CEA DISCUSSES TRENDS WITHIN THE BUSINESS COMMERCIAL SECTOR OF THE CABLE INDUSTRY

Transcription

1 CEA DISCUSSES TRENDS WITHIN THE BUSINESS COMMERCIAL SECTOR OF THE CABLE INDUSTRY Del Henry April 2013

2 DISCLAIMER All financial and other data contained in this report has been gathered from publicly available sources including various governmental agencies such as the Securities & Exchange Commission. All information contained herein has been reviewed and is believed to be accurate to the best of our knowledge and belief. However, CEA shall not be liable for any misstatement, error, omission or other inaccuracies related to the information contained herein. The information contained in this report is not investment advice and should not be considered as such. The reader is solely responsible for performing its own due diligence in order to form any opinions regarding the efficacy and accuracy of the information and data contained herein.

3 TABLE OF CONTENTS Disclaimer 2 Author Page 4 Introduction 6 Overview and Current Status 8 Capital Expenditures within BCS are on a steady Growth ramp 9 Time Warner Cable 10 Comcast 12 Comcast s Commercial BCS Capital Expenditures Continue to Increase 13 Other Commercial Comments by CEA 14

4 AUTHOR PAGE Del Henry Del spent his professional career on all sides of the media, entertainment and communications sectors. There are few people, however, that can match his ability to conceptualize and execute on new trends for traditional media infrastructure and content. He has amassed an extensive sales, operating and technical background with private and public companies. Overall, Del has accumulated unique expertise in the cable, satellite, fiber, Internet, IP Backbone, Telephony, and VoIP industries, and he now focuses his analytical energies on how these industries are converging.

5 CEA DISCUSSES TRENDS WITHIN THE BUSINESS COMMERCIAL SECTOR OF THE CABLE INDUSTRY As this report indicates, the cable industry has spent the last three years building momentum in the Business Commercial Services (BCS) sector. Market conditions for traditional CLECs and Metro Fiber companies are changing due to encroachment and pricing pressures; which means that operations and sales management requirements and costs will be increasing for others. Here are a few factors to consider: 1. In 2012 the FCC changed enforcement regulations so as to allow cable companies to acquire CLECs, which may potentially reduce the number of competitors while allowing cable to increase market share by way of acquisition. 2. Incumbent carriers, such as AT&T and CenturyLink, have been moving aggressively against competitors in this sector so as to protect and preserve their customer base. 3. Hence, local and regional CLECs and Metro Fiber companies will need additional capital for upgrades and expansion so as to remain competitive. 4. Also, as this report indicates, margins in this sector will become flat and may decline due to aggressive pricing and promotion pressures by incumbents and the new cable players. 5. This is an industry that survives on three and five year contracts with its customers, which eventually come up for renewal. Pricing pressure at renewal time reduces margins, especially for companies trying to retain customers. Commercial customers do shop pricing at contract renewal time so as to save money and retain bargaining power.

6 CEA DISCUSSES TRENDS WITHIN THE BUSINESS COMMERCIAL SECTOR OF THE CABLE INDUSTRY Here are some things the cable industry has been doing to build momentum: 1. Cable s BCS revenues continue to ramp up, meaning other companies lose revenues; a) A twofold increase is expected over the next five years, from $6 to $12 Billion. 2. Cable s BCS CapEx has continued to increase year over year a) Comcast s BCS CapEx has been increasing by $100 million a year; b) Comcast CapEx for BCS in 2012 was about $700 million. c) In two years this might run at about a $1 Billion a year (at one cable company). 3. Cable continues to increase Broadband speeds for businesses; 4. Video service packages have been developed for SMB customers; 5. Cable is deploying capital to expand product offerings so as to move up market. New entrants always need an SCA (strategic competitive advantage). Within the BCS sector, cable companies have three distinct SCA s: 1. A lower cost of capital since major trunking and distribution fibers have been placed; A Broadband SCA with higher speeds already operating; a) If a competitor has fiber in place this SCA may be somewhat neutralized? b) If no competitive fiber is in place, then HFC DOCSIS speeds are the SCA. i. DSL (U-Verse) speeds max out at about 24 Mbps; ii. DOCSIS 3.0 cable broadband speeds easily run at iii. 50 to 100 Mbps. But cable is also building fiber to the business and to buildings. 2. Cable s video packages are in place, subject to rights constraints. a) This is a distinct SCA differentiator, when the CLEC does not offer video.

