Cablevision Earnings Preview: Stakes Raised By Earlier Cable Reports

First Time Warner Cable (TWC) and then Comcast (CMCSA) set the table for Cable vision (CVC) with stronger than expected earnings reports. The first two reports revealed financial and subscriber metrics that were better than expected pretty much across the board. In earlier quarters as cable metrics decelerated, CVC was generally able to buck the trend. It will be interesting to see if the company continues to out outperform its peers when it reports 1Q results on Thursday morning.

Analysts expect EPS of 15 cents and $1.9 billion in revenues. Revenue and EBITDA growth in core cable operations is expected to be around 10%. TWC was considered to have done well with 5% growth and CMCSA with 8% growth. CVC benefits from its focus and a single cluster of subs in New York and a fully upgraded network offering the fasters and most digital network among major cable companies.

Surprisingly, CVC has been able to maintain its growth profile even as Verizon (VZ) has aggressively rolled out its FiOS fiber to the home network in much of CVC's footprint. Aggressive investment in updated plant and effective triple play promotions have enabled CVC to fend off the challenge so far. I expect 1Q09 to show more of the same but any sign that FiOS is having a growing impact and slowing CVC's growth would be treated rudely by investors.

Subscriber metrics should all be in positive territory. Analysts are looking for alight pick up of basic cable subscribers, about 25,000 new digital TV subs, about 35,000 high speed internet net adds, and around 50,000 additional VOIP telephone subs. Pricing is expected to remain fairly stable with the focus on high speed data where some fall in ARPU is likely. Price competition between cable and telco has been surprisingly mild during the recession even as sub growth has slowed. I believe a price war remains the single greatest risk to cable and telco investors.

Since it is CVC, the conference call will also have plenty questions about the company's strategic direction and balance sheet. Management has made moves to extend maturities taking the pressure off a leveraged balance sheet. Potential merger and acquisition activity will be of interest with CVC as both a buyer and seller. An update on the ill-timed Newsday acquisition is expected.

I also want to hear details on the rollout of WiFi service across the footprint. I think this is a very effective way for CVC to respond to smartphones, next generation wireless networks, and the FiOS bundle that includes wireless phone. CVC is unique among cable companies in that its tight cluster allows WiFi as an option.

The outlook for cable is better than I thought and the stocks are still cheap by historical standards, especially as free cash flow is really kicking in as capital spending moderates. However, the group has rallied very hard off the TWC and CMCSA results so the possibility that even a good report by CVC is met with a yawn is possible.

Cablevision Dealling Well With Competition For Now

Cablevision reported better than expected results driven by its core Cable operations and Madison Square Garden. Revenues grew 11% to $1.84 billion ahead of consensus of $1.78 billion. EBITDA grew 20% to $610 million, ahead of estimates for $560 million.

Financial and subscriber metrics at the Cable systems were better than expected. Revenues rose 8.6%, in line with expectations, while EBITDA rose 13.3% against consensus for 10% growth. The EBITDA beat provided about $15 million of the $50 million EBITDA surprise at the corporate level. Basic subs fell by 4,000 but analysts were expecting a fall of 8,000 to 10,0000. Digital subs grew by 43,000, in line with estimates. Data and Telephone subs beat estimates rising 62,000 and 102,000 respectively.

The rest of the beat in the quarter was at the MSG segment. "Lower provisions" for "tam personnel transactions" looks like it might have been a big positive swing factor. Also, the entertainment business grew nicely. On the call, management pointed out upside in entertainment at MSG including the acquisition of the Chicago Theatre. Recent speculation that Cablevision may invest more in this segment outside of New York seems plausible, especially the company finally pulls the trigger on a sale of Rainbow. Rainbow had 9% EBITDA growth, wrapping up a very good year.

The big message from these results is that for now, Cablevision is dealing well with the competition from Verizon....

If this is because Verizon is backing off a bit in New York as it grows FiOS elsewhere, the better than expected performance could prove fleeting. Or maybe Cablevision's superior network, excellent operating management, and well established incumbency is going to prove a stronger competitive advantage than expected.

I'm not sure and thus I have no opinion on the shares for now. They deserve to trade up on this quarter. Even more so given that Comcast's recent shareholder friendly actions have improved sentiment on cable stocks. Cable is also benefiting from the realization that cable vs. telco is not an either or investment decision.

