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Mediacom Sees Free Cash Rise

1/04/2004 7:00 PM Eastern

Mediacom Communications Corp. has given analysts guidance about its 2004 results, forecasting a strong increase in free cash flow but hitting the low end of most analysts' expectations for other key metrics.

The Middletown, N.Y.-based MSO said on Dec. 23 it expected revenue in 2004 to come in at between $1.075 billion and $1.085 billion (a 6% to 8% increase over 2003), with cash flow of between $425 million and $435 million (4% to 7% growth).

Mediacom also said free cash flow — cash after interest payments and capital expenditures are made — would amount to about $50 million in 2004, short of some analysts' estimates of $56 million.

DISAPPOINTMENT

Capital expenditures are expected to be between $165 million and $175 million — $50 million to $60 million lower than in 2003.

Most analysts were disappointed with the numbers, adding that the low expectations were a continuing sign that Mediacom faces stiff competition from direct-broadcast satellite service providers.

Credit Suisse First Boston cable analyst Lara Warner said in a research note that DBS competition is likely to create increased pricing pressure for Mediacom while driving up marketing and operating expenses.

Mediacom stock is trading at about 10 times 2004 estimated cash flow, about the same as Cablevision Systems Corp. and Insight Communications Co. "despite having lower growth prospects," Warner wrote. For that reason she did not anticipate that Mediacom stock — which was down 5.7% between Jan. 2, 2003 and Dec. 26 — to appreciate much in the new year.

"We believe Mediacom's stock will offer little upside until fundamentals begin to show some sign of improvement," Warner said in a research report.

Investors didn't appear to be spooked by the announcement. Mediacom stock fell to $8.65 on Dec. 23 (down four cents) but clawed back to $8.72 on Dec. 26.

Mediacom, the eighth largest MSO in the country with about 1.6 million subscribers, has been struggling with DBS competition in the past year. It lost 24,000 basic subscribers in the second quarter and 8,000 basic customers in the third quarter.

But chairman and CEO Rocco Commisso, in a statement, said Mediacom is fighting hard to stem subscriber losses and win back lost customers by aggressively rolling out new technology.

DVRs DUE SOON

During its third-quarter conference call in November, Mediacom said part of the reason for the subscriber losses is that about 43% of its customer base can receive local-to-local broadcast channels through DBS. That local-into-local penetration was expected to increase to about 64% of Mediacom customers in 2004.

Mediacom plans to roll out digital video recorders and to expand the reach of its video-on-demand and HDTV services in early 2004. The secondary market MSO also plans to introduce voice-over-Internet protocol telephony service during the second half of 2004.

Citigroup Smith Barney cable analyst Niraj Gupta said in a research report that the Mediacom guidance was also below his expectations, but said the company is well-positioned for strong growth in high-speed data additions and for VoIP telephony. Gupta's models do not account for any telephony subscriber additions.

Gupta wrote that the VoIP "product could be a material source of growth for the company over time and the addition of the service to its bundle could aid in its video customer retention efforts."

September