January 28, 2013

Earnings Preview—Programming Costs, Sandy, ROI to Dominate

By Joyce Wang

Verizon kicked off a busy 4Q earnings week last Tues with not-too-shabby FiOS results. In addition to management guidance on the next fiscal year, earnings calls from major operators, most of which are scheduled in Feb, are likely to be filled with updates on programming expenses, the impact of Hurricane Sandy and capital returns.

Of all line items, Wells Fargo analysts deem programming costs as most important given the myriad of deals signed within the past 6-12 months. Of the major MSOs, the analysts expect the greatest YOY programming expense growth from DirecTV, followed by Comcast, DISH, Cablevision and Time Warner Cable. Higher costs mean price increases, which can be reflected in revenue trends, Wells Fargo analysts said. Based on estimated YOY revenue growth among the major cable ops, the biggest price increase might come from DirecTV, followed by Comcast, Time Warner Cable and Cablevision.

For the most part, Hurricane Sandy was isolated to 4Q, but Cablevision is most likely to feel the impact a bit longer than the others, the analysts said. "Investors will give a pass to any operational or financial 'misses' this quarter," they said. Of the 3 companies expected to announced incremental capital returns (Comcast, TWC and DirecTV), Comcast is likely to have the greatest acceleration from last year, as TWC and DirecTV are pursuing potential transactions and are approaching their "target leverage ratios," the analysts said.

What about programmers? Time Warner's margins will face pressure as content costs rise, according to Bernstein Research analysts. At Turner, affil fees will grow at about the same rate as operating expenses, with advertising growing more slowly, they said. HBO is expected to face difficulties growing subs or pricing "in a world that includes multiple SVOD entrants at significantly lower price points," while cost pressures are expected to intensify.

Analysts were a bit perplexed by Time Warner's decision to start putting kids content on Netflix. "We don't understand why it's worth putting ratings and ad revenue at risk, especially at this moment in time when Nickelodeon is vulnerable, to pursue a few extra pennies from Netflix," Bernstein said in a research note. Meanwhile, Goldman Sachs analysts said Viacom' s stepped-up investment in Nick programming will likely keep driving ratings higher. Even Nick's golden oldies are pulling through. "SpongeBob" was one of the top 5 cable program last week.

Editor's Note: This story originally appeared in CableFAX Daily. Go here to subscribe.