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February 27, 2007

Cablevision Results Are Good News For The Cable Industry

The most important takeaway from 4Q06 results from Cablevision (CVC) is that there is no negative read through for the cable industry at large. CVC has the deepest penetration of advanced services of any cable company and faces the most competition from Verizon's fiber overbuild. Following recent concerns about the cable industry following higher than expected capital spending at Comcast (CMCSA/K), investors were anxious to hear what CVC had to say. CVC is essentially where Comcast will be in two or three years in terms of penetration and competition so the fact that CVC hit expectations, provided solid 2007 guidance, and did not increase capital spending expectations is favorable for sentiment toward the cable industry. I remain bullish on cable for 2007 with the caveat that the easy money has been made and risks are moderately higher....

In 4Q06, CVC reported 18.6% revenue growth and 16.8% EBITDA growth from its cable TV operations. Cable TV represents about 90% of the company and is all anyone cares about unless asset divestitures are planned for the Rainbow networks or the NY sports teams. These results were inline with expectations although another percentage point in EBITDA growth would have been nice.

Subcriber metrics came in slightly below expectations across the board. Basic susb rose 16,000 against expectations for 20-25,000. Digital subs grew just 82,000 against hopes for 100,000. High speed data growth of 75,000 fell short of expectations for 85,000. VOIP Telephony did hit targets with 110,000 new subscribers.

I think the slight shortfalls indicate that analyst models need to be tweaked to adjust subscriber growth downward respecting the industry high penetration rates CVC has in the triple play. In particular, digital TV is at 78% penetration which management indicates is effectively mature given the economics of getting the remaining 22% to upgrade.

Higher penetration does not mean growth will slow significantly, however. Analyst pressed management very hard on this topic on the call and management effectively noted that HD, DVRs, interactive advertising, and other emerging revenue streams could drive growth at very good economics. Furthermore, capital spending is not going up at CVC in 2007 indicating that a more fully penetrated cable system does not require incremental capital spending. This is bullish for the industry and indicates that Comcast's explanation that better than expected subscriber growth is driving rising capital spending is a fair argument.

CVC stated that VZ was servicing between 600,000 and 850,000 households in its markets TV or FiOS internet. According to CVC, penetration of TV is low for VZ even in markets where it is most heavily promoting the service. That said, CVC did indicate that in a couple of communities it saw about a 5% drop in its own TV penetration when VZ came calling. However, in those same communities, CVC was able to continue to increase penetration of its VOIP Telephony and high speed data services.

CVC's 2007 guidance calls for mid-teens growth in revenue and EBITDA from its cable division on flat capital spending. I think this is good news relative to expectations and recent fears as investor sentiment toward cable has soured. CVC is forecasting a slowdown in RGU growth but all of the shortfall is in digital TV and the aforementioned alternative revenue streams allowed by having a digital set-top in the home still can drive revenues.

CVC is more heavily leveraged and produces less free cash flow than other cable companies. CVC also has the difficult to deal with Dolan family in control. For these reasons, I prefer Comcast or Time Warner Cable (TWCA) but solely at the operating level CVC is every bit the equal of its peers and asset value is near $40 if a true open auction ever took place. Thus, I have no argument with anyone who prefers CVC to Comcast or TWCA.

Posted by Steve Birenberg at February 27, 2007 03:27 PM in Comcast/Cable TV