Good Things Come First

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The first-quarter earnings season kicked off with a bang last week, with Comcast Corp. reporting strong gains, Cox Communications Inc. showing robust growth in its three-product bundle and even troubled Charter Communications Inc. reporting encouraging results.

Most eyes were focused on Comcast's earnings release last Thursday. Analysts were hoping for a strong showing at Comcast, the largest MSO in the country and one of the main drivers of cable-sector stocks.

Comcast did not disappoint. Revenue rose 10% in the quarter, to $5.2 billion, and cash flow was up 22% to $1.6 billion. At the cable operations, revenue rose 10% and cash flow was up 25.3%.

"If you look at the major themes, basically everybody in the industry is doing what they said they were going to do," said Banc of America Securities LLC cable analyst Doug Shapiro. "You're seeing evidence of [capital expenditures] coming down, you're seeing evidence of continued solid basic subscriber growth and the high-speed data numbers have been enormous.

"That's all in the face of aggressive competition. It seems like all of these guys have talked the talk and now they're walking the walk."

Of the four major MSOs that reported earnings last week — Charter, Cox, Comcast and Insight Communications Co. — all except for Charter showed basic subscriber growth. And each one reported substantial increases in high-speed data subscribers.

Comcast reported the highest basic subscriber growth (57,000), followed by Cox (35,000) and Insight (8,300). Although Charter lost about 51,000 customers in the quarter, it was one-third of the 157,000 subscribers the MSO lost in the same period last year.

"Even at Charter, it seems like there is a light at the end of the tunnel," Shapiro said.

The first quarter is traditionally a strong one for cable. Subscriber additions likely won't be as strong in the second quarter, mainly because of seasonality, as part-time residents leave the Sun Belt for the summer.

Doing it their way

Interestingly, these large MSOs managed to report strong results by focusing on different aspects of the business: Cox, by concentrating on selling the bundle of voice, video and data products; Charter, through a focus on higher-margin customers; and Comcast, through old-fashioned good management.

Comcast has been under the microscope ever since it closed its deal to acquire AT&T Broadband in November. But even under such intense scrutiny, the Philadelphia-based MSO managed to outpace analysts' already high expectations for the first quarter, showing signs that the turnaround at the former AT&T systems would occur much sooner than expected.

Comcast added 42,000 subscribers from former AT&T Broadband systems alone, spurring it to increase its year-end basic subscriber guidance to between 75,000 and 100,000 customers. Comcast had previously expected subscriber growth to be flat in 2003. Overall, revenue increased 10%, to $5.52 billion, and cash flow rose 22%, to $1.6 billion.

Behind AT&T growth

Comcast also boosted year-end high-speed data guidance to 1.6 million net additions from previous estimates of between 1.3 million and 1.4 million additions. For the quarter, 417,000 high-speed data subscribers signed on, up from the 367,000 customer additions in the fourth quarter.

The growth in the former AT&T systems was a surprise. Broadband had lost 180,000 customers in the first quarter last year and 50,000 subscribers in the fourth quarter.

Comcast cable division president Steve Burke said on the conference call that the MSO's focus on video, an aggressive program to sell service to new home-builds, promoting Hispanic networks in areas with large Hispanic populations and a dish buy-back program were all factors in the recovery.

Subscriber growth also translated into improved cash-flow margins (cash flow as a percentage of revenue) at the former AT&T systems, to 28.9% from 22.6% in the fourth quarter. Overall cash flow margins were 33.6%.

The margin expansion at the former AT&T systems was driven mainly by significant reductions in personnel costs associated with the removal of Broadband's former headquarters operations in Denver.

In an interview, Comcast executive vice president and treasurer John Alchin said that there are more cost savings opportunities within the former AT&T systems and hinted that it would probably take less time to bring those systems to Comcast-like operating levels.

Comcast systems are currently producing 41% cash flow margins and the stated goal is to reach combined margins of 36% by the end of the year — 32% for AT&T and 41% for Comcast.

