Cash is flowing into the cable business, and digital technology will only speed the flow.
That was the theme as three cable operators reported results for the first quarter on Monday evening and Tuesday morning. Third-largest U.S. cable operator
, New York-area giant
and digital-cable evangelist
each touted digital technology as a springboard for future cash flow growth, in the hopes that investors will continue to see the sector as insulated against economic slowdown despite weakness in the cable TV advertising market.
In afternoon trading, Insight was down 4 pennies to $26.99, Comcast dropped $1.25 to $44.26 and Cablevision fell $4.35 to $60.15.
With the companies balancing the costs of system upgrades with the benefits of the numerous services they can offer on digital services, they each tried to reassure investors that money spent on system upgrades will come back in the form of high-margin business in the near future.
Archana Basi, media analyst for Comcast shareholder
T. Rowe Price,
says she thinks industry investments in digital systems and high-speed data services will yield "very good" returns on investment. "We are just starting to see the fruits," she says, in the form of revenue and rates of customer acceptance. "We're just starting to see the payoffs of product rollouts."
Demand continues to outstrip supply for high-speed connections to the Internet, Basi says, and the future looks encouraging for digital video systems, which enable such features as better-quality video signals, additional channel capacity and interactive program guides. "I think once you do get VOD
video on demand out there in any major way, the revenues will really accelerate on the digital side as well," she says.
David Lee Smith, senior analyst at
Dain Rauscher Wessels
, says that Insight, Cablevision and Comcast are emblematic of the rest of the cable industry. "They're all becoming effusive about the opportunities in video on demand they see," he says.
In Insight's conference call with analysts, chief operating and financial officer Kim Kelly said revenue from advertising sold on the company's systems was less than expected. But the digital cable package that the operator is offering is reducing customer turnover, or churn, she said. And the introduction of interactive digital service has turned the company's Louisville, Ky., system from a subscriber-losing operation to one that has grown by 2.3% since September, Kelly says.
With the company's test launch of telephone service through its Louisville system, CEO Michael Willner said he found more evidence of how advance services foster subscriber loyalty. More than 90% of the roughly 600 customers who have signed up for the service have opted for their cable and telephone service to be paid via a single monthly bill. And experience, says Willner, indicates that single-bill customers are "very loyal."
Cablevision said on its call that bundling video and cable modem services has had encouraging results: 28% of the company's video subscribers in Nassau County, N.Y., have signed up for high-speed Internet service, too, as have 23% of video subscribers in Fairfield County, Conn. In a measure of the company's progress in cutting installation expense, Cablevision said that 85% of the company's cable modem sales in the first quarter were self-installed by customers, and 85% of those self-installs were successful, not requiring subsequent visits by Cablevision personnel.
Cablevision says its capital expenditures will rise from a range of $1 billion to $1.1 billion in 2001 to about $1.5 billion to $1.7 billion in 2002 -- a disclosure that Smith says was the main culprit in sending the company's stock down 7.3% for the day. The company's head of engineering and technology, Wilt Hildenbrand, took pains to tell analysts that Cablevision's upgrade to digital technology, costing about $100 for a household that could be served in its service area, will make it easy for the company to offer a variety of new products, including video-on-demand and Internet-based telephony, without making any trips to subscribers' households.
"This is not a very forgiving market that we're in, obviously," says Smith, adding that investors probably expected a smaller number for 2002. Smith has a buy on Cablevision, a buy on Insight and a strong buy on Comcast; his firm hasn't done underwriting for any of the companies.
Comcast, in its earnings announcement, proclaimed that the payoff of new technology, especially in newly acquired cable TV systems, is already here. Following the addition of nearly two million subscribers, the company sees "significant growth opportunities in these systems as we begin to accelerate the delivery of new digital and data services," said Comcast President Brian Roberts. Based on this, he said, the company is raising its full-year 2001 guidance for cable cash flow growth from a range of 10% to 11% to roughly 12% to 13%.