1Q09 EARNINGS: General Communications

Looking Good up North

Anchorage, Alaska-based General Communications (Nasdaq:GNCMA) turned in its best first quarter ever with double digit gains in revenue and OIBDA.  The company expects 2009 revenue to grow between 7% and 8%.

Much of the reported revenue growth is attributable to revenues added as a result of GNCMA’s June 1, 2008 acquisition of Unicom (The Deal Advisor, 07/08, p.10) and its July 1, 2008 acquisition of Alaska Wireless.  But video and data revenues were also up as existing customers upgraded to packages offering premium services. 

Additionally, wireless revenues continue to grow as GNCMA adds subs and expands its new wireless network.  GNCMA expects to complete its statewide wireless network by 2011.  GNCMA is close to completing the transfer of its wireless customers from the old Dobson Communications network—now owned by AT&T (NYSE:T).  The company expects to finish the conversion by the end of 2Q09.

For some time now it has been a fierce battle between GNCMA and Alaska Communications (Nasdaq:ALSK) for the Alaska telecommunications customer.  GNCMA’s bundled offerings are clearly taking their toll on ALSK, which has been steadily losing customers while GNCMA has been gaining new subs.  GNCMA increased voice subscribers by 6.7% YoY while ALSK’s coiuce connections declined 10.3% over the same period.  GNCMA also gained wireless subscribers while ALSK saw a slight decrease.  ALSK likes to pride itself on selling more premium services, but GNCMA also experienced both data and video revenue increases from customers upgrading to its premium plans.

1Q09 EARNINGS: Cablevision Systems

Battle with Verizon Heats Up

Cablevision Systems Corp. (NYSE:CVC) grew voice, broadband and video revenues over the past year, but the loss of 6,300 basic video subscribers may be a sign of things to come. 

On July 16, 2008, Verizon (NYSE:VZ) was approved by the New York Public Service Commission to provide FiOS TV service to all five boroughs in New York City—within CVC’s service area.  VZ already competes with the company in Long Island and other areas surrounding the city, but now CVC will have direct competition within areas of the city where it was the only video service provider.  As VZ ramps up its FiOS service, its battle with CVC has intensified. 

The company and VZ are currently in a fight over programming as VZ has accused CVC of not selling it CVC’s Madison Square Garden network sports programming in HD.  VZ has asked the FCC to investigate while CVC says that it fully complies with federal regulations.  The two have also exchanged jabs over who has faster internet speeds.

CVC can’t afford to lose basic video customers as the company says growth rates of both voice and broadband have slowed due to high penetration rates.  Voice penetration rates stood at 40.6% of homes passed while broadband was at 52.3% of homes past at the end of 1Q09.    

The company’s Rainbow segment, which includes programming such as AMC, WE tv, IFC and Sundance (acquired on June 16, 2008), grew revenues, but its operating costs were up on increased programming costs.

On July 29, 2008 CVC acquired Newsday, Inc. for $650m.  Newsday consists of the Newsday daily newspaper, amNew York (a free daily newspaper), Star Community Publishing, and online media websites.   The segment experienced revenue declines in 1Q09 compared to the company’s prior periods which CVC attributed to the economic downturn in the newspaper industry and competition from online advertising.

1Q09 EARNINGS: Comcast

Digital Voice Leads the Way

Philadelphia, Pa.-based Comcast Corp. (Nasdaq:CMCSA) posted 1Q09 results that detailed a slowdown in revenue growth and a substantial increase in free cash flows.  Top line growth was led by gains in digital voice revenues while the increase in free cash flows was mainly due to a reduction in capital expenditures.

Growth in both voice and broadband revenues was off from prior periods.  Voice revenue was up 32.2% over 1Q08 while broadband revenue was up 9.1% YoY.  CMCSA is slowly losing video subscribers and expects the trend to continue based on the current economic conditions and increased competition.  The company also said that growth in broadband is slowing due to the market maturing.  As with other cable providers, advertising revenue was down from a decline in political advertising and a decline in the overall television advertising market, particularly the housing and automotive sectors.  CMCSA did increase ARPU from $106.70 at 1Q08 to $115.27 during 1Q09, which was attributed to the sale of more bundled services and premium services.  Looking forward, CMCSA expects growth will continue to be slow for the rest of 2009.

