Cox Stays Strong Despite Setbacks
Each quarter, Broadband Daily delivers to our annual paid subscribers data-rich analyses of leading companies in the broadband sector. The following is our Q4 01 analysis of U.S. cable operator Cox Cable, prepared by our broadband media research partner, Broadband Markets (www.broadbandmarkets.com). To look at our analyses of the other leading cable operators, AT&T, Cablevision Systems, Comcast, Time Warner, Charter, Insight and Mediacom, as well as a cross-company comparison of all the operators, please click on the Quarterly Reports button in the header or click on the Quarterly Reports graphic on our home page.
Cox
Cox ended 2001 with a strong fourth quarter, even as it faced two significant setbacks: the collapse of Excite@Home and its losing bid to acquire the systems of AT&T Broadband.
Subscribers and Penetration 4Q00 1Q01 2Q01 3Q01 4Q01
Homes passed 9,710,963 9,843,052 9,866,948 9,936,499 9,979,207
Basic subscribers 6,193,317 6,213,994 6,166,614 6,206,737 6,237,888
Basic penetration 63.8% 63.1% 62.5% 62.5% 62.5%
Pro Forma annual sub growth 1.8% 1.3% 0.5% 0.7% 0.7%
For the year, Cox's service footprint increased 2.8%, to almost 10 million homes passed, while basic subs rose by 0.7% to 6.24 million. With homes passed growing faster than basic subscribers, the company's penetration declined by 1.5 points during the year.
New Services RGUs & Bundling
New Services 4Q00 1Q01 2Q01 3Q01 4Q01
New service RGUs 1,568,424 1,839,907 2,083,884 2,406,327 2,723,173
New service RGUs % of basic subs 25.3% 29.6% 33.8% 38.8% 43.7%
Growth in new service RGUs 280,856 271,483 243,977 322,443 316,846
% change versus prior quarter 16.7% -3.3% -10.1% 32.2% -1.7%
Digital video % of RGUs 54% 52% 51% 51% 51%
High speed data % of RGUs 31% 32% 32% 32% 32%
Residential telephone % of RGUs 16% 16% 17% 17% 17%
Though its basic penetration slipped during the year, Cox was quite successful in growing its new services (digital video, data, and telephone) business during 2001, as measured by its count of RGUs (revenue generating units). The third quarter, typically strong due to seasonal factors, set a record for new service RGU growth at 322,000 (up 32% over 2Q01). The fourth quarter was nearly as good – almost 317,000 new RGUs were added, with record net adds in both digital and telephony. At yearend, Cox served over 2.7 million RGUs; a 74% increase over year-end 2000.
Cox management attributed RGU growth to the company's success at selling bundles of services to both new and existing subscribers. They also cited the renewed importance of home and family to many Americans after the attacks of September 11 as a factor helping the sale of new cable services.
Company-wide, new service RGU penetration is now at 43.7% of basic subscribers, one of the highest in the industry. More than 1 million homes now subscribe to more than one service. Across the Cox network, 15% of new subscribers now take a bundle of at least two new services from day one. In markets where telephony is offered, the bundled penetration for new subscribers increases to 25%. Among existing subscribers, 42% of new-service customers take more than one new service. In telephony markets, that figure stands at 50%. Cox also reported adding about 53,000 new ‘non-video’ customers during 2001, (meaning HSD or telephony subs that do not take video service).
Digital Video
Digital Video 4Q00 1Q01 2Q01 3Q01 4Q01
Digital-ready homes passed 7,397,306 8,119,305 8,590,488 8,996,975 9,258,310
Digital-ready homes % of total homes 76% 82.5% 87.1% 90.5% 92.8%
Digital video customers 841,824 960,507 1,071,322 1,228,015 1,386,039
Quarterly net adds 158,748 118,683 110,815 156,693 158,024
% change versus prior quarter 29% -25.2% -6.6% 41.4% 0.8%
Penetration of digital-ready homes 11.4% 11.8% 12.5% 13.6% 15.0%
Penetration of basic subscribers 13.6% 15.5% 17.4% 19.8% 22.2%
Penetration of total homes passed 8.7% 9.8% 10.9% 12.4% 13.9%
Many of the country’s leading MSOs have begun to note a decline in growth rates for digital video, and predict further slowing during 2002. Cox was able to buck this trend during 2001, with management stating they do not expect it to see a slowing of digital growth during 2002.
