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Cablevision 3Q11 Earnings Drop 65%

Video Subs Fall 19k While Operating Costs Increase 17%

Cablevision (NYSE:CVC) was the second major U.S. cable provider to report its quarterly results this earnings season, and already some common threads are being laced throughout the cablecos’ discussions of their 3Q11 performances. Aggressive competition is impacting subscriber and top line growth, while rising programming costs are taking a toll on bottom lines.

For the quarter, Cablevision’s revenue was up around 9% YoY to $1.67b, but factoring in the impact of its Bresnan Cable acquisition, revenues were essentially flat, up only 1%. Its bottom line performance was even more disappointing, falling 65% YoY to $39.3m in 3Q11 from $112.1m in 3Q10. Revenues from Cablevision’s business services area, Optimum Lightpath, remained a bright spot for the company, as revenue from this segment jumped 6% YoY, to $77.5m in 3Q11.

Cablevision management attributed the lack of overall revenue growth to three main factors: aggressive competition from Verizon (NYSE:VZ), the inability to increase prices, and the lagging economy.

Verizon lowered prices for its FiOS services in Cablevision’s New York footprint starting in 2Q11, without requiring long term contracts to new customers. This move limited the ability of Cablevision to increase prices for its triple play packages and as a result its average revenue per video customer in New York slipped below $154 in the quarter. Thomas Rutledge, Cablevision coo, indicated the company held off on larger rate increases, sacrificing potential revenue gains in order to stabilize its subs.

Despite these efforts Cablevision lost 19k video subs in 3Q11, but added 17k high speed data subs and 38k voice lines. Amid continuing video losses and flat residential revenues, Cablevision remains optimistic for residential growth the future, eyeing the current satellite customers in its markets. Greg Seibert, evp and cfo of Cablevision, commented on potential areas for growth.

“Over the long-term I think the business still has a lot of growth in it, and in the areas where we thought there would be growth there is continued opportunity to sell a triple play package to residential customers who don’t buy it today. There is still a considerable amount of satellite penetration in our footprint which we think is an inferior product at its core and ultimately gives us a path to additional residential growth.”

In order to make its video and broadband services more attractive, Cablevision appears to be embracing the transition from the more traditional, living room, television viewer to the more flexible, on-the-go viewer.  In an attempt to benefit from the growing popularity of iPads, Cablevision launched an app for the tablet through which subscribers can use the iPad as an additional television screen in the house.  As of 3Q11, it had 500k customer devices connected to WiFi to enable mobile video.

While this value-added wireless strategy may attract and maintain customers, rising programming costs continue to eat into the profitability of Cablevision’s operations. Technical and operating expenses were up 17%, or $100m, YoY, leading to the 65% drop in earnings. Seibert spoke to the rising programming costs during the earnings call, pointing the finger at the broadcasters.

“It is an issue and it is an expensive part of our business, it is the single biggest cost item we have. And the fact that retransmission consent became necessary from the eyes of broadcasters, particularly after the ’08 recession, has been flowing through our business, and there was a large step up. I think that the overall rate of programming going forward will moderate to some extent naturally. But right now we are observing the collapse of the broadcast industry business model.”

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