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Cowen Analyst: MSOs Poised for 2001 Growth

5/27/2001 8:00 PM Eastern

With a full quarter under their belt, cable operators are poised to turn in steady revenue and cash flow growth for the rest of the year, despite a down economy.

According to a recent report from SG Cowen Securities Corp. analyst Gary Farber, seven publicly traded cable operators saw first-quarter revenues grow by an average of 11.7 percent.

Meanwhile, earnings before interest, taxes, depreciation and amortization (EBITDA), or cash flow, rose 10.2 percent. Both performances were in line with expectations.

But Farber sees both metrics rising steadily in subsequent quarters of 2001 — to 12.3 percent, 14 percent and 15 percent on the revenue side, and 12.1 percent, 13.6 percent and 15.3 percent with respect to cash flow.

"The majority of our universe posted [first-quarter 2001] EBITDA growth and new-product customer counts at the high end of expectations, and the stage is set for a healthy acceleration throughout the year," Farber wrote in his report.

Farber expects cable to take off in the second half of the year, as operators become better-positioned to pass programming cost increases on to customers through basic rate hikes and the continued rollout of new services.

According to his report, Farber anticipates second-half EBITDA increases in the 12-percent to 15-percent range, with Charter Communications Inc. (15.5 percent), Cox Communications Inc. (14.8 percent) and Comcast Corp. (13.1 percent) expected to report the strongest growth.

New services, particularly video-on-demand and high-speed data, will be the primary driver that fuels those gains, Farber wrote.

Both Comcast and Charter have revised their guidance upward on high-speed data and VOD, spurred mainly by increased retail sales and an emphasis on self-installation.

"To the extent that the truck roll becomes less of a gating factor and the industry increasingly transitions to a self-install/retail model, upside to estimates will likely continue," according to Farber's report.

Packages of bundled services have also proven to be a success, added Farber, as they cut down on churn for advanced services — especially digital cable.

For example, Charter reported that subscribers that take both digital cable and cable-modem service are eight times more likely to be retained than those customers who take only analog cable. And Cox, which offers a full bundle of voice, video and data, has enjoyed even better retention rates.

In first quarter 2001, Cox had about 750,000 bundled customers, or 12 percent of its total customer base, compared to 340,000 subscribers, or 6 percent of total customers, in last year's first quarter.

Cox's monthly churn rates for bundled products also declined by nearly 1 percent in the first quarter, compared to 2.3-percent basic video churn and 5-percent digital video churn (half of which were downgrades to analog).

Farber was less optimistic about advertising, which can account for between 5 percent and 10 percent of an operator's revenue. Although there have been some exceptions — Charter and Comcast increased ad revenue in the quarter by 56 percent and 10 percent respectively, owing to greater digital inventory and new interconnects — ad revenue at most operators either stood flat or declined. Farber forecasts that the advertising market will continue to be weak.

Although some cable operators are beginning to see growth rates decelerate as they get closer to 100-percent availability, Farber said the digital ramp-up should continue and should outpace DBS subscriber additions.

Digital-cable subscriber additions more than doubled in 2000 to 5.4 million, compared to 2.3 million in 1999. In 2001, Farber expects a 17 percent increase to 6.2 million additions.

DBS' rapid growth pace of the past few years, however, is expected to slow down to 3.2 million additions in 2001, versus 3.4 million in 2000. DBS added about 2.8 million customers during 1999.

Forecasting 2001
Quarterly Cable Revenue Growth
1Q 01: 11.7%
2Q 01E: 12.3%
3Q 01E: 14.0%
4Q 01E: 15.0%
Cable Cash Flow Growth
1Q 01: 10.2%
2Q 01E: 12.1%
3Q 01E: 13.6%
4Q 01E: 15.3%
Source: SG Cowen
Digital Cable vs. DBS Net Adds (MM)
1999 2000 2001E
Cable 2.3 5.4 6.2
DBS 2.8 3.4 3.2

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