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Cable Operators

Comcast Comes Up Short

2/21/2009 9:05 AM Eastern

With Comcast reporting its fourth-quarter results last week, the numbers are in for the two biggest cable operators in the country. The message from both appears to be: In a recession, any growth is good growth.

Comcast fell short of analysts’ estimates for every subscriber metric — basic, digital, high-speed data and phone customers — but managed to squeeze out 8% revenue and cash-flow growth in the quarter.

The numbers eerily reflected those of Time Warner Cable — 119,000 basic-subscriber losses, more than double 2007 losses and decelerating growth in digital, high-speed Internet and phone — earlier this month. Whether this will serve as a template for other publicly traded cable companies that are expected to release quarterly results in the next few weeks remains to be seen.

Cablevision Systems is scheduled to report its earnings on Feb. 26, followed by Charter Communications and Mediacom Communications.

Comcast lost 233,000 basic customers in the period, well above analyst estimates of between 100,000 and 200,000 losses. Perhaps even more concerning was the decline in advanced-services growth — digital additions were 247,000 in the quarter (below analysts estimates of 400,000); high-speed Internet customers rose by 184,000 (versus estimates of 275,000 additions); and digital phone subscribers rose by 344,000 (short of estimates of 425,000).

In a research report, Sanford Bernstein cable and satellite analyst Craig Moffett wrote that Comcast’s results were a “carbon copy” of those of No. 2 cable operator Time Warner Cable, which released its fourth-quarter earnings on Feb. 4 — “strong financially … but weak on all forward-looking growth metrics.”

Charter Communications, which said it would file for Chapter 11 bankruptcy protection by April 1 as part of an overall restructuring, expects similar performance. In releasing preliminary results earlier this month, Charter said it expects basic subscriber losses to increase to 75,100 from 65,800 in the prior year and revenue and cash-flow growth of 8.5% and 8%, respectively.

And while the numbers so far might be cause for alarm in a healthier economic climate, in the current environment they could be considered downright encouraging for the simple reason that cable operators are reporting growth in everything but basic subscribers. And even those losses are more tied to the overall economic downturn rather than operational issues.

Collins Stewart analyst Tom Eagan said that in the cable operators’ favor is the fact that expectations are becoming increasingly lower. He added that Comcast’s RGU growth in the most recent period was its lowest since the second quarter of 2005.

“It seems to me that expectations are at historic lows,” Eagan said. “People are expecting now, 2%, 3%, 4% revenue and cash-flow growth, which is historically low for this company. Expectations are low enough that they can actually beat expectations.”

On a conference call with analysts, Comcast chief operating officer Steve Burke said that the economy and stiffer telco competition led to the increased subscriber losses. He added that telco video overlaps about 22% of Comcast’s footprint, versus 10% just a year ago.

Burke said that the economic impact has been primarily in lower housing starts and moves, not from people that are disconnecting service. Disconnects were actually lower than anticipated in the quarter, he added.

“We are not realizing a larger number of downgrades. We are not seeing a material increase in bad debt, which is really remarkable given what is going on around the world,” Burke said. “We are not seeing large numbers of people dropping television service either through financial hardship or the fact they can get video increasingly on the Internet.”

Burke said Comcast is making moves to reverse those subscriber trends, including increasing its direct sales efforts, introducing more aggressive promotions — like $200 cash back to consumers who commit to a long-term contract — and lower cost tiers, such as a 1 Megabit-per-second high-speed data service for $24.99 per month.

Eagan said that promotions will likely have a positive effect on the first quarter.

“Both companies [Time Warner Cable and Comcast] seemed to indicate that Q1 will be better than Q4,” Eagan said. “The trough was in November.”

Eagan pointed to Burke’s comment that for Comcast, the phone started to ring in December after it launched the $200 cash back promotion. He added that DirecTV — which added 301,000 new customers in the fourth quarter — gave most of the credit for that growth to promotional offerings.

“They’re seeing people look for deals,” Eagan said of DirecTV.

Eagan doesn’t believe that the subscriber losses that seemed to have plagued Comcast and Time Warner Cable will translate to Cablevision.

“I think Cablevision will be essentially better,” Eagan said.

Miller Tabak media analyst David Joyce estimated that RGU growth at Cablevision will be down about 23% in the fourth quarter to 159,000. But that is still better than half the RGU growth declines that Comcast (56%) and Time Warner Cable (70%) had in the period.

Joyce believes that Cablevision’s industry-leading advanced services penetration — at 90% for digital, 39% for phone and 52% for high-speed Internet in the third quarter — will soften the blow from the bad economy.

Joyce estimated that basic subscribers would be flat and that Cablevision would add 26,000 digital customers, 65,000 high-speed Internet subscribers and 68,000 voice subscribers in the fourth quarter.

Decelerating Growth
Comcast reported a slowdown in virtually every subscriber growth metric in the fourth quarter. A comparison of 4Q ’08 performance with 4Q ’07:

  4Q ’08 4Q ’07
SOURCE: Company reports
Basic Subscribers (233,000) (94,000)
Digital Cable 247,000 523,000
High-Speed Internet 184,000 331,000
Digital Phone 344,000 604,000
September