Cablevision (CVC) reported weaker than expected 2Q07 results and lowered 2007 guidance dealing another blow to the bull case for cable. Results were weak pretty much across the board with Telecom EBITDA and all subscriber metrics short of estimates. The only silver lining was lower than expected capital spending in thee quarter and a reduction in the 2007 capital spending forecast. This implies that as growth in cable slows, free cash flow should expand as capital spending related to subscribers adding digital TV, high speed data, and/or telephony will fall.
As expected, CVC provided no color on privatization transaction other than noting the shareholder vote was scheduled for the fall. There were a couple of good questions noting the discrepancy between the bullish guidance in the SEC filings made just six weeks ago and the lower guidance for 2007 issued today. Management’s unwillingness to comment on this issue was disturbing.
CVC reported Telecom revenue growth of 13%, close to estimates, but EBITDA growth of just 4%. The margin contraction was attributed mostly to increased marketing spend in response to Verizon’s rollout of its FiOS TV and internet products. CVC management says that Verizon’s subscriber uptake is no different than what they assumed earlier this year but the marketing spend in support of FiOs is enormous so CVC had to respond….

While I have used CVC’s growth pattern as a forecasting tool for Comcast since it is two years ahead in its rollout of the triple play, one area where CVC differs form the rest of the cable industry is in its exposure to Verizon. CVC has 100% overlap with Verizon while all other cable companies have well under 50% exposure with most in the 30-40% range. Given the slow and geographic concentrated rollout of FiOS I think that the increased impact that CVC appears to be feeling may not translate to the rest of the industry over the next six to twelve months.
Investors will still worry though as they will not pay up for cable’s growth if they believe it will wind down more rapidly than previously expected. Comcast and Time Warner Cable must deliver better 3Q results to rebuild confidence and show that low to mid-teens growth for the next few years is still on track.
One other potential troubling item from CVC was a comment that they are extending triple play pricing to existing customers. Despite a few questions, I did not get clarity as to exactly what this meant. I believe that it means that customers who reach the one year expiration of the $99 triple play will be offered the same pricing to renew. Previously most customers incurred a price increase to $129. This may be making a mountain out of a molehill as most triple play customers buy extra services like DVRs, HD, pay per view, and specialty channels and already pay $130-150 per month to CVC.
CVC is now forecasting no growth in basic subscribers for 2007, down from a previous forecast of up 1-2%. New service subscriptions (RGUs or revenue generating units in cable lingo) are now forecast at up 825,000 to 900,000 down from a prior forecast of 825,000 to 950,000. Revenue growth has been revised downward from mid-teens to 11% and EBITDA growth from mid-teens to 10%. Bears will be worried that growth will decelerate rapidly after 2007. Bulls will note that CVC is still growing double digits and capital spending is winding down.