Cox Stumbles Over Basic Growth Slowdown
Slower-than-expected subscriber growth in the second quarter offset gains in cash flow and revenue at Cox Communications Inc., sending its stock price down more than 7 percent last week.
Cox reported 13-percent cash-flow growth and 14-percent revenue growth for the period. But investors were wary of slow second-quarter growth in basic subscribers — 0.5 percent, compared to 2 percent for its peers — and warnings from Cox management that the numbers would not improve soon.
In a conference call with analysts, Cox chief financial officer Jimmy Hayes said subscriber growth was affected by seasonal disconnects and the end of an aggressive marketing plan for digital cable and high-speed data.
As a result, weekly run rates for digital and high-speed data subscribers declined slightly in the quarter — from 9,100 to 8,500 customers for digital and from 8,000 to 6,200 subscribers for cable-modem service.
But Hayes said that once the marketing program began in June, those run rates began to climb. Weekly adds climbed to 10,300 customers for digital cable and 7,000 subscribers for high-speed data, he said.
"June was a strong digital connection month," Hayes said. "Competitive pressures are declining. The overbuilders are rapidly fading away and the satellite providers are showing declining growth."
Still, Hayes said he didn't believe those increases would be enough to offset the downward trend for the year. He reduced Cox's third-quarter basic subscriber-growth projection to 1 percent, from a range of 1.5 to 2 percent.
One way to boost sagging subscriber growth is through dish buy-back programs, which Cox said it will implement in the future.
Cox vice president of marketing Joe Rooney said that although Cox has one of the lowest direct-broadcast satellite penetration rates in the industry — about half of what other MSOs experience — the company is looking into starting its own buy-back program to drive basic customer growth.
"We have not focused as much on dish buy-backs, but with the acquisition of TCA [Cable Inc., a rural MSO, in 1999] it is something we will add to our arsenal," Rooney said. "The best way to grow is to do dish buy-backs."
Rooney said dish buy-backs wouldn't begin until the fourth quarter or the beginning of next year. While he declined to reveal what the Cox program will entail, MSOs typically offer DBS subscribers cash and programming incentives in return for their DBS equipment and a one-year commitment to digital-cable service.
SG Cowen Securities Corp. analyst Gary Farber said despite the reduction in basic subscriber growth, Cox is on track to meet its projections for the rest of the year.
"Timing is everything," Farber said. "They were late to get their marketing packages out and the incentive for high-speed data changed. But with all that has happened, for the year everything is in place. The third quarter and the fourth quarter are going to be better."
Cox restated its previous guidance of 14-percent to 16-percent revenue growth and 12-percent to 13-percent operating cash-flow growth for the year.
DIALING UP SUBS
Hayes focused on telephony service, which he said has begun to hit its stride.
Cox added about 4,000 telephony customers per week in the second quarter, ending the period with 344,000 subscribers. Telephony operating margins were about 20 percent in the quarter, he added, and would increase to 30 percent by the end of the year and 40 percent by 2002.
Telephony service also has helped retain overall subscribers, Hayes said. Churn rates are about 1 percent in markets where customers take Cox Digital Telephone and at least one other service.
"The bundle is a powerful marketing tool," Hayes said.
Farber said that although Cox had a good financial quarter and should report more robust numbers in the second half of the year — historically its strongest period — investors apparently didn't want to wait.
"It's a tough stock market," Farber said. "Investors are not going to wait around to see how it plays out."
Cox's share price dropped 7.1 percent, or $2.99, between July 20 and July 24, closing last Tuesday at $39.20. The falloff affected other stocks in the sector, with Charter Communications Inc., Adelphia Communications Corp. and Cablevision Systems Corp. losing the most ground. Adelphia dropped $2.46, to $36.05; Cablevision lost $3.89, to $53.75; and Charter fell $1.59, to $20.99.
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