RCN Revenue Rises, but So Do Losses

Revenue at RCN Corp. surged 18 percent in the second quarter, but cash-flow deficits and net losses more than tripled as the Princeton, N.J.-based overbuilder absorbed charges for new acquisitions, plant expansion and a new stock-option plan tied to market performance.

RCN reported pro forma revenue of $96.2 million in the period, up from $81.3 million in the same period last year. Pro forma earnings before interest, taxes, depreciation and amortization, or cash flow, was a negative $75.8 million compared to a loss of $24.7 million last year.

Net losses more than tripled to $208 million ($2.45 per share) in the quarter, compared to $67.9 million (98 cents per share) for the like period in 1999.

Despite the steeper losses, RCN increased its homes passed in the period by 30 percent, to 1.1 million homes. Marketable homes rose 38 percent to 831,000.

RCN currently offers service in 14 markets, including Los Angeles and Chicago. The company is building networks in 81 towns across the country, including 19 localities added in the second quarter.

"We are rapidly building a valuable asset for the residential market-a network that not only is unmatched in capacity and functionality, but serves the most attractive, densely populated areas of the country," RCN chairman David McCourt said in a prepared statement.

RCN attributed the increased losses and cash-flow deficit to higher expenditures for plant construction. The company added that its bundled voice, video and data package-called Resi-Link-is now being marketed to 145,000 homes, up 62 percent from the previous quarter. Revenue per customer in those homes has averaged $128 per month, the company added.

On-net connections more than doubled to 352,167 in the second quarter, up from 173,128 in the same period last year. The company said it added about 96,000 new on-net connections in the quarter, about half of which were for the Resi-Link service.

Although the cash-flow loss was high in the quarter, SG Cowen Securities Corp. analyst Gary Farber said, RCN beat the consensus estimate of $80 million.

"They had very good customer growth in the quarter, particularly on the on-net connections," Farber added. "While they are not guiding people upwards for the second half of the year growth, it looks like the flow for second quarter will raise guidance for the year.

"A bull sign for the stock would be if they could put together another quarter above expectations for growth," he added.

Although RCN has had problems meeting the demand for service in the past, it is moving ahead in building out its infrastructure, which should bode well for investors.

"The original thought was that in the first half of the year, they were going to temper their marketing to get the infrastructure in place," said Farber. "It seems like the infrastructure is getting in place. Now the thing is to see if it will carry over into the second half and see how much of a difference it really makes."

In a conference call with analysts, RCN officials reported that about 50,000 new customers were added in the quarter. That number will double next year, Farber predicted. He also figured that new subscriber additions will reach 75,000 per quarter in the second half.

RCN will do that mainly through aggressive marketing, not acquisition, Farber added. Although the company added 47,044 on-net connections and 137,000 marketable homes through its purchase of 21st Century Telecom Group Inc. for $500 million in stock and assumed debt, RCN will likely take a break from the acquisition market for a while.

Despite speculation, RCN may not be a leading candidate to buy the telco-owned cable systems now on the market-those owned by GTE Corp., now part of Verizon Communications Inc., and SBC Communications Inc.

The GTE systems have about 123,000 subscribers in Florida, California and Hawaii. The SBC properties, mainly in the Chicago area, have about 300,000 customers.

"They didn't seem to be really interested in doing anything like that," Farber said.

RCN By The Numbers, In thousands, except per share amounts.