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Cablevision: Large Growth, Large Debt Payments

Despite recording strong cable subscriber and revenue gains once more, Cablevision Systems Corp. (NYSE: CVC) suffered a higher than expected net loss in the third quarter as its capital spending and debt interest payments both shot up dramatically.

The nation's fifth largest MSO, which is now weighing a $7.9 billion offer from its ruling Dolan family to take the company private, reported Wednesday that it lost $59.2 million in the quarter ending Sept. 30. That represents just a slight improvement from the company's $63.0 million net loss in the year-ago period. (See Going Private, Cable's New Competitive Weapon)

Cablevision bled red ink over the summer months largely because of much steeper spending on cable system upgrades and interest expense. In particular, net interest expense soared $52 million, or 28 percent, to $238.7 million to help pay off nearly $3 billion in extra debt that the company took on to fund a special $10-per-share cash dividend to shareholders last April. Working capital expenses also rose.

The loss came even as Cablevision, one of the cable industry's leading proponents of high-speed data, VOIP, and triple-play bundles, racked up another quarter of impressive subscriber and revenue growth.

The Long Island-based company posted $1.41 billion in consolidated net revenues, up 13.4 percent from $1.24 billion in the year-ago period. It also generated $135.4 million in operating income, up 25.6 percent from $107.9 million a year earlier. In addition, it reported $438.8 million in adjusted operating cash flow (AOCF), up 16.1 percent from $377.9 million in 2005.

Cablevision's large cable television division drove just about all of this growth. The unit's net revenues jumped 18.7 percent to $1.04 billion while its "adjusted operating cash flow" (AOCF) spiked 17.5 percent to $397.6 million on a year-over-year basis. The company's other divisions -- including its Rainbow programming and Madison Square Garden units -- either contributed nominal revenue increases or suffered declines.

In a note dashed off to investors yesterday, Craig Moffett, an analyst with Sanford C. Bernstein & Co., referred to the cable profit increase as "astonishing." He wrote that the company's growth continued to "defy expectations of deceleration" despite its "already very high penetration in all areas."

The New York MSO fueled its cable revenue gains by netting 288,000 new revenue generating units (RGUs) in the quarter, down slightly from 305,000 RGUs in the year-ago period. Its average monthly revenue per basic customer, a key cable metric, also climbed to an industry-leading $111.13, up from $96.69 a year earlier.

In their earnings call with analysts, Cablevision executives declined to address either the Dolan family buyout proposal or the lawsuit filed against the company last spring by several programmers fighting its proposed network digital video recording (nDVR) service. Nor did they deign to discuss the ongoing federal investigations into the company's stock options practices.

Instead, Cablevision officials spent most of the time bragging about the cable unit's operating performance and fending off analysts' questions about more unpleasant matters. They especially talked about their VOIP product, Optimum Voice, which is the crown jewel of the company's triple-play offering.

In his opening remarks, for instance, Cablevision President & CEO Jim Dolan stressed that the company's cable business enjoyed its highest year-over-year increase in net revenue since launching Optimum Voice more than two years ago.

As has been the case of late, Optimum Voice led the way among Cablevision's major products in Q3, garnering 113,086 new subscribers. That's down slightly from the pace in last year's summer quarter, when the MSO picked up 122,851 residential phone customers.

Thanks to the gain, Cablevision closed out September with 1.1 million VOIP customers, making it the third North American MSO to scale the 1 million-customer mark. It now stands a solid third behind Time Warner Cable Inc. (NYSE: TWC) and Comcast Corp. (Nasdaq: CMCSA, CMCSK), which recently shot past Cablevision in the MSO rankings.

Moving on to broadband, Cablevision signed up 72,438 cable modem customers in the third quarter, again down slightly from 80,570 in 2005. The increase lifted its total Optimum Online customer count to just below 2 million, giving it an industry-leading 43.3 percent penetration of homes passed.

Turning to its core business, Cablevision added 93,587 digital video subscribers over the summer, down a bit from 101,611 customers a year earlier. With the increase, the MSO now has close to 2.4 million iO digital subscribers, earning it an enviable 76 percent digital take rate among basic cable homes.

In another digital video milestone, Cablevision also surpassed the 500,000-customer mark for its high-definition TV (HDTV) service over the summer. Tom Rutledge, the company's COO, said the MSO closed out the quarter with more than 525,000 HD customers, up 16 percent from the second quarter.

On the basic cable front, Cablevision also shined, picking up 9,756 subscribers, extending its string of basic video gains to 10 straight quarters. The MSO now boasts more than 3.1 million basic subscribers, which comes out to 68.5 percent of the 4.5 million homes that it passes.

— Alan Breznick, Site Editor, Cable Digital News

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