Investors Eye Cash Flow As Earnings Season Starts

BY MAVIS SCANLON It’s earnings season, and cable investors are looking for answers. Specifically, they want to know how quickly MSOs are apt to reach the free cash flow mark. Operators have spent years upgrading their systems to allow for advanced services and new revenue streams. But the costs have been huge. And so free cash flow — or what’s left over after all expenses and investments are taken into account — has taken a back seat. Cox has stated that it would be cash flow positive for the full year. Comcast generated positive cash flow in the third quarter, but the monies it will spend upgrading low-end AT&T systems has pushed back its cycle. During the late 1990s and into this decade, as cable operators spent billions upgrading systems, the major focus was on growth, not profits. Then came Enron, WorldCom, Tyco and Adelphia, and everything changed. Adelphia especially highlighted concerns over cable companies’ accounting methods, concerns that persist to this day. Investors virtually abandoned the industry last year after the Adelphia scandal highlighted the heavy debt loads carried by so many MSOs. Despite the ensuing distractions, operators insisted overall operations were sound. Fourth-quarter and year-end earnings reports should show improved metrics, said Goldman Sachs analyst Richard Greenfield last week in a research note. Goldman estimates 2002 cable industry revenue growth of 10.5% to 15.5% and EBITDA growth of 8.7% to 25.4%. MSO reporting season kicks off this week with AOL Time Warner reporting results on Wednesday, followed by Cablevision Systems, Cox Communications and Charter Communications the week of Feb. 10, and Comcast Feb. 27. Sobani Warner, an analyst at Williams Capital Group, says MSOs must at least show progress toward becoming free cash flow positive. A good indicator that progress is being made will be lower capital expenditures, she says. She estimates the industry’s capital expenditures will be at least 20% lower than the $14.5 billion spent in 2002. “When those numbers come out it will be beneficial,” Warner says. “Not only will that help companies get to positive cash flow in 2003 but it would also reinforce in the market’s mind that cable companies don’t have to spend billions to see profitability.” Secondly, investors will look for signs that advanced services such as cable modems, VOD, digital and telephony are helping to improve margins. This will be the first reporting quarter for Comcast since it completed its mid-November acquisition of AT&T Broadband. In addition to the release of the first pro forma figures for the combined company, Comcast is expected to update the market with its expectations for subscriber growth for the year and the progress it is making in integrating the two companies. “Any improvement in [AT&T customer defections] will be viewed as a positive,” Warner at Williams Capital says. Following recent asset sales at Cablevision, the looming question is whether and when it may sell the AMC network, and will it sell or go through with plans to launch a satellite service. The company expects to update investors on Feb. 11. Wall Street has several questions for troubled Charter. Can it remain solvent? When will the grand jury investigation end? Can newly installed management stem sub losses? How can the company’s heavy debt load be restructured? For the latest on MSO earnings, see “Kagan Media Money” at. www.kagan.com/cw.