Sinclair Tackles Mediacom for Loss

Although Mediacom Communications Corp. ended last year on a strong note, it expects to get off to a very slow start in 2007, due in large part to its long, bruising fight with Sinclair Broadcast Group over retransmission-consent fees.

Mediacom, the seventh largest MSO in the U.S. with nearly 1.4 million basic cable subscribers, reported earlier today that its revenues, operating income, and adjusted operating income all increased by double-digit percentages in the fourth quarter. Quarterly revenues jumped 12 percent to $313.1 million, operating income surged 29 percent to $55.1 million, and adjusted operating income before depreciation and amortization (adjusted OIBDA) climbed 10 percent to $111.0 million.

Likewise, Mediacom posted hefty revenue and operating income gains for all of 2006 as it enjoyed its second straight year of strong cable subscriber gains. Annual revenues rose 10 percent to $1.21 billion, operating income increased 21 percent to $223.6 million, and adjusted OIBDA climbed 9 percent to $444.3 million.

While Mediacom still couldn't eke out a profit for either the quarter or the year, it also cut its losses for both periods. The MSO registered net losses of $3.6 million for the quarter and $124.9 million for the year, improving from its respective losses of $212.7 million and $222.2 million in 2005.

"It was a good finish to a solid year," says Mark Stephan, executive VP and CFO of Mediacom. He and other company executives stressed that the company registered its highest yearly revenue and adjusted operating income increases since 2002, thanks to its net gain of 174,000 new revenue generating units (RGUs).

But Mediacom officials, drained from their nasty, ultimately losing struggle with Sinclair, don't see the good times rolling into the first half of this year. On the company's earnings call today, they braced analysts and investors for much more sluggish growth and reduced profit margins in the first six months of 2007, particularly in the current quarter.

"This year needs to be split into two pieces," says Rocco Commisso, chairman and CEO of Mediacom. He and other company officials predicted that the MSO would return to double-digit revenue and operating income growth in the last six months of the year.

Mediacom executives cite Sinclair as the biggest culprit, costing the MSO both subscribers and marketing and legal expenses. Seeking monthly retransmission-consent payments as high as 50 cents per subscriber, the large broadcaster launched an aggressive public campaign against Mediacom last fall when the MSO refused to meet those demands. As the battle escalated, Sinclair pulled 23 of its TV stations off Mediacom systems in 16 markets early last month, pulling the plug on 700,000 cable subscribers.

With many Sinclair stations carrying the Super Bowl, Mediacom capitulated three weeks ago, two days before the big game. Although the two companies have not disclosed the terms of their new carriage agreement, Commisso conceded to analysts that Sinclair pretty much got all that it wanted.

"At the end of the day, we caved in to their demands," he says. "We did not want to spend another two months fighting this battle on principle."

Mediacom officials, who reported the loss of 14,000 basic cable subscribers in the fourth quarter, attribute about half of that loss to Sinclair's campaign. They expect to report further customer losses for the first quarter because of the Sinclair fight, although they declined to quantify them.

"We have lost some subscribers," Commisso says. He added, though, that Mediacom did not lose anywhere near the 70,000 customers that Sinclair CEO David Smith had predicted at the height of the battle.

Besides the Sinclair fight, other factors are conspiring against Mediacom this winter. Company officials said recent ice storms in the Midwest, the resulting customer outages, the delay of their usual annual rate increases until the spring, and sharply lower advertising revenues will also put a serious crimp in the company's financial results for the next two quarters.

"Advertising revenues are coming off a huge quarter driven by political spending," Stephan says. "We won't see anything close to the high spending in 2006."

Despite the rough first six months, Mediacom officials said they still expect revenue growth of 8 to 9 percent in 2007 as they continue to roll out VOIP services and sign up more customers for their new triple-play packages. The company, which finished off 2006 with 105,000 VOIP subscribers after adding 22,000 in the final quarter, now offers IP phone service to 2.3 million of its 2.8 million homes passed.

"Phone is rapidly increasing its contribution to overall revenue growth," Stephan says. He noted that the company's phone business, which just completed its first full year, "is looking very much like the data business in its first year."

Mediacom executives are also projecting adjusted OIBDA growth of seven to eight percent this year. They expect to record $215 million in capital expenditures, up slightly from $210.2 million in 2006.

— Alan Breznick, Site Editor, Cable Digital News