Cox Swings to a Profit

Cox Communications ( COX) swung to a first-quarter profit Thursday as revenue surged 13% from a year ago.

The Atlanta-based company said its success in selling broadband Internet access and other lucrative digital services resulted in operating income growth of 84% and operating cash flow growth of 18%.

"We had another remarkable quarter, driven by continued demand for our bundle of video, voice and high-speed Internet services," said CEO Jim Robbins.

For the first quarter ended March 31, the company posted a profit of $57.7 million, or 9 cents a share -- ahead of the Thomson First Call analysts' consensus of 5 cents a share, and reversing the year-ago loss of $29.2 million, or 5 cents a share. Revenue surged to $1.54 billion, and operating cash flow hit $567 million, better than the First Call forecasts of $1.53 billion in revenue and $554 million in operating cash flow.

Cox, one of the nation's largest operators of cable TV systems, added 161,000 high-speed data customers in the quarter, bringing its broadband Internet customers to 2.1 million. Analysts surveyed by TheStreet.com had forecast no more than 140,000 additions in the quarter.

Cox said it ended the quarter with 2.2 million digital cable customers, achieving 35% penetration of its basic video customer base. After adding 30,600 basic video customers in the quarter, Cox has 6.4 million basic customers, up 0.8% from a year ago.

The company said services costs rose 10%, led by a 9% rise in programming costs. Other direct costs and field service costs rose 10%. On a conference call with analysts, Robbins noted that programming costs were coming under control thanks in part to Cox's new agreement with Disney's ( DIS) ESPN, which has been a major element of the cable operator's programming costs -- and against which Cox waged a very public campaign over the past few months. Over the life of the contract, ESPN costs will increase 7% annually, compared to previous increases of 20% per year, Robbins said.

Selling, general and administrative expenses also rose 10%, including a 19% increase in marketing expense. Cox cited increased salaries and benefits and costs related to trials of new video and telephony products. Marketing expense increased due to additional marketing related to new video products and an industrywide campaign aimed at satellite competition, as well as a 6% increase in costs associated with Cox Media, Cox's advertising sales business.

The early reaction to Cox's results from Wall Street analysts was positive Thursday.

Citigroup Smith Barney's Niraj Gupta called the operating results "excellent," noting that Cox captured 64% of high-speed data market share in the quarter despite stiffened DSL competition from the likes of SBC ( SBC), and without sacrificing average monthly revenue per customer in the data business. Gupta has a buy rating on the stock; Cox has been an investment banking client of Citigroup's over the past 12 months.

Addressing a question that's been on investors' minds for months, Robbins said on the call that Cox did not want to buy all of bankrupt cable operator Adelphia Communications, though he left open the door to buying parts of it. What is important to Cox, he said, is "the right systems, not just a whole bunch of disparate customers." As in the past, he said, the company is interested in buying well-clustered systems in midsize to large markets.

Adelphia's management said last week that the company, which is operating under Chapter 11 bankruptcy protection, would explore the possibility of selling off its assets rather than emerging from bankruptcy as a freestanding company.

On Thursday, Cox shares rose 93 cents to $32.28.

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