts to increase average revenue per user, and signals a strategic shift to target more profitable business customers.  Average monthly revenue per business sub was over $181 in 2Q11, 3.3x greater than the monthly take per residential sub.  Cross-selling Navisite’s managed IT services to Time Warner’s existing business customers serves to further expand ARPU, while bundling Navisite’s services with its voice, video and data packages could also lure new business customers away from competitors.

Overall, Time Warner still generates a great majority of its revenues from cable television, but with each passing quarter that majority is narrowing.  The company’s strategy to push triple plays and invest in business services will ensure this trend continues in future periods.  Despite growing revenues in 2Q11, losing subscribers will eventually catch up with Time Warner and it will need to expand its customer base. Targeting businesses appears to be management's answer.