2Q09 and Beyond

Some Very Mixed Messages

By Evie Haskell

 

Take U.S. multiplatform providers in the second quarter of 2009.

Please.

Okay ... old joke.  And it’s not really that bad.  There are, in fact, some shoots of gold in the second quarter news.  But overall the April-May-June reports from cable, satellite and telco operators present a mixed medley with the drum beat on economic doldrums.  To be sure, we saw some cash vaults overflowing; but at the same time, subscriber pools were draining.  In other cases we saw good news on the subscriber front, but bad news on the bottom line.  In all cases, we saw battle lines drawn across overlapping interests and territories with rising competition – plus strapped consumers – taking their toll on the multiplatform businesses.

But enough of the intro whoha.  Down to brass tacks:

Cable Takes It on The Chin ...

And To The Bank

 

For the larger cable operators, the second quarter was mostly a story of continued losses of basic subs; a distinct slowing on the high-speed data and telco sides; and some very, very nice cash balances.

On the cable giant side, both Comcast and Time Warner Cable saw basic subs dip faster than most Wall Street expectations.  For the Philly company, the losses came in at 173,000; for New York-headquartered TWC the numbers dipped to a negative 57,000.

Even worse, Time Warner saw its revenue-generating unit (RGU) additions slip by over 80 percent in a year-over-year (YOY) comparison with voice subs slowing to a miserly YOY 11 percent. 

As the charts on the following pages reveal, the results were similar for most of the top 10 cable operators.  But amid the downs are some very big ups.

Read:  Money in the bank.

The TWC 2Q09 net profit jumped by 4.7 percent YOY to $316 million.  For Comcast, financial performance was, in the words of BernsteinResearch analyst Craig Moffett, “very, very strong” as the company reported consolidated revenues of $8.93 billion.  Likewise, smaller cable operators, such as Mediacom and Insight reported solid financial results and burbling streams of cash flow.

From whence come this rare golden news?

For Collins Stewart analyst Tom Eagan, soft sub numbers and happy financial results go hand in hand:  “When you grow fewer customers, you have less costs,” he noted when discussing Time Warner results. 

Likewise, lower capital expenditures were widely cited for the cable companies’ sunny cash reports.  As is usually the case with cash on hand, speculation immediately cropped up on the subject of “what-are-they-gonna-do-with-all-that-money?”  Rumors have been especially hot and heavy over Comcast where, despite a revitalized share-repurchase program, some observers are quaking over the specter of another Disney adventure for CEO Brian Roberts.  (For those of you with short memories, this refers to Roberts’ ill-fated $54 billion fling at Disney in 2004.)

Winners & Losers

Tracking The Top 10 MSOs

 

Satellite Subs Up

Cash Mixed

 

Paint satellite as the (nearly) opposite case of cable: 

Subscriber numbers were up; but cash ... comci comca.

For the beleaguered folks at DISH, which       has slogged through several straight quarters of diminished numbers, the gain of 26,000 net new subs must have looked golden.  At least one observer on the Street also saw it that way especially given DISH’s relatively low valuation.  Wrote Citigroup analyst Jason Bazinet, “Even with recent strength in Dish shares, we believe (the stock's) valuation remains compelling."

Others were less  sanguine.  Noted BernsteinResearch’s Craig Moffett, “As is so often the case with DISH Network, it’s where investors weren’t looking that holds the key.  Despite the solid grades on DISH’s subscriber scorecard, cost controls were very weak, with soaring SG&A and Subscriber Related Expense eating away at margins ... Valuations based on old assumptions about margins, earnings and Free Cash Flow will all need to be revisited ... and not for the better.”

Also troubling for DISH is the fact that the TiVo litigation still hangs over its head like a $190 million+ wrecking ball.  DISH has scored some recent wins in this battle but TiVo remains “confident” of victory.  At last word, the suit is expected to be back in court in November. 

Still, the news isn’t all bad for DISH’s Charlie Ergen.  His “other” company – a.k.a technology-holder EchoStar – now has a $5 million cap on its TiVo liability thanks to an agreement with DISH.  Likewise, EchoStar’s SlingPlayer is reportedly seeking alliances with cable operators – although the ops, at least so far, have shown little interest.

As for DIRECTV, subscribers continue to flock to its service.  The leading DBS player added 224,000 net new subscribers to its service in the second quarter, bringing its U.S. total to just over 18.3 million.  When combined with subscribers to its Mexican and Latin American services, DIRECTV can now boast of a 24.2 million total, which (as various company releases trumpeted) make the El Segundo-based company the world’s largest pay-TV provider.

