Talk about turnarounds.Or at least whispers of the same.
Cable operators should be riding a big wave of optimism into this year’s Cable Show in New Orleans, buoyed by strong first-quarter growth, rising stock prices and moves by three of the top five cable companies to address questions surrounding the industry’s wireless strategy.
On the wireless front, Comcast, Time Warner Cable and Bright House Networks — fresh off pulling the plug on their Pivot joint venture with Sprint Nextel — announced a new move into a higher-speed mobile communications technology called WiMax. Yet, their partner again is … Sprint Nextel. And three more companies are in the mix.
Separately, Cablevision Systems, the fifth-largest operator, said it had its own plan. Within two years, it will provide Wi-Fi service throughout its metropolitan New York City service area. If you’re a current subscriber to its Optimum Online service, you’ll be able to hook in over the air, wherever you go. If you’re not a customer, you can pay as you go.
But as a rule, the top cable companies kept topping each other as they reported earnings between late April and early May. Each turned in better-than-expected results.
One surprising thread throughout most of the reports: Investors appear to be looking beyond basic subscriber metrics and focusing more on new product gains and fundamental growth.
Case in point: Comcast reported that it lost 57,000 basic video customers in the first quarter. Stock in the Philadelphia-based operator that day went up 8.6%, or $1.76 per share, to $22.31 each.
MORE THAN JUST SUBS
Granted, Comcast also reported strong gains in revenue (14%) and cash flow (17%) as well as robust growth in telephony subscribers (639,000), digital video (494,000) and high-speed Internet customers (492,000) in the fourth quarter. The nation’s largest cable operator also turned attention to the burgeoning commercial telephony market, reporting that its commercial revenue rose 37% in the period.
“I think people are finally focusing on more than just basic subscribers,” said Miller Tabak media analyst David Joyce. “Cable companies are able to hold their own competitively.”
Cable stocks also proved they could hold their own, a bit. A dismal 2007 — in which the sector was down a collective 40% — was followed by a shaky first few months of the year. But cable stocks rebounded nicely in light of the robust earnings reports. On the whole, the sector is up about 5.8% since the beginning of the year and nearly 10% since the beginning of April.
It isn’t just Comcast bouncing back. Time Warner Cable reported even stronger numbers, gaining 55,000 basic customers, as well as 261,000 digital video, 304,000 high-speed Internet and 280,000 residential phone customers in the first quarter. In commercial telephony, Time Warner Cable doubled its subscribers from 5,000 in December to 10,000. Commercial revenue — including phone, data and video — grew to $180 million in the quarter, more than twice the pace of residential telephony service.
Comcast was the only major operator not to show a basic-subscriber gain in the first quarter: Mediacom Communications and Cablevision each reported an increase of 2,000 basic customers in the period. And though Charter Communications has yet to release its first-quarter earnings — that is scheduled for May 12 — it is almost a safe bet that the cable sector will show an overall basic subscriber gain.
But just where those subscribers are coming from remains to be seen.
“With Time Warner Cable and Comcast performing above expectations and Verizon and AT&T performing slightly above, maybe it’s been a challenging environment for the satellite-TV companies. Those subscribers have to come from somewhere. It could also mean that it’s been a somewhat challenging time for the smaller operators,” Joyce said.
Early indications are that those subscribers aren’t coming from satellite. DirecTV released its first-quarter results on May 7 and reported a gain of 275,000 net new subscribers. Dish Network, the second largest satellite-TV company, is scheduled to announce its first-quarter earnings this week.
As far as the smaller operators go, Mediacom Communications would appear to be a benchmark. Midwest-centric Mediacom is the ninth-largest operator, but provides service in largely non-metropolitan areas. And it had one of its best quarters ever.
Revenue increased 10.3% to $340 million and cash flow rose 17% to $125.8 million. Mediacom had been plagued in the past by basic-subscriber losses, as has the rest of the industry. But it reported a gain of about 2,000 basic video customers in the quarter. It was the first time since early 2005 that Mediacom grew basic customers sequentially.
In addition, Mediacom added 27,000 digital video subscribers, 30,000 high-speed Internet customers and 19,000 phone subscribers in the period.
In a statement, Mediacom chairman and CEO Rocco Commisso said that while the company expected that its financial and operating performance would benefit from comparisons to its unusually weak performance in the first quarter last year, even he appeared surprised by the strong results.
“We significantly surpassed expectations and produced record results, giving us a great deal of momentum for the balance of 2008,” Commisso said in the statement.
Mediacom also increased its full-year guidance as a result of the gains. Now, the company believes revenue growth for the full year will be between 6.5% and 7.5% (instead of 6% to 7%). Growth in a measure of operating income known as AOIBDA is expected to be between 7% and 8% for the year instead of between 6% and 7%.
The strong results prompted Joyce to slap a “buy” rating on the stock. Joyce raised his rating on Mediacom from “neutral” to “buy” last Wednesday, adding in a report that the company “handily beat” his estimates for the quarter.
Cablevision Systems continued its seemingly never-ending string of strong quarters, adding 2,000 basic video subscribers in the first quarter and managing to maintain its leadership in voice, video and data additions despite bearing the brunt of fierce competition from Verizon Communications.
Cable net revenue for the period was up 10.5% to $1.2 billion and adjusted operating cash flow increased 13% to $467 million.
But perhaps more surprising is the Bethpage, N.Y.-based cable operator’s ability to consistently grow advanced services and basic subscribers, despite industry-leading penetration rates.
Verizon said in late April it had added about 263,000 FiOS TV customers in the first quarter, bringing its total video subscriber base to about 1.2 million.
On a conference call with analysts, Cablevision chief operating officer Tom Rutledge said Verizon FiOS currently passes about 1.3 million homes in Cablevision’s footprint, 1.1 million of which are capable of receiving video service from the telco.
“Their impact on us is still single-digit after two years of head-to-head marketing,” Rutledge said. “We have grown in all categories.”
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