Cablevision Reports Inline: Implications Limited

I see little impact from Q06 results from Cablevision (CVC), either on CVC or on the broader cable industry. The company's results were very close to consensus estimates with revenues rising 13% and EBITDA rising 16%. Subscriber metrics look a little below expectations for high speed data and digital TV but analysts didn't seem too concerned and management aggressively promoted a seasonality argument that seems plausible to me.

There was no commentary in the press release or on the conference call about the Dolan family's bid to take CVC private. Industry observers expect a deal to get done which makes the quarterly results not very important for the outlook for CVC shares. Only a large deceleration in growth would impact the privatization attempt and clearly this quarter showed no signs that might occur.

The broader implications for cable were similarly minor.....

CVC's cable results were very strong with revenues rising 19% and EBITDA rising 18%. Given that CVC is furthest along among major cable companies in rolling out the triple play of TV, broadband, and voice, analysts expect other cable companies to enjoy similar growth rates over the next year or two. Following some signs of deceleration in the cable division at Time Warner (TWX) when it reported last week, investors will be relieved to see solid results from CVC.

As mentioned, high speed data and digital subscribers grew a little less than expected but basic subs were up for the 10th straight quarter and telephony subs matched expectations. Management said the slight shortfall in digital TV and broadband subs was due to summer home disconnections on Long Island and the Jersey shore.

The reason it is important to monitor CVC's reutls for broader industry trends is that its penetration of its customer base is very high. 76% of all CVC cable TV subscribers now take digital TV. 63% take high speed internet and 5% take phone. These penetration levels are near where analysts think that growth could stall. Conseqeuntly, CVC's role as the first to market with these products makes it a good guidepost for the rest of the cable industry. 3Q results suggest no problems in the near future.

Another Attempt To Take Cablevision Private

I finally had a chance to review all of the news stories and analyst reports about the Dolan family’s latest attempt to take Cablevision (CVC) private. My conclusion is that I think this deal will get done with a small sweetener.

On the one hand, I can see good reason for the special committee of independent directors to reject a deal at $27. The Dolan’s are making much of the fact that their latest offer is a premium to their 2005 offer. However, CVC’s EBITDA is growing by around 15% in 2006 and will likely grow by at least another 12% in 2007. Therefore, solely by rolling the clock forward the deal price should be higher.

On the other hand....

CVC shares are up huge this year and shareholders have pocketed a $10 special dividend. This should materially reduce the emotional reaction of major shareholders to being ripped off in the current deal. Additionally, the current deal is straightforward, being all cash and easily financed. Also, according to one analyst, Delaware law leaves the Dolan’s in a pretty strong position to ignore other offers should they emerge given their 70% plus voting control. Finally, the Dolan’s probably have a pretty good idea of how the independent directors will look at the new offer given that they went through the process just a year ago.

The Dolan’s are saying that CVC should be private because competition could lead to difficult decisions including increased capital spending. I am sure there is some truth to this along with my bearish hypothesis that CVC’s EBITDA and free cash flow growth could slow markedly in a few years as triple play penetration maxes out and Verizon (VZ) rolls out its fiber optic network.

There is probably more truth to the view that the Dolan’s want to get 100% of control of CVC with other people’s money now at a cheap price with the knowledge that they can flip it in 2-3 years when EBITDA is likely to be 20-40% higher. Even if the current favorable sentiment toward cable stocks moderates by then and the Dolan’s ultimate exit multiple is only at the current 7-8 times EBITDA, they would still be locking in a price 20-40% premium for 100% of the economic interest.

I have little doubt that if CVC were for sale to the highest bidder, Comcast (CMCSA/CMCSK), Time Warner (TWX), and private equity would push the price solidly into the $30s. But it seems unlikely to get that far in the near future. The Dolan’s are in a strong position legally with a justifiable but cheap offer. This makes the most likely scenario acceptance of the current deal with a small sweetener of $1-2.

Arbitrageurs will probably play this form the long side but the upside isn’t likely enough to entice fundamental investors currently on the sidelines to get long. That means unless you believe that CMCSA or TWX will go public with a statement that would be willing to pay a substantial premium to the Dolan’s offer in a friendly deal, there is probably little reason to worry about CVC until the current offer is accepted or rejected.