Cox substantially expanded the availability of digital in its system during 2001. The number of digital-ready homes increased by 25% to over 9.2 million at year-end, or nearly 93% of all homes passed. The company expects that the expansion of its digital footprint will be virtually complete this year, reaching 96% of homes passed by yearend.
Cox added 544,000 digital video subscribers during 2001 – increasing its digital sub base 65% over yearend-2000 levels and topping the prior year's net adds by 11%. As noted earlier, the second half of the year is seasonally the strongest for Cox, and the digital video numbers bear this out. The third and fourth quarters accounted for nearly 60% of the year’s growth in digital video, when 315, 000 subs were added. Quarterly additions during 4Q were at nearly the same level as the prior year, dropping less than 1%.
Last year’s 65% increase in digital subscribers still leaves considerable room for future growth. Penetration of digital video now stands at 22.2% of basic subs. Though this is up from less than 14% a year ago, it is still well below levels achieved by some of Cox's peers.
During the second half of 2001, Cox was able to increase net adds over the same period during 2000 (315,000 vs. 282,000), even though availability of digital service was increasing less quickly (an 8% increase during 2H01 vs. 15% during 2H00).
Continued growth in the penetration of data and telephony is expected to help drive penetration of digital video. Cox reports that 62% of its three-product customers take digital video. Among two-product households, 37% take digital video--significantly higher than the company's overall digital penetration of 22%.
High-Speed Data
Despite the difficulties posed by the bankruptcy and shutdown of the @Home network, Cox experienced substantial growth in its residential data service last year.
During the company's 3Q01 conference call, Cox executives discussed the need to insure the stability of their data services, but had not yet made a decision on a course of action.
By mid-4Q01, Cox, like most of other major MSOs faced with the decision, elected to build and operate its own network rather than continuing to outsource the core of what has become a strategically vital service.
The subscriber-transition process was originally planned to begin in December and be completed by mid-year 2002. In the wake of @Home's bankruptcy announcement, Cox management decided to accelerate the transition. During the company's February 12 earnings call, they said they expected the process to be 100% completed ‘within the next few weeks.’
The transition required two distinct steps. The first, migrating network traffic from @Home to the Cox-owned network, was 99% completed by mid-February. The second step, updating subscriber software to allow them to utilize the new network, was 88% done by mid-February, with expectations that it would be completed by the end of February, when the @Home network was scheduled to shut down. Indications are that this goal was largely met without major service disruptions. Cox management believes that having their own network for data services will allow them to provide a more reliable service, with lower operating costs than they experienced with @Home.
High Speed Data 4Q00 1Q01 2Q01 3Q01 4Q01
HSD-ready homes passed 7,122,773 7,756,393 8,384,737 8,738,507 9,057,020
HSD-ready homes % of total homes 73% 79% 85% 88% 91%
High-speed data customers 481,947 587,170 668,038 779,499 883,562
Quarterly net adds 83,131 105,223 80,868 111,461 104,063
% change versus prior quarter 6% 26.6% -23.1% 37.8% -6.6%
Penetration of HSD-ready HP 6.8% 7.6% 8.0% 8.9% 9.8%
Penetration of basic subscribers 7.8% 9.4% 10.8% 12.6% 14.2%
Penetration of total homes passed 5.0% 6.0% 6.8% 7.8% 8.9%
Average Weekly Run Rate 6,395 8,094 6,221 8,574 8,005
To Cox's credit, HSD subscriber growth was not noticeably slowed by the @Home transition. Total subscribers at yearend reached nearly 884,000 – an 83% increase over yearend 2000. Cox added 401,000 subscribers during 2001, compared to 278,000 in 2000, a 44% increase. Fourth quarter net adds of 104,000 were slightly below the third quarter, which company management attributed to seasonal factors related to the beginning of school and the events of September 11th.
Penetration of high-speed data at yearend was just below 10% of marketable homes, up from 6.8% a year ago. During the year, availability of HSD on the Cox network increased significantly: from 73% to 91% of homes passed.
