Cable Operators

More Basic Erosion Forecast in Second

7/29/2005 8:00 PM Eastern

The second-quarter earnings season kicks off Aug. 2, with Comcast Corp. first out of the blocks, and most analysts are predicting basic-subscriber erosion will continue.

That should come as no surprise, given that the second quarter is typically weak as customers disconnect service as they move to their summer residences. All but Cablevision Systems Corp. are expected to lose basic customers in the quarter.

Subscriber additions in digital cable and high-speed Internet services are also likely to be weaker. And the newest advanced services metric — telephony additions — is expected to be watched the closest.

DIPS AT COMCAST

Sanford Bernstein & Co. cable and satellite analyst Craig Moffett expects top MSO Comcast to report a loss of 43,000 basic customers in the period. Banc of America Securities cable and satellite analyst Doug Shapiro expects those losses to be a little higher — 75,000 in the period — but still below the 96,000 basic subscribers Comcast lost in the second quarter of 2004.

Prudential Equity Group media analyst Katherine Styponias went still higher — she anticipated Comcast’s basic losses to be around 84,000 in the period.

In a report last Monday, Moffett wrote that telephony additions will be scrutinized the most and that Comcast could take an especially hard hit, given the perception that its voice-over-Internet-protocol telephony roll out is going slower than expected.

“The second quarter was supposed to be Comcast’s coming out party for VoIP,” Moffett wrote. “No such luck.”

Moffett predicted that Comcast should lose about 45,000 circuit-switched telephone customers, offset by the addition of 28,000 new digital phone subscribers.

Shapiro said that the perception that the rollout is going slowly for Comcast may be exaggerated. In his report, Shapiro said that in recent meetings with Comcast management, he was told that the telephony rollout was on track.

GETTING IT RIGHT

“To whatever degree it [the telephony rollout] is perceived to be going slowly, it pointed out that, unlike other operators, it is doing everything in house; it has been working for more than the past year on its Project Bedrock unified provisioning system, which it wanted to have in place before making a concerted VoIP push; and, like other operators did, it wants to make sure it gets it right the first time,” Shapiro wrote.

Moffett added that visibility into Comcast’s progress with digital voice rollouts will be important, especially as telco competitors have recently begun substantial price discounts to their digital subscriber line high-speed Internet offerings.

He said basic subscriber losses could be misconstrued as being tied to the telco price cuts — SBC Communications Inc. recently began a $14.95 per month promotional offering for its DSL service.

Moffett said because of the slower voice rollout, Comcast stock is trading at its lowest multiple in years — about 7.8 times forward cash flow.

2Q GAINS FOR CABLEVISION

Cablevision (reporting earnings Aug. 9) has been less affected by seasonality than other MSOs and the second quarter isn’t expected to be any different. Moffett expects Cablevision to report a gain of 11,000 basic subscribers in the second quarter. He also predicts the MSO will add 111,000 digital-cable customers, 52,000 high-speed Internet subscribers and 94,000 VoIP customers.

But investors are expected to pay little attention to those metrics, Moffett wrote, especially with a buy-out offer from the MSO’s controlling Dolan family to acquire the remaining shares of Cablevision stock they don’t already own. That offer — worth about $7.9 billion — is currently being evaluated by a committee of independent Cablevision directors.

Moffett said investors will be looking to see if the Dolan family is forced to increase its offer, or if there will be a sale of Cablevision’s Rainbow Media Holdings LLC programming assets.

SMALLER OPS, FEWER LOSSES

At small market MSOs like Mediacom Communications Corp. and Insight Communications Co., basic-subscriber losses are expected to be less dramatic. Shapiro estimated that Mediacom would lose about 15,000 basic subscribers (an improvement over the 38,550 lost in the second quarter of 2004) and Insight would lose 13,000 basic customers (compared to 15,500 lost in 2004).

Time Warner Cable, Shapiro estimated, would lose 10,000 basic customers (half the 21,000 lost in 2004).

Time Warner Cable should continue to aggressively add telephone customers, though, according to Shapiro. The analyst predicted that the No. 2 MSO in the country would add 180,000 phone customers in the period, compared to 152,000 added in the first quarter of this year.

Both Shapiro and Styponias believe that the biggest driver for basic-subscriber growth will be the VoIP product. While Styponias predicted that Time Warner Cable would lose 19,000 basic customers in the second quarter (a number she said Time Warner will more than recapture by the end of the year) she estimated that voice additions will be in the 204,000 subscriber range.

Styponias wrote that investors will look especially closely at Time Warner’s telephony progress, as it could serve as an indicator of what could be achieved at Comcast.

Comcast has launched VoIP service in Boston and Hartford, Conn., but Styponias wrote that some of the most densely populated neighborhoods in Boston hadn’t been launched by the end of the second quarter. She added that Comcast will not likely market the service heavily until the entire city is launched.

“While this is probably smart from a marketing cost standpoint, it will likely push meaningful subscriber growth into next quarter,” Styponias wrote.

Even Charter Communications Inc., which has rolled out telephony in about four markets, is expected to step up telephone adds in the second quarter.

Although Shapiro estimates that Charter will lose about 45,000 basic subscribers in the quarter (down from the 60,600 it lost a year ago), he expects the St. Louis-based MSO to sign on 9,500 phone customers in the period.

STRONG FINANCES

Financial performance in the quarter should be strong at three of the largest publicly traded MSOs. The analysts estimate that Comcast will report revenue growth of about 9% and cash flow growth in the 11% to 13% range.

Cablevision should see the strongest revenue growth — mainly because of telephony additions — at between 16% and 17%. Cash flow is expected to rise about 14% in the period.

Telephone additions also should power Time Warner Cable revenue and cash flow up between 10% and 11%, Shapiro and Styponias predicted.

Shapiro estimated that Charter would report revenue growth of 6.2% in the quarter and that cash flow would rise 3.4%. And while the impact of direct broadcast satellite local-into-local launches has diminished for Mediacom, Shapiro expects results to be relatively weak — revenue growth of 4.3% and cash flow down 3.4%.

At Insight, he said revenue should rise 11.4% and cash flow would be up 8.6% in the quarter.

Second Quarter Estimates
Basic Sub Additions (Losses) Digital Additions High-Speed Data Additions Telephony Additions (Losses)
Comcast (75,000) 145,000 290,000 (7,462)
Time Warner (10,000) 105,000 115,000 180,000
Cablevision 15,000 90,000 60,000 94,520
Charter (45,000) 15,000 50,000 9,571
Insight (13,000) 7,500 10,000 11.600
Mediacom (15,000) 2,000 19,000 2,813
Source: Banc of America Securities

March