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Cox pins hopes on bundled digital options

Apr 29, 2002  •  Post A Comment

Cox Communications is becoming the bundled digital service champion at a time when many of its cable peers are suffering from slower subscriber growth, increased debt and disparaging financial statement disclosures.
But despite continued speculation to the contrary, company officials last week said they prefer to maintain their independence and grow organically and through conservative acquisitions.
There continues to be speculation that Cox will buy additional systems from cash-strapped Adelphia Communications or that Cox eventually may make the biggest grab for scale and power by merging with AOL Time Warner, perhaps by creating a spinoff cable system holding company.
However, with AOL Time Warner struggling with its own balance sheet issues, Cox is more likely to expand its base by being the acquirer of a smaller cable operator such as Adelphia, analysts said.
“We are comfortable at our current size and markets,” said Jim Robbins, Cox Communications president and CEO, during an April 23 first-quarter earnings call with investors. “That said, we may want to grow larger over time, given the right opportunities. But we do not feel compelled to make any acquisitions simply to get bigger.”
Tom Wolzien, analyst at Sanford Bernstein, said additional debt financing may position Cox as a potential consolidator of distressed cable assets if the price is right. Cox has $7 billion in debt.
Almost more important for now is the impact Cox’s successful bundling of three new digital services will have on the industry.
Cox, which was the first major cable operator to report quarterly earnings, may prove to be the industry exception rather than the rule in its success with new service rollout and subscriber growth.
The strong performance of Cox’s new bundled services, supported by $5 billion in capital spending over the past three years, is “significantly bucking industry trends,” according to Jessica Reif Cohen, an analyst at Merrill Lynch.
Cox was even able to reverse what has been the flat-to-falling basic subscriber growth at all cable operators in recent years by aggressively pushing its bundled services: digital video, high-speed data and IP voice. About 21 percent of new basic cable subscribers start their relationship with Cox by paying for two or more bundled services, the company said.
Cox’s first-quarter basic-cable subscriber growth doubled from a year earlier to 1.3 percent, the highest level of growth Cox has seen in five years.
The result was nearly 19 percent growth in revenues to $1.2 billion and a 12 percent rise in operating cash flow to $402 million in the quarter. Net income fell 80 percent to $135.5 million, or 22 cents per share, reflecting a one-time $720 million gain on a derivative instrument.
Cox expects to meet its full-year target of 1.15 million new service subscribers. About one-quarter of its basic subscribers pay for digital services. But the penetration of digital cable services is much higher in select markets. Nearly half (46 percent) its subscribers in Orange County, Calif., and in Omaha, Neb. ( 44 percent), pay for bundled services.
Cox Cable’s bundled services have grown to 19 percent penetration of its countrywide system, from 12 percent a year ago. The company said last week it collects $140 in average monthly revenue per home from three-product-bundled customers and $88 from two-product-bundled customers.
Cox has been quick to build on that momentum by rolling out its new Entertainment on Demand service to all San Diego subscribers and as many as seven additional markets, or 43 percent of its homes already passed, over the next six months.
Cox also said it now has more than 1 million high-speed Internet customers, or more than 10 percent of homes already passed, andmore than 500,000 IP telephony customers.