Classic Hit on Digital Rollout Costs

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Classic Communications Corp.'s already-hurting stock dropped 26 percent-or $1.53-to $4.25 per share last Monday after a Goldman Sachs & Co. analyst's downgrade.

Goldman's Barry Kaplan removed Classic from his "recommended list" and downgraded the stock to "market performer" based on his expectation of weak third-quarter performance.

Classic's slide continued on Tuesday, with the stock closing at $4, down 25 cents.

In a research note Kaplan said he expected Classic's third quarter revenue to be flat at $45.5 million, and cash flow for the period to be down about 10 percent to $18 million, mainly because the operator has boosted its marketing spending as it steps up its digital cable rollout.

Kaplan lowered his full-year 2000 cash flow estimate for Classic by about 4 percent-from $77 million to $74 million. For 2001, he expects Classic to generate about $195 million in revenue-a 6.5 percent increase-and cash flow to rise more than 5 percent to $78 million.

"However, with the company's shortfall in 2000, we are concerned about its ability to achieve its 2001 targets," Kaplan wrote.

Classic announced Wednesday that it finished the third quarter with 11,200 digital customers, surpassing its targets. The company said it will report about 404,000 subscribers for the quarter, down less than 1 percent.

But revenue for the quarter will be flat and cash flow lower for the period, the company said in a statement, due mainly to increased technical, customer-care and marketing costs for the digital product, as well as lower subscriber numbers.

Classic is scheduled to release results on Nov. 8.

Although Kaplan believes Classic is moving to roll out digital and regain subscribers-he estimated that it lost 3,500 customers in the third quarter-the stock will continue to trade at a significant discount to its cable peers.

"Until we see visible improvement in its growth and ability to achieve expectations, we believe Classic's stock price will remain under pressure," Kaplan wrote in his report.

Classic's stock has taken a beating since its $30-per-share initial public offering last December. The stock, which had been at as high as $39 in the first month, has been trading at under $10 since early May.

Classic began taking steps to retain subscribers in conjunction with its second-quarter results in June. It launched a new limited-basic tier for $15 per month and repackaged and relaunched its digital product.

Although those programs have been in effect for a little more than a month, they have seen some success. But they will cost money, adding to cash-flow woes.

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