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Sun, Clouds in Earnings Season

Analysts Offer Mixed Take on Q3 Numbers 11/11/2012 7:00 PM Eastern

The third-quarter earnings season came to a close last week, and analysts were mixed in their interpretations of the results, with some seeing a lack of pricing power for the MSOs and others finding a silver lining in cable’s continued broadband dominance and the promise of new fees.

Time Warner Cable, Cablevision Systems and Charter Communications all reported third-quarter results last week. TWC kicked off the week by missing average monthly revenue per unit (ARPU) targets and reporting higher than expected capital expenditures.

While revenue and cash flow growth were each a healthy 9.2%, those amounts were a bit skewed because of TWC’s December acquisition of Insight Communications.

No matter how the results were sliced, investors appeared to take them as a sign that TWC’s fundamentals were deteriorating and sent the stock down 6.4% ($6.24 per share) on Nov. 5, falling from $98.17 to close at $91.93. The stock see-sawed in the following days, closing at $94.17 on Nov. 6, but dipping to $93.02 on Nov. 8.

TWC blamed its ARPU weakness on lower than expected pay-per-view and video-on-demand revenue and tough competition from the London Summer Olympics.

Pivotal Research Group principal and media & communications analyst Jeff Wlodarczak pointed to the sector’s broadband dominance — cable operators accounted for 115% of all broadband additions in the quarter, the second straight quarter above 100% of total additions.

Canacord Genuity media analyst Tom Eagan, in a note to clients, pointed to positive trends in legacy TWC systems , where ARPU was up 7%. “While true that the results were below many of our estimates, we believe the pullback was overdone,” Eagan wrote.

Investors also bailed from Cablevision stock after it reported earnings Nov. 6 — shares fell 6.3% ($1.04) that day to $15.49, adding to the months-long pressure on the company as its industry-leading product penetration rates have limited growth. Third-quarter results did little to counter that thesis. Excluding one-time items, cable revenue increased 0.5%, and adjusted operating cash flow declined 10.7% (it was the third consecutive quarter of AOCF declines).

Cablevision froze prices in 2012 to boost customer growth, reflected in a 0.4% lift in total ARPU for the quarter to $154.83.

Cablevision CEO James Dolan said Verizon Communications has not been overly aggressive in the MSO’s footprint, but added that FiOS pricing promotions the telco had suspended in the past have been reinstated, and Verizon has extended those price cuts beyond the introductory period.

“I don’t think that that’s a sustainable model for them and that they will eventually need to go to regular pricing,” Dolan said on the earnings call. “But meanwhile, we’re very much holding our own and I think that we will continue to do so.”

CAPEX CONCERNS

At Charter Communications, revenue increased 4% and cash flow declined 0.5% in the period, but the real story was a 60% rise in capital expenditures to $488 million, tied to the company’s efforts to go all-digital and to reinvigorate its product packaging and services.

As a result, Charter stock was down as much as 4% ($2.93e) to $70.01 on Nov. 6, before closing at $71.62, down 2% ($1.32).

CEO Tom Rutledge said Charter has revamped its products, beefing up its HDTV offerings and streamlining its high-speed data service, and reorganized its operations, including revamping regional teams and sales functions. While he said these changes will take time to fully implement, the company is making some “meaningful headway” — it saw a 70% increase in the number of new connects taking the Triple Play package and expandedbasic subscriber losses improved by 30,000.

Wlodarczak noted the increased spending was entirely focused on success-based capital. Charter lost about 73,000 basic customers in the period, but added 66,000 revenue generating units, which was above expectations.

“We believe Charter could lead the U.S. cable industry in regards to growth in 2013 and beyond,” Wlodarczak said.

September