CMCSA has $4.1b remaining under its share repurchase program that was started back in 2007. The company had originally planned to be completed by the end of 2009.  With the company’s stock price dropping to multi-year lows at the end of 2008 and into the beginning of 2009, it would appear to be a great time to buy back stock.  But due to the current economic conditions and uncertainty in the capital markets, CMCSA ceased buying back stock in 4Q08 electing, instead, to preserve its cash. 

During 4Q08, CMCSA recorded a pretax impairment of $600m related to its $1.05b investment in Clearwire Corp. (Nasdaq:CLWR) in November 2008 (The Deal Advisor, 12/08, p.12).

1Q09 EARNINGS: Charter Communications

Entering a New Chapter

On March 27, 2009, Charter Communications (OTC:CHTRQ) filed Chapter 11 bankruptcy despite posting solid 1Q09 results just a few days later.  CHTRQ grew total revenues as gains in voice and broadband services offset the slow bleed of basic video subscribers.

Voice revenue was up 39.7% and broadband revenue was up 9.8% while advertising revenue was down 19.4%.  Despite the continuing decline in video connections, video revenue was up 1.6%.  An increase in bundled services resulted in a gain of revenue generating units over 1Q08 and pushed ARPU up 9.9% YoY to $110.32.  CHTRQ will look to further increase voice customers as its penetration rate was at 13.5% at the end of the quarter and voice revenues accounted for 10.2% of total revenues.

Although CHTRQ saw strong OIBDA growth and took in $187m in net cash flows from operations during 1Q09, its massive debt service forced the Chapter 11 filing.  Interest expense was 70.7% of OIBDA and 138.6% of operating income in 1Q09, clearly unsustainable especially after figuring for capital expenditures necessary to drive growth and remain competitive.

CHTRQ wants to decrease its debt by approximately $8b as the company has classified $9.849b in debt as liabilities subject to compromise under its Pre-Arranged Joint Plan of Reorganization petition.  It hopes to complete a debt for equity exchange.  CHTRQ expects the reduction in interest expense from the debt decrease will be enough to generate positive free cash flows going forward.

CHTRQ is currently a “debtor in possession” and, as such, is authorized to transact business as normal.  The company did not offer any guidance for 2009, but said it expects cash on hand and cash generated from operations to be adequate to fund its cash needs as it goes through financial restructuring.

1Q09 CONNECTIONS

Access Line Losses Accelerate; Wireless Widens the Gap

The troubled economy has been tough on all businesses, but it’s particularly fiendish to the ILEC industry, as the pervasive belt-tightening occurring nationwide is serving to accelerate the loss of traditional access lines to other competitors—primarily wireless providers.  And we’d argue that once a customer cuts that cord, very few are likely to come back into the fold, even when jobs and money become available again.

Let’s face it—people scrutinizing their monthly budgets for ways to trim fat aren’t likely to get rid of their cable TV service—it’s still the dominant source for home entertainment programming (even more important if you’re not going out as often as you used to) and broadband Internet service, which few are wont to go without. 

And with wireless penetration now officially above 90%, most of us have a way to communicate on us at all times.  Unless you live in an area with poor cellular coverage, or have younger kids at home who don’t yet have their own cell phone, you probably don’t need the landline.  You didn’t mind the extra $50 a month when times were good, but these days, every penny counts.  Add to that the dearth of new construction and the proliferation of cheaper VoIP offerings, and the writing on the wall is crystal clear.   

Voice and Wireless Connections

As a result, ILECs lost more voice market share in the first quarter, and the trailing twelve month change in total access lines showed its largest decline to date. 

Based on our sample of publicly-traded companies, the ILECs’ voice customers accounted for just 29% of the total at the end of March, down from 30% at year end, and wireless service providers improved to 67% of the total—although that’s not entirely fair as a small percentage of that wireless base is really for data-only accounts.  Over time, this will likely become a bigger factor, and we will be forced to adjust for reported or estimated data-only wireless accounts.  Cable voice share held relatively steady at just under 4% of the total, despite a slight drop in net new customers.  Here too, we assume wireless substitution is having an impact.

On a trailing twelve month basis, the decline in voice customers increased to 10.2% for the ILECs. During 2008 the ILEC’s lost 9.7% of their voice base.  That translates to another 3.44m voice access lines lost in the first quarter. For the twelve months ended March 31, the ILECs lost 13.7m lines, up from 13.2m voice lines lost in 2008.

