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TCI: Subs Are Up, Cash Flow Down

Tele-Communications Inc. beat its own estimates for
subscriber growth, continuing to bury memories of last year's customer drain by
adding 115,000 basic subscribers in the first quarter and reporting solid gains in
digital-cable sales.

Other numbers, including revenue growth and an
operating-cash-flow decline, weren't so upbeat for the nation's biggest cable
operator. But TCI once again had guided analysts to expect what it reported, and officials
promised that top- and bottom-line growth would accelerate the rest of the year.

"No surprises," TCI president and chief operating
officer Leo J. Hindery Jr. said several times during a conference call with reporters last

During TCI's March gathering with analysts, officials
had warned that first-quarter cash flow would be flat compared with a year ago. One
analyst said last week that the 4.3 percent decline, to $706 million from $738 million,
fit that description.

Overall revenue growth of 2.5 percent, to $1.872 billion
from $1.827 billion a year ago, was "a little soft," though, the analyst said.
In the TCI Group core cable business, revenue grew 5.2 percent, to $1.1 billion, on a pro
forma basis. Operating cash flow at TCI Group declined by 0.6 percent, to $620 million
from $624 million, on a pro forma basis.

Analysts drew encouragement from other revelations,
including Hindery's statement that other deals will be announced shortly that are
similar to Intuit Inc.'s and BankAmerica Corp.'s agreement to pay TCI to carry
their services on advanced set-top devices early next year.

Hindery blamed the cash-flow dip on rising programming
costs -- they went up $39 million on an "apples-to-apples" basis, and rate
increases to subscribers don't kick in until midyear. He also cited increased
marketing costs for new services, like digital cable, that are just starting to generate

Year-to-year cash-flow comparisons will be positive for
every other quarter this year, he said.

Hindery also said his "agenda is not to raise
revenues, but to generate cash flow." Much of the revenue rise came from strong
advertising-sales growth -- Hindery said TCI was on pace for 20 percent ad-sales growth
this year -- and increased revenue per subscriber.

TCI did produce $104 million in "free" cash flow
-- cash left over after debt service, capital expenditures and preferred-stock dividends
-- during the quarter, which, he said, met shareholder expectations.

TCI had $318 million in net income during the quarter, up
from a $58 million loss in the same period the year before. TCI Group's operating
income dropped by 36.4 percent, to $210 million from $330 million a year ago.

Along with the rise in subscribers, TCI's
digital-cable growth continues apace. After ending the year with 150,000 basic-digital
customers, TCI is now up to about 275,000, using 345,000 digital boxes. Hindery said the
company is on pace to meet its target of 800,000 to 1 million digital customers by the end
of the year.

TCI whittled its subscriber base by 1 million, to 13.3
million, during the quarter by closing three "partnership" transactions that
shifted customers and debt into joint ventures or to other operators.

During the quarter, the company also shed $856 million in
debt, ending March with $1.34 billion in debt, Hindery said. But TCI's deal with
Cablevision Systems Corp. -- in which TCI sold 10 cable systems and handed off debt in
exchange for about one-third of Cablevision's common stock -- actually added to
TCI's debt-to-cash flow ratio because those were lightly leveraged systems. So
TCI's leverage ratio rose to 5.41 times operating cash flow from 4.82 the year

But Hindery said the MSO's debt ratio will continue to
fall as other partnership deals close, shifting another $3.8 billion in debt from
TCI's books (along with 2.9 million subscribers and $564 million in annualized
operating cash flow).

"That [leverage] number will be 4.5 or less by the
third quarter," he said.

TCI Group's capital spending totaled $210 million in
the quarter. Excluding closed and pending partnership deals, the pro forma tab was $166
million, including $42 million related to digital cable.

Separately last week, TCI's Liberty Media Group
reported its quarterly earnings. Liberty's quarterly revenue rose to $157 million
from $59 million a year ago, and operating cash flow rose 12 percent, to $28 million from
$25 million. Liberty reported $303 million in net income, versus $16 million a year ago.

But the comparisons are difficult because of changes in
ownership in some of Liberty's assets, as well as a $515 million one-time gain from
the sale of Southern Satellite Systems Inc. to Time Warner Inc.

Encore Media Group, which ended the first quarter wholly
owned by Liberty, generated $25 million in cash flow during the quarter, versus $5 million
in the same period a year ago, as its revenue rose 42 percent, to $122 million from $86
million, and its operating expenses rose 20 percent, to $97 million from $81 million (all
on a pro forma basis).

During the quarter, the Encore mini-pay service rose to
11.4 million subscribers from 10.4 million at the end of 1997, while mini-pay
Starz!'s subscriber count rose to 7.6 million from 6.7 million.

Discovery Communications Inc., which is 49 percent-owned by
Liberty, reported that its revenue rose 23 percent, to $227 million from $185 million.
DCI's cash flow declined to $21 million from $23 million a year ago, due to rising
costs for start-ups such as Animal Planet and the Discovery digital channels and to its
acquisition of The Travel Channel.