Cablevision: Strong 2Q, But More Problems


Cablevision Systems Corp. reported strong growth in basic subscribers for the
second quarter -- outpacing direct-broadcast satellite competition for the third
quarter in a row -- but fell behind expectations for revenue and cash-flow
growth in the period and announced that its independent auditors had discovered
additional accounting problems at its AMC and WE: Women’s Entertainment cable

Cablevision added 12,000 basic customers in the period, ahead of its DBS
competitors, fueled by strong growth in digital cable. Digital-cable additions
for the period were 196,000 (up from 185,000 in the first quarter).

High-speed-data additions were 68,000, below the 83,000 customers the
Bethpage, N.Y.-based MSO added in the previous quarter.

Cablevision increased its high-speed-data guidance to between 1.025
million-1.05 million (compared with its prior forecast of 1 million-1.05
million) and upped its digital year-end guidance to between 875,000-900,000
(versus the prior range of 800,000-825,000).

The company’s cable systems’ adjusted operating cash flow rose just 5.6%
(behind analysts’ expectations of 8.5% growth), mainly due to
higher-than-expected legal fees associated with Cablevision’s past fight with
Yankees Entertainment & Sports Network. The cable systems’ revenue growth
for the period was 10%, outpacing expectations of 8.4% growth.

In a conference call with analysts, president and CEO James Dolan said the
MSO spent about $8.4 million in legal fees and indemnity claims during the
quarter tied to YES.

Rainbow Media Holdings Inc.’s core cable networks -- AMC, WE, The Independent
Film Channel and its consolidated regional sports networks -- fared better, with
revenue up 33% to $152.7 million and AOCF up 55% to $61.9 million, mainly due to
strong affiliate-fee revenue and advertising sales.

Cablevision revised its 2003 guidance for adjusted operating cash flow for
its telecommunications division (which includes its cable operations) downward
to between 14%-16% from between 16%-18%.

For the entire company, Cablevision reiterated is 2003 revenue guidance of
between 10%-12% and operating-cash-flow guidance of between 17%-19%.

Investors were apparently alarmed at the guidance revisions and the
revelation that new accounting irregularities were discovered at two of the
company’s cable channels, driving Cablevision stock down $1.73 per share (8.24%)
to $19.27 Tuesday.

In June, Cablevision announced that it had discovered improper expense
accruals at its AMC unit and terminated 14 employees as a result, including AMC
president Kate McEnroe. The MSO said it did not expect the improper accruals to
affect its financial results.

At the time, the company said it had hired Wilmer, Cutler & Pickering to
investigate AMC and its other core networks and it had forwarded information to
the appropriate authorities.

Since then, Cablevision said, the law firm has identified additional amounts
of improperly recognized expenses in the AMC and WE financials. In a press
release, the MSO said the additional amounts are immaterial -- less than $1
million in each of the years 2000-2002 and about $3.4 million in 2003.

Cablevision’s auditor, KPMG International, said that as a result of the
ongoing investigation, it is unable to complete its review of Cablevision’s
financial statements.

Cablevision has said that it does not expect to restate its financial figures
as a result of the investigations. However, on the conference call, vice
chairman Bill Bell said the probes could delay financing.

"If we don’t have comfort at some point in time, we will have to delay
financing until we do," Bell said. "We are actively trying to resolve that

But Dolan said the inquiry will not affect plans to spin off its Rainbow DBS
unit and its Clearview Cinemas holdings.