The subscribership increase was accomplished by relatively consistent performance throughout the year. Weekly run-rates for new HSD subscribers averaged 7,723 during the entire year – quarterly run rates ranged from a high of 8,574 during 3Q to 2Q01’s low of 6,221.
Company management noted that HSD demand has increased in part due to generally declining modem prices, and wider availability of the modems at retail outlets. Cox's HSD service is now marketed in 498 retail outlets, and the company has deals with major chains, including Circuit City, CompUSA, and Gateway.
As a result, modem ownership, rather than leasing, has become the preferred method of connection to the Cox network; with 52% of new subscribers choosing to buy their modem during 4Q01. Company executives noted that this trend has significant long-term advantages to Cox, as customer who have invested in the modem are less likely to switch to DSL or go back to dial-up.
Modem ownership also implies lower operating costs for Cox, as more customers are able to self-install the modem and initiate the service. During 4Q01, more than 30% of new data subs chose to self-install.
Telephone Services
Telephony
Residential telephone 4Q00 1Q01 2Q01 3Q01 4Q01
Telephony-ready homes passed 2,426,580 2,644,390 2,816,649 3,142,393 3,338,097
Phone-ready homes % of total homes 25.0% 26.9% 28.5% 31.6% 33.5%
Residential telephone customers 244,653 292,230 344,524 398,813 453,572
Quarterly net adds 38,977 47,577 52,294 54,289 54,759
% change versus prior quarter 0% 22.1% 9.9% 3.8% 0.9%
Penetration of telephone-ready homes 10.1% 11.1% 12.2% 12.7% 13.6%
Penetration of basic subscribers 4.0% 4.7% 5.6% 6.4% 7.3%
Penetration of total homes passed 2.5% 3.0% 3.5% 4.0% 4.5%
Lines 334,589 393,705 456,084 518,922 583,114
Lines Per Customer 1.37 1.35 1.32 1.30 1.29
Average Weekly Run Rate 2,998.00 3,660 4,023 4,176 4,212
Cox now offers residential phone service to one-third of the homes passed by its networks. Telephone availability continued to expand throughout 2001, rising from just 25% of homes passed at the start of the year. Most recently, Cox launched telephone service in New Orleans last December, bringing to eight the number of markets in which it offers the service. Its telephone footprint will continue to expand during 2002; one more unspecified market has been approved for launch this year, with one or two others considered candidates for approval.
Cox executives characterized their telephone service as experiencing ‘tremendous growth’ during 2001. During 4Q01 more than 54,000 residential phone lines were sold – a record quarter and, in fact, the eighth consecutive record quarter for Cox’s telephone service. At yearend, more than 450,000 residential phone lines were in service on Cox networks, completing more than 16 million calls per day. This is an 85% increase over the course of the year – during a period where phone-marketable homes increased only 38%.
Among telephone customers, more than 74% also purchase long-distance telephone service from Cox, contributing significantly to average revenue per user (ARPU) for telephone service of more than $50/month.
Though Cox currently utilizes circuit-switched technology to provide telephone service, company executives believe voice-on-Internet Protocol (VOIP) may find applications in smaller markets, and they anticipate trials of the technology this year.
Cox Business Services also enjoyed solid growth during 2001; total circuits in service rose by 48% during the year to 1.77 million voice grade equivalents (VGEs)
Financial Results
Strong RGU growth translated into positive financial results for Cox last year. Cable systems revenue (excluding CBS) topped $1 billion in 4Q01, the first billion-dollar quarter for Cox's cable operation. Annual revenue, again excluding CBS, was just under $4 billion. Compared to the full year 2000 and 4Q00, total revenue increased 12.8% and 13.8% respectively. Average monthly revenue per basic subscriber, excluding CBS, was $55.86 for the quarter, up 12.9% from $49.46 during 4Q00.
Cox Business Services revenue also increased nicely during the year, totaling $144.3 million, including a 4Q01 that exceeded $40 million, a record for CBS. Compared to prior periods, these were increases of 47.5% for the year and 38% for 4Q. Including CBS, total company revenues for the year increased 14% over 2000 levels.
