News

Forecasts Are 'Solid' for the Fourth

1/25/2004 7:00 PM Eastern

The fourth-quarter earnings season for publicly owned cable operators kicks off next week, and analysts are expecting solid results for cable companies.

Deutsche Bank Securities cable and satellite analyst Doug Mitchelson predicts that the cable sector will show a combined 10.7% increase in revenue during the quarter (9.8% for the full year) and a 25% rise in combined cash flow in the quarter (19% for the full year).

Time Warner Inc. will be the first company to release earnings (on Jan. 28) and Lehman Bros. cable and satellite analyst Vijay Jayant estimates that revenue and cash-flow growth at the cable operations to rise about 10% for the quarter.

STRONG SUB ADDS

Jayant expects growth to be driven by strong subscriber additions in digital and high-speed data (156,000 and 195,000 additions, respectively).

At Time Warner's cable networks, Jayant wrote in a report that comparisons will be more difficult, mainly because of the weak state of the "scatter" (post-upfront) advertising market, strong licensing revenue from Home Box Office Inc. in 2002 and strong advertising growth at the Turner Broadcasting System Inc. networks in the fourth quarter of 2002.

Jayant estimated fourth-quarter 2003 revenue at the networks would be up by about 9.1% to $2.4 billion (compared to $2.2 billion in 2002) and operating income before depreciation and amortization would rise 15%, to $768 million, versus $666 million in 2002.

Of the pure-play cable operators, analysts all are pointing to Comcast Corp. for a strong fourth quarter.

UBS Warburg LLC cable debt and equity analyst Aryeh Bourkoff said in a report that he believes the biggest U.S. MSO will benefit most from the economies of scale in voice-over-Internet-protocol telephony, once the company begins to roll that service out more aggressively in mid-2004.

Bourkoff expects Comcast to hit revenue and cash-flow guidance for the year, and he estimates digital subscribers will increase by 340,000 customers in the period, while high-speed data customers will grow by 455,000.

Telephony subscribers will decline in the fourth quarter — Bourkoff estimated Comcast would lose about 48,000 telephone subscribers in the period — but that is mainly attributable to the increased focus in 2003 on basic-video subscriber additions.

Bourkoff estimated basic subscribers would increase by 126,600 for Comcast for the year.

When VoIP services are rolled out full-force in mid-2004, Comcast is expected to reverse those telephony setbacks.

Mitchelson estimated Comcast would add about 65,000 basic subscribers in the fourth quarter, and was slightly less optimistic concerning digital additions (330,000) and slightly more on high-speed data additions (490,000).

In a report, Mitchelson wrote that a promotional offering for high-speed data ($19.95 per month for three months) likely spurred high-speed data growth in the period.

At Cox Communications Inc., revenue and cash flow growth is expected to be relatively consistent – 12% and 12.5%, respectively – as the MSO continues to reap the benefits of its three-product bundle.

Bourkoff estimated telephony additions for Cox will reach 68,000 in the fourth quarter, and those numbers should continue to grow as the MSO expands the rollout of less capital intensive VoIP technology.

Currently, Cox is offering VoIP telephone service only in Roanoke, Va.

Cablevision Systems Corp., which launched a VoIP service late last year, is expected to continue to push that product successfully, analysts said.

Bourkoff estimates that telephony additions in the fourth quarter will be about 13,000 customers, while Mitchelson is more conservatively estimating an increase of about 3,000 subscribers.

At Charter Communications Inc., which had a dismal year in terms of subscriber losses, the fourth quarter is not expected to be a major improvement.

Bourkoff estimated Charter would lose about 9,000 digital customers in the period and that revenue growth would be about 4.5% and cash flow growth about 8.1%.

DELEVERAGING CHARTER

Still, Bourkoff expected strong high-speed data additions (104,000) in the period, and was optimistic about Charter's telephony product, estimating that Charter would add about 24,000 subscribers.

But Bourkoff was concerned about Charter's high leverage, and said in his report that reducing debt should be its first priority.

Although Charter has paid off some debt through non-core asset sales (raising nearly $1 billion last year), Bourkoff said that a debt for equity swap could put a bigger dent in its leverage ratio. Given that Charter's stock has appreciated more than four-fold in the past 12 months — it closed at $5.25 each on Jan. 20, 340% above its Jan. 2, 2003 close of $1.25 — Bourkoff added that a straight equity or equity linked offering could give the company an opportunity to deleverage its balance sheet.

Fourth-Quarter Growth Forecasts
Comcast Cox Cablevision Time Warner Cable Charter
Source: Analyst Reports
Digital Additions 330,000-340,000 75,000-100,000 150,000-200,000 156,000 (9,000)
Data Additions 455,000-490,000 136,000-140,000 65,000-100,000 195,000 104,000
Telephony Additions (48,455) 65,000-68,000 3,000-13,000 N/A 24,000
Cash-Flow Growth 40.5% 12.8% 12% 10% 8.1%
Revenue Growth 8.6% 12.5% 13.5% 10% 4.5%

September