Cable Operators

Analysts: Slowdown Is Likely to Continue

4/26/2009 2:00 AM Eastern

While there may be some improvement over fourth-quarter results, the slowdown in advanced services and basic subscriber growth will continue for cable operators.

That’s the song from a chorus of analysts on Wall Street handicapping the giants. With the cable earnings season set to kick off later this week — Time Warner Cable and Comcast are expected to report first-quarter results on April 29 and April 30, respectively — influential Citigroup media analyst Jason Bazinet predicted that despite the recent market rally, he is seeing no signs of a recovery. At best, he added, is that “the rate of deterioration has stabilized.”

Still, the Citigroup analyst wrote that there are some indications in the cable sector that some metrics will improve compared to fourth-quarter results, but adding that those improvements aren’t expected to move the needle in any noticeable way.

Time Warner Cable will be the first out of the blocks, releasing earnings on April 29 and Bazinet does expect a slight revenue gain of 4.8% to $4.36 billion and a 5.7% rise in cash flow from $1.4 billion to $1.48 billion in the period. But basic subscriber losses are expected to continue — he predicts that TWC will lose 120,000 basic-video customers in the period versus a gain of 55,000 customers in the prior year. And the slowing growth in advanced services is expected to continue as well.

Bazinet predicts that TWC will add 50,000 digital cable customers (compared to 261,000 in 2008); 100,000 high-speed data customers (vs. 301,000 last year) and 90,000 voice customers (compared to 280,000 in 2008). Miller Tabak analyst David Joyce has predicted a decline of 76,000 basic subscribers at Time Warner in the first quarter.

Executives at the companies themselves are also bracing for sluggish growth. At the Deutsche Bank Media and Entertainment conference in March, Time Warner Cable chief financial officer Rob Marcus said that revenue and cash flow should grow at least at the same pace as 2008. But he said that while first-quarter growth is expected to be better than the fourth, it is still substantially below the prior-year period.

At Comcast, the outlook isn’t any better. Bazinet anticipates revenue growth of 4.3% to $8.75 billion and cash flow should rise about 5.3% to $3.34 billion. The analyst expects the No. 1 cable operator to add about 557,000 revenue-generating units in the period, less than half the 1.46 million Comcast added in the first quarter of last year. Diving deeper into RGUs, Bazinet expects Comcast to lose 190,000 basic-video customers in the period, more than three times the 57,000 lost in 2008. Growth in advanced services is also expected to slow to about 250,000 additional digital-cable customers (from 494,000 in 2008); 322,000 additional voice customers (from 529,000) and 175,000 high-speed data customers (from 492,000).

Bazinet sees continued strong financial growth at Cablevision Systems — where he expects revenue to rise 8.5% and cash flow to rise 11.8% — but even that growth juggernaut will experience a slowing down in key subscriber metrics. Bazinet expects Cablevision to lose 40,000 basic subscribers in the quarter (vs. a gain of 2,000 last year); and add 20,000 digital cable customers (compared to 41,000 last year); 30,000 high-speed data customers (half the 61,000 additions in 2008) and 50,000 voice customer additions (compared to 90,000 last year).

While cable operators are expected to show at least some improvement over last year, Bazinet does not hold the same hope for programmers.

“We don’t expect many positive financial results to come out of the media conglomerates during Q1 ’09,” Bazinet wrote. “Local ad markets — like radio, TV, outdoor — are still contracting sharply. And national ad markets, while seeing less severe pressures, are still shrinking.”

Several analysts are predicting declines for major programmers like Viacom, News Corp., and The Walt Disney Co. At Viacom, which will report earnings on April 30, overall revenue is expected to decline 6.5% to $2.9 billion from $3.1 billion in 2008, according to Bazinet, who also noted that domestic advertising revenue should continue to slide in the first quarter by 14% to $945 million.

At News Corp., set to release its fiscal third quarter earnings on May 6, revenue should be about $7.3 billion according to Bazinet, down 16.6% from $8.75 billion last year and operating income should come in at $899 million, a 37.6% decline from last year.

At The Walt Disney Co., set to reveal fiscal second-quarter results on May 5, Bazinet is predicting a 7% decline in revenue to $8.1 billion, while cash flow at its media-networks segment is expected to decline 21% to $1.1 billion from $1.4 billion.

Reversal of fortune
Several analysts expect Q1 basic subscriber losses to increase, reversing a trend. How Citigroup media analyst Jason Bazinet handicaps the group:

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SOURCE: Citigroup estimates
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