Operating Results ($000)
Revenues 4Q00 1Q01 2Q01 3Q01 4Q01 Full Year 2001
Residential
Video 722,152 738,276 757,378 762,573 778,572 3,036,799
% of total revenue 76.3% 77.9% 75.6% 73.9% 71.9% 74.7%
Data 44,293 56,566 62,308 75,169 91,654 285,697
% of total revenue 4.7% 6.0% 6.2% 7.3% 8.5% 7.0%
Telephony 34,113 40,149 47,837 55,949 63,998 207,933
% of total revenue 3.6% 4.2% 4.8% 5.4% 5.9% 5.1%
Other 12,550 12,670 12,013 11,496 16,275 52,454
% of total revenue 1.3% 1.3% 1.2% 1.1% 1.5% 1.3%
Total residential service revenues 813,108 847,661 879,537 905,187 950,499 3,582,884
% of total revenue 86.0% 89.4% 87.8% 87.7% 87.8% 88.1%
Advertising 103,588 69,687 86,986 88,628 92,278 337,579
% of total revenue 11.0% 7.4% 8.7% 8.6% 8.5% 8.3%
Cox Business Services 29,200 30,594 35,278 38,155 40,252 144,279
% of total revenue 3.1% 3.2% 3.5% 3.7% 3.7% 3.5%
Total revenues 945,896 947,942 1,001,800 1,031,970 1,083,029 4,064,741
Revenue excluding CBS 916,696 917,348 966,522 993,815 1,042,777 3,920,462
Cash flow
Operating cash flow 386,450 358,132 382,114 396,259 432,464 1,568,969
Operating cash flow margin 40.9% 37.8% 38.1% 38.4% 39.9% 38.6%
Revenue and cash flow per sub
Monthly revenue per basic sub $ 51.03 $ 50.93 $ 53.94 $ 55.60 $ 58.02
Monthly rev. per sub excluding CBS $ 49.46 $ 49.29 $ 52.04 $ 53.55 $ 55.86
Monthly avg cash flow per basic sub $ 20.87 $ 19.24 $ 20.55 $ 21.35 $ 23.17
Monthly cash flow per sub excl. CBS $ 20.23 $ 18.62 $ 19.83 $ 20.56 $ 22.31
Though video, at 75% of total revenue, remains the revenue backbone for Cox, the contributions of HSD and telephone continue to grow more significant in the big picture. Revenue from HSD service more than doubled in 2001 compared to 2000, accounting for 7% of total revenue for the year and 8.5% for 4Q01. Annual telephone revenues nearly doubled, with a 96% increase over 2000, contributing 5.1% of Cox’s total revenue for the year and 5.9% for 4Q01
Advertising revenues generally declined last year, and Cox was no exception. At $93 million, 4Q01 ad revenues were 11% below 4Q00. Advertising revenue for the year was nearly $338 million, down 4.3% from the prior year.
On the cost side of the equation, operating expenses increased 15%, due in large part to the impact of an 11% increase in programming acquisition costs.
Operating cash flow (OCF) margin for the fourth quarter was 39.9%, down a point from 4Q00's 40.9%. As a result, the quarter's OCF ($432.5 million) grew somewhat slower than revenue, coming in 11.9% ahead of 4Q00. During the past five quarters, Cox's OCF margin has fluctuated within the 37.8-40.9% range.
Guidance for 2002
Cox management is very bullish regarding future growth and the company's position in the industry, predicting that the momentum of 4Q01 will continue this year. With cable plant upgrades now approaching completion, well more than 90% of Cox's homes passed will marketable for both digital and HSD services this year. Company management expects this upgraded network platform to support even greater rates of RGU and OCF growth during 2002 than 2001, even as they cut capital expenditures to $2 billion, down from $2.2 billion last year. No slowdown is expected in any of the new services categories, including digital video.
Some analysts have speculated that, after losing the bid to acquire AT&T Broadband, Cox will be hunting for a comparable merger candidate. While Cox executives expressed regret that they were not the winner in the AT&T contest, their comments suggest that they do not see other major opportunities for M&A expansion this year, nor do they feel a sense of urgency to pursue growth via acquisition.
