Adelphia Rollout Costs Hit Cash Flow

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Increased capital expenditures to fuel a torrid fourth-quarter digital cable rollout helped to curb Adelphia Communications Corp.’s cash flow growth for the period, but most analysts were not overly concerned.

Adelphia reported cash flow growth of 4.1 percent in the quarter, well below the 10 percent that operators typically shoot for. Revenue in the period was up 7.4 percent, to $710.3 million.

Adelphia’s stock took a beating on April 2: It fell nearly 7 percent, or $2.1 each, to $37.69 per share. The stock closed at $35.13 on April 4.

But those numbers can be a little deceptive. Although cash-flow growth was pretty anemic for the quarter, Adelphia sacrificed higher growth rates in an effort to substantially boost digital subscribership.

Adelphia added 380,000 digital subscribers in the quarter — averaging 32,000 digital installations per week — to end the year with 904,000 digital customers. Its high-speed data rolls grew by 43,500 customers in the period — or about 3,300 installs per week — to 148,500 subscribers.

In a conference call with analysts, Adelphia chief financial officer Tim Rigas said the company expects to have 375,000 data customers by the end of 2001 and is already ahead of pace to meet that goal.

“We’re installing 4,500 data customers per week,” Rigas said. “We’re well on our way to installing 6,500 to 7,000 units per week by the end of the year.”

Banc of America Securities Corp. cable analyst Doug Shapiro said the slide in the stock is attributable to missing the cash-flow numbers, but added that investors should be pleased with the company’s rapid acceleration of digital and data services.

“If you’re going to miss your numbers, this is a very high-class miss,” Shapiro said. “In digital, they are already on a faster pace that the rest of the industry. The high-speed data business also is accelerating — they’re already on track to beat the consensus expectation today.”

Rigas told the analysts that Adelphia is rebuilding its plant at a 4 percent clip per quarter; 95 percent of its systems should be two-way capable by the end of the year.

Compared with other operators, Adelphia was late to the digital party — but it’s catching up quickly. Rigas said Adelphia averaged about 32,000 digital installations per week in the fourth quarter. Adelphia has managed to maintain that pace this year, averaging about 100,000
installs per month.

Adelphia plans to have about 1.6 million digital subscribers by the end of 2001, Rigas said.

Basic subscriber growth was about 1.3 percent for the quarter, to 5.5 million customers.

Rigas said Adelphia already has received several preliminary bids for its Puerto Rico systems and should have final bids in the next four to eight weeks.

Adelphia still plans to sell its non-strategic domestic systems, which have about 500,000 subscribers, he added. However, the book on those systems is not expected to go out for another four to six weeks.

Rigas said Adelphia closed its purchase of GS Communications Inc. — an operator with about 125,000 subscribers in Maryland, Pennsylvania, Virginia and West Virginia — in March. However, vice president of finance Jim Brown said the final deal figures came in lower than originally announced.

During the call, Brown said Adelphia paid $816 million for 155,000 subscribers (about $5,300 per customer) compared to the originally announced price of $836 million (about $5,400 per customer).

In its annual 10-K report to the Securities and Exchange Commission, Adelphia said it paid $705 million in cash and issued 2.4 million shares (worth about $110 million) for the GS systems and others. A breakdown of those other systems was not available.

Adelphia also closed a separate deal in March for Benchmark Media Inc., which had about 54,000 subscribers. Terms of that deal were not disclosed.

Analysts’ original estimates pegged the GS deal at about $750 million in cash, boosting the per-subscriber cost of that transaction to about $6,250.

Shortly after the deal was announced, Adelphia filed a lawsuit in York County, Pa., Common Pleas Court on Jan. 8, claiming that GS failed to meet certain deal covenants. Most analysts saw the suit as a way to renegotiate the transaction.

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