In contrast, the wireless providers we track grew their base at a 5.6% rate over the twelve months ended March 31, down from a 5.9% growth rate in 2008.  Given the already high penetration levels enjoyed by the wireless providers, we have to admit that we’re nonetheless impressed with the nearly 3.5m new accounts wireless providers added in the first quarter, and it may not be a coincidence that the number of new wireless service customers tracks very closely with the number of ILEC voice customers lost in the period.

AT&T, Inc. (NYSE:T) is far and away the largest wireline voice service provider today, with nearly 54m voice customers at the end of the first quarter.  Verizon Communications (NYSE:VZ), which has been shaving off non-core territories for years now, is a distant second with 37.4m voice lines.  The third remaining “RBOC”, Qwest (NYSE:Q), is an even more distant third, with 11.2m lines, and cable provider Comcast (Nasdaq:CMCSA) comes in fourth, with 6.8m voice customers. 

All three of the RBOCs posted a more than 10% decline in voice customers in Q1, losing 10.4%, 10.2% and 10.9%, respectively, in the trailing twelve months.  Only three ILECs showed increases over the trailing 12 month period, and in every case it was due to acquisitions.  Iowa Telecom (Nasdaq:IWA), Otelco (Nasdaq:OTT) and SureWest Communications (Nasdaq:SURW) “bought” that growth over the past year, and sadly, we’d wager that once an “apples-to apples” full-year comparison is available, the red ink will appear again.

Pro forma pending acquisitions and divestitures, Verizon Wireless (VZW) is the nation’s largest wireless service provider, with a whopping 83.9m subscribers, or more than 30% of the estimated total 273.8m U.S. wireless subs.  In reaching VZW’s total, we’ve adjusted for the Alltel/ Rural Cellular divestitures pending, and added in the Centennial Communications (Nasdaq:CYCL) markets in Louisiana and Mississippi that VZW is picking up from T.

T is a close second to VZW, also adjusted for pending M&A activity.  We’ve added in the pending CYCL buy subs, the pending Alltel/ Rural Cellular divestiture subs, and backed out the Louisiana/ Mississippi divestitures in arriving at our 80.75m sub total.

VZW’s base increased by more than 14m in the first quarter, due primarily to its close of the Alltel deal.  Adjusting for the 13.17m customers it acquired in that buy, VZW’s net adds declined to less than 1m.  T got a boost thanks to the growing popularity of the iPhone, adding more than 1.2m new customers in the first quarter—and it didn’t close on any significant deals in the period.  T’s total subscriber base grew by nearly 10% in the 12 months ended March 31.

“All you can eat” providers Leap Wireless (NYSE:LEAP) and MetroPCS (NYSE:PCS) continued to post strong gains in the first quarter, adding 493k and 684k net new customers, respectively.  For the trailing twelve months, they grew their bases at 40.2% and 37.1% rates.

Number three provider Sprint Nextel (NYSE:S) stanched the bleeding in the first quarter, losing “only” 182k customers. S had lost about 1.3m subscribers in both the third and fourth quarters of last year. And number four T-Mobile added 415k new customers in 1Q09, down from 618k in 4Q08. Combined, the top four account for more than 90% of total U.S. wireless subscribers.

Meanwhile, cable TV providers continue their slow but steady incursion into the voice business as well.  Our sample added 633k new voice customers in the first quarter, bringing the total number of CATV voice subscribers to 15.35m and the resulting penetration of video subscribers to 31.4%.  For the twelve month period ended March 31, the CATV contingent grew its voice base by 26.3%, down from a 32.3% growth rate in 2008 and a 61% increase in 2007.  CMCSA and Time Warner Cable (NYSE:TWC) accounted for most of the growth, adding 298k and 174k new voice customers, respectively, in the period.

Wireline Connections and Broadband

All is not lost for the ILECs, despite the grim picture painted by their voice business results.  Growth in broadband connections continued in the first quarter—but again, as in the last quarter, T’s U-verse and VZ’s FiOS get most of the credit.  T’s 372k new broadband connections (wireline only) accounted for nearly half of the 808k net new broadband connections garnered by the ILECs we track. 

