Vendors Feel Ripples From Adelphia Woes

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Adelphia Communications Corp.'s misery has company among its suppliers, some of whom have already lowered their financial guidance to deal with the MSO's apparent freeze on new orders.

While none of Adelphia's vendors are panicking over the effects of the disarray in Coudersport, Pa., the big question right now is how long the pity party will last.

Two Adelphia vendors have already lowered their guidance for the current quarter. The first was State College, Pa.-based C-COR.net, which in January landed a $50 million contract with Adelphia to supply fiber-optic and radio-frequency equipment for upgrades in 10 states.

Last week, the broadband communications systems provider said it does not anticipate further revenue from Adelphia in the near term. Thus, it lowered its quarterly sales projections to between $60 and $65 million, compared to $77.2 million in sales posted in the previous quarter.

On top of that, Adelphia owes C-COR.net about $42 million in accounts receivable. At the close of the fourth quarter on June 28, C-COR.net must decide whether to record part or all of that outstanding bill as an allowance.

If C-COR.net does take that hit, its earnings would be cut by about 73 cents per share.

C-COR.net chairman and CEO Dave Woodle said the lowered guidance was intended as fair warning to investors.

NO DEATH BLOW

"Basically what we are communicating for our shareholders is a full, clear picture of our total exposure to Adelphia," Woodle said. "We are going to work hard to keep it within that or less than that.

"In this day and age, it is important that we fully and clearly communicate with our shareholders."

Although the Adelphia business would have constituted 10 percent to 15 percent of C-COR.net's revenue over the coming months, in the near-term the loss of that business is not a death blow to the company, Woodle said.

"We are still 50 percent higher than where we were a year ago in revenues, even after that," he said. "So if we can manage through that, we can manage through this."

Voice, video and data access-gear provider Arris Group Inc. followed C-COR.net's lead. It lowered its guidance for the quarter from $195 million to $205 million to $185 million to $195 million, with earnings of 1 cent to 4 cents per share. Like C-COR.net, Adelphia owes Arris money; the MSO's outstanding bills total about $19 million.

If Arris records those outstanding accounts as a quarterly allowance, its earnings will fall an additional 24 cents per share, according to the company.

Arris has supplied Adelphia with its Cornerstone voice- and data-access devices. Earlier this spring, it struck a deal to supply Adelphia with its Cadant C4 cable-modem termination units for the MSO's planned high-speed data deployment in the Great Lakes region.

Adelphia is Arris's third-largest account. It represented about 8 percent of the company's cable revenue in 2001 and about 9 percent through first-quarter 2002, according to Arris investor-relations chief Jim Bauer.

'CONSERVING CAPITAL'

Adelphia has told Arris and other equipment vendors that "they are in a conserving of capital mode, and that we are not going to see any additional orders except for service-affecting things," Bauer said. "But the landscape is changing very rapidly."

If Adelphia's leadership and finances stabilize, "I think business can get back to business as usual much sooner than we, and a lot of other companies that have lowered guidance, have said. But knowing that, we just had to take a cautious view."

The high end of Arris's adjusted guidance will lead to an increase in revenues from the first quarter, Bauer added.

Adelphia did not return phone calls seeking comment on its capital-expenditure plans.

At this point, Scientific-Atlanta Inc. is not lowering its quarterly projections. But it does have some $83 million in accounts receivable due from Adelphia, and the MSO has constituted about 10 percent of S-A's business over the prior three quarters.

Motorola Inc. — which supplies digital set-top boxes and cable modems to Adelphia — is releasing no information or comment about potential effects at this point, according to a company spokeswoman.

Asked about how the Adelphia troubles might affect his company after a Lehman Bros. wireless communications industry conference in New York last week, Motorola chairman and CEO Christopher Galvin declined comment.

"In this situation, it wouldn't be appropriate for me to comment," Galvin said. "They [Adelphia] remain a customer, and hopefully will work their way through this."

CONFIDENT STARZ

But not all of Adelphia's business partners expect to suffer during the MSO's management shakeup. TVN Entertainment Corp. and Starz Encore Group LLC, which are involved in Adelphia's Cleveland video-on-demand rollout, both said they expect no impact from the MSO's financial and leadership troubles.

Starz's subscription-VOD offering in Cleveland is still going strong, and there are no indications that rollout will be damaged, said vice president of SVOD Greg DePrez.

"From our point of view, it has really not affected the system," DePrez said. "It continues to grow its base of Starz On Demand customers to the point where we believe we are very close to market-wide promotion.

"If anything, our future for SVOD with them continues to be bright."

TVN CEO Ian Aaron said his company's relationship with Adelphia has not changed, "and we continue to deliver and manage Adelphia VOD, NVOD and PPV programming for its subscribers.

"It is business as usual, and any recent internal Adelphia developments have not affected our operational or business relationship," he said.

Nevertheless, even cable-industry vendors who don't hold contracts with the MSO may feel the pinch from Adelphia's woes, according to Michael Harris, president of analyst firm Kinetic Strategies Inc.

"Certainly it doesn't invigorate the cable capital markets, and one thing the vendors have been challenged with is renewed capital conservatism from the other MSOs," Harris noted. "The extent to which this puts more pressure on them to continue doing so doesn't help the vendors' cause.

"I think what the vendor community is looking for, essentially, is some MSOs to be able to break out and get beyond the capital crunch, and prove they can spend and generate cash flow and get rewarded for it — kind of get the engine going again. But everyone is really moving quite cautiously."

Mike Farrell contributed to this report.

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