Trying to be Cheery

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While Adelphia Communications Corp.'s debt woes still hang over the cable industry, some solid MSO earnings reports issued last week helped spread cheer in a sector that could use some.

Comcast Corp., Cablevision Systems Corp. and Insight Communications Co. last week each reported first-quarter results — in Insight's case, preliminary numbers — that topped analysts' expectations.

Adelphia even offered a hint at what could be some better news last week, issuing a statement on May 2 that said it would likely consolidate about $1.6 billion worth of debt currently held in a private partnership, Highland Holdings Inc., into the MSO's balance sheet.

The statement gave some analysts hope that Adelphia's long-awaited 10-K annual report — which is expected to shed some light on the assets held in the Highland partnership — could be filed as early as this week.

Highland Holdings, a private partnership controlled by Adelphia's ruling Rigas family, had previously said it had about $2.3 billion in debt. Some of that was used by the Rigases to purchase Adelphia stock.

What helped crush Adelphia's stock — it's fallen more than 70 percent in the six weeks since the revelation was made — was the fact that the MSO could be liable for the debt.

Most analysts assumed the $700 million difference — $1.1 billion, if the Highland debt is $2.7 billion, as some have estimated — is likely the amount that Adelphia's auditors believe can be covered by the assets contained in Highland Holdings — primarily about 300,000 cable subscribers.

EARNINGS: GOOD NEWS

But as cable stocks took a pounding over the past few weeks, thanks to the Adelphia uncertainty, Comcast, Cablevision and Insight quelled some fears the old-fashioned way — by putting up good results. (Charter Communications Inc. also posted double-digit revenue and cash-flow gains. See story, page 121.)

The improved numbers were a departure from the previous week, when AT&T and AOL Time Warner Inc. reported sluggish growth.

AT&T Broadband — Comcast's merger partner — was hurt by negative subscriber growth and declining cash-flow margins. At AOL Time Warner, the cable operations did well, revenue rose 19 percent and cash flow rose 10 percent, but results from Internet-service provider America Online have dragged the stock down.

Cox Communications Inc. kicked off the cable-earnings season on a high note April 22, reporting its strongest basic-subscriber growth in five years. Cox added more than 54,000 basic video customers in the first-quarter ended March 31, for a 1.3 percent increase.

Revenue at the MSO rose 17 percent for the period, and cash flow was up 12 percent, in line with most analysts' expectations.

DIGITAL'S UP AT COMCAST

For the first quarter, Comcast reported cable pro forma revenue growth of 12 percent, and said cash flow increased 13.5 percent.

Company-wide — including the QVC home-shopping unit and other programming interests — revenue was up 12 percent and cash flow rose 18.3 percent.

Most heartening to analysts was Comcast's digital-subscriber additions — 204,000 in the period, or 15,600 new customers per week — at a time when such growth was expected to slow down. Some analysts had expected digital-subscriber growth to slow to about 12,000 additions per week in the first quarter.

Data subscribers rose by 93,000 customers, while basic-cable subscribers grew by 0.9 percent, to 8.5 million.

Comcast stock had been battered in the past few weeks, thanks to AT&T Broadband's operating difficulties. Comcast's own earnings helped stem that slide: The stock rose more than 11 percent, or $3.04, to close at $29.79 on May 1. Comcast retreated a bit on May 2, closing at $28.87, down 92 cents.

Comcast president Brian Roberts, who spoke at the Banc of America Securities LLC Telecommunications, Media & Entertainment conference in New York last week, addressed AT&T Broadband's performance, adding that he is confident that Broadband management has made headway in correcting its problems.

"AT&T Broadband has significantly lower margins," he said at the conference. "We were disappointed that subscriber growth went backwards.

"Management of AT&T Broadband has come in and is doing a fine job fleshing out some of the problems. But, frankly, they're six people. When we bring in 250 [people] at Comcast that focus on not 12 million subs, but 1 to 2 million subs broken into small geographies, we really do believe we can accelerate AT&T's results to look more like Comcast's."

TWE UPDATE

Roberts declined to comment on another potential drag on Comcast stock: uncertainties surrounding negotiations with AOL Time Warner Inc. regarding AT&T's 25.5-percent interest in the Time Warner Entertainment L.P. partnership.

