Slight Sub Growth Ahead

10/17/2004 8:00 PM Eastern

The third-quarter earnings season begins for cable MSOs next week, and for one analyst who has already released her previews, investor focus will remain on basic-subscriber growth.

Cable stocks took a beating following second-quarter results in July and August, when MSOs reported a net loss of 280,000 basic subscribers while direct-broadcast satellite TV providers DirecTV Inc. and EchoStar Communications Corp. added a combined 800,000 net new customers.

Cable stocks are down about 10% since Jan. 2.

Third Quarter Estimates
How MSOs are expected to fare:
Co. Basic Sub Adds Digital Adds High-Speed Data Adds Telephone Adds Revenue Growth OIBDA Growth
Source: Prudential Equity Group estimates
Time Warner Cable(18,000)92,000169,000 N/A11%10%

Prudential Equity Group cable analyst Katherine Styponias wrote in a research note that “basic-cable sub growth will take center stage” as investors analyze third-quarter results. She thinks those results will include only modest basic-customer gains. But, looking ahead for possible good news, she said telephone-unit growth could help the stocks.


Comcast Corp. is expected to kick off the earnings season, reporting results on Oct. 27.

Styponias was optimistic MSOs would show subscriber gains in the third quarter, coming off a seasonally weak second quarter and thanks to more-focused marketing efforts by some in cable.

Overall, Styponias estimates basic-subscriber growth at the four MSOs she covers — Cox Communications Inc., Comcast, Time Warner Inc. and Cablevision Systems Corp. — should rise a combined 36,000 (only Time Warner Cable is expected to lose basic customers in the period, about 18,000).

“But will that be enough to get cable investors interested in this sector again? We fear the answer in the near term is no,” Styponias wrote. “Unfortunately, cable stocks appear to be stuck in valuation limbo, the netherworld between growth and value investors. Concerns about growth prospects and competition have caused growth investors to exit while value investors would like to see even lower OIBDA multiples before they become interested.”

To get the stocks back, Styponias believes the sector needs a catalyst — and it could be strong telephony subscriber-growth results from Time Warner Cable.

Time Warner Cable began launching voice-over-Internet protocol telephone service late last year and has voice capability in all of its markets except Hawaii. Time Warner Cable expects to have voice service up and running in all 31 markets by the end of the year.

Time Warner Cable has not released subscriber numbers for its telephone service, but has said it has about 20,000 customers in both Portland, Maine, and Raleigh/Durham, N.C. Styponias does not expect Time Warner Cable to release telephone subscriber counts until the fourth quarter, but she does expect they will be “approaching something substantial and could serve as a positive catalyst for [Time Warner Inc.] shares and for the cable industry in general.”

Time Warner Cable most recently launched VoIP service in New York and New Jersey.

Strong Time Warner Cable telephone numbers, coupled with gains at Cablevision and Cox, should provide a lift that cable stocks have lacked, she said.

Cablevision launched VoIP in its New York metropolitan area late last year and had 115,000 subscribers in the second quarter.

Styponias estimates that Cablevision will add another 52,000 voice subscribers in the third quarter.

At Cox, which has led in circuit-switched voice service – with about 1.13 million customers — third-quarter telephony additions are expected to be about 74,000 customers.

An increase in telephony subscribers couldn’t come at a better time. Growth in cable’s other growth sectors — digital cable and high-speed Internet services — is likely to continue to decline as penetration levels pass the 40% and 30% mark, respectively.


For Comcast, Styponias estimates digital adds at about 234,000 and HSI adds at around 402,000. That’s down from the 473,000 data additions and 318,000 digital cable additions during the third quarter of 2003.

Comcast is expected to lose about 20,000 telephone subscribers — it de-emphasized the circuit-switched business after it acquired AT&T Broadband in November 2002 to focus on basic-subscriber and new-services growth.

But VoIP trials in three markets earlier this year should begin to have an impact in Comcast’s fourth quarter.

Styponias estimates Cox will add 92,000 digital and 117,000 data customers (down from 122,000 and 169,000 additions in 2003); Time Warner will add 92,000 digital and 169,000 data subscribers (down from 131,000 and 190,000 in 2003); and Cablevision will add 118,000 digital and 58,000 data customers (down from 158,000 and 64,000 in 2003).

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