On the cash side of DIRECTV’s equation, results were, in Eagan’s words, “soft”  That softness came primarily in lower than expected EBITDA which Eagan chalked up mainly to higher than expected programming expenses.

That cash weakness is expected to continue for DIRECTV (and, indeed, most multiplatform players) in the second half of this year.  As the company has noted, premium and pay-per-view take rates are declining – a situation which is unlikely to reverse itself soon.

As for DIRECTV’s future, two things appear certain:  There will be a new CEO and the merger with Liberty Entertainment will close.  According to Eagan, the latter event could be finalized via shareholder vote in early October.  And for the former?

At this point no one’s talking (although the names Maffei and Churchill have been whispered) as a special committee headed by DIRECTV’s majority owner, Liberty Media’s Dr. John Malone, pours over resumes

Competition Is Us

 

Telcos: A Bleak Outlook

With Two Shining Stars

 

For the two big telcos in the multiplatform space, second quarter news was, on the whole, horrendous.  Voice land lines, which have long been the big cash cows for AT&T and Verizon, continued to drop precipitously.  (Between them, the big two lost nearly 1.4 million voice customers in the latest quarter.)  Likewise, DSL numbers have been dismal.  Even on the once-cheerful wireless front, the news is not so good as the market saturates.

Notes BernsteinResearch’s Moffett, overall wireless industry growth is “now just 3.6 percent.  Verizon and AT&T continue to gain share, but in a less attractive market, increasingly, they are just the best house on a bad block.”

Indeed, Moffett said in a recent report, “On an organic, equity-adjusted basis, both Verizon and AT&T have now gone ex-growth on the topline.
“Profitability,” he added, “is even worse.”

With this miserable an outlook, what could possibly be positive? 

Multiplatform, of course, as both AT&T’s U-verse and Verizon’s FiOS came through 2Q09 with flying colors. 

Wrote Moffett, “AT&T and Verizon both had  solid quarters in terms of building the subscription bases of their fiber-based businesses, boosted by relatively aggressive promotional activity and, to a lesser extent, the digital TV transition.”

For the April-May-June period, AT&T added 248,000 U-verse video subscribers and, most analysts believe, an equal number of high speed data subs.  For Verizon, the three months yielded 303,000 net new HSD subs and 300,000 net new video customers.•

Video Subscribers: 1Q08~2Q09

 

Broadband & Voice Subscribers: 1Q08~2Q09

 

Cable Center Bibliography

 

 If you are interested in reading more about this topic the following is a selection of additional periodicals provided by The Cable Center’s Barco Library.  Dedicated to chronicling cable’s varied and colorful history, The Barco Library houses the largest collection of cable telecommunications equipment, photographs, and marketing and informational materials in the industry.  

Visit www.cablecenter.org for more information.

"Cable Ops Feel Q2 Pinch." Multichannel News 30.31 (August 10, 2009): 3.

"Discovery's Results Surprise." Multichannel News 30.31 (August 10, 2009): 22.

Umstead, R. Thomas. "Cable Rides Q2 Ratings Wave." Multichannel News 30.26 (July 6, 2009): 32.

Farrell, Mike. "Cablevision, TWC Exceed Q2 Expectations." Multichannel News 30.30 (August 3, 2009): 23.

"Mixed Q2 For TV Firms Comcast, DirecTV."  Investor's Business Daily (August 7, 2009): A04.

"Comcast Profits Up Sharply; The nation's biggest cable TV provider cited its 'all-digital' strategy, wideband deployment, and launch of a wireless service as factors.(Brief article)." InformationWeek (August 6, 2009)

Scott, Jeffry. "CNN's prime-time ratings fall to third for first time: Fox, MSNBC both now ahead on weeknights. Viewership has dropped 10 percent from same quarter a year ago." The Atlanta Journal-Constitution (Atlanta, GA) (July 1, 2009): A13.

Peers, Martin. "Time to screen out unloved channels" The Wall Street Journal Eastern Edition  (June 27, 2009): B10(1).

"Monthly broadband cost jumps to $39.(LIES, DAMN LIES AND STATISTICS)." The Online Reporter 641 (June 19, 2009): 15(2).

Farrell, Mike.  "Dish Files For $1-Billion Debt Offering: Moves Comes After Surprisingly Strong Sub Results in Q2." Multichannel News (8/12/2009)