Comcast, Cablevision Rally on Results

Fears that the economic downturn or telco competition would crimp the high-speed Internet market for cable operators were partially alleviated last week as two of the top cable operators reported strong second-quarter results.

Comcast kicked off the cable earnings season on Tuesday, with 11% cash flow and revenue growth over a year earlier, and perhaps more importantly, announced it added 278,000 high-speed Internet customers in the second quarter, well above analyst expectations.

Industry pundits had feared that because of poor Internet subscriber growth at Verizon Communications and AT&T that the broadband market was beginning to slow. “As it turns out, the telcos' loss has been Comcast's gain,” Sanford Bernstein cable and satellite analyst Craig Moffett said in a research report. “Cable is taking share and it is taking it in gulps.”

Cablevision Systems, which reported its second quarter results on July 31, bolstered the cable momentum. The Bethpage, N.Y.-based operator added 52,000 high-speed data customers, 81,000 voice customers and 120,000 digital video customers. Cablevision also bucked the recent trend of basic customer losses at other operators, adding 7,000 basic subscribers in the period. All that from the cable operator with the most direct exposure (30% of its total footprint) to Verizon's aggressive FiOS TV rollout.

“Indeed, it is not an overstatement to say that — despite seeing direct head-to-head competition with Verizon in nearly a third of their footprint — the impact of the Verizon competitive incursion is entirely indiscernible,” Moffett wrote. “And Verizon just announced earlier this week that net additions for FiOS are already slowing.”

Verizon reported its second quarter results on July 28, and although it added 176,000 FiOS TV subscribers — below Moffett's estimates of 283,000 additions — the real concern focused on weakness in its broadband product offering. Verizon reported 54,000 net broadband additions in the quarter — 187,000 new FiOS Internet customer offset by the loss of 133,000 digital subscriber line customers. Couple that with weak broadband growth at the other telco competitor — AT&T reported just 46,000 high-speed Internet additions in the period, compared to 491,000 additions in the first quarter — and some analysts believed that they had a bona fide broadband downturn on their hands.

Comcast's results also alleviated those fears: At 278,000 high-speed data additions Comcast's total represented 75% of the broadband market so far. And with Time Warner Cable and Charter Communications scheduled to report earnings this week (Aug 6 and Aug. 5, respectively), cable's share is expected to get even bigger.

“When the book is closed on Q2 reporting, cable will likely have gained 85% to 90% of the broadband net additions,” Moffett wrote.

Comcast also outperformed on the telephony front, adding 555,000 voice subscribers in the period. The cable giant also added 320,000 digital cable subscribers in the period. Comcast lost 138,000 basic subscribers in the quarter, but that was in line with expectations given the seasonal nature of the period.

On the financial front, Comcast reported revenue of $8.6 billion, an 11% increase, and operating cash flow also rose 11% to $3.4 billion.

Although Comcast showed that it is managing well in light of fierce competition and an economic slowdown, Collins Stewart media analyst Tom Eagan warned that the country's largest MSO may have to increase spending significantly next year. While capital expenditures were down in the second quarter to $1.3 billion — a 19% decline but mainly because of a big capex spend last year to purchase set-top boxes ahead of an FCC mandate — Comcast said that it plans to upgrade about 20% of its network to all-digital technology this year, with the remainder completed in 2009.

That increased spending and uncertainty surrounding an FCC vote to punish the company for limiting bandwidth for some high-speed data users could put pressure on the stock, Eagan said.

But for the moment, Comcast's strong performance seemed to lift at least some of the pallor from the cable sector. Comcast shares rose as high as $20.59 each (up 7.4% or $1.41 per share) on July 30 before closing at $20.07, up 89 cents each or 4.6%. The rest of the cable sector also enjoyed a slight lift — Time Warner Cable shares were up 3.6% (95 cents) to $27.50; Cablevision Systems rose 59 cents each (2.9%) to $21.25; and Mediacom Communications rose 16 cents each (2.8%) to $5.87 per share. Charter Communications was down 1 cent per share to $1.14.