Video Losses and Mediocre Internet Adds Limit Growth
We are well into earnings season and it is abundantly clear that cablecos across the board experienced a bumpy ride in the second quarter. It has been the same of old story for cable providers of all sizes: lagging video subs and moderate Internet gains have translated into a period of low growth.
Aware of this trend, I was shocked yesterday to find Insight Communications announcing front and center on its website: 'Insight’s Aggressive Growth Plan Leads to Jump in Revenue.' The headline made more sense after the link directed me to an article written in March 2010. As a rule of thumb, it is probably not a good sign for a company that on the day it's set to report quarterly earnings, the best news it has to offer is over a year old.
For Insight ceo Michael Willner, March 2010 was a better time. 1Q10 marked Insight’s 5th straight quarter of over 10% YoY revenue growth, as it expanded its fiber optic network and added broadband customers at a rapid pace. Growth has since declined steadily in subsequent quarters, and in 2Q11 Insight grew revenue only 2% YoY to $270.5m. Insight also lost 2% of its customer base in 2Q11 as its broadband growth slowed, and the penetration of homes passed dropped for its phone, Internet and television services.
Insight’s lackluster 2Q11 earnings validate The Carlyle Group’s effort to sell its 42% stake in the company earlier this year. Carlyle, however, timed the exit from its investment poorly, with Insight well into its slowdown before Carlyle announced its auction. Better timing and Carlyle could have received an offer closer to the $4b price tag that it wanted in the deal.
Cablevision (NYSE:CVC), which at one point expressed interest in purchasing Carlyle’s ownership in Insight, also reported 2Q11 earnings this week. Let’s see if these results sound familiar… pro forma revenues up just under 2% YoY (to $1.69b), Internet adds lower than expected (5k), and video sub declines (23k). The same old song and dance, and yet the market reacted sharply to these results, driving down Cablevision’s share price 13%. For anyone paying attention to cable earnings over the past few weeks, these underwhelming results should not have come as a surprise.
While YoY revenue was up around 9.8% for Cablevision, nearly all of the increase was attributable to its acquisition of the Bresnan properties. Cablevision cfo Gregg Seibert suggested in the earnings call, that the current marketplace is not favorable for cable deals down the road.
“I don’t see anything on the immediate horizon in that regard (acquisitions). Given the disruption in the markets at this point in time, it would be very difficult to go out and ring-fence a transaction today. The high-yield markets locked up quite a bit over the last few months,” commented Seibert.
Without deals to rely on for “growth,” Cablevision is joining Comcast and other cablecos in pushing mobile video services in an effort to stabilize its television losses. Its new app for IPads and IPhones allows a customer to view on demand content from any room in their house. Through these apps Cablevision looks to better compete with over-the-top providers like Netflix and Hulu in the video on demand space. The free app will not directly provide incremental revenue, but management hopes it will make its video services more “sticky”—a universal goal for all cablecos heading into 3Q11.