Cable Operators

Mediacom's Momentum

6/24/2005 8:00 PM Eastern

For the first time in over two years, Mediacom Communications Corp. grew its basic-subscriber base by 3,000 customers during the first quarter of 2005. The MSO also showed strong growth in digital-video and high-speed data subscribers in its 23-state footprint, leaving some analysts with the impression that Mediacom’s fortunes are finally turning around.

The MSO has been hammered the last two years as EchoStar Communications Corp. and DirecTV Inc. began delivering local broadcast signals in nearly all of Mediacom’s markets. In 2003, only 28% of the markets served by Mediacom had access to satellite-delivered local signals. That number grew to 92% by the end of last year. And it has drained 131,000 customers from Mediacom since the end 2002.

Mediacom at a Glance
First Quarter 2005 Results
* Represents the average monthly revenues for the three months in the period divided by the average basic subscriber count.
Homes Passed: 2,790,000
Basic Customers: 1,460,000
Basic Penetration: 52.3%
Avg. Video Revenue/ Basic Subscriber: $47.91
Digital Customers: 430,000
Digital Penetration: 29.4%
High-Speed Data Customers: 407,000
Data Penetration: 14.6%
Avg. Revenue/Data Subscriber: $38.78
Revenue: $266.2M
Net Loss: $841M
Avg. Revenue/Basic Subscriber: $60.81*

The latest results have pleased — if not surprised — some analysts. But many say that only time will tell whether Mediacom can sustain the positive growth it showed in the first three months of the year.

“Mediacom had a very nice quarter,” says Janco Partners media analyst Matthew Harrigan. “They added customers, but they didn’t deeply discount their product to get a rise in customer numbers. Rather than have a lot of giveaways, Mediacom’s [revenue per unit] came in pretty strong, but their revenue growth per unit isn’t as strong we’d like. The jury is still out for these guys, but the positive first quarter is good news.”

Mediacom executives are careful not to celebrate too loudly. “Clearly, we are pleased with the subscriber numbers in the first quarter,” says John Pascarelli, executive vice president of operations. “We’ve been cautious about tooting our horns. But our turnaround is based on a number of things, including the completion of our rebuilds and the launch of new products like video on demand, digital video recorders and faster high-speed data.”

No matter how positive those results may be, analysts and Mediacom executives are well aware that the first quarter results were a mixed bag. Sure, there were 3,000 new basic customers between December and March 31, but video revenues dipped 2.9% from the year earlier period because the MSO still posted a loss of basic customers compared to the first quarter of 2004. Indeed, the company lost 72,000 customers year over year. But average monthly video revenue per customer rose 2.4% compared to the first quarter a year ago, to $47.91.

Data revenues were also somewhat problematic. They rose 22.4% due to an increase in Internet customers, from 302,000 to 407,000. But average monthly revenue per data customer decreased 7.9% from the first quarter of 2004, due primarily to the growth of lower-priced, slower-speed data customers. Sequentially, data customers grew by 40,000 between December and March.

But everything’s relative. Citigroup analyst Jason Bazinet had some glowing words for the MSO in a June 15 note to investors: “We continue to believe Mediacom is the most compelling name in our coverage universe due to our expectations of improved fundamentals coupled with an attractive valuation.”

Bazinet readjusted his video subscriber estimates for the second quarter from 3,000 net adds to 13,000 losses, but he increased his estimates for data customers to 29,000 new additions from the 19,000 he thought Mediacom would post as of June 30.

Meanwhile, Merrill Lynch media analyst Jessica Reif Cohen was pleased to see the gain in basic customers, especially in light of her prediction that Mediacom would lose 8,000 basic customers during that time frame. She remains neutral on the stock.

FURTHER CHANGE

Pascarelli, chairman Rocco Commisso and chief financial officer Mark Stephan all admit the company probably can’t keep up that kind of subscriber growth every quarter.

For one thing, the second quarter is a traditionally slow period for cable operators, and Mediacom is no exception. Still, Stephan and Commisso maintain the financials will continue to improve as the year goes on even if the subscriber growth slows a bit. Commisso is maintaining his guidance of $420 million in operating cash flow for the year, so that means the numbers will continue to rise despite a 5% dip in operating cash flow in the first quarter.

“We demonstrated a greater willingness to sacrifice short-term cash flow for long-term retention in the first quarter,” Commisso says. But new product launches, including local phone service, should pump up the numbers.

Stephan says Mediacom will continue to be prudent when it comes to promotions, but the company does intend to increase its number of promotions this year. Pascarelli says the company’s new promotions are smarter. For instance, discounts have been stretched out over 12 months vs. two months in the past. The incentives encourage customers to stick around and also reward them for taking more services.

That may help account for future growth, but as for its most recent gains, Pascarelli points to a few key factors: Mediacom’s upgrades are basically finished; new products are being launched continually, and customer service is improving. It certainly helps that the buzz surrounding direct-broadcast satellite providers’ local signal launches in many of Mediacom’s markets is finally subsiding.

