Insight Takes Analyst Hit

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Already stung by a disappointing second quarter and the resignation of a top executive, Insight Communications Co. sustained another minor blow last Thursday when Fulcrum Global Partners cable analyst Richard Greenfield downgraded the stock to "sell" from "neutral," citing a possible shift in the MSO's strategy.

Insight shares Thursday dropped nearly 6% (63 cents) to $11.33 in 4 p.m. trading. At about 2:30 Friday afternoon, the price was down another 20 cents, to $11.13.

In his report, Greenfield said that in light of Insight's soft second-quarter results — it lost 13,000 basic subscribers, and digital and telephony subscriber additions were weaker than expected — he believed the MSO was contemplating a strategy shift from growing its advanced services to focusing on accelerating basic-subscriber growth.

"While [Insight] has high-quality, well-clustered cable systems, it has spent a significant amount of time and effort focusing on new products (particularly telephony) and advanced technology, which we increasingly sense has distracted management from focusing on the core video and data business," Greenfield wrote.

He also said Insight was trading at about 10 times estimated 2004 cash flow, a premium to almost all peers (other than Cox Communications Inc.), and at a "notable" premium to Comcast Corp., whose stock Fulcrum rates a "buy." Comcast owns half of Insight.

The downgrade came about two weeks after Insight president and chief operating officer Kim Kelly announced her resignation, stating she wanted to pursue other opportunities. Kelly will stay on at Insight until Nov. 30 to help with the transition. Greenfield's report did not cite Kelly's departure as a factor in the downgrade.

In an interview last Thursday, Insight CEO Michael Willner said no major strategy shift was in the works.

"We're always reviewing our strategy, but that is nothing new," he said. "We're in the middle of our budget season right now, this is exactly when you review your strategy for next year."

Willner said the New York-based MSO was taking a closer look at its basic-subscriber business, "but I don't think that is a shift away from what we're doing."

On its second-quarter conference call last month, Insight said the subscriber losses were due to seasonal disconnects when college students leave school and transients move to summer residences. The telephony slowdown was mainly due to delays in rolling out the service in the first half of the year as Comcast . — Insight's telephony partner — got its hands around the telephone business.

Insight had said on the second-quarter conference call it expected telephony adds to pick up in the second half.

Still, Greenfield believes in light of the bad quarter, Insight is likely to revise cash-flow guidance downward. Insight had said it expected cash flow to grow 11.5% to 13% for the year.

"It's not that I think that it's going to be a train-wreck type year," Greenfield said in an interview. "I think growth is occurring more slowly than they originally expected, and they're going to have to bring guidance down, which was fairly aggressive going in to the year. They've already signaled the bottom end of the [cash-flow growth] range, and I think the bottom end of the range is really tough to get to."

A "sell" stock to Fulcrum is one expected to produce a negative return of 15% or more over the 12 months after the recommendation. On Aug. 6, Greenfield also cut Mediacom Communications Corp. to "sell" from "neutral" on weak second-quarter results and "extremely weak" second-half guidance from management.

Since Aug. 5, Mediacom's share price has fallen from $8.85 to last Thursday's close of $7.27, or about 17%.

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