Good Time for Good News

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Cable companies like to head into the annual industry convention riding a tide of good news.

Even with mixed outcomes on basic-subscriber growth, that's the case this week after the top two firms, Comcast and Time Warner Cable, reported first-quarter results.

Maybe most encouraging for the group, Comcast's stock ticked up Thursday even after saying it lost 57,000 basic subscribers in the period.

That's 0.2% of the company's 24.7 million basic customers. And it's a reversal of the 83,000 subscribers added in the same period a year ago.

Not a positive trend, that. Still, Comcast's stock rose a solid 8.5%, to $22.31, by day's end.

Time Warner Cable had better basic-customer news, adding about 55,000 when analysts had predicted it would lose about 32,000. It closed Thursday at $30.10, up 7.5%.

Why? There's more to the cable business now than just getting television subscriptions. So cable stocks rising on the basis of new fundamentals is a welcome surprise.

Wall Street now looks at more than basic subscribers. Particularly for Comcast, the other metrics of its business — from Internet access to telephony — were solid if not stunning. “Broadband was the highlight,” as Sanford C. Bernstein's Craig Moffett said in a note.

A net gain of nearly half a million Comcast cable-modem customers in the quarter was 50% ahead of expectations, he said.

At Time Warner, the net gain of broadband subscribers was around 300,000. Both operators are gaining broadband share against Verizon and AT&T, Moffett noted.

This before either has a “wideband” product in the market that, logic dictates, should help win even more Web surfers upgrading from digital subscriber line. (With 3 Mbps DSL at the bottom, 50 Mbps wideband at the top, I'm thinking a 10 Mbps cable service priced in the middle will look even better.)

Comcast also gained close to 500,000 digital-cable customers, and about 450,000 digital-cable subscribers upgraded to HDTV and DVRs.

Phone customers continue to rise: Comcast added 639,000, smaller Time Warner added 289,000.

The basic-video business picture is interesting. Moffett pointed out in a note Friday that when you add up what AT&T, Verizon, Comcast and Time Warner Cable reported, basic-video subscriber additions were 176,000 ahead of the first quarter in 2007. Even though fewer new homes are being added and vacancy and foreclosure rates are rising.

Wired video providers seem to be getting a bigger slice of the pie, Moffett said, raising a question about what the subscriber picture will look like for DirecTV and Dish Network when they report first-quarter numbers on May 7 and 13, respectively.

Time Warner Cable CEO Glenn Britt said stepped-up marketing bolstered its video gains. In New York City, it's clear TWC is going hard after Verizon Communications, ahead of the telco's impending 12-year franchise here. TWC added a couple of dozen HD channels in Brooklyn, Queens and Staten Island last week, and began a new ad campaign attacking Verizon's supposedly complicated billing.

The game is definitely on, and cable is enhancing a strong hand.

Britt and Comcast chief operating officer Steve Burke may have different views about how big the potential is for converting over-the-air TV watchers into cable subscribers, but clearly the digital transition is an opportunity to pick up new customers.

And the two big operators are also still at the start of adding small- and medium-sized businesses to their rolls of phone, Internet and, yes, even TV customers.

Capital spending is always a concern for cable investors, but both Comcast and Time Warner Cable delivered sharply higher free cash flow in the quarter. Comcast, for instance, reported free cash flow of $702 million, up from $442 million.

As Moffett said, “Comcast's results lend support to the still-contrarian view that cable will weather the advent of telco video relatively well, with moderate share loss in video being more than offset by much larger (and higher margin) gains in data and voice.”

Yes, cable operators should have plenty of good things to talk about at the convention in New Orleans in a couple of weeks.

Like happier investors.

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