New Services Rise at Comcast, Cox

11/03/2002 7:00 PM Eastern

Big MSOs Comcast Corp. and Cox Communications Inc. kicked off the second wave of this earnings season by making strong new-services advances, but they disappointed investors and analysts with weaker-than-expected growth in basic subscribers.

The result was a big drop in their respective stock prices. Cox took the biggest hit, as its shares fell more than 7 percent, or $2.30 each, on Oct. 29, to $27.85 as of 4 p.m. trading.

Comcast stock, which rose 31 cents on Oct. 28 — the day on which the earnings were reported — gave back those gains and then some on Oct. 29, dropping to $23.59, down 56 cents.

Most analysts were pleased with Comcast's 12.7 percent overall revenue growth and 17.8 percent cash-flow growth, but couldn't ignore a small decline of 2,500 basic subscribers during the period. At the cable division, revenue was up 12.3 percent to $1.55 billion, while cash flow rose 12.2 percent to $645 million.

Basic slowdown

Cable operators have expected basic growth to slow this year to between 0.5 percent and 1 percent, from past averages of 1.5 percent to 2 percent, as basic cable saturates the market. Since about 70 percent of U.S. households already subscribe to cable, most operators and analysts agree that focusing on upselling higher-margin advanced services to existing customers should be a greater priority.

But in the wake of accounting scandals at Adelphia Communications Corp. — whose methods for counting basic customers came into question — analysts are paying more attention to basic growth.

SunTrust Robinson Humphrey cable analyst Gary Farber agreed that the 2,500-subscriber loss at Comcast is small — and better than the 10,000 customers the company lost during the second quarter.

But the second quarter is usually weak, he noted, as students and snowbirds leave their homes for the summer and disconnect. The third quarter is normally a rebound period, he added.

"If you put them up against the rest of the industry, they're very strong results," Farber said. "The loss of customers is negligible, but you just wonder if it is an ongoing trend or not."

Stifel, Nicolaus & Co. cable analyst Ted Henderson sees a trend toward declining basic-subscriber growth, but due mainly to low-end customers attracted to deeply discounted direct-broadcast satellite offers.

"To me it's a fairly good business model if you lose your low-end subs to a price point, but your top subs you're adding new services to, you're showing new revenue growth at those levels and it's driving overall business growth that is pretty dramatic," Henderson said.

Comcast's results back up that premise. The MSO added 205,000 new digital customers over the period, and its penetration rates climbed to 24.9 percent from 19.4 percent in 2001.

High-speed data was up by nearly 170,000 customers to 1.3 million, with penetration rising almost three percentage points, to 11 percent of marketable homes.

Free cash flow — or cash left over after interest and capital expenditures are made — was $262 million in the period. In the first nine months of the year, Comcast said it had generated $660 million in free cash flow and is on track to finish the year with between $800 million and $1 billion in free cash flow.

Targets maintained

The company also reported net income of $75.6 million, or 8 cents per share, compared to a loss of $106.8 million, or 11 cents per share in the same period last year.

The company is on track to meet its full-year guidance of 12 percent to 14 percent revenue and cash-flow growth, Comcast executive vice president and treasurer John Alchin said.

As the closing date nears for its planned merger with AT&T Broadband — which will establish AT&T Comcast Corp. — Comcast cable division president Steve Burke said the Philadelphia-based MSO has worked hard over the past several months to ease the transition.

During the conference call, Burke said AT&T Comcast's main goals will be driving cash-flow growth from video — not telephony — and adding basic subscribers.

After creating a new operational structure for the combined company in August, which split the MSO into six regional divisions, Burke said he asked each divisional head to create a preliminary operational plan. During September, Burke and his senior managers visited each of those units and revised those plans, resulting in new priorities for each of AT&T Comcast's 16 markets.

"The goal was to have a comprehensive business plan vetted before the close [of the merger]," Burke said.

Among those new priorities are leveraging Comcast's structure and people; increasing revenue by repackaging and remarketing digital offerings; and "right-sizing" staffing in the field.

"We have a very clear sense of what we have to do," Burke said.

Cox's growth story

For Cox, the quarterly numbers were equally impressive.

Cox reported its highest-ever quarterly growth in high-speed data subscribers in the third quarter, but told analysts it would revise downward its 2002 guidance for basic-subscriber additions.

In its third-quarter conference call with analysts, Cox said it added 157,300 high-speed-data customers in the period, besting its previous record by more than 40,000 subscribers. Telephony additions also beat expectations, as 73,000 additional consumers signed on. Analysts had estimated that Cox would add about 58,000 telephony customers.

Digital-cable growth slowed over the period, as expected, as 71,900 customers took a digital package — down from 102,000 digital additions in the second quarter. Earlier this year, Cox said it would allocate fewer marketing dollars to digital in favor of higher-margin services like high-speed data and telephony.

The MSO also said it would raise the price of its high-speed data product in select markets by about $5 per month, beginning in the fourth quarter.

Although Cox would not specify which markets would be the first to get a price hike, executive vice president of operations Pat Esser said that the increase would be implemented in about half of Cox's high-speed data markets by the middle of 2003.

Although basic subscribers increased by 13,000 over the period to 6.3 million (or 1.2 percent since the beginning of the year), Esser said on the conference call that overall basic growth in 2002 would be in the 1.1 percent to 1.2 percent range. Earlier guidance tagged basic growth at 1.3 percent to 1.5 percent.

Cox did affirm its year-end guidance of 14 percent to 15 percent revenue growth and 13 percent to 14 percent operating cash-flow growth.

Warner's concerns

In a research note, CS First Boston Inc. cable analyst Lara Warner expressed concern about the slower basic-subscriber growth and rising sales, general and administrative (SG&A) costs, which she said could make it difficult for Cox to expand its cash-flow margins. Cash-flow margins are cash flow as a percentage of revenue.

SG&A grew by about 19 percent to $555.2 million from $467.5 million in the previous year, which Warner attributed to increased installation costs. Cash-flow margins for the period were 35.6 percent, about 0.3 points below the previous quarter.

On the subscriber front, Warner said it was unclear whether the slower growth was due to increased competition or economic issues.

"We will be clearly focused on the fourth quarter," Warner said in a research note.

Warner was pleased with Cox's revenue and cash-flow performance — up 16 percent and 14 percent, respectively. In her research note, Warner said that robust high-speed data growth is expected to continue.

By the Numbers
Cox Comcast
In millions, except percentages Source: company reports
3Q02 3Q01 % Change 3Q02 3Q01 % Change
Cash Flow$453.4$396.314%$825.8$700.618%
Free Cash Flow$18.3($346.5)n/a$262$0.7n/a
Basic Subscribers6.256.1891.2%8.4988.4370.7%

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