Cable Operators

Sub Defections a Drag

11/14/2004 7:00 PM Eastern

Mediacom Communications Corp. stock hit a new 52-week low last week, after the Middletown, N.Y.-based MSO reported its third straight quarter of basic-customer defections.

Mediacom lost about 30,000 basic customers in the period, about 8,000 related to damage caused by Hurricane Ivan.

The rest were due to direct-broadcast satellite competitors’ continued local-into-local broadcast channel launches in its markets.

Going Down, Down, Down
Mediacom’s stock price:
Source: Nasdaq Web site
Open High Low Close
11/04 $6.40 $6.75 $6.38 $6.72
11/05 $6.75 $6.75 $6.65 $6.65
11/08 $6.22 $6.33 $6.05 $6.25
11/09 $6.25 $6.31 $5.75 $5.93
11/10 $5.80 $5.88 $5.49 $5.71

It was the third consecutive quarter of customer decreases for the MSO — Mediacom lost 10,000 basic customers in the first quarter and 42,000 in the second.

REVISED GUIDANCE

The hurricane, which struck Mediacom markets in Florida and Alabama, also affected revenue and cash-flow growth.

Third-quarter revenue increased 3.9%, to $261 million, and operating income before depreciation and amortization declined 2.6%.

Without the hurricane’s effects, Mediacom revenue would have increased 5.1% and OIBDA would have risen 1.3%.

Mediacom shares fell as much as 44 cents each to $5.49 per share — the new 52-week low — last Wednesday, before rallying to close at $5.71 per share. The stock is down more than $1 each from its Nov. 4 close of $6.72 each.

The operator also lowered its full-year guidance. Revenue is now expected to come in at between $1.055 billion and $1.063 billion in 2004, versus previous guidance of between $1.075 billion and $1.085 billion.

Cash flow is also expected to fall between $411 million and $417 million, compared to past estimates of $425 million to $435 million.

In a conference call with analysts, Mediacom chairman and CEO Rocco Commisso said that although basic-customer losses were lower than in the previous quarter — when they topped 40,000 subscribers — they were “still unacceptably high.”

But as the level of new local-into-launches subside (about 91% of Mediacom’s footprint has local-into-local DBS service), Commisso added, the MSO should be able to recover some of those customers.

SPRINT TO KEY BUNDLE

Commisso said that Mediacom will fight back with a robust bundle of digital video, video-on-demand, digital video recorders and telephony.

Cable telephony service, through an agreement with Sprint Corp., is expected to start in the first half of 2005. Also as part of that agreement, Mediacom would eventually have the right to resell a Sprint PCS wireless product, Commisso said.

“Potentially, we could sell Sprint wireless services to our customers like the VoIP service, which will be branded Mediacom VoIP service,” Commisso said. “On the wireless side, we could be a potential reseller of Sprint wireless service.”

Executive vice president of operations John Pascarelli said that the idea is to move toward a combination VoIP/wireless product that will allow customers to use the same phone as a VoIP device inside the home and a wireless device outside of the home.

“Both Sprint and ourselves view that those markets are going to merge together over time,” Pascarelli said. “We feel it’s a natural to start working toward that.”

Digital customers increased by 9,000 in the period to 382,000, while high-speed data subscribers rose 23,000 to 350,000.

Mediacom already offers VOD to about 56% of its digital base, while DVRs are available in almost all of its markets.

Commisso said lower-end customers — those that spend about $40 per month — made up the bulk of basic subscriber losses. And Mediacom is targeting those customers with lower-priced digital and data packages.

Mediacom already has a $9.95 per month low-end digital offering, and is experimenting with a 56 Kilobit per second data service aimed at basic-only subscribers.

On the conference call, chief financial officer Mark Stephan said that the 56 Kbps service is being tested in a handful of markets and no final decision has been made to offer the service.

MORE TROUBLE AHEAD?

But while Mediacom was optimistic that the worst was over with respect to DBS competition, Fulcrum Global Partners analysts Richard Greenfield argued that the fight could only be just beginning.

In a report, Greenfield wrote that in light of No. 1 DBS service provider DirecTV Group Inc.’s settlement with Pegasus Communications Corp. — which gives DirecTV access to 10 million rural subscribers in National Rural Telecommunications Cooperative territories — Mediacom could be heading for a major battle for rural customers.

While Mediacom said on the conference call that it had not seen any significant competition in the NRTC territories in the third quarter, Greenfield wrote that the MSO could have significant exposure in the future.

September