7 CEA DISCUSSES TRENDS WITHIN THE BUSINESS COMMERCIAL SECTOR OF THE CABLE INDUSTRY If cable is willing to price and discount aggressively, then competitors must match or beat to save existing customers, and/or to sell into new customers. Cable has a long history of promoting and discounting to maintain and grow market share. We have seen DBS subscriber growth go flat and decline as cable has developed promotion, discounting, and retention processes. Short sale activity on Directv s public stock increased recently. Dish sub growth has been flat. Our friends in the CLEC business have said that larger Telco s cannot make money in the small business sector. Hence, cable has been picking the-low-hanging-fruit small businesses where cable can make money. Comcast and Cox have reported that 85% of their BSC revenues come from small businesses (with 1-20 employees). Now cable is moving up-market and selling more medium sized businesses (with employees). Recent estimates indicate that Cable s revenues from this category may increase fourfold over the next five years, to about $5 billion. Cable sales people write orders within the small business community quickly and easily. So cable has been hiring and training BCS sales people at a rapid pace. For example, TWC increased its BCS employee group by 35% during One thing we do know, if cable commits to deploying CapEx for BCS, then cable will follow through with discounts, pricing plans, and promotions to win business customers. This then justifies further capital commitments and the corresponding revenues needed to impress Wall Street. Cable s high growth rate (20% to 30%) in the BCS segment has impressed Wall Street. Comcast s BCS revenue growth in 2012 was 34%. Cable has two major growth drivers right now Broadband and BCS (Business Commercial Services). Since the cable video business is flat, if not declining, cable must maximize its growth opportunities to remain vibrant and avoid declining stock prices. So the industry is exploiting its SCA advantages in the Broadband and BCS sectors. As this report delineates, Time Warner Cable and Comcast are telling analysts that Business Commercial Services is a high growth and new profit segment for them. It would seem, therefore, that the proverbial handwriting is on the wall.

8 OVERVIEW AND CURRENT STATUS As the findings and data in this report indicate, the Business Commercial Services sector within the Cable Industry has been growing at a compounded rate of and above 20%, and the industry has been committing about 10% to 14% of its total annual CapEx to build and expand within this segment. At a time when pricing and margin pressures have limited the growth of cable s video businesses, the Business Commercial Services (BCS) sector has consistently demonstrated accelerating revenue growth and market acceptance. Hence, management has increased CapEx, headcount, and focus so as to expand and be even more competitive within this new growth market. Time Warner Cable added 1500 employees (a 35% increase) to its BCS group in Two companies (Comcast and Time Warner Cable) account for about 62% of the subscribers and homes passed within the Cable Industry. This report will focus on three perspectives from three vantage points of BCS (Business Commercial Services): the data and strategy comments from the industry s two leaders, Comcast and TWC (Time Warner Cable), and from our perspective at CEA. We believe that the two largest cable companies are the trend leaders and that the other cable companies tend to migrate toward the same conclusions and strategies. However, we weight the Other CableCo s at 35% of the CapEx levels of the two industry leaders (Comcast & TWC). This therefore means that 38% of the industry would expend CapEx for BCS at 35% of the rate of the two leaders.

9 CAPITAL EXPENDITURES WITHIN BCS ARE ON A STEADY GROWTH RAMP The following is a Five Year perspective of CEA s view of CapEx expenditures by the Cable Industry overall. In 2010 the industry started to place CapEx at the $1 billion per year rate and that is expected to almost double to $2.0 billion per year by By 2015 CEA estimates that this will increase to about 15% of all CapEx, or an increase of almost $1 billion per year. Cable Industry - CapEx - Business Commercial Services Estimating Technique for Industry wide CapEx for BCS (000) Comcast $ TW Cable $ subtotal $ % Other CableCo $ Total Industry $ (estimates above are in italics) Rough Estimate Increase over Prior Year: Notes: 1. Comcast & TWC are actuals for 2010, 2011, 2012 (in bold) 2. Other CableCo estimate is at 33% of Comcast-TWC Formula: if Comcast+TWC = 62% of industry, then the other CableCo's CapEx would be at 35% of 38% of the industry's equivalent share. 3. CapEx emphasis on extending fiber to buildings and wiring buildings, and upgrading services The modeling above is based on the assumption that the balance of the cable industry will place CapEx at 35% of the rate of Comcast and TW Cable. The two largest cable companies actual expenditures for BCS CapEx are shown above in bold face type, for 2010, 2011, and These are the actuals reported to Wall Street in Quarterly Reports. The italics above indicate CEA estimates. Comcast s 4 th Quarter 2012 run rate for BCS CapEx was at $840 million, meaning that the $800 million estimate above should be within range for Comcast s BCS CapEx has been increasing at about $100 million per year recently, indicating that a $95 and $90 million increase for the next two years should be reasonable. TWC s 4 th Quarter run rate was at $720 million for BCS CapEx, so $80 and $75 million for the next two years would seem reasonable. Although, based on history and commitment, we think that they both will allocate a little more than that in 2013 and At CEA we think that this indicates that the MSO s see the returns and hence are allocating more capital to BCS to compete and accelerate growth sooner.

