Cable Operators

Cable Ops Feel Q2 Pinch

8/08/2009 4:00 AM Eastern

Cable operators struggled with seasonality and marketing glitches affecting their basic subscriber rolls in the most recent financial period, while satellite giant DirecTV turned in its best second quarter in four years.

Comcast helped close out the second-quarter earnings season for cable with mixed results — while free cash flow at $1.2 billion continued to be strong, high-speed Internet additions, one of the more consistent subscriber metrics in the cable universe, were unusually weak. Comcast added 65,000 high-speed Internet customers in the period, about one-fifth the amount (320,000) it added in the first quarter.

On a conference call with analysts Aug. 6, Comcast chairman and CEO Brian Roberts said the decline in high-speed customers was disappointing, but the operator has a handle on the problem.

“We understand what happened and we have made the necessary corrections,” Roberts said on the call. “This does not represent a new trend.”

Later, chief operating officer Steve Burke said that while the economy played a role in the declines — the company said that several areas with high unemployment rates were hit hardest — so did its marketing message. Burke said that most of Comcast's second-quarter marketing efforts were centered on the federally mandated digital transition. That has changed and now the message is more targeted to specific products and the triple play. Already, Burke said, Comcast has added more high-speed data customers in July than in the entire second quarter. And the rest of the third quarter is expected to be better as students go back to school.

“300,000 [additions] to 65,000 [additions] is a big drop,” Burke said on the conference call. “But the good news is that once we made the adjustments and [targeted] more single- and triple-play promotions, we've seen the business pick up significantly. The third quarter is going to look a lot more like the first quarter.”

Comcast still managed to lose about 214,000 basic subscribers in the period. Telephony and digital additions were in line with expectations, at 233,000 and 250,000, respectively.

But for the most part, Comcast met what were already lowered expectations from the analyst community.

“Expectations were low going into Q2 results for Comcast, at least as it relates to forward-looking growth metrics. Now we know why,” wrote Sanford Bernstein cable and satellite analyst Craig Moffett in a research note. Moffett added that while unit growth metrics may have been weak, financial performance was “very, very strong.”

At Mediacom, which released its results Aug. 7, revenue rose 6% to $364.5 million and AOIBDA was up 6.6% to $136.8 million. The small market MSO lost about 15,000 basic customers in the period.

But the biggest story for Mediacom was its free-cash-flow generation. The small market MSO reported free cash flow of $31.1 million in the quarter, a 480% increase over the prior year. As a result, Mediacom increased its full-year free cash flow guidance from $1 per share to $1.30 per share.

While the cable companies tried to steer attention toward their financial metrics, DirecTV focused on good old- fashioned subscriber growth. The satellite giant added 224,000 net new subscribers in the period, its best second- quarter performance in four years. And this was after coming off 460,000 net new customers added in the first quarter.

One minor cause for concern — DirecTV lowered its average revenue per unit (ARPU) guidance for the full year to between 1% and 2% (down from 2% to 3%), mainly because of declines in premium-channel subscribers.

In a research note, Citigroup media analyst Jason Bazinet wrote that the ARPU was no cause for alarm.

“We believe DirecTV is where investors like to hide,” Bazinet wrote, adding that no other media company has turned in more consistent performance over the past several years than DirecTV.

On a conference call with analysts, DirecTV chief financial officer Pat Doyle said that a big factor in the subscriber growth was the satellite giant's telco relationships. The second quarter was the first full period of DirecTV's resale relationship with AT&T. That deal began in February.

Doyle estimated that the entire telco sales channel accounted for about 25% of DirecTV's total gross subscriber additions in the quarter, about double the telco contribution last year.

Whether that growth is coming from cable or from rival satellite TV service Dish Network is slightly in dispute. On the Aug. 8 conference call, Burke said the biggest impact on its basic-customer losses in the period was from telephone companies, not satellite. That appeared to rankle Doyle, who made a point of singling out Comcast's results on his conference call with analysts.

“On a day when Comcast reported a subscriber loss of 214,000, it's nice to see the strength of the DirecTV brand continues to drive market share gains,” Doyle said.

DirecTV interim CEO Larry Hunter said on the call that despite Comcast's claims, the bulk of DirecTV's additions are coming from cable. He added that subscriber gains from Dish have not changed materially.

 

JUST THE BASICS
DirecTV again outpaced its cable competition in key subscriber metrics for the quarter:
Q209 Basic Customer Additions (Losses)

SOURCE: Company reports
DirecTV 224,000
Comcast (214,000)
Mediacom (15,000)
September