Earnings Could Join Metrics Mix

Las Vegas — Cable operators, valued for years on multiples of operating cash flow, could see themselves gauged by earnings in the not too distant future as their successful rollout of the triple play of voice, video and high-speed data begins to mature, the chief financial officers of the two largest cable companies said during a panel discussion at The Cable Show here last Monday (May 7).

Operating cash flow has long been the metric to which the cable industry has been valued, largely because earnings — the metric by which most other public companies gauge their health — have been non-existent due to traditionally high capital expenditure levels. But as capex has fallen after the completion of the industry-wide rebuild in the past few years, and the acceleration in growth in advanced services, earnings could begin to creep their way into cable valuations.

“Certainly, operating cash flow has been a very useful metric as the industry has gone through an evolutionary phase,” Comcast co-CFO John Alchin said. “And I think it is still very relevant in a business that continues to add new product lines and generate new revenue streams. … Over time, earnings and free cash flow [cash flow after capital expenditures and interest payments are made] will become relative valuation metrics.”

But for the time being, Alchin said that Comcast has made the decision in 2007 to invest virtually all of its free cash flow [estimated to be about $2.5 billion] into buying back its stock.

Comcast has already begun to show earnings on a relatively consistent basis, reporting net income of $2.5 billion ($1.19 per share) in 2006, $928 million (42 cents per share) in 2005 and $970 million (43 cents per share) in 2004. The nation's largest cable operator reported a net loss of $218 million (10 cents per share) in 2003.

Time Warner Cable CFO John Martin agreed that earnings could be a valuable tool in measuring the strength of cable operators, but warned that relying too heavily on one metric could be dangerous.

“Over time, earnings will become probably more in vogue,” Martin said. “But the best way is to look at a variety of metrics.”

Martin added simply valuing cable companies on a single metric like free cash flow could force some operators to drive that part of the balance sheet by drastically cutting back on marketing and slowing growth of the overall business to a crawl. “That would be absolutely terrible for business,” he said.