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Cox Promises to Slash $400M in Capex

Cox Communications Inc. kicked off the fall conference season by telling analysts gathered in Miami last week that it would slash capital expenditures by about $400 million in 2003, allowing the MSO to reach free cash flow positive a lot sooner than first expected.

Cox chief financial officer Jimmy Hayes, speaking at the Morgan Stanley Global Communications Conference last week, said that Cox will be free cash flow positive for all of 2003. Originally, Cox had not expected to show free cash flow — or earnings once capital expenditures and interest payments have been made — until the fourth quarter of 2003.

Hayes told analysts that capex for 2003 will be about $1.6 billion, down from the $2 billion expected in 2002 and the $2.2 billion spent in 2001.

The main reason for the capex decline is that the MSO's plant upgrades are nearly completed. Cox said that about 89 percent of the company's plant will be at 750-megahertz capacity by the end of 2002.

Hayes also said operating margins at the company would be in the 35 percent to 38 percent range in the next few years as it "turns from an upgrade focus to a concentration on the accelerated delivery of additional advanced broadband services and products more efficiently."

Reducing capital expenditures has been a hot-button issue for cable operators for months, as they weather the storm created by accounting scandals at Adelphia Communications Corp. Adelphia's problems started in March when the company revealed it had about $2.3 billion in off-balance sheet debt. That figure has since grown to $3.1 billion.

While no other MSO has had the same problems as Adelphia, leverage has become something of a taboo on Wall Street.


While the market appeared pleased with Cox's acceleration to free cash flow — the stock was up 89 cents per share in the two days after the conference — AOL Time Warner Inc. was busy trying to calm investors.

Earlier last Monday, the media giant said that third-quarter advertising and commerce revenue at its America Online Internet unit would be lower than expected.

The company said in a statement that for the full year, advertising and commerce revenue at the AOL unit was tracking to between $1.6 billion and $1.7 billion. AOL had previously expected advertising and commerce revenue to come in at the low end of a range of between $1.8 billion and $2.2 billion. Cash flow at the Internet division is expected to be between $1.7 billion and $1.8 billion.

But the company said performance at its other divisions is strong, and that it continues to expect full-year cash flow growth at the low end of the previously announced 5 percent to 9 percent range and full-year revenue growth within the previously announced 5 percent to 8 percent range.

For the third quarter, the company expects revenue growth in the mid-single digits and cash flow growth to be down by low-single digits, compared with the same period in 2001.

In afternoon trading Monday, AOL Time Warner stock was down nearly 3 percent, or 39 cents, to $12.74 per share.

AOL Time Warner CFO Wayne Pace spoke at a late session at the Morgan Stanley conference, and tried hard to keep the damage to a minimum.

Pace shrugged off rumors that AOL Time Warner might spin off or sell the online division.

"It is a business we want to own rather than not own," Pace said.


Charter Communications Inc. CEO Carl Vogel didn't stray far from the script of the company's investors' day presentations earlier this month. In his comments, Vogel stressed the MSO's commitment to debt reduction, lowering costs for certain services and greater economies of scale as penetration levels for new services rise.

"We're now at a point in time where Charter will become much more operationally oriented," he said. "It's been an acquisition company that has rolled out a number of new products. Now is the time for us to improve, frankly, our operating metrics."

Charter said it expects to produce positive free cash flow in 2004.

Vogel also added that improving customer service is a high priority. Charter placed second to last in the most recent J.D. Power and Associates customer satisfaction poll and dead last in a recent Wall Street Journal
customer satisfaction poll.

"We're not happy with where we stand in the customer care arena. In my career I've won the J.D. Power award twice," said Vogel, a longtime cable executive who also had senior posts at satellite providers EchoStar Communications Corp. and PrimeStar Inc.

He added that initiatives centered around incentives that reward employees for customer care improvements as well as its strong line of new products should boost its standings.

Vogel also said that the industry, Charter included, needs to come up with a lower-tier video service to help it compete with lower priced offerings from EchoStar's Dish Network.

"We need to figure out how to make the analog package an advantage rather than a disadvantage," he said. "The satellite guys are essentially coming with a low-end price point message."

Vogel used EchoStar as an example, because it offers roughly 43 channels for about $28 per month.

"I think we need to see if we can come up with a 50-channel package that addresses the low end of the market. That's where the pricing power is really not in our favor anymore."