Gains Equal Losses


Cable investors and analysts eagerly awaited last week's second-quarter results from Comcast and Cox, hoping strong numbers would deflect attention from bad-news stories — like that of Adelphia Communications Corp. — and from an overall distaste for debt-heavy companies that don't report profits.

The good news: Comcast Corp. and Cox Communications Inc. reported some of their strongest financial numbers ever.

The bad news: their stocks went down anyway.

Cox, which released its results first, on July 31, actually received a slight lift in its share price after it reported 16 percent rates of revenue and cash-flow growth. Cox rose 70 cents last Tuesday, closing at $27.

But those small gains were reversed the next day — and then some — when Comcast reported results that include the Philadelphia-based MSO's best operating cash-flow growth in five years.

Revenue at Comcast's cable operations rose 11.9 percent and cash flow was up 15.3 percent. Overall, Comcast reported that revenue rose 11.7 percent and cash flow rose 20 percent.

What's more, Comcast showed better-than-expected growth in digital-cable and high-speed-data customer additions, prompting the company to boost digital estimates by 100,000 customers — to as much as 800,000 total additions — by the end of the year.

The company installed 336,000 revenue-generating units in the second quarter, or more than it did in the whole of last year (301,000). High-speed-data revenue nearly doubled in the quarter compared to last year, to $139.6 million from $69.3 million. High-speed data subscribers rose 12.3 percent, or 128,000 customers, over the first quarter of this year, to 1.17 million.


Analysts that recommend cable stocks were at a loss as to why the sector was down, and why Comcast and Cox led the day's losers. Of the nine publicly traded MSOs, only Mediacom Communications Corp. and Insight Communications Co. showed slight gains.

"We're in a panicked market that won't touch things simply based on balance sheets," said Stifel Nicolaus and Co. cable analyst Ted Henderson, a cable bull. "Although Cox and Comcast have the best balance sheets in the cable industry, still they're leveraged companies.

"There seems to be a presumption that these guys aren't going to be able to grow into their balance sheets."

Henderson added that cable stocks were up slightly during Comcast's earnings conference call, before they began to plunge. That, he said, is an indication that cable investors are interpreting any upward tick in the sector as an opportunity to bail out.

"The difference is, four or five years ago, these stocks would have been up easily 10 percent, if not more, on numbers like this," added SunTrust Robinson Humphrey cable analyst Gary Farber, whose top cable pick is Cox. "For most people who follow the sector, these were results that five years ago people had forecasted, and they've delivered."

Comcast's content division also showed strong results, he said, with revenue up 2.7 percent and operating cash flow up 12.6 percent. QVC alone posted revenue and operating cash flow increases of 13.5 percent and 21.7 percent, respectively.

"The thing to look at is the strength across the board," Farber said. "It's not like they're saying they're great cable operators — they're great managers of their businesses."

In fact, Comcast showed free cash flow — or earnings after capital expenditures and interest payments are made — of $398 million for the first half of the year. That compares to a free-cash-flow deficit of $193 million in the first half of 2001.

The company said it was on track to report free cash flow of between $800 million and $1 billion for the year. In a call with analysts, Comcast executive vice president and treasurer John Alchin said that the cable unit contributed 75 percent of the free cash flow in the period.

That should have been a positive sign to investors who've been waiting for positive free cash flow from cable operators.


"If you try to pick apart the numbers and find a negative trend, you're going to have a difficult time," said Banc of America Securities LLC cable analyst Doug Shapiro. "Cox had an acceleration in basic-subscriber growth, Comcast had digital-subscriber additions and there was data strength across the board. The fundamentals continue to improve as the valuations continue to decline."

Cable stocks are down about 66 percent since the beginning of the year, battered by a weak economy and accounting scandals and criminal and civil charges levied at one of its top operators, No. 6 MSO Adelphia Communications Corp.

Other cable operators have gone out of their way to reassure investors that their accounting practices are above board. Both Cox and Comcast said that they would certify their financial statements by Aug. 14, as required by new Securities and Exchange Commission rules. Comcast did so on Aug. 1.

Other MSOs, including Charter Communications Inc., Cablevision Systems Corp., AT&T Corp. and AOL Time Warner Inc., also are expected to certify their financial statements.

Speaking to analysts, Cox CEO Jim Robbins tried to minimize the Adelphia taint on his company by reassuring that the Cox family — which controls privately held Cox Enterprises Inc., a 63 percent equity owner of Cox Communications — has no similar issues with the MSO.

"Let me assure you that there should be no concern with regard to Cox Communications and our relationship with Cox Enterprises and the Cox family," Robbins said.

Aside from the 16 percent revenue and cash-flow growth — above analysts' estimates by at least a percentage point — Cox reported basic-subscriber growth well ahead of industry benchmarks.

In the second quarter, Cox increased its basic-customer rolls by 1.6 percent, raising its year-end estimates to 1 percent at a time when the rest of the industry considers basic growth of 0.5 percent to be high.


While digital-cable subscriber growth slowed in the quarter — Cox averaged 7,900 weekly digital additions, down from the 12,000 in the first quarter — most analysts said that was expected, given Cox's relatively high digital penetration rate of 26 percent now.

Cox said it was focusing its digital efforts on new customers, a more efficient use of marketing dollars.

Shapiro agreed. "Cox is basically saying 'We're getting most of our new digital subscribers from new connects,' " Shapiro said. "Spending a lot of money marketing trying to get your existing analog sub base to upsell to digital, is probably not an efficient use of capital."

"Digital is working for us," Rooney said. "It's less necessary in our markets because we really look to the [voice, video and data] bundle as being the key driver for churn reduction."

Shapiro said that as operators approach 30 percent digital penetration, it is logical to expect growth to fall off slightly.

He added that it makes more sense to devote more marketing dollars to other products, like video-on-demand and high-speed data.

"The reality about digital is that the organic demand pull is nil," Shapiro said. "Initially, one of the major drivers [for digital growth] was premium subscribers. Now that that is exhausted, the only thing driving digital is the marketing budget and new connects."

But Cox also is slowing down its VOD rollout.

The MSO had planned to launch its "Entertainment on Demand" service in seven markets, representing 43 percent of homes passed. It will now launch in only four markets serving 30 percent of its homes passed by year's end.

The company said it was redirecting capital dollars from the "saved" launches to San Diego and Hampton Roads, Va., and it will offer premium-network subscription VOD in those markets.

The moves will allow Cox "to fully understand the business model before making further investments," executive vice president of operations Pat Esser said.