10 TIME WARNER CABLE Briefing re TWC Fourth Quarter and 2012 results: Rob Marcus, President & COO, TWC. Marcus statements about Business Services during 4 th Quarter Report briefing: What more can I say about business services? We posted organic growth of more than 20% again in Powered by an expanded sales force, more buildings on net and some new products, we think we can achieve that kind of growth yet again in Couple of quick business services metrics. In 2012, we added more than 1,500 people to our business services headcount, that's a 35% increase. And we nearly doubled the number of commercial buildings connected with fiber. We expect that business services will continue to drive a disproportionate amount of growth in So we'll continue to focus on and invest in B2B. That means additional expansion of our sales force and more buildings on net, as well as more new products. TWC Commercial Revenue Breakout (mil.) FY 2008 FY 2009 FY 2010 FY 2011 FY ,107 1,469 1,901 15% 21% 33% 29% Q Q Q Q Q % 23% 37% 26% 2012 SNL Kagan

11 Time Warner Cable Irene Esteves, TWC s CFO, said: Fourth quarter business services revenue was up 26% or $106 million. Excluding $17 million from Insight during the quarter, business services revenue grew 22% year-over-year. That s our 11 th consecutive quarter of at least 20% organic growth. TW Cable Commercial CapEx (mil.) Q-1 Q-2 Q-3 Q-4 Year Total Year 2010 $ 116 $ 117 $ 113 $ 124 $ $ 113 $ 118 $ 117 $ 145 $ $ 120 $ 143 $ 161 $ 182 $ 606 Year 2012 compared to base year: % 122% 142% 147% 129% Year 2012 compared to previous year: % 121% 138% 126% 123% Source: Time Warner Cable 4 th Quarter Trending Schedule

12 COMCAST Michael Angelakis - Vice Chairman & CFO Briefing re Comcast 3 rd Quarter 2012 results: We continue to experience strength in our Business Services group as well which was the second largest contributor to our cable revenue growth in the third quarter, with revenue increasing 34% to $621 million. The small end of this market or businesses with less than 20 employees now accounts for 85% of business services revenue and continues to be meaningful driver of growth. We are also making good progress with the mid-sized businesses as well, as this revenue base now represents 15% of the group s revenue and is growing rapidly off a smaller base. Comcast Commercial Revenue CAGR (%) Annual Revenue ($ mil.) ,267 1, Annual Growth (%) n/a The table below summarizes Comcast s Commercial revenues by quarter over a three year period. These numbers are from Comcast s annual and quarterly reports. The company s report for the Fourth Quarter of 2012 was released February 13 th, The annualized revenue run-rate for the 3 rd and 4 th Quarters of 2012 was at about $2.5 Billion. This division of Comcast was growing at about 34% in 2012 (over prior year revenues). Comcast Cable Commercial Revenues 2012 SNL Kagan Q-1 Q-2 Q-3 Q-4 Year Total Year 2010 $ 263 $ 306 $ 334 $ 364 $ 1, $ 394 $ 435 $ 464 $ 498 $ 1, $ 541 $ 582 $ 621 $ 663 $ 2,407 Year 2012 compared to base year % 190% 186% 182% 190% Year 2012 compared to base year % 134% 134% 133% 134% Source: Comcast 4th Quarter 2012 Report "Trending Analysis"

13 COMCAST s COMMERCIAL BCS CAPITAL EXPENDITURES CONTINUE TO INCREASE The table below delineates Comcast s reported CapEx expenditures by quarter for Commercial Services. All quarters come from Comcast s financial reporting to stockholders and Wall Street. Comcast Cable Commercial CapEx (mil.) Q-1 Q-2 Q-3 Q-4 Year Total Year 2010 $ 97 $ 109 $ 128 $ 162 $ $ 152 $ 153 $ 147 $ 155 $ $ 146 $ 162 $ 185 $ 212 $ 705 Year 2012 compared to base year % 149% 145% 131% 142% Year 2012 compared to previous year % 106% 126% 137% 116% Source: Comcast 4 rd Quarter 2012 Report Trending Analysis It appears that Comcast continues to increase investments in the Commercial BCS sector. Their annual CapEx has been increasing by about $100 million per year. The annualized run-rate for the 4 th Quarter of 2012 was $848 million. A CapEx above $800 million in 2013 would seem to be on track. This would extrapolate to Comcast at $1 Billion for BCS CapEx in 2014 or 2015.

14 OTHER COMMERCIAL COMMENTS BY CEA In recent years the cable industry has been focused on the low-hanging-fruit of small businesses where cable can make money by offering bundled services including video, broadband, and telephone. Now cable is moving up the food chain to larger, but still small, businesses. This focus is still on in-franchise and in-region. But long-haul connectivity must be included soon so as to compete in the larger business categories wherein offices out of market become integrated into pricing and service offerings. Larger companies demand blended connectivity and pricing. Cable s 20%, 30%, and 40% growth rates over recent years within the BCS sector lead to a huge growth category with higher margins than residential video. For these reasons we see continued growth within this unique cable industry sector. A continued commitment to CapEx placement will lead to continued revenue growth. One thing we know for sure about the cable industry, CapEx is allocated where it is most productive.