Cablevision Comes Through: Stick With Comcast

Cablevision (CVC) shares are up sharply after the company reported better than expected 4Q05 results and announced 2006 guidance for its cable division that is above current analyst estimates. As the conference call begins, CVC shares are up 5% and dragging Comcast (CMCSA/K), up over 1% along for the ride. Wall Street may hate cable stocks but with CVC in the books, the big three of CMCSA, Time Warner (TWX), and CVC have all reported double digit gains in EBITDA on improved basic subscriber growth, stable to higher ARPUs, and stronger than expected growth in new services including high speed data, telephony, and digital TV. With CMCSA and CVC trading under 7 times EBITDA, producing big free cash flow, and projecting another year of double digit growth, I continue to think the street is wrong and that cable stocks will offer decent returns in 2006.....

CVC reported a strong quarter. Cable revenue grew 16.1% with EBITDA growing 15.8%. Both of these figures slightly exceeded analyst estimates. Subscriber metrics were particularly strong. Basic subs rose by 17,000 ahead of estimates that ranged from 3,000 to 10,000. Digital TV, high speed data, and telephony subs each grew more than expected. Digital subs were up 119,000 against expectations for a mid-90,000 gain. High speed data subs grew 94,000 against expectations of 75,000. Telephony subs were up by 130,000, versus analyst estimates fro gains of 100,000 to 120,000. ARPU was strong at $100.46, the first time it has ever exceeded $100. Churn remained under control with management attributing the especially low churn among the growing base of triple play subscribers. This is having the impact of helping the closely watched basic subscriber growth.

Capital spending was slightly higher than expected at $189 million. Most analysts were closer to $175 million. Most of the excess was from customer premise equipment that came from the better than expected sub growth.

There is no sign that CVC growth is about to abruptly slow. Penetration of digital TV, high speed data, and telephony grew sequentially by 350 basis points, 200 basis points, and 290 basis points, respectively, from already industry leading levels. Competition from RBOCs, via low cost DSL and Verizon's fiber overbuild, so far seems to have no impact.

Guidance for 2006 implies another year of strong growth. Basic subs are projected up 2-2.5% with total revenue generating units up 1 million to 1.25 million. Analyst estimates assumed growth of less than 1% for basic subs and RGU gains of no more than 1 million. Revenue and EBITDA are both projected to rise in the mid-teens on flat capital spending. At one point earlier this year, analysts expected slightly lower capital spending in 2006 for CVC and the entire industry. Due to faster than expected subscriber gains, 2006 capital spending is now projected flat throughout the industry. This remains the key point of concern for investors. CVC management reiterated that there is no need to rebuild plant and capital spending is a function of new product growth.

The Rainbow national networks including AMC, Independent Film Channel, and Women's Entertainment enjoyed low single digit revenue growth in 4Q05. Growth in revenue and EBITDA is 2006 is projected in the high single digits. In response to a question management stated it was not looking to sell the networks. The street would like to see a sale.

The balance sheet is leveraged relative to CMCSA and TWX at 4.9 times debt to EBITDA. With an agreement in place for a new credit line, a special dividend is back on the table. Analysts estimate a $10 dividend, as previously planned, would raise leverage to 6 times. The sale of the Rainbow networks would likely be back on the table if the dividend comes to pass.

I think CVC shares are cheap. I also think CMCSA shares are cheap. CVC is the more aggressive play as growth is faster, leverage is higher, and management-shareholder conflicts exist. CVC also has takeover potential. I like cable stocks and think the street will eventually lift valuations in recognition of double digit EBTIDA growth, flat capital spending, and growing free cash flow. CVC's earnings report wraps up reporting season for the major market operators and supports the bull case.

Cablevision: March 2006 Quarterly Earnings Preview

Cablevision (CVC) should report another strong quarter before the open on Tuesday. Analyst are estimated growth in the mid to upper teens for revenues and EBITDA in the company's Telecom division. Consolidate growth will be a little less as the company’s programming assets and New York City properties will grow at a modestly slower rate.

Growth at CVC leads the cable industry due to the company’s advanced network and early adoption of cable telephony. At yearend, about 24% of CVC's customers were taking VOIP telephony, by far the highest level in the industry. CVC leads the way in selling the triple play bundle of TV/high speed data/voice and is seeing the financial benefits. Analysts are expecting CVC to pull in about $103 of revenue per user this quarter vs. $91 a year ago, a gain of 13%. With subscribers growing in all parts of the triple play, it is no wonder that revenue and EBITDA can gain more than 15% year-over-year. The company has guided to mid-teens revenue and EBITDA guidance for all of 2006 so 1Q strength will not be isolated....