Indeed, while Mediacom executives were celebrating their first subscriber gains in two years, EchoStar chairman Charlie Ergen seemed almost depressed when he told analysts during a May conference call that his partnership with SBC Communications Inc. is rocky; the impact of local signals has begun to subside, and competition from DirectTV, telcos and cable operators is on the rise.

Pascarelli hopes to fade the bloom of the DBS rose by making Mediacom even more competitive. The MSO has launched VOD in over half of its markets with plans to make it available to 80% of its customer base by year’s end. DVRs are available to 98% of Mediacom’s customers today, with 100% coverage planned by the end of the year. High-speed data is available to about three-quarters of Mediacom’s customers; that number should grow to 90% by December.

SPRINT ALLIANCE

But the product that could have the biggest impact on Mediacom is Internet phone service. The MSO has teamed up with Sprint Corp. to deliver voice-over-Internet protocol service.

Mediacom had planned to launch the service in the first quarter, but Pascarelli says the operator expects its digital phone service to be available to 1.6 million of its 2.8 million homes passed by year’s end.

Mediacom is testing its VoIP service in two markets and is already selling the product in its Gibson City, Ill., system.

Sprint interconnects all the calls with the local exchange carriers and handles emergency 911 service and long distance. Mediacom is in charge of all the marketing of the product, customer service, tech support, billing and installation.

Mediacom’s entry into the phone business comes at a time when its regional Bell operating competitors have yet to test their video clout in the MSO’s markets.

BellSouth serves customers in 15% of Mediacom’s footprint and has not released any plans for video yet. Qwest Communications International Inc. operates in 26% of Mediacom’s footprint, and its video strategy is still unclear. SBC operates in 11% of Mediacom’s markets but has no plans to deliver video in any of those markets any time soon. Verizon Communications Inc. delivers phone service to customers in 13% of Mediacom’s markets but, like SBC, will concentrate on markets larger than Mediacom’s for some time to come, Pascarelli says.

Independent phone companies comprise the rest of Mediacom’s service territory, and many are sticking to their knitting by just offering telephone service for the time being.

Pascarelli figures that gives Mediacom about three or four years to get its phone service into customers’ homes before any serious competition arises.

“We’re going after the phone business, and we expect a response from the telcos at some point. We take the competition very seriously,” Pascarelli says. “But if and when they come into our markets, we’ll have a good head start in delivering our fleet of services, including local phone service.”

Not only will phone service give Mediacom another arrow in its quiver, it opens up a whole new area of business for the MSO: commercial services. That is a revenue stream Mediacom hasn’t been able to access until now. And Pascarelli expects the business to be robust.

In the meantime, Mediacom continues to beef up its existing product lines. The company recently increased the speed of its high-speed data service. It also reconfigured its contracts with Starz Encore Group LLC, Showtime and Home Box Office so it could offer subscription VOD at no extra cost.

“I pay Cablevision Systems [Corp.] an extra $5 a month to have access to HBO’s subscription VOD product,” Stephan says. “If I lived in a Mediacom system, it would be free to me as an HBO subscriber.”

Mediacom senior vice president of programming and human resources Italia Commisso Weinand spent almost three years reengineering all the company’s programming contracts. She says she still doesn’t pay the same rates as Comcast Corp. or Time Warner Cable, but they are better than they were. Weinand says programming fees are Mediacom’s largest expenditure. But she notes the rates Mediacom pays programmers are better today than they were when she started renegotiating all the contracts.

“It wasn’t easy, but we finally got it done,” says Weinand, who is Rocco Commisso’s sister.

DIGITAL ON RISE

Those new deals have not only helped the company’s bottom line, they have also helped create better programming packages that appeal to customers. Between a more robust VOD product and digital tiers, digital subscriptions have soared. Mediacom added 34,000 digital subscribers in the first quarter alone — a number that surprised and pleased analysts.

And Commisso is certainly pleased himself. “The best part of my job, personally, has been seeing our management team take on such big responsibilities and seeing them bloom and develop in an environment that has changed so radically in the last three years,” he says.

Challenges will continue. The DBS providers aren’t expected to lie down and just let the competition take the lead. EchoStar says it is on the verge of offering a broadband service that will challenge the cable’s Internet offerings. The telcos may concentrate on the larger markets with their video offerings, but Commisso says they will eventually embark on strategies for smaller markets.

At the same time, the MSO will continue to reduce its debt. Stephan says the company wants to eventually move from its current seven times cash flow to between five and six times debt to cash flow.

Mediacom’s stock was on the rise last week on the possibility of Commisso taking the company private, a la Cox Communications Inc., Insight Communications Co. and, most pertinently, Cablevision Systems Corp., if the Dolan Family Group gets its way. Chairman Charles Dolan et al. put a $7.9-billion privatization offer to Cablevision’s board on June 19. A three-independent-director committee was named last week to evaluate the offer, the start of a process that could last two months or more.

Mediacom has said it has no plans to go private but Commisso, the consummate financier, never says never. In any event, he has no plans to exit the business.

“The launch of local signals by DBS hurt us,” he says. “But we have a better product today than we did one or two years ago, and we intend to be better than the competition.”