Knology adds video subs in Q3, mulls usage-based data billing
Knology's aggressive approach for adding revenue-generating units (RGUs) paid off in the third quarter, as the cable operator bucked the trend of its bigger cable brethren by actually adding video customers in the quarter.
West Point, Ga.-based Knology added 11,972 voice, video and data connections in the third quarter, which excluded the 11,301 connections that exited the company when it sold off its system in Troy, Ala., to Troy Cable  in a deal that closed July 22.
For both commercial and residential customers, Knology added 6,590 data, 2,093 video and 3,289 voice subscribers. Knology also added more than 7,000 digital video subscribers in the third quarter.
The 11,972 third-quarter connection additions represented an increase of 10,213 connections, or 581 percent, compared with the same period last year.
Knology's total connections at the end of the third quarter of 2011 were 793,583, representing a 13 percent increase over the same quarter a year ago.
"This is our best third-quarter growth numbers since 2007, and it's actually the second-best third-quarter growth number in the history of the company, so we're real proud of that," Knology Chairman and CEO Rodger Johnson said on this morning's earnings call.
"We saw growth across all three product lines – data, video and voice – and that growth extended to both our edge-out and our legacy properties. We feel quite good about this performance.
"More than half of our growth came from our broadband/high-speed Internet additions, which is where we have our highest growth margins. Our bundled customers, which includes the double- and triple-play bundles, represent about 82 percent of our residential subscriber base, and the triple-play component is now inching up to right at 52 percent."
Johnson said Knology's strategic focus on RGU growth in this quarter was designed to recover some of the shortfalls that the company experienced in the first quarter of this year.
"Some of you will recall that we had an internal pricing problem and some regional competitive pressure in one of our markets during the fourth quarter of 2010, and that activity carried over into January and put us a little behind where we wanted to be for RGU growth coming out of the gate this year," Johnson said. "What we've been doing is diligently working to exceed our goals since January to get back as close as we can by the end of December to our original end-of-year subscriber growth targets.
"Part of the reason we want to do this is not so much for how it impacts this year, but to give us the base that we wanted to start 2012 with, and that's kind of all about the future and laying things so that future foundation is where we want it to be."
Johnson also acknowledged that there was a price tag associated with the increased RGUs in the third quarter, which included more sales force commissions, overtime for installers and the need to higher additional outside labor to keep up with the installations.
Borrowing a page from satellite video providers, Knology fueled its RGU growth with promotional pricing that started in the second quarter and carried over to the third. While the promotional pricing will go back to normal levels in the fourth quarter, customers who signed up in the second and third quarters will enjoy the reduced rates for roughly a year before being put on regular rate card pricing.
Knology's digital penetration was 58 percent at the end of the quarter. Knology President Todd Holt said the company's DOCSIS 3.0 rollout was largely completed with the addition of its Dothan, Ala., system last week.
"So we are now substantially done with our DOCSIS 3.0 rollout, and I'm glad to say it was done on schedule and on budget," Holt said. "Also, this DOCSIS deployment puts us into a position to drive higher ARPUs in the future from our data product.
"As I'm sure you are aware, the industry is setting monthly data usage caps and working on monthly data usage-based billing solutions. These initiatives will drive incremental value from data services and should also result in bandwidth cost management improvements. We at Knology are currently evaluating these same initiatives."
Holt didn't give a timeline on when metered billing would take place but noted that Sunflower Broadband, which Knology purchased last year, already had a plan in place .
While Knology's RGU increases were across both its legacy and edge-out territories, the company added almost 12,000 marketable homes to its salable inventory in the edge-out areas.
Knology initially targeted $100 million for its edge-out projects. After the $25 million earmarked for this year is finished, the company will have invested about $46 million of the initial $100 million, but there's more to come.
Holt said that due to the success of the initial edge-out projects, which started last year, he recently asked Brent McCants, executive vice president of operations, to evaluate additional edge-out opportunities.
"The early results tell us that there's at least $50 million of edge-out investment ahead of us and that this incremental potential expansion is in areas with very similar demographics and a similar competitive environment, as compared to the current investment, and is expected to yield consistent returns," Holt said.
Knology's third-quarter numbers
Knology's net income increased to $10.3 million, or 27 cents per share, for the third quarter. Analysts polled by Thomson Reuters had a consensus estimate of 33 cents per share.
Revenue increased to $130 million for the third quarter of 2011, up 15 percent compared with the same period one year ago.
Knology's operating income increased to $18.5 million for the quarter, representing an increase of 21 percent compared with the same quarter last year.
Total revenue for the third quarter of 2011 was $130 million, compared with revenue of $112.9 million for the same period one year ago and $131.4 million for the previous quarter.