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SVOD Helps Cut Mediacom’s Losses

2/27/2005 7:00 PM Eastern

Subscriber losses at Mediacom Communications Corp. slowed substantially in the fourth quarter, due in part to a plan to widely roll out subscription video-on-demand services and a decrease in new local-channel satellite-TV launches within its service territory.

Mediacom lost about 3,000 basic subscribers in the quarter, its smallest quarterly decline in two years.

Revenue rose 2% in the period, to $265 million, and cash flow was flat at $102.5 million.

Reversal of Fortune
Mediacom basic subscribers:
Period total subs loss/gain
4Q04 1,458,000 -3,000
3Q04 1,461,000 -30,000
2Q04 1,491,000 -42,000
1Q04 1,533,000 -10,000
4Q03 1,543,000 -9,000
3Q03 1,552,000 -8,000
2Q03 1,560,000 -24,000
1Q03 1,584,000 -5,000
4Q02 1,592,000 +4,000
Source: Company reports

For the year, revenue rose 5.2%, to $1.06 billion while cash flow ticked up by 2%, to $413.7 million.

STABILIZATION SEEN

Mediacom was encouraged by the subscriber numbers, claiming those figures could indicate that the losses of the past two years are beginning to stabilize.

Mediacom has lost about 131,000 basic subscribers since the first quarter of 2003, mainly because of aggressive local-channel launches by direct-broadcast satellite service providers.

Those launches are nearly complete, though. Mediacom said about 92% of its markets now have local-into-local DBS service. At the end of 2003, only 62% of Mediacom markets had local-into-local service.

Satellite companies usually follow new local-into-local launches with about six months of aggressive pricing.

“This gives us some reason to believe that the worst is behind us, with respect to the local-into-local launches by DBS, and that customer erosion has stabilized,” Mediacom chief financial officer Mark Stephan told analysts during a Feb. 23 conference call to discuss results.

Mediacom executive vice president of operations John Pascarelli credited the addition of subscription video-on-demand capabilities — at no additional charge — to premium services such as Home Box Office, Showtime and Starz with reducing subscriber losses.

About 65% of digital homes now have access to VOD and SVOD, Pascarelli said on the call — and more than half of digital subscribers watch 10 VOD-type events per month.

That VOD and SVOD penetration translated into stronger digital customer growth: Mediacom added about 14,000 digital subscribers in the quarter. The high-speed Internet customer count increased by 17,000 in the period, below estimates.

PHONE COMING SOON

Mediacom also plans to begin rolling out telephony service — called Mediacom Digital Phone — in the second quarter.

The Middletown, N.Y.-based MSO said phone service will be available to 70% of its total households by the second quarter of 2006.

Mediacom plans to offer telephony at three price points. The first, for customers that take at least one other Mediacom service, would be $39.95 per month, including unlimited local and long distance service, voice mail, three-way calling, whole-house wiring and in-home battery backup capability.

Pascarelli said Mediacom’s phone service, while IP-based, would not be carried over the public Internet like other offerings from companies like Vonage Holdings Corp. Mediacom signed a deal last year with Sprint Corp. to provide the backbone network for the voice service.

“So when you hear price points from the Vonages of the world, we won’t be matching them,” Pascarelli said on the conference call. “Our competition is the local incumbent.”

Citigroup Smith Barney cable and satellite analyst Niraj Gupta wrote in a report that Mediacom should do well with phone service, given low exposure to regional Bell operating company competition.

Gupta estimated 30% of Mediacom’s territory has no RBOC competition, making it an unlikely candidate for telco-video rollouts.

Mediacom’s most significant regional-telephone competitor (Qwest Communications International Inc.), with a 35% overlap, has not announced any plans for video service.

Gupta said Mediacom’s rural and secondary market footprint also should work to its advantage.

“While Mediacom’s less-clustered systems have disadvantages — lower new-service penetration, reduced scale efficiencies in marketing and ad sales, and reduced scale in rollouts of new services (VOD, telephony, etc.), we believe these characteristics also provide an excellent buffer against RBOC video competition,” Gupta wrote.

GUIDANCE FOR ’05

Mediacom also issued 2005 year-end guidance, expecting revenue for the full year of $1.09 billion to $1.11 billion and cash flow of $415 million to $425 million.

Capital expenditures for the year will be slightly up from the $181.4 million spent in 2004 — to between $200 million and $210 million — because of upgrades to its Florida properties due to the hurricanes in the region last year and the telephony rollout.

A big chunk of that additional capex will be used to pay for high-end set-top boxes, mainly dual HD/DVR tuners.

On the conference call, Mediacom chairman and CEO Rocco Commisso said the new boxes cost about $500 each.

“That’s a huge investment that we’re making into a home, but the consumer sees value [in it] and the consumers are staying with us once they get those HD/DVR boxes into the home — we’re seeing a significant reduction in churn once we’re able to put these HD/DVR boxes to our consumers,” Commisso said. “That is part of the reason capex shows an increase in 2005. We do expect to get more DVR boxes into customer homes and consequently, our capex will go up.”

Commisso would not elaborate on how many DVR and HDTV customers Mediacom has signed up.

Mediacom would not issue guidance concerning subscriber additions for 2005. But Commisso said that with the digital and telephony initiatives underway, and a plan to spread out rate increases more evenly throughout the year, the MSO should have better subscriber numbers than in previous years.

Mediacom had previously made its rate increases across the board in February and March. Now, the company will stretch those increases out over the course of the year.

“That should have a positive impact on subscribers,” Commisso said.

September