NEW YORK – Healthy fundamentals and good credit conditions led Moody’s Investors Service to say on Wednesday that its outlook over the next 12-18 months for the U.S. cable television industry is positive.
“This view is supported by continued strong, albeit moderating revenue and cash flow growth tempered somewhat by a heightened competitive environment and ongoing capital spending to further boost recent operating momentum gains. The positive outlook is also bolstered by the relative stability typically evidenced by domestic cable TV companies in times of economic uncertainty, with the value proposition afforded by the triple-play bundle of services and the pending digital broadcast transition potentially spurring even higher subscription growth rates than currently anticipated,” said the debt rating company.
(Ed. Note: The same could easily be said about the Canadian cable sector.)
“U.S. cable operators have thus far largely neutralized the competition via what Moody’s believes to be a compelling product offering, ubiquitous product/network coverage, and highly effective marketing strategies and execution. While the large regional Bell operating companies arguably continue to pose one of the biggest long-term risks, incumbent cable TV operators appear to be meeting the challenge, taking far more share from the phone companies of late than they are losing,” reads the release.
"We’re still in the early days of telco competition, but the cablecos appear to be well situated for the coming fight," said Russell Solomon, Moody’s senior vice-president with primary rating responsibility for the high yield cable companies. "Although only a couple of companies are affected, refinancing and/or liquidity needs would probably represent the biggest near-term concern given ongoing tightness of the credit markets.”
As competitive encroachment intensifies, more aggressive promotional activity is expected, which will pressure margins somewhat and prove incremental to higher programming payments for retransmission consent fees and other normal-course escalators, adds the Moody’s research.
But new customers subscribing to multiple services at higher contribution margins should at least mitigate if not wholly offset this risk, yielding margin improvement and growing revenues-per-homes-passed opportunities for most operators.
“The price war that is now well under way, as expected, has resulted in greater demand for bundled services, much of which has accrued to the benefit of the cable companies," said Neil Begley, Moody’s senior vice-president who covers the investment grade cable companies. “Commercial business, which is really only in the infancy stage of its development, also looms as a potentially material, albeit longer-term opportunity for cable TV companies. Conversion rates of EBITDA into free cash flow for investment grade companies is becoming more noteworthy, allowing them greater discretion in determining their credit ratings based on management of financial risk to targeted levels.”
Although the fundamental credit outlook is positive, Moody’s expects that still high, albeit opportunistic and appropriate investment activity related to new service subscription growth and more efficient network utilization, coupled with moderately aggressive fiscal policies and increasingly shareholder-friendly bias will likely continue to temper an otherwise positive ratings outlook, as has long been the case historically for the industry sector, says the release.
“While 2008 may prove to be the peak year for capital spending, Moody’s believes that the sector will continue to invest in technology, equipment, content and/or other applications as a means of trying to further enhance and differentiate what are rapidly evolving into increasingly commodity-like products and services.”
