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Cable Operators

Q2 Forecast: Sub Losses — But Not as Many

8/01/2011 12:01 AM Eastern

With the second-quarter earnings season
upon us, analysts are anticipating that cable subscriber
losses should continue during the seasonally weak period.
But those declines should be at a decelerated pace, compared
to prior years.

Most cable operators are expected to release secondquarter
results in the coming weeks. While Time Warner
Cable is the lone exception — it released its earnings on
July 28 — the rest are waiting until August.
Charter Communications is slated to release results
on Aug. 2, followed by Comcast on Aug. 3. Cablevision Systems
hasn’t announced its earnings date yet.

The cable sector enjoyed one of its best first quarters
in recent years last March, when cable operators reported
customer losses that were far below analysts’ expectations.
Comcast cut its first-quarter losses in half — it shed
39,000 basic customers in the period, versus 82,000 in the
prior year. Time Warner Cable was a little less dramatic
— it lost 65,000 basic subscribers, more than the 42,000 it
lost in the prior year but less than half the 147,000 it lost in
the fourth quarter.

That performance, and comments by Comcast Cable
president Neil Smit and Time Warner Cable chairman
and CEO Glenn Britt that the two largest cable operators in
the nation were declaring war on subscriber losses, helped
drive the stocks.

Cable shares were up about 21% in the first six months
of the year, with most of that growth occuring in the first
quarter, when the stocks were up about 13.4% collectively.
Although cable operators cautioned that basic losses
would rise in the seasonally weak second quarter, when
college students leave school and other customers move
to their summer residences, most analysts believe that the
first quarter’s momentum will carry into the second, although
not in as dramatic a fashion.

Morgan Stanley media analyst Ben Swinburne estimates
that the pay TV sector will have negative subscriber
growth in the second quarter, fueled by seasonal losses at
cable companies and flat growth for satellite-TV providers.

SHEDDING FEWER SUBS

But Swinburne expects Comcast’s basic video losses to
continue to decline — he estimates it will shed 190,000
customers in the period, compared to 265,000 in the prior
year. For Time Warner Cable, Swinburne estimates that
basic losses will be flat — 105,000 in the quarter versus
111,000 in the prior year. Cablevision Systems, down 6,000
versus a gain of 3,000 in 2010, and Charter Communications,
down 83,000 in the period versus 77,000 in the prior
year, round out the field.

Collins Stewart media analyst Tom Eagan was cautiously
optimistic about second-quarter performance,
adding in a report that while first-quarter results were uneven
across the major MSOs, operators have embraced a
compressed development schedule that should accelerate
the availability of new products in the pipeline. Offerings
like Comcast’s Skype product, Cablevision’s Optimum
Link PC-to-TV product and Time Warner Cable’s iPad app
should help lower churn.

Eagan was more concerned about macroeconomic factors.
Although housing foreclosures in June were down
compared to the prior year and housing starts were up,
unemployment is inching back up (9.2% in June) and consumer
confidence is weak, making the overall economic
picture a bit murky.

“Regardless, our outlook for the players in the pay TV
space remains cautiously optimistic as the bulk of consumers
have shown the appetite to increase household
cable and broadband spending,” Eagan wrote. “That said,
trends in certain metrics, such as foreclosures, occupied
homes and housing starts, are important indicators for the
pay TV operators because of the insight into RGU growth.”

Citadel Securities media and satellite analyst Vijay
Jayant expects a strong quarterly showing from cable —
405,000 subscriber losses in the quarter, compared to
447,000 in the prior year. In a recent research report, Jayant
wrote that in the second quarter, while video appears
to be getting more competitive, high speed data service is
less so. That, he wrote, could spur cable operators, whom
Jayant believes has a distinct price advantage on HSD, to
eventually begin to implement usage-based pricing.

“In our view, cable ISPs have the pricing power to implement
usage-based pricing, since most households have
only one or two choices for Internet service — DSL is the
better value at the low end, but doesn’t compete with cable
at the high end,” Jayant wrote. “Certain operators are
also raising base prices while off ering faster speeds that
will improve [average monthly revenue per unit].”

DISH MAY SLUMP AGAIN

The analysts were somewhat split on the satellite sector,
particularly Dish Network. While Dish has been riding
high on a better-than-expected first quarter — in which
it added 58,000 customers, settled a long-standing patent
dispute with TiVo and began snapping up wireless spectrum
— Swinburne and Jayant expect the satellite giant to
return to subscriber losses in the second quarter.

Both Swinburne and Jayant were close in their respective
estimates for Dish losses (62,000 and 60,000). Swinburne
pointed to earlier rate increases at the second
largest satellite-TV provider, and Jayant expects slightly
higher churn (1.67%) in the quarter. However, Jayant also
reduced his year-end loss estimates from 200,000 customers
to 75,000, indicating he expects positive growth in the
third and fourth quarters.

Eagan had expected Dish to lose about 65,000 subscribers
in the period, but changed that to an 11,000-customer
gain. Eagan expects churn to drop slightly in the second
quarter, possibly spurred by promotions at its satellite service
and Blockbuster video stores.All three analysts expected
DirecTV to add between 66,000 and 99,000 new
subscribers in the second quarter, slightly lower than the
100,000 additions in the first quarter.

September