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Cable Operators

Weathering The Storm

2/24/2006 7:00 PM Eastern

Mediacom Communications Corp. is coming off a tremendously difficult period after furiously trying to upgrade its networks, stave off competition and withstand a series of hurricanes that destroyed cable plant, reduced customer counts, increased bad debt and hurt ad sales.

Since 2003, Mediacom has lost about 10% of its customer base to direct-broadcast satellite providers Echostar Communications Corp. and DirecTV Inc., a statistic that stings Mediacom chairman, CEO and founder Rocco Commisso every time he hears it.

Adding salt to that wound is the fact that Mediacom’s stock price is hovering around $6 a share, about a third of what it cost when Mediacom went public in 2000. Of course, the entire cable sector is down from those heady days, but Wall Street investors have severely punished Mediacom and not necessarily for the right reasons, UBS Warburg LLC analyst Aryeh Bourkoff said.

“From a cost perspective and margins perspective, Mediacom has outperformed its peers of the same size,” he said. “They have lost some share, but they integrated the AT&T Broadband systems well and they have been diligent buyers.”

Mediacom disappointed Wall Street analysts with its third-quarter results, reporting a 5% rise in revenue to $275 million compared to a year ago. That was below estimates by Citigroup Smith Barney analyst Jason Bazinet, who predicted the company would reach $277.1 million in revenue in the third quarter. Third-quarter cash flow was also below Bazinet’s estimates, hitting $104.8 million rather than the $106.1 million he predicted.

Mediacom also lost 17,000 basic subscribers, 9,000 of which were related to Hurricane Katrina, during the quarter.

The company lowered its guidance for year-end cash flow and said capital expenditures will be higher than expected. It was scheduled to report fourth-quarter and year-end results on Feb. 23, after press time.

But some things appear to be turning around for the MSO: Customer defections are slowing; new product sales are increasing; and local phone service is being rolled out across the company’s footprint.

“Mediacom is a company that owns good infrastructure in less attractive markets that larger MSOs have opted not to stake out,” said Ted Henderson, an analyst with Stifel Nicolaus. He says that even though Mediacom has lost share to competition, he’s still bullish on the stock, especially at its current price. “We see an improved infrastructure and operating efficiencies going forward.”

Bourkoff likes what he sees and hears about Mediacom’s local phone service rollouts but he continues to have a “hold” rating on the company. He believes Mediacom will have to concentrate on its bundling message with customers to solidify its phone business. “Satellite has been more aggressive than [Mediacom executives] first thought it would be and [the DBS companies] have been successful,” Bourkoff said. “But Mediacom has made up for some of those losses with their broadband product and by preparing to offer phone service.”

Bazinet initiated coverage of Mediacom last April with a “buy/speculative” rating. He rejiggered his projections after Mediacom’s third-quarter results didn’t meet his expectations but maintained his rating. In a Nov. 9 report to investors, Bazinet wrote that Mediacom should be able to sidestep the competitive bullet from telcos for a while as larger phone companies focus first on large, urban markets.

Meanwhile, chief financial officer Mark Stephan said traditional benchmarks are improving. Although Mediacom lost 17,000 customers in the third quarter, the bleeding is slowing down. The operator lost 30,000 customers in the third quarter of 2004. And it experienced a 3,000-subscriber increase in the first quarter, posting the company’s first subscriber gain in two years.

“We’ve stabilized our basic-subscriber base and we have the right mix of products, bundling and pricing strategies in place,” Stephan said. “We continue to have the dominant share of our products in our marketplaces and even though we are a small company, we are keeping up with our cable brethren with the introduction of new products. We’re bringing in big market product mixes to small markets and we’re very proud of that.”

Mediacom was cash flow positive in 2004, despite the subscriber losses. But Stephan said the company opted to stabilize its eroding customer base by lengthening its promotions and changing some of its pricing structures, which resulted in a decrease in cash flow in 2005. Moreover, Hurricanes Ivan (in 2004) and Katrina (in 2005) hurt revenues and boosted capex. It also negatively affected new product penetrations.

But Mediacom doesn’t need to borrow money to fund its capital expenditures or marketing efforts going forward, “so we’re getting back to breakeven cash flow and more as we look toward 2006,” Stephan said.

The operator will now focus on reducing its debt-to-cash flow ratios, which currently stand at around 7.5 times. Analysts and Mediacom executives would like to see that number drop to below 6 times over the next couple of years. There has been some mild speculation that Mediacom could go private but most analysts dismiss the notion at this point.

Clearly, being publicly traded presents some headaches, Stephan said. But Commisso said he doesn’t regret going public in February 2000. After all, he said, he sold about a third of his company at the height of the market. The stock began trading at $19 a share, which enabled Mediacom to double its size with the purchase of the AT&T Broadband systems. “What’s to complain about there?” he asked rhetorically.

Commisso is proud of the fact that Mediacom is the first cable company in the history of the business to reach $1 billion in revenue within six years of being founded.

“We built this company without a lot of financial difficulty. We bought all our properties at a great price,” Commisso said. “When it comes to finance, I think we’ve earned our reputation fairly and we have worked hard to maintain that.”

September