TCA Cable TV Inc. thinks that subscriber gains are worth
paying out some employee bonuses.
Chairman and CEO Fred Nichols told analysts that the
company incurred an additional $2 million in marketing expenses during the third quarter,
including $1 million in cash awards to employees under a plan pegged to long-term
subscriber gains.
Partly because of that extra expense, TCA -- the only major
publicly traded cable operator to register net income, in addition to earnings before
interest, taxes, depreciation and amortization (EBITDA), or cash flow -- fell short of
Hoak Breedlove, Wesneski & Co. analyst Murray Arenson's published estimate of 22
cents per common share of profit in the quarter. TCA's net income was 20 cents per
share, versus 19 cents in the third quarter of 1997.
TCA's stock got hit hard for missing that estimate in
trading Sept. 11 (the report was released after the market closed the day before). Its
share value fell by as much as $4 in heavy trading, before Nichols spoke to analysts. The
stock rallied to close at $25.38 per share, down just 6 cents.
During a conference call, Nichols told Arenson that TCA
would do a better job in the future of keeping analysts informed about decisions like
pumping up marketing spending.
Arenson said later that he thought that the extra spending
to drive subscriber acquisitions during a seasonally slow period was "a smart thing
to do, and the cost is negligible."
Nichols said TCA has several systems in college
communities, so subscriber growth in the third quarter is usually slow. "It's a
down time for us, and it's a big time for the satellite people," Nichols said.
"And we made sure that we weren't going to lose a lot of our customers."
TCA's subscriber count dipped to 853,505 as of July
31, from 867,555 at the end of the second quarter, due to losses in the systems with
colleges and a net reduction after a system swap with Cable One.
But on a same-system basis, TCA's subscriber base grew
2.6 percent between July 1997 and this July, Nichols said. At a time when direct-broadcast
satellite growth is accelerating, Nichols added, "I'm very proud of what our
people did."
Subscriber growth and the advent of new revenue streams
from digital television and cable-modem services are going to be increasingly important to
TCA in the near future, Nichols said. TCA, which raised its rates by about 8 percent this
year, plans to keep rate increases to 5 percent or less in 1999.
Given the fact that TCA absorbed about 150,000 former
Tele-Communications Inc. subscribers into a joint venture in February, it's not
surprising that Nichols is following TCI president and chief operating officer Leo J.
Hindery Jr.'s strongly worded advice on keeping rate increases low to avoid angering
Congress.
Nichols told analysts that TCA's advertising-insertion
business is still growing smartly (up 24 percent in revenue over last year), and that the
MSO is speeding up rebuilds, with 16 systems currently being upgraded to two-way
750-megahertz capacity. "So while we probably won't get as much in rate
increases, we should be able to get as much from new services," he said.
TCA's digital-TV and modem penetration has been slow
so far, Nichols conceded. The operator is offering digitally encoded channels, using
TCI's Headend in the Sky apparatus, in six systems, where it is available to 125,000
subscribers, and it has signed up 2,600 customers so far.
Penetration averages about 2 percent, well below TCI's
average HITS penetration of 10 percent, Nichols said. TCA charges $10 per month for
digital basic, plus a $3.25 monthly equipment charge. With pay-per-view buys and the lift
in premium sales from offering multiplex versions, the company takes in between $14.50 and
$18 per digital box, he added.
Nichols blamed part of the slow penetration on the time
that it takes to install the General Instrument Corp. digital set-top, which requires a
telephone line. Depending on the availability of two-way boxes, TCA plans to roll out HITS
in up to 20 markets, he said.
TCA is offering high-speed-data service in three markets --
one using a phone line for outgoing data, and the other two using Terayon Communication
System modems.
"The results on the Terayon side are very
pleasing," Nichols told analysts. TCA has about 1,300 customers using those modems,
and it only launched its second market (Amarillo, Texas) in August, he said. The operator
is on track to be able to market cable modems to 380,000 subscribers by the end of 1999,
he added.
One benefit of the Terayon modems is that they can be
installed by the subscriber about 80 percent of the time, Nichols said. And TCA has gotten
the back-office functions to the point where the company expects to be able to offer
different levels of data service -- including a $24.95-per-month offering with
56-kilobit-per-second "always-on" service.
Overall, TCA's revenue rose 28 percent in the quarter,
or $22.4 million, to $101.5 million, but 68 percent of that increase came from adding the
TCI systems. Internal cable revenue and ad-sales growth each made up most of the rest.
Cash flow was up 24 percent, to $40.9 million.
Compared with the second quarter -- the first three-month
period after the TCI joint venture closed -- revenue was up 5 percent and cash flow was up
1.6 percent, Nichols said.
Bucking the industry trend, TCA's premium-service
revenue rose 20 percent, or $1.8 million, compared with the third quarter of 1997. Nichols
said premium-unit sales rose 6 percent. He credited digital-multiplex packages, including
one that offers 15 movie screens for $15.95 per month. "One of the reasons why
we're gaining premium units is because we're selling it at a price where the
customers think that there's value," he said.
Finally, Nichols said TCA's board is going to consider
buying back shares -- which many other companies, including MSO Comcast Corp., have said
they will do following last month's stock-market decline.
Nichols said TCA had been trying to conserve cash for
system acquisitions, but most of the systems that it would want to buy are owned by other
MSOs that don't want cash due to the tax impact.
