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Cablevision Sees Slower Growth Ahead

Alan Breznick
2/27/2007

Cablevision Systems Corp. (NYSE: CVC) reported record cable subscriber and revenue growth in 2006, but the company doesn't expect the party to continue this year.

In its latest earnings report, Cablevision said it posted $1.69 billion in consolidated net revenues for the fourth quarter, up 13.4 percent from $1.49 billion in the year-ago period.

Cablevision finished the quarter in the red, registering a net loss of $23.9 million as its net interest expenses rose and it took a tax loss on some discontinued operations. For the year, Cablevision reported consolidated net revenues of $5.93 billion, up 14.6 percent from $5.17 billion in 2005.

But the company still posted a net loss of $126.5 million for the year, reversing its gain of $89.3 million in 2005, largely for the same reasons driving its quarterly loss.

The nation's fifth largest MSO added 282,000 new revenue generating units (RGUs). Optimum Voice, the company's VOIP product, led the way by netting 109,000 new customers, raising its total above the 1.2 million mark. That keeps Cablevision a solid third among cable VOIP players, behind Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC)

Cablevision also signed up 75,000 high-speed data customers, boosting its total over the 2 million mark. In addition, it enlisted 82,000 digital video subscribers, lifting its total to more than 2.4 million, and brought in 16,000 more basic cable subscribers.

For the entire year, Cablevision added more than 1.4 million RGUs, its highest annual haul yet. That total includes 484,000 digital video, 478,000 VOIP, and 345,000 cable modem subscribers.

Cablevision officials boasted that they achieved such high growth at the same time that Verizon Communications Inc. (NYSE: VZ) aggressively rolled out its rival FiOS service in the New York metro area. Tom Rutledge, the company's COO, said that while Verizon's FTTP plant now passes 850,000 of the 4.6 million homes in Cablevision's footprint, the phone company has achieved less than 3 percent video penetration.

In addition, Cablevision executives bragged that more than a third of their 3.1 million basic cable customers now take triple-play packages from the company. Thanks to this development, the MSO's monthly revenue per subscriber (RPS) climbed to a new industry high of $115.30 in the fourth quarter, up from $100.46 a year earlier.

Wall Street analysts marveled at Cablevision's continued growth pace. In a note sent to investors earlier today, Craig Moffett, a senior analyst at Sanford C. Bernstein & Co. Inc. , called the results "impressive' and said the company's "unit growth for every product was as good or better than we had expected, with high-speed data and telephony showing particular resilience."

However, things look to be slowing down. In its financial guidance for 2007, the company predicts that it will add 850,000 to 950,000 RGUs over the next 12 month, which represents a big drop from the 2006 total.

Cablevision executives attributed the projected drop in RGUs to an expected sharp decline in new digital cable subscribers this year. With an industry-leading 78 percent of their basic cable subscribers now subscribing to digital video service, they contended that there simply aren't that many prospects left to sign up.

"Essentially we will have completed the digital upgrade in '07," Rutledge told analysts. From now on, he said, most of the MSO's RGU growth will come from new data and phone subscribers.

Due to this slower RGU growth, Cablevision anticipates that its revenue and earnings growth will also dip this year. But the MSO still projects percentage growth rates in the mid-teens for both categories.

The flip side of the projected decline in new digital subscribers is that Cablevision expects to spend less money installing expensive new digital set-top boxes in subscribers' homes this year. As a result, the MSO projects that its cable capital spending budget will range between $600 million and $650 million in 2007, down from a recent high of $777 million in 2006 and $666 million in 2005.

— Alan Breznick, Site Editor, Cable Digital News

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