Comcast has said it would like to find a way to unwind the partnership once its merger with AT&T Broadband is completed. But Broadband parent AT&T Corp. thinks its stake is worth as much as $10 billion, which is more than AOL Time Warner wants to pay.

Later at the Banc of America conference, AOL Time Warner co-chief operating officer Dick Parsons called unraveling the TWE partnership a top priority.

Parsons, who will become AOL Time Warner's CEO at the company's annual meeting on May 16, said TWE "served its purpose a number of years ago. It no longer serves a purpose. AT&T would like to find a way, and we'd like to find a way to restructure it ourselves."

Parsons said there were a number of alternatives to consider in unwinding TWE, and that he and AT&T chairman C. Michael Armstrong and Roberts are in "very active discussions to solve this Rubik's Cube. It's a question of finding the right path."

Among the alternatives AOL Time Warner has for unwinding TWE include a spin-off of its Time Warner Cable assets, in which the conglomerate would keep a majority stake, but issue a small part to AT&T in return for its interest in TWE.

"We're looking at a range of approaches to simplify our structure," Parsons said. "We're looking at several things and that [a TWC spin-off] is one of them."

CABLEVISION LOSES SUBS

Cablevision — which has faced problems concerning its very public fight with the Yankees Entertainment & Sports Network — indicated that the impact of refusing to carry the network, and its 130 exclusive New York Yankees baseball games, was significantly less than expected.

Cablevision subscribers — encouraged by YES to switch to DirecTV Inc.'s direct-broadcast satellite service to receive Yankees games — apparently haven't been listening in huge numbers.

The MSO said it lost 5,400 subscribers in March and April as a direct result of the YES fight. The operator has lost about 10,400 subscribers year-to-date, including 4,000 subscribers that had signed on after the Sept. 11 terrorist attacks temporarily knocked out broadcast television towers in the New York metropolitan area.

According to some reports from the past few weeks, Cablevision was expected to have lost as many as 20,000 customers as a result of the YES dispute. And in a report published in last Friday's The New York Times, YES CEO Leo J. Hindery Jr. said his sources — including DirecTV — told him the subscriber defections totaled 40,000 or more.

YES said Cablevision posted gains of 20,000 or more subscribers in the first four months of both 2000 and 2001.

According to its financial statements, Cablevision added 9,055 net basic customers in the first three months of 2001 and 12,840 customers in the first quarter of 2000. Those figures don't include any April gains or losses.

Cablevision also reported 13-percent revenue and cash-flow growth in the period.

CEO James Dolan added Cablevision is working hard to resolve a perceived funding shortfall for 2003. "It's No. 1 on our hit parade," he said during an analyst conference call.

Vice chairman William Bell said Cablevision is investigating several options, including issuing debt or equity securities, reducing capital expenditures or selling assets.

But Dolan may have put a damper on investor expectations that the MSO would sell its lucrative PCS licenses to fund the shortfall when he said Cablevision's board of directors has authorized a $42 million investment in its PCS unit NorthCoast Communications. Cablevision said it plans a focused pilot rollout of the PCS service in New York, but offered no timeframe.

SNEAK PEEK AT INSIGHT

Insight, which isn't set to release its first-quarter results until May 10, felt compelled to offer investors a sneak peek on May 2 — mainly as a result of the beating the company's stock has taken in the wake of the Adelphia debacle.

"I'm a little confused about all the negativity in the sector," Insight executive vice president and chief operating officer Kim Kelly said at the Banc of America Securities conference. "We're having our best quarter in years."

Insight estimated that its revenue would be up 10.1 percent, to $192 million, while operating cash flow would rise 9.6 percent, to $82 million.

Kelly added that the first quarter is historically Insight's worst, and that the company is on track to meet its year-end guidance of 14 percent to 16 percent cash-flow growth.

Insight also said basic customers would grow by 1 percent in the period.

That news gave Insight's stock, which had dropped nearly 14 percent between April 25 and April 30, a needed lift. Insight shares rose 7.7 percent, or $1.23 per share to close at $17.28 each on May 2.

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