Using a cross-section of several of my favorite analysts including Aryeh Bourkoff of UBS, Jessica Reif of Merrill Lynch, and Matthew Harrigan of Janco, here are some key measures to watch for: telecom revenues of $975 million, telecom EBITDA of $380 million, basic sub adds of 15,000, digital TV sub adds of 95,000, high speed data adds of 80,000, VOIP adds of 120,000. Cable capital spending is expected to be near $170 million.

ARPU trends will also be closely watched. So far, the gains are coming from more customers taking more products but within specific products like video and high speed data, year-over-year ARPU levels could be slightly lower. I am not all that concerned because the declines are coming form customers getting small discounts for taking the whole bundle. In the long run, it is much better to capture these customers now at a small discount before Verizon rolls out enough fiber to do some damage.

With the $10 special dividend finally paid, it is possible that the Rainbow and MSG assets may get a little more attention as adjusted for debt they are now a more important of CVC's value equation. MSG results are lumpy due to the sports teams but Rainbow's national cable networks including IFC, WE, and AMC should produce mid single digit gains in revenue and EBITDA.

Overall, CVC is a leveraged play on a rebound in cable valuations. The company has a debt to EBITDA ratio of greater than 6 vs. around 2 times for Comcast (CMCSA/K). Aryeh Bourkoff calculates that each EBITDA multiple point is worth about 27% of CVC's stock price vs. 14% for CMCSA. So if you believe my rants that cable has further upside as the industry continues to growth at double digit rates through 2006 and 2007 then CVC is your stock. If you think growth will slow and the bear case will re-emerge, CVC is your short.

Cablevision: Cheap But Too Many Distractions

My initial reaction when I read through the Cablevision (CVC) earnings report was that the shares would trade off because EBITDA from the cable business was light of expectations by about $15 million or 4%. The Street seemed to agree as the shares fell by about 1%. However, on the call the company explained the shortfall and the shares have since recovered are now up on a down day in the market. I don't think there was any major news in the press release or on the conference call and I continue to believe the shares are stuck in the mid $20s unless cable industry valuations in general rise. I think that is possible as double digit growth will continue for the foreseeable future. So far investors have been unwilling to pay for that growth because they fear a sharp slowdown when RBOCs start offering wireline video across large numbers of households. Nothing on the conference call will allay those fears but multiple compression can only go so far, in my opinion....

CVC reported cable division revenue of $911 million, up 15% over year ago levels. EBITDA grew 11% to $354 million, below expectations of $370 million. Subscriber metrics were in line to better than expected. Basic subs grew a modest 3,500. Digital TV subs were a bit below expectations but data and especially telephony easily exceeded expectations. Churn rose sequentially but fell year over year. Management reminded investors that churn rises sequentially in 3Q due to vacation home shut-offs on Long Island.

Management attributed the EBITDA shortfall to one-time items including "increased marketing costs for new businesses." No specific dollar amount was given despite repeated questions from analysts. There was no change to full year cash flow guidance despite the shortfall so working backwards, the explanation seems plausible. This is further supported by the fact that sub growth at new services was better than expected and full year guidance on sub growth was moved up to the high end of the previous range. All of this suggests that 4Q is shaping up well on revenue, cash flow, and subscriber measures.

Management refused comment on the special dividend but analysts pressed the matter with questions about asset sales and target leverage levels. Jim Dolan did state unequivocally that "we have no plans to sell the national cable networks but can’t ever rule it out." This means that the $10 special dividend is sure to be financed with debt, raising leverage to 7 to 8 times EBITDA before free cash flow in 2006 and beyond is considered. I think this is a mistaken capital allocation strategy given competitive concerns as it will inhibit the ability of the Street to raise the valuation on the stock since it raises the risk profile if the growth slowdown everyone fears comes to pass.

CVC remains a cheap stock with solid near-term fundamentals. Asset value is well above the current stock price and an eventual takeover is a real possibility. However, the stock takes a lot of patience due to Dolan family shenanigans -- more than I have -- so I remain on the sidelines.