News

Rainbow Media Probe Could End Soon

3/07/2004 7:00 PM Eastern

Cablevision Systems Corp. reported mixed fourth-quarter results last week, but said an independent investigation of accounting practices at its Rainbow Media Holdings Inc. division could be completed by March 15 — setting the stage for the spin-off of the Rainbow DBS direct-broadcast satellite unit.

Overall, revenue rose 12% in the quarter, to $1.2 billion, but adjusted operating cash flow (AOCF) declined 19% to $249.9 million, due to the costs of launching the Voom-branded DBS service and a decline in adjusted operating cash flow at both Rainbow Media and Madison Square Garden.

Full-year net revenue increased 10%, to $4.2 billion, and AOCF rose 5%, to $1.1 billion, versus 2002.

TURNED TO LOSS

Cablevision also reported a $46.2 million loss in the period, compared with year-earlier operating income of $70.6 million, because of Voom launch costs, along with higher depreciation and amortization costs and higher stock-plan expenses.

Among those increased expenses: $33 million in bonuses paid to management. Cablevision said the increase was an effort to “catch up” after withholding management bonuses for the previous two years.

Cablevision hired independent law firm Wilmer Cutler & Pickering in June to conduct an investigation into improper expense accruals at Rainbow Media. The discovery of those improper accruals led to the firings of 14 executives at AMC and WE: Women’s Entertainment, including former AMC Networks chief Kate McEnroe.

That investigation — and a second conducted by the Securities and Exchange Commission — have held up the Voom spin-off, which was originally scheduled for January. Its completion should remove a major overhang on the stock.

Cablevision’s share price declined 91 cents (3.5%), to $25.33 on March 2. The stock dipped slightly on March 3, to $25.20.

The MSO showed strong new-services growth — including additional 28,700 customers for a new voice-over-Internet protocol telephone service.

Cablevision averaged 1,800 VoIP additions per week in the quarter.

“It looks like a very attractive future product for us,” said cable and communications division president Tom Rutledge.

Cablevision added 150,200 digital subscribers in the quarter, to reach 900,000, or 31% penetration by year’s end. Some 72,200 high-speed Internet subscribers were added in the quarter — to total 1 million across the MSO, for a 24% penetration rate.

HDTV subscribers, which reached 38,000 by year’s end, grew another 23,000 households by the end of February, Rutledge said, giving it 61,000 HDTV subscribers.

The only chink: Cablevision lost 11,400 basic subscribers over the quarter and 19,600 for the full year. Rutledge said the company completed its New York City rebuild in the fourth quarter, enabling it to better compete with DBS in the Bronx and Brooklyn, which accounted for 90% of the MSO’s basic subscriber losses.

Additional growth in advertising and VOD, plus the digital-video and high-speed data additions, helped total revenue per basic video subscriber per month jump 17% to $76.74, versus $65.56 a year ago.

Cablevision projects it will reach free cash flow status by fourth-quarter 2004. The company projected basic subscriber additions of 0.5% in 2004 and growth in revenue generating units of between 850,000 and 900,000.

The company expects revenue growth between 12% and 14%, adjusted OCF growth between 13% and 15% and capital expenditures of about $600 million.

Rutledge said Cablevision has launched VoIP across its entire footprint. Per-subscriber costs are at $150, giving Cablevision a payback period of less than 12 months.

Rutledge and Cablevision president and CEO James Dolan said VoIP would be used to bring new subscribers into the fold.

“We will target new households that aren’t Cablevision subscribers,” Dolan said.

Added Rutledge: “Voice has the potential for driving data. We can offer a value proposition to everyone.”

Rutledge said the MSO will introduce attractive bundled packages of voice, video and data. In some areas, high-speed Internet penetration is pushing 60% of homes passed.

Penetration is north of 40% on Long Island, giving Cablevision plenty of homes in which to market VoIP.

Perhaps the most surprising statistic was the MSO’s revenue per home figure. It’s been many years since cable produced 17% growth in average revenue per subscriber.

Rutledge attributed some of that to continued growth in digital, high-speed data and even VoIP. But advertising revenues increased 12% year-over-year, and VOD and SVOD quarterly revenue per digital subscriber rose 44%, from $3.97 last year to $5.72 in 2003. A year ago, 18% of digital subscribers were paying for an SVOD service. That number rose to 34% by year-end 2003.

CHURN’S DOWN

Despite the basic losses, Rutledge reported better churn numbers. The digital churn rate stood at 3.3% a month, he said, while high-speed Internet churn dropped from 2.6% in the third quarter, when a rate increase took effect, to 2.2% in the fourth quarter.

In responding to analysts’ questions, executives provided few specifics on Voom costs or plans for 2004. The company spent roughly $160 million in 2003 on Voom, but declined to estimate 2004 costs.

Those details, along with potential financing plans, are expected to be included in a Form 10 report to be filed with the SEC in the second quarter.

Revenue at Rainbow Media’s core networks rose 26% to $167 million, but operating income decreased 42% to $24.5 million, due to a $17.9 million write-down of certain film and programming contracts and $4.9 million in legal and audit expenses associated with the Wilmer Cutler investigation.

March