Cable Operators

Earnings Forecast: Higher Expectations

4/23/2012 12:01 AM Eastern

Time Warner Cable is scheduled to kick off
the first-quarter earnings season next week, a period that several
analysts hope will be a continuation of the positive financial
and subscriber growth metrics of the fourth quarter.

TWC, the nation’s second-largest MSO, is slated to report its
first-quarter earnings on April 26. It will be the first financial
reporting period since it closed its $3 billion
acquisition of Insight Communications,
which should help boost results.

Operators have some big shoes to fill.
After several months of improved subscriber
metrics, the industry as a whole
— led by stellar results at Comcast —
began to steer investor sentiment away
from competitive threats like telcos and
over-the top services toward a mindset
that could actually see MSOs reporting
positive video-subscriber growth. While
that is not expected for at least a year,
continued strong performance in highspeed
Internet, phone and commercial
services is expected to rule the day.

RAISING THE BAR

“As we head into 1Q ’12 earnings, expectations are materially
higher than six to 12 months ago,” wrote Morgan Stanley media
analyst Ben Swinburne in a recent research note. He added
that he expects cable to take between 85% and 90% of new
broadband additions in the period, as digital subscriber line
service from telcos continues to shrink.

Swinburne expects total pay-television subscribers — cable,
satellite and telco — to grow by about 500,000 in the first quarter
and around 700,000 for the year. Next year, barring a major
uptick in household formation, Swinburne predicts that pay
TV customer growth will turn negative.

Fueling the first-quarter growth will be a strong showing
from satellite-TV companies: Swinburne predicts Dish Network
will add about 91,000 net new customers and DirecTV
will gain 126,000. For cable, the story will continue to be reduced
losses. Swinburne anticipates that Comcast will shed
about 25,000 basic customers (better than the 39,000 it lost in
2010). At Time Warner Cable, the damage will be a little heavier
— losses of about 56,000 video customers, vs. 66,000 in 2010.

At Cablevision Systems, which lost about 31,000 basic video
subscribers in the second half of 2011, the pain is expected to
continue. With industry-leading penetration rates in virtually
every customer segment, growth has been hard to come by as
the Bethpage, N.Y.-based MSO has been the victim of its own
success. In the first quarter, most analysts expect Cablevision
to lose about 7,000 customers, about the same as the 8,000 video
subscribers it shed in the prior year.

Charter Communications, which has a new CEO in former
Cablevision Systems chief operating officer Tom Rutledge, will
again focus on cutting customer losses. Swinburne predicts
the MSO will shed about 23,000 basic video customers in the
period, comparable to the 25,100 basic customers it lost in 2010.

Aggressive promotions will help drive Charter subscriber
metrics, according to ISI Group media analysts Vijay Jayant
and Judah Rifkin. In a research report, the two analysts
noted that a pair of aggressive high-speed-data promotion
plans — one that delivers speeds of 15 Megabits per second
for $20 per month and another that delivers 30 Mbps for $30
per month, compared to other MSOs
that offer similar speeds for $49 and $59
per month — has been “wildly successful,”
and should drive strong growth. But
that could come at a price — while HSD
additions are expected to be about 50%
higher than in the prior year, cash flow
growth will lag analysts’ consensus expectations.

Jayant and Rifkin predict that Charter
will grow EBITDA by just 0.5% in the
period (vs. 4.7% in the 2010 first quarter.
Primary Service Units, a mixture of
voice, video and data customers, are expected
to grow by 138,000 in the period,
50% higher than the 90,000 additions of
a year ago.

CONTENT COST PRESSURES

Charter isn’t the only operator that is expected to turn in
lighter than expected financial growth. Higher programming
costs — expected by most MSOs to be rising in the
high single-digit percentage range for the year — should
chip away at cash-flow growth.

At Comcast, which outperformed its peers in 2011 with nearly
7% EBITDA growth (the industry average was between 2%
and 3%), is not likely to repeat that performance in 2012 without
a “healthy share gain across its product portfolio,” according
to Swinburne.

September