IP Democracy: Cablevision's New Service Growth Slows
Cablevision Systems, which yesterday announced a plan by the founding Dolan family to take the company private, issued its Q3 earnings report today showing continued but slower growth in its already highly penetrated new video, high-speed and voice services.
The financial performance of the Long Island-based operator was good too, with one tiny slip. Telecommunications revenues (i.e. cable system revenues, not including the programming networks or other properites owned by Cablevision) advanced 14.9% year-over-year to $1.14 billion, while operating cash flow grew by 12.3% year-over-year to around $429 million.
This slight disparity between revenue and cash flow growth is a bit worrisome — the net effect of the lag in cash flow growth was a drop in Cablevision’s operating cash flow margin, a critical metric in the cable business. The operator’s cash flow margin ticked down by 2.3% from 38.4% to 37.6%, a change that is not all that important except Cablevision will be incurring a lot of debt in taking the company private.
The lower the cash flow margin the greater the risk that Cablevision will struggle to repay debt. Debt ratings agency Fitch has already raised a red flag in this regard.
Still, Cablevision is the industry’s top performer, with very high penetration rates across the board and good, but slowing, growth. Despite hefty competition from Verizon’s FiOS high-speed and TV services, Cablevision boosted its basic subscriber count by 12,000 during the quarter.
Digital subscriptions grew too, but at a far lower rate than in the corresponding quarter last year. Cablevision added 64,000 net new digital subscribers during the quarter, far less than half of the net 165,000 digital customer gains posted during Q1 06.
High-speed data subscriptions advanced, but also at a far slower pace. Cablevision added 79,000 net new modem subscribers during the quarter, compared to the 112,000 or so net new high-speed customers added during Q1 06.
Digital voice, or VoIP subscriptions, grew during the quarter by a net 109,000 new customers, down from the 134,000 or so net new telephony customer gains during Q1 06. But, all of these services are very highly penetrated to begin with, so a growth slow-down was inevitable.
At the end of Q1 07, 80% of Cablevision’s customers were digital cable subscribers, while 46% of all homes passed by the company’s systems purchased Cablevision’s Optimum High-Speed Internet services. And Cablevision’s digital voice penetration was nearly 29% by the end of the quarter, a phenomenal level of acceptance.
Company execs could say nothing about the buyout during Cablevision’s investor call. They did, however, talk about the growing competition from Verizon in the New York/Long Island area, noting that despite the heavy deployments of fiber-based high-speed and TV services by the telco over the past year, Cablevision still has felt little pain from the new rival. Verizon has rolled out its FiOS services to around 900,000 of Cablevision’s 4.6 million homes passed, Cablevision execs maintain.
| Cablevision Systems Operational Statistics (in mil., except %) | |||||
| Basic Subscribers and RGUs | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Homes passed | 4.501 | 4.519 | 4.539 | 4.562 | 4.589 |
| Basic subscribers | 3.066 | 3.101 | 3.111 | 3.127 | 3.139 |
| Pro Forma annual sub growth | 2.7% | 3.2% | 3.3% | 3.3% | 2.4% |
| Basic penetration | 68.1% | 68.6% | 68.5% | 68.5% | 68.4% |
| Monthly churn | 1.5% | 1.7% | 2.0% | 1.8% | 1.7% |
| Customer Relationships | 3.224 | 3.264 | 3.278 | 3.300 | 3.318 |
| Total Revenue Generating Units | 7.872 | 8.257 | 8.546 | 8.827 | 9.088 |
| Digital Video | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Digital subscribers | 2.127 | 2.271 | 2.364 | 2.447 | 2.511 |
| Quarterly net sub adds | 0.165 | 0.144 | 0.094 | 0.083 | 0.064 |
| Penetration of total basics | 69.4% | 73.2% | 76.0% | 78.2% | 80.0% |
| Monthly churn | 1.9% | 2.0% | 2.3% | 2.0% | 1.9% |
| High Speed Data | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Customers | 1.807 | 1.891 | 1.964 | 2.039 | 2.118 |
| Quarterly net adds | 0.112 | 0.085 | 0.072 | 0.075 | 0.079 |
| Penetration of total homes passed | 40.1% | 41.9% | 43.3% | 44.7% | 46.1% |
| Monthly churn | 1.7% | 2.0% | 2.4% | 2.1% | 2.0% |
| IP Telephony Voice | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Customers | 0.865 | 0.988 | 1.101 | 1.209 | 1.318 |
| Quarterly net adds | 0.134 | 0.122 | 0.113 | 0.108 | 0.109 |
| Penetration of Optimum Voice | 19.2% | 21.9% | 24.3% | 26.5% | 28.7% |
| Residential Voice - circuit switched | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Customers | 0.007 | 0.007 | 0.006 | 0.005 | 0.002 |
| Residential Voice - Total | 1Q06 | 2Q06 | 3Q06 | 4Q06 | 1Q07 |
| Total Residential Telephony Subs. | 0.873 | 0.994 | 1.107 | 1.214 | 1.320 |
| % of homes passed | 19.4% | 22.0% | 24.4% | 26.6% | 28.8% |
| Source: Emerging Media Dynamics, Inc. analysis of company data. © 2007. | |||||
Update: Pali Research’s Rich Greenfield is mounting a “Just Say NO to Chuck & Jim” campaign, arguing that, despite the Q1 07 drop in cash flow margins, free cash flow (cash flow after capex and other expenses) is kicking in big-time at Cablevision. That’s true — Cablevision swung from a negative free cash flow of $105 million in Q1 06 to positive free cash flow of around $81 million in Q1 07. Greenfield thinks the Dolans are taking Cablevision private now in order to rake in all this left-over cash, only to end up selling the company for top dollar to Time Warner Cable. In a research note, he writes:
The Dolans want to harvest CVC’s free cash flow for their own personal benefit, while enabling themselves to capture 100% of the profits from an eventual sale to Time Warner.
He’s urging public shareholders to make the Dolans wait until mid-2008 when the price of the stock could reach mid-$40s or even over $50 per share.
Posted by Cynthia Brumfield on May 3, 2007 10:38 AM to IP Democracy