The Washington Post's 2Q11 Earnings: Cable Provides Best of the Bad News

Earnings Drop for Media and Education Conglomerate

In a vacuum, the 2Q11 results reported for The Washington Post Company’s (NYSE:WPO) cable division last Friday were disappointing. Revenues were flat, operating margins narrowed, and video subs down in 2Q11 for Cable ONE, The Washington Post's cable subsidiary. Not exactly top of the press release material... Well, everything is relative. In comparison to the conglomerate’s education business, Kaplan, Cable ONE turned in a banner quarter.

Revenues for the for-profit-education company dropped 15% YoY, or $114m, as student enrollments fell 30% at Kaplan schools. Operating margins plummeted from 15% to 3% YoY at Kaplan and 2Q11 profits were nearly cut in half for The Washington Post, which generates 60% of revenue from education. Newspaper revenue also slumped, falling 6% YoY.

Meanwhile, Cable ONE grew revenue less than 1% to $191m, reported 8% lower operating margins and lost near 40k video subs YoY, yet it still generated 50% of the Post’s total operating income in 2Q11—up from 26% a year ago. Cable ONE was however able to add Internet and voice connections, but the gains represented a rare highlight to an overall disappointing 2Q11.

The poor performances of its education and newspaper divisions magnify the importance of The Washington Post's cable operations. Given that Kaplan’s enrollment is expected to remain lower and that newspaper declines will surely continue, the Post will rely more heavily on cable to generate earnings in the future, which could prove troublesome.

Despite The Washington Post’s overall size, its cable division is dwarfed by many of its cable’s competitors. It has lost video subs in each of the last six quarters, and its penetration of video subs with broadband and voice services was the lowest of all cablecos in JSI’s 1Q11 survey. Depending on revenue and earnings growth from a smaller player that operates in an increasingly consolidated industry is not an enviable position for the Post to be in. In the near future however, it may not have a better option.

As Revenues Dip, Consolidated Communications Tightens its Belt

Consolidated Cuts Costs and Refinances to Boost Financial Results

Ironically enough, Consolidated Communications (Nasdaq:CNSL) opens its second quarter 2011 press release with: “Delivered another quarter of strong access line performance.” With the predicted death of PTSN and an influx of ever growing competition, the statement seems extraordinary.  The company is basing the statement on its CLEC equivalent calculation, in which it grew equivalent lines 10.9% year-over-year, to end the second quarter with 81,746 equivalents. DSL subsribers also grew 5% to end the quarter with 105,581 subscribers. Consolidated actually lost 4.1% of its local access line business, reporting 232,360 lines. 

Despite its ‘strong’ equivalent growth, Consolidated’s revenues declined 3.3% from the second quarter 2010 from $95.7 million to $92.6 million for the three months ended June 30, 2011. For the six months ended June 30, revenues declined from $194.0 million to $188.1 million.  Not surprisingly, the loss is attributed to declines in local calling services, network access, long distance and subsidies with being partially offset by growth in data and internet services. 

Reacting to revenue pressures, Consolidated continues to cut costs – financially and operationally. Bob Currey, president and ceo, explained, “The quarter also included the completion of two important strategic initiatives. First, we were pleased with the terms of our refinancing that successfully extended $409.1 million of our term loan by three years and our undrawn $50 million revolver by nearly two and half years. Second, we realigned functional responsibilities to bring customer facing employees into a single group and identified approximately $2.5 million in annual expense reductions to be implemented throughout the rest of the year."

These actions hit the bottom line, as net income attributable to common stockholders was $12.7 million, compared to $14.0 million in the prior year period. The decline was primarily due to refinancing and restructuring costs of $1.9 million, net of tax.  However, Adjusted EBITDA increased $6.1 million to $61.2 million, compared to $55.1 million for the six month period in 2010. Consolidated expects to experience further benefits of cost cutting in the coming quarters.

