Cable companies....
By Ellen Sheng
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Cable operators may have continued to squeeze spending during the fourth quarter, but cable equipment makers managed to close out the year on a hopeful note.
"It looks like the fourth quarter could be better than expected," said Dan Ernst, analyst at Rodman & Renshaw. "Digital and broadband really picked up in the second half of 2002, and December was a pretty strong month."
Subscribers to cable modems jumped 42% year over year, while digital subscribers increased 32% from a year ago, Ernst said.
Still, strong demand for digital and broadband couldn't make up for cutbacks elsewhere, and overall spending was down both sequentially and year-over-year. Under pressure to be cash-flow positive while trying to stem a steady stream of defecting basic cable subscribers, cable companies have been forced to scale back. Also, most companies are wrapping up costly upgrade projects, and the fourth quarter is traditionally a quiet time since cold weather stalls much of the cable installation work.
Kaufman Brothers analyst Michael Perica estimated that fourth-quarter spending was down 10% to 15% sequentially, while total spending plummeted roughly 35% in 2002. Companies making equipment used for plant upgrades and expansions "will suffer the greatest decline as this spending is largely discretionary and success-based," said Perica.
Easing the blow, however, is Comcast Corp.'s (CMCSA, CMCSK) buildout plans for its AT&T Broadband network. At a time when most other cable companies are nearly done with their upgrade projects, Comcast intends to spend between $2 billion and $2.5 billion in 2003 to improve AT&T Broadband's network. Companies most likely to benefit from the buildout are Harmonic Inc. (HLIT) Arris Group Inc. (ARRS), C-Cor.net Corp. (CCBL), and CommScope Inc. (CTV). The massive upgrade project may have lent a boost to a few cable equipment companies during the fourth quarter, but most of the payoff won't come until 2003.
Also benefitting some of the equipment makers is the failed merger between satellite broadcasters EchoStar Communications Corp. (DISH) and Hughes Electronics Corp. (GMH). The outcome "is likely a recommitment by EchoStar and Hughes to adding local broadcast markets and to increasing their high-definition television footprint," Greg Mesniaeff, analyst at Friedman Billings Ramsey, said in a note last week. Both those areas will become very important to suppliers to satellite broadcasters, as such broadcasters try to draw subscribers away from cable.
Leading cable box maker Scientific-Atlanta Inc. (SFA) should see higher than anticipated sales volume during its fiscal second quarter ending December. In early December, the company said it already reached the low end of its guidance of 150,000 units. It won't be much of a reach to hit the high end of its 175,000-unit target.
What remains to be seen is the company's sales mix. Scientific-Atlanta has been selling both low-end and high-end Explorer set-top boxes to Time Warner. Though Time Warner has said it remains enthusiastic about the high-end Explorer 8000 model, the company appeared to pull back slightly on that enthusiasm in September, said Lawrence Harris, analyst at H.C. Wainwright. Harris, who rates Scientific-Atlanta shares at outperform, does not own any shares, but his company has recently done banking for the company.
Also a plus this quarter, Scientific-Atlanta signed an agreement with Cablevision Systems Corp. (CVC) in December that will allow it to recognize previously deferred revenue. As a result, Scientific-Atlanta will be able to recognize revenue on products shipped to Cablevision in the current and future quarters, in addition to about $16 million of revenue deferred from the first quarter ending in September.
Scientific-Atlanta is scheduled to release quarterly earnings Thursday after the market close. Analysts surveyed by Thomson First Call estimate earnings of 15 cents a share on revenue of $317.36 million. A year ago, the company earned 26 cents a share.
Strong Cable Modem Sales For Motorola
Similarly, rival set-top maker Motorola Inc. (MOT), which is scheduled to report earnings Jan. 21, should see strong shipments of cable modems. Alan Bezoza, analyst at CIBC World Markets, says sales of the modems could be up as much as 15% from a year ago. Sales of set-tops should also be "OK," though flat, he said.
Motorola is expected to earn 10 cents a share, after losing 4 cents a share a year ago.
Among the small equipment makers poised to benefit from Comcast's network upgrade, Arris stood out for having a strong fourth quarter. The company should be making "lots of trips to the bank this quarter," said Bezoza, who does not own shares of the company. Arris was able to generate nearly $90 million in operating cash flow and paid down lots of debt during the quarter, the CIBC analyst said. CIBC has done investment banking for Arris, as well as for C-Cor and CommScope.
During the quarter, cost-cutting moves and the sale of its Actives product line to Scientific-Atlanta aided Arris' financial position. The company also laid off 340 people, saving $8 million in the process.
As a result, the provider of broadband local access networks announced in mid-December that its fourth-quarter cash loss before items would come in narrower than the consensus loss estimate of 14 cents a share. Instead, Arris said it was expecting a loss of 8 cents a share to break-even. Arris is scheduled report earnings the morning of Feb. 5. Analysts expect the company to lose 7 cents a share, according to First Call. Arris lost 7 cents a share in the year-ago period.
Though the Comcast buildout bodes well for Arris' equipment business, it is less positive for its cable telephony business. The telephony segment had gotten a significant amount of business from AT&T Broadband, but since Comcast's acquisition of the unit, those projects have been put on hold.
For another company that preannounced, the quarter didn't shape up as well as hoped. In November, C-Cor.net lowered its fiscal second-quarter expectations due to delays in orders from "certain international customers." Officials blamed a proposed merger of two Spanish cable operators for some of the order delays.
The State College, Pa., company now anticipates that net sales for the quarter ended Dec. 27 will be between $49 million and $53 million, with a net loss of 21 cents to 25 cents a share. It previously anticipated sales of $57 million to $63 million, with a net loss of 12 cents to 17 cents a share. The company is scheduled to report results Thursday before the bell.
Analysts expect C-Cor.net to lose 18 cents a share, compared with earnings of 3 cents a share a year ago.
Also hurting from the slowing spending environment, coaxial cable maker CommScope cut its 2,800-person work force by 6% to 7% during the quarter, but maintained its revenue guidance. For the fourth quarter, CommScope still expects fourth-quarter revenue of $125 million to $135 million and a gross margin of 18% to 19%, excluding potential severance costs. Analysts expect a loss of 7 cents a share, according to First Call. A year ago, CommScope earned 10 cents a share.
On a brighter note, Harmonic, which is slated to report Jan. 22 after the market's close, should meet or beat consensus expectations, says Friedman Billing's Mesniaeff. Though the Sunnyvale, Calif., maker of digital and fiber-optic systems has been hurt by cutbacks at troubled cable operator Charter Communications Inc. (CHTR), the company can expect to benefit from the Comcast buildout as well as new HDTV and local projects from satellite operators, Mesniaeff said.
Analysts surveyed by First Call estimate a fourth- quarter loss of 20 cents a share on revenue of $37.8 million. In the year-ago quarter, Harmonic lost 14 cents a share.
Mesniaeff does not own shares of any of the companies he follows, and Friedman Billings Ramsey has not done investment banking for any of the cable equipment makers mentioned.
-By Ellen Sheng, Dow Jones Newswires; 201-938-5863; ellen.sheng@dowjones.com
(END) Dow Jones Newswires
01-14-03 1315ET
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