Cable Operators

Broad Bandwagon

8/02/2010 10:01 AM Eastern

Comcast reported stronger-
than-expected second-quarter
results last week, fueling
some analysts’ expectations that
cable operators will continue to
dominate the broadband market.
Although most analysts were
not expecting a repeat of cable’s
exceptionally strong first quarter
— when broadband additions
topped 780,000 for the five publicly
traded MSOs — several expect
the industry to pounce on what
appears to be signs of weakness
from the main telco competition.

Verizon reported adding just
196,000 FiOS Internet customers
in the second quarter (compared
to 303,000 additions in the same
period in 2009). AT&T’s U-Verse
gained 209,000 TV subscribers,
but lost 93,000 digital subscriber
line customers in the period.
Some analysts were predicting,
after those reports, that cable
would capture 90% of broadband
additions in the second quarter.

Comcast was the first cable
operator to report earnings, last
Wednesday, and it added 118,000
high-speed Internet additions in
the quarter.

That missed analyst consensus
estimates of 204,000 additions
by a mile — and was less than
one-third of Comcast’s 399,000
high-speed additions in the first
quarter.

Expectations may have been
misleading, though.

SEASONAL SHIFTS
One factor in the broadband
falloff from the first quarter is
typical seasonality, as college
students and vacationers move
to their summer homes.

Discussing earnings on a conference
call with analysts last
week, Comcast Cable Communications
president Neil Smit noted
last year the MSO gained just
65,000 high-speed data customers
in the second quarter — followed
by a gain of 361,000 subscribers in
the third quarter.

“That’s a pretty significant difference
and a lot of that can be
attributed to the back-to-school
movement and some of the seasonal
movement,” Smit said.

Smit and other Comcast executives
said high-speed Internet additions
in the first half of the year
are outpacing 2009. The top cable
operator has gained 517,000 new
data subscribers so far this year,
compared to 393,000 additions at
the same time last year.

Sanford Bernstein cable and
satellite analyst Craig Moffett
said that while the broadband additions
appeared to be light, compared
to wireline losses at the
telcos, cable is still in the lead.

“Our long-term bull case for cable
— at least, before regulatory
concerns clouded the picture —
is that cable will win the broadband
wars,” Moffett wrote in a
research note.

Time Warner Cable, Cablevision
Systems, Mediacom
Communications and Charter
Communications all have yet to
report their second-quarter results.
TWC, scheduled to report
results on Aug. 5, is expected to
gain about 76,000 broadband
subscribers, according to Collins
Stewart media analyst Tom Eagan,
compared to 88,000 in the
same period last year.

Eagan also predicted cable
would capture 90% of secondquarter
broadband gains, up from
a 54% share of first-quarter additions.
He had expected Comcast
to add 89,000 broadband customers
in the period.

Pivotal Research Group principal
and media and communications
analyst Jeff Wlodarczak said
Comcast’s results show that cable
will continue its dominance of
the broadband market, and predicted
TWC would “produce a
carbon copy” of Comcast.

STRONG FINANCIALS
Comcast had a strong second
quarter financially, beating analysts’
expectations for revenue
and cash-flow growth.
Free cash flow, up 15.8% to $1.4
billion in the quarter, also beat
estimates.

Operating cash-flow margins
(as a percentage of revenue) remained
stable at 41.3% vs. 41.1%
in the 2009 period, suggesting
that although Comcast has fewer
customers — it lost 265,000 basic
subscribers in the period — they
are spending more.

Comcast executives said gains
from last year’s digital transition
played a role in basic subscriber
losses (and broadband additions)
in the quarter.

Chief operating officer Steve
Burke said on the analyst call
many of those lost customers
had been attracted to deeply discounted
offerings. When those
promotions rolled off, Comcast
was disciplined in the new off ers
it presented.
“These are price-sensitive,
high-churn customers and we
elected not to chase them,” Burke
said.

Smit said Comcast added about
100,000 customers from the digital
transition.

Cable revenue was up 5.1% in
the period to $8.9 billion and operating
cash flow increased 5.4%
to $3.7 billion. Programming-segment
(cable-network) revenue
rose 18.1% to $454 million and
OCF was up 34.4% to $152 million
as advertising revenue rose
across all properties coupled with
additional ratings strength at E!,
Versus and G4.

Burke said the resurgent advertising
market — he estimated
ad revenue was up about 23%
in cable and networks in the period
— bodes well for its pending
NBC Universal joint venture. Today,
advertising represents about
$2.5 billion in revenue for Comcast
(both cable and programming).
Once NBCU is added to
the mix, ad revenue jumps to
about $10 billion annually.

“Having the advertising market
rebound is a very good thing
for the combined company,”
Burke said.
Burke also said Comcast executives
are meeting with NBCU
execs weekly to identify growth
opportunities and that they anticipate
receiving regulatory approval
for the joint venture by
year-end.

September