As for growth, Consolidated is not quite ready to think outside the box. Its strategy is to aggressively promote its DSL service, including selling DSL as a stand-alone offering. The company is focusing on value bundling, such as DSL or IPTV, with a combination of local service and custom calling features.  The company said it will continue excellent customer service standards and keep a strong local presence in the communities it serves.

2Q11 Earnings: Industry Leaders Comcast and DirecTV Report Strong Growth

Providers Turn to Mobile and Online Video Services

After hearing the news that cable giant Comcast (Nasdaq:CMCSA) called satellite leader DirecTV (Nasdaq:DTV) a “serial false advertiser” and plans to sue the DBS provider over its Sunday NFL ticket advertising, I decided to review the 2Q11 earnings of the feuding companies together.

Both providers reported stronger than expected revenues and profits for 2Q11. DirecTV’s revenue was up 13% YoY, while its 2Q11 profit of $701m jumped 30%. Comcast on the other hand saw pro forma revenue grow 9% and profits rise 16% YoY. Despite solid earnings growth, both struggled to add and retain television subs, suggesting that discounted prices for FiOS and U-Verse may have adversely impacted both providers.

Comcast and other cablecos have been losing video subs to Dish and DirecTV for years, but in 2Q11 satellite gains in the U.S. dropped sharply. While DirecTV added nearly 500k subs in 2Q11, only 26k of the net adds were in the U.S., as Venezuela and Brazil accounted for the lion’s share of its growth. By comparison, it added 184k U.S. customers in 1Q11 and 100k in 2Q10. A growing churn rate is of increasing concern for DirecTV ceo Michael White.

“In response (to rising churn), we've significantly stepped up our efforts to closely manage churn in a more targeted fashion. For instance, we further refined our segmentation analysis to identify those customers that are most likely to churn as they get close to the end of their two-year contract, and matched them up with our best agents and best offers. We also increased our upgrade and retention spending for higher quality subscribers.”  

Essentially, DirecTV plans to spend more to retain customers, which will translate into compressed operating margins. Its margins from U.S. operations dropped in 2Q11 and look for that trend to continue as its retention efforts increase. 

DirecTV’s top line growth could also suffer over the next few periods, thanks to its free NFL Sunday ticket promotion which Comcast claims is laden with potential fees and penalties. DirecTV has historically charged a monthly fee for its NFL package, but decided to drop the fee for the 2011 season—expecting an influx of new subs in return. Subscriptions however remained relatively flat, and it will lose the NFL fees from existing customers.

While Latin America bolstered DirecTV’s 2Q11 results, Comcast benefited from a strong performance from its NBC Universal segment that it acquired in 1Q11. On a pro forma basis, revenue jumped 17.1% YoY for the division in 2Q11—as broadcast and filmed entertainment revenue rose around 20%. It was the same old story for its cable communications segments—television revenue was flat as video subs were down, high-speed Internet revenue was up 10% on improved broadband penetration, and its business services delivered impressive 45% YoY growth.

In order to retain and attract television customers, both Comcast and DirecTV are expanding their mobile and online video services. Comcast is much further along in the process, offering video on demand with XFINITY over the Internet and through its XFINITY mobile aps for smartphones and tablets. DirecTV however appears poised to ramp up its mobile video strategy, hinting of its interest in Hulu (partially owned by Comcast) on its 2Q11 earnings call. The main question however remains: how much incremental revenue can be earned through mobile and Internet video?

“I think suffice it to say, we have consistently said that we want to make sure that we can make DIRECTV available anytime and anywhere our customers want it. The Hulu software has some nice aspects to it, but you also have to kind of form a judgment about its business model and what you think that business model can generate,” said White.

Overall, 2Q11 on paper was a solid quarter for both Comcast and DirecTV, but the areas of their 2Q11 growth are not sustainable. DirecTV admitted its Latin America business was volatile and that 50% growth cannot be expected in the future, while Comcast said with regards to NBC Universal, “there'll be some hits and misses and more volatility.”

Where Comcast however can benefit from its diversified service offerings and its high margin and growing business segment, DirecTV is reliant on television subs for growth. Unable to offer its own triple plays, programming is where DirecTV has won customers in the past. Adding mobility to its programming appears to be what DirecTV believes will grow its business in the future.

