Mediacom Sags in Digital Doldrum


Mediacom Communications Corp. enjoyed a short-lived increase in its stock price after delivering quarterly results that were a little ahead of guidance — and promising to cut capital spending next year — but fell after one influential analyst lowered his rating on the company.

Mediacom stock rose 6 percent, or 27 cents, to close at $4.66 on Aug. 12, the day it released its second-quarter results. (It was the last big public MSO to do so.)

But the next day, after Salomon Smith Barney Inc. analyst Niraj Gupta dropped his rating on the company from "buy" to "neutral," Mediacom took a nosedive. It closed at $4 on Aug. 13, down 14 percent or 66 cents. The stock hit a new 52-week low of $3.96 during that day.

Mediacom continued to fall on Aug. 14, hitting a low point of $3.60 before rallying to close at $3.98, down 2 cents.

Though Mediacom generally delivered results in line with analysts' expectations, it fell short on digital-subscriber growth, which was flat in the quarter compared to analysts' estimates of about 9,000 digital additions. The analog-subscriber count also declined by 15,000 since the end of the first quarter, which company officials said was more than they'd expected, even though Mediacom raised basic and digital rates in that period.

That appeared to be the last straw for Gupta, who took note of the company's disappointing digital growth and high digital churn rates. He also lowered his 12-month price target on the stock, from $16 to $4.


In his report, Gupta said the flat growth was due to a major repackaging of the digital product — mostly in systems Mediacom bought from AT&T Broadband in July 2001 — and that trend should reverse once customers get accustomed to it. But he still characterized the digital results as disappointing.

Gupta also speculated that given the low price of Mediacom's stock — and the fact that company executives own more than 50 percent of outstanding shares — the MSO could be taken private for as little as $265 million.

"Our revised price target reflects our view of an appropriate public market valuation for Mediacom and is not indicative of the value the company could command in a going-private transaction," Gupta wrote. "We believe such an alternative is likely to receive serious consideration if the stock continues to languish."

In a conference call with analysts, Mediacom CEO Rocco Commisso addressed the possibility of going private by reading — very quickly — a statement drawn up by his attorneys. That statement basically said that any such transaction would have to be approved by Mediacom's board of directors and that no such proposal has been made to the board.

"Our stock, I'll leave it to others to decide if it's expensive or cheap," Commisso said later on the conference call. "Our liquidity is what it is. But we have as strong a percentage of cash flow as anybody else in this industry."


Gupta wasn't the only analyst alarmed by the lack of digital-subscriber growth. Credit Suisse First Boston cable analyst Lara Warner maintained her "strong buy" rating on the stock, but expressed concern that the company might not be able to maintain its high cash-flow margins.

Cash-flow margins, or cash flow as a percentage of revenue, at the Mediacom LLC unit — which does not include the former AT&T systems — were about 45 percent in the quarter. The former AT&T systems had cash-flow margins of about 39 percent in the period.

"We remain watchful as to whether Mediacom can sustain 45 percent margins in the LLC subsidiary or will it continue to be pressured over time," Warner wrote.

Mediacom also has access to capital, through about $990 million in untapped credit facilities, and is making moves to lower its leverage, Commisso added.

The company said it would shave about $20 million from its capital-expenditure budget next year — to between $390 million and $410 million — mainly through savings on customer equipment like digital set-top boxes.

Commisso also said he expects Mediacom to begin reporting positive free cash flow — or operating cash flow after capital expenditures and interest payments — in the second half of 2003.

Investors who've soured on companies that carry a lot of debt, like cable operators, are taking a closer look at free cash flow as, in cable's case, operators near the end of a hugely expensive system-upgrade cycle.

Mediacom said that it should have about 94 percent of its systems upgraded by the end of the year, up from the current 85 percent.

The MSO stuck to its 2002 guidance on revenue (the $923 million to $931 million range) and operating cash flow ($380 million to $385 million).

But with the digital-TV customer count stuck at 329,000 (the same figure as at the end of March), Mediacom lowered its forecast of digital customers by about 20,000, to a year-end maximum of 380,000.

In the quarter, revenue rose 10.5 percent, to $230.8 million, and operating cash flow rose 20 percent, to $95.9 million.

The guidance had been for 10 percent and 18 percent growth, respectively.

Excluding the 3,000 subscribers Mediacom bought, the company's basic-subscriber count ticked up 0.5 percent from a year ago. But the basic count of 1.585 million at June 30 had declined by 15,000 since March 31.

Mediacom raised basic rates by an average of about $3 earlier in the first quarter.

The MSO also bumped up digital-TV rates, eliminating discounts that had been in place in former AT&T Broadband systems that represent about half the basic subscriber base.

Mediacom knew some customers would downgrade to analog because of the price increase, but there were more disconnects than expected, officials said.

The high-speed-data customer count rose 18,000, to end the quarter at 145,000.

On the call, Commisso was asked the status of efforts to renegotiate contracts with programmers, which stemmed from Mediacom's acquisition of the AT&T systems. He said Mediacom has reached a number of new agreements, but that he wouldn't provide details on the call.

"They're coming down on line with what we've put in our numbers," he said.