News

Sneak Peek at Earnings

4/18/2004 8:00 PM Eastern

Comcast Corp. and Cox Communications Inc. kick off cable’s spring earnings season next week, and analysts expect both to deliver reliably solid growth.

Comcast is set to report first-quarter earnings on April 28, with Cox following the next day.

Citigroup Smith Barney analyst Niraj Gupta wrote a report last week, offering his forecasts as to what those cable companies will say.

He figures Comcast will report that revenue for the three-month period rose about 8% over the same period a year ago, while cash flow rose 18%.

From Cox, Gupta is looking for revenue growth of 11% and cash-flow growth of 15%.

MARGIN GAINS

According to Gupta, Comcast is expected to continue to close the gap in cash-flow margins (cash flow as a percentage of revenue) at the former AT&T Broadband systems, compared with historic Comcast systems.

Cash-flow margins at the former AT&T Broadband properties are expected to be lower in the first quarter compared with the fourth quarter of 2003, reflecting a timing mismatch associated with the increase in programming costs and the implementation of basic rate increases. But Gupta expects margins to continue to improve throughout 2004, reaching 38.3% in the fourth quarter.

Gupta expects high-speed Internet additions to be about 403,000 customers in the first quarter — giving Comcast a total of 5.7 million — and digital additions to be about 247,000.

Basic subscribers should rise by about 40,000 in the first quarter — down from 50,000 additions in fourth-quarter 2003 — to 21.5 million.

PHONE FIGURES

Comcast is expected to lose about 6,500 telephony customers in the period, in keeping with its strategy of focusing on digital and data additions, set shortly after it acquired AT&T Broadband in November 2002.

But Gupta said voice offerings — particularly a voice-over-Internet protocol service set to expand to three new markets this year — have potential.

Gupta estimated Comcast’s existing telephone footprint is about 9 million homes. By 2005, he estimates VoIP to be available to roughly 20 million homes.

Gupta also predicts Comcast will back away from its unsolicited bid for The Walt Disney Co., made in February, in the next couple of months.

“We believe execution of a meaningful share repurchase program (i.e. $5 billion) through a Dutch tender offer or open-market activity is also possible,” Gupta wrote. “Such an announcement could serve as a catalyst for the stock and demonstrate management’s commitment to shareholder value maximization.”

COX ESTIMATES

At Cox, Gupta believes revenue will rise 11.9% and cash flow will surge 15%, fueled by data and telephony subscriber additions.

Gupta estimated first-quarter data adds would be about 130,000 customers, down about 15% from the same period in 2003. Telephony adds are estimated to be 71,500 in the first quarter, up 11.5% from the 2003 period.

Digital subscribers, estimated at 78,000 in 2004, would be slightly ahead of the 76,800 digital customers added in the like period in 2003.

Basic subscribers will also rise by 35,000 customers to 6.4 million, Gupta predicts, despite pressure from direct-broadcast satellite and regional telephone companies.

Cox has been under pressure because one of the more aggressive regional phone companies — SBC Communications Corp. — has a large footprint in Cox territory.

SBC has begun bundling EchoStar Communications Corp.’s Dish Network DBS service with SBC telephone and data offerings. Gupta estimates 42% of Cox customers are in SBC markets.

DBS IMPACT

Gupta figured the partnerships between telcos and DBS service providers could yield between 200,000 and 300,000 new subscribers for DBS in 2004.

While he expects SBC to be the most aggressive, he doesn’t see the partnership as a significant threat to Cox.

Cox should weather the storm with a strong three-product bundle and because it has lower DBS penetration in its markets than any other MSO in the industry, Gupta wrote.

Even if SBC/Dish managed to win 500,000 new subscribers in 2005, it would still have a minimal impact on Cox, Gupta wrote.

“Under this scenario, the SBC/Dish partnership could potentially wipe out the 1% growth or 64,000 new basic subscribers we are modeling for 2005, hardly a disastrous result.”

First-Quarter Forecasts
(In Thousands)
Cox Comcast
1Q03 1Q04E 1Q03 1Q04E
Source: Company reports; Citigroup Smith Barney
Revenue $1,366.3 $1,529.5 $4,230.7 $4,581.4
EBITDA $479.4 $551.3 $1,421.0 $1,677.7
Basic Adds 35.1 35.0 56.7 40.0
Digital Adds 76.8 78.0 168.5 247.0
High-Speed Data Adds 154.4 130.0 417.0 403.0
Telephony Adds (Loss) 64.1 71.5 (19.6) (6.5)

October