GCI Reports $2m Loss as Growth Slows in 2Q11

Wireless Competition Ramps Up in Alaska

Alaska-based General Communications’ (Nasdaq:GNCMA) 2Q11 results show clear signs that the provider’s growth is slowing. Its wireless customer gains have flattened, and it experienced video, broadband and voice customer losses YoY. Despite less than spectacular 2Q11 results for GCI, its ongoing fiber build out promises broadband growth in the future.

Overall, GCI reported a net loss of $2m for the quarter—its first quarterly loss since 4Q09. Revenue growth was a slim 2% in 2Q11 for GCI, which it attributed to a soft consumer market. The cablecos’ wireless and consumer video revenues were flat YoY, while its voice revenue declined 10% or $1.6m from 2Q10 levels. GCI president on Ron Duncan pointed to a large troop deployment from Fairbanks and subsequent connection losses to explain the lack of growth. On the wireless side, consumer revenue jumped 12.5% YoY, but was flat compared to 1Q11—a trend that could persist.

GCI has grown its wireless sub lead over competitor Alaska Communications in each quarter since 2Q10, but its competitor is aggressively working to grow its wireless business. ACS’ development of a 4G network will undoubtedly attract current GCI wireless customers, and it has also announced more flexible voice and data plans in an effort to expand its wireless base.

As ACS invests in wireless infrastructure, GCI focuses on broadband expansion. Through its wholly-owned subsidiary, United Utilities, it is building a fiber network with 290 miles of cable that will provide nearly 10k rural households and businesses with high speed Internet. The $88m project is jointly funded by an RUS loan and ARRA funding and should be completed by the end of the year.

While broadband remains an area of growth for GCI, it will be interesting to watch how it responds to ACS’ renewed effort to grow its wireless business. In past years, GCI used acquisitions to grow its wireless customer base, but has been relatively quiet on the M&A front of late. Given that wireless represents a sizable 30% of its revenue, look for GCI to make efforts to reinforce its wireless operations over the rest of the year.

Revenue and Net Income Rise Sharply for Knology in 2Q11

Acquisition Contributes to Strong Performance

Earnings season can be the best of times and worst of times for ceos. The microscope is placed on your company for the hours prior to, and after your quarterly results are reported. Poor financials leave ceos on the defensive—focusing on any positives from the quarter while emphasizing the future. But cable provider Knology’s (Nasdaq:KNOL) 2Q11 conference call served as a reminder of just how easy it is to present earnings when your company is performing well and growing in all areas.

Revenue jumped 16% YoY to $131m for the Georgia-based provider, while its net income in 2Q11 nearly doubled 2Q10 totals. Video revenue rose near 20% YoY, while voice and broadband increases also contributed to the top line growth. Knology’s strong earnings suggest that its acquisition-based growth strategy has been effective. The provider finalized its $30m purchase of CoBridge’s cable and broadband operations in 2Q11, and also made significant investments in Tower Cloud, a backhaul service provider.

The strong earnings allowed Rodger L. Johnson, ceo of Knology, to be direct and to the point when discussing the quarter. No frills, no homemade financial metrics, and no spin. "We achieved all-time records for revenue, EBITDA and net income. Our high network edge-out investment activity, combined with solid legacy performance, resulted in our second quarter connections performance being the best in the last five years. As always, we continue to focus on taking care of our customers and running a fundamentally sound business."

Among cablecos and telcos, Knology is unique in that it maintains very similar amounts of voice, video and Internet connections given that its business model is built on bundling. This fact, however, also makes generating revenue growth from its current customer base more difficult, as a majority of its customers already utilize its three services. In order to produce future growth comparable to its 2Q11 increases, Knology will likely depend on more acquisitions. Todd Holt, Knology’s president, stated during the conference call that its strong cash balances put the company in position to be an active buyer. It however must continue to be strategic with its purchases, as we pointed out earlier this week, acquisitions don't necessarily translate into real growth.