Overall, the ILEC group grew its broadband base at a 7.1% rate in the twelve months ended March 31, adding more than 2m new customers.  But the growth is slowing somewhat—in 2008 the ILECs added broadband customers at an 8.5% pace, and in 2007 the growth rate was nearly 10%.

We counted more than 30.2m ILEC broadband connections at the end of the first quarter, which translates to a penetration level of 25.1% of voice lines.  VZ’s FiOS added another 252k connections in the first quarter, up from 214k in 4Q08.  Q and EQ were a distant third and fourth in terms of new broadband customers, adding 42k and 40k, respectively.

As a result, total wireline connections, which we define as the sum of ILEC voice, broadband and video connections, fell by more than 2.3m in the first quarter.  For the trailing twelve months, ILEC wireline connections fell by 13.2m, up from a decline of 12.2m wireline connections for the full year 2008.  That equates to a 7.9% annual decline, up from a 7.3% drop in 2008.

The cable contingent posted a solid quarter in terms of broadband net additions, adding 711k new customers, up from 463k in 4Q08 and 669k in 3Q08.  In fact, the group had its best quarter in a year—back in 1Q08 the cable companies had added more than 1m net new broadband subs.

As of the end of the first quarter, cable’s broadband penetration of basic video subscribers was 65.3%, up from 63.7% at the end of last year.  Combined, then, the telcos and cablecos in our sample were providing broadband service to  62m households, assuming one broadband connection per household.

Clearly growth in overall broadband penetration is likely to continue to slow as more and more households now consider high-speed Internet access to be something they can’t live without—and for the ILECs that means aggressive pricing and stealing market share will be the primary means for continued growth.  Wireless broadband offerings, still in their infancy today, are also likely to become a more aggressive competitor in quarters to come.

Video Connections

Finally, in terms of video service provision, the incumbent cable companies continued to lose customers, albeit at a much slower pace than in 4Q08.  Our sample lost 74k video subscribers, down from a loss of more than 500k in the prior period. 

When compared with 1Q08, however, the CATV group lost more than ten times as many customers as the mere 7k dropped a year ago.  The nation’s largest provider, CMCSA, was also the hardest hit, dropping 78k in the first quarter.  That translates to a 2.4% decline over the past year, higher than the industry average loss of 2% for the twelve months ended March 31.

As a group, the cablecos provided basic service to just more than 48.8m customers, or about 47.8% of the 102.1m homes passed.

DBS provider DirecTV (Nasdaq:DTV) appeared to be the biggest winner last quarter in terms of video subscriber gains, adding an impressive 460k new customers.  That’s more than it has added in one quarter in more than four years, and the company has been aggressively promoting its video-on-demand and high-def services. 

Meanwhile, competitor DISH Networks (Nasdaq:DISH) suffered further losses in the first quarter, losing 94k customers, only slightly better than the 102k subs it lost in the fourth quarter of 2008.

Overall, DBS service grew by 366k, resulting in an annual growth rate of 3.4% for the twelve months ended March 31, up from a 2.2% gain for all of last year.

Telco partnerships are due at least some of the credit for the impressive results posted by DTV, and the DBS growth overall.  Led by T, whose DBS subscriber base grew to more than 2.2m at the end of the first quarter, the telcos accounted for almost 16% of total DBS subs as of March 31, but more impressively, brought in fully 40% of the new subscribers.  Seven of the ILECs in our sample were growing their DBS sub base in the first quarter, adding a total of 146k net new customers, for an annualized growth rate of 14.5%.

Overall ILEC video initiatives also grew solidly in the period, once again, due largely to the success of FiOS and U-verse.  Total ILEC video connections increased by 749k, the biggest one-quarter gain we’ve seen in at least ten quarters.  T, bolstered by the solid performance of U-verse, added 299k new video customers, of which just 15k were DBS subs.  VZ’s video customer base grew by an even more impressive 342k, of which 25k were DBS subscribers.

Overall, the ILECs we follow were providing video service to more than 8.7m customers at the end of March, and that total has increased by nearly 43% in the past twelve months.  ILEC video connections grew by 68% in 2008 and 79% in 2007.  And while their overall numbers were less significant, the fastest growth was posted by RLECs.  Granted, their bases are small, but New Ulm (Nasdaq:NULM) and Shenandoah Telecommunications (Nasdaq:SHEN) increased their video customer bases by roughly 83% and 85% in the past twelve months—due in part to acquisitions.