"We said at the beginning of the deal that within three years we could get both companies to 36%," Alchin said. "The trends we have established with the fourth and first quarters would indicate that will take something less than three years."

Comcast also reduced its debt during the period by about $2 billion to $27.2 billion — mainly through the refinancing of existing debt and the restructuring of its Time Warner Entertainment partnership with AOL Time Warner Inc., through which Comcast received $2.1 billion in cash.

Comcast is on track to finish the year with outstanding debt of between $25 billion and $26 billion without disposing of any assets.

On the conference call, Comcast CEO Brian Roberts said that even at that lower debt level, Comcast would have about $8 billion of other partnership assets on its books, including its 21% stake in Time Warner Cable (obtained through the TWE restructuring); its 50% interest in Insight; and its 50% interest in cable partnerships in Houston and Kansas City with AOL Time Warner.

"It is a goal to find ways to restructure those partnerships and come up with either additional assets or pay down additional debt," Roberts said.

In an interview, Alchin said what Comcast ultimately does with these partnerships will be decided over time. Nothing, he added, is imminent.

"These are things we will spend more time on and work out how best to rationalize these assets," Alchin said. "We don't report or manage any of these assets. There is a lot of value there. Discussions and negotiations are going to begin over time."

Gains at Charter

While Charter did not have as robust a quarter as its peers, it did have pockets of improvement.

Revenue rose 9.7% to $1.18 billion and operating cash flow grew 7.5% to $458 million, in line with most analysts' expectations.

Charter CEO Carl Vogel said on a conference call with analysts that the operational changes and cost cutting initiatives began last year — Charter reorganized into five geographic division and laid off about 10% of its work force — have begun to show positive results.

For example, Charter is squeezing more profit from operations — cash flow from operations was $162 million in the quarter, up 59% from the same period last year. In contrast, cash flow from investing activity was $231 million, about one-third of the $604 million investments generated last year.

As a result, cash requirements for the business were just $69 million in the quarter, compared to $502 million in the prior year.

At Cox, CEO Jim Robbins continued to hype the bundle, and had the numbers to back it up.

Revenue for the first quarter grew 16% to $1.05 billion and operating cash flow was up 22% to $479 million.

That growth was primarily driven by Cox's three-product bundle: It added 150,000 bundled customers, defined as subscribers that take at least two services, in the period. Cox has a total of 1.8 million bundled customers, or 29% of its total customer base.

For the period, Cox increased its high-speed data customers by 154,000. Telephony customers increased by 64,000 and digital cable rose by 77,000 customers.

Insight loves sub gains

Insight officials were beaming over basic growth of 8,300 subscribers, twice what direct-broadcast satellite providers gained in its territories during the quarter, according to Insight president Kim Kelly. "We had very good customer gains."

Insight posted 20,000 net additions in digital subscribers, 23,500 cable-modem subscribers and 7,100 telephony subscribers, said Kelly. The adds came despite rough winter weather in many of its markets, which curtailed sign-up activity.

Still, Kelly said, revenue generating units were up 18% over first quarter 2002, and 20% over fourth-quarter 2002.

Kelly also said digital set-top penetration could continue to increase because of HDTV. "We had really strong HD numbers," she said, adding that Insight has signed HD deals with 25 of the 28 broadcast affiliates in its markets. That gave Insight subscribers the chance to watch the Super Bowl, the Final Four, the Kentucky Derby and The Masters in HD, which DBS could not do, she said. Insight executives said it planned to launch a $9.95 "basic" HDTV tier later this year.

On VOD, Kelly said 80 percent of Insight subscribers are VOD enabled. Usage rates range from 28 percent to 50 percent among Insight's 355,0000 digital subscribers who can receive VOD. Insight is averaging $3 a month per digital subscriber in VOD revenue, she said.

Insight said average revenue per subscriber rose 12%, year over year, to $55.34 per month, driven by high-speed gains and basic rate increases.

Matt Stump contributed to this story.

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