TCI boasts cash bump

Shows 4th quarter cash flow up 28%

DENVER — Cable giant Tele-Communications Inc. showed signs of a strong turnaround at its cable systems in the fourth quarter, the company said Tuesday, despite a plunge back into the red caused by a decline in gains on asset sales compared with a year earlier.

At an analyst and press briefing in Denver, TCI execs outlined plans to dramatically increase spending on digital system upgrades in the next three years as a way to drive a big increase in the number of customers taking digital TV service.

For the fourth quarter, TCI said its total earnings before interest, taxes, depreciation and amortization (cash flow) jumped 28% to $743 million on 11% lower revenue of $1.9 billion, including tiny contributions from both its programming affiliate Liberty Media and its investment arm TCI Ventures.

Cash flow improves

TCI said it had a net loss of $392 million in the quarter, compared with a profit of $722 million a year earlier that had been inflated by a big profit on an asset sale. For the year, TCI reported 31% higher cash flow of $2.97 billion and a net loss of $626 million compared with a net profit of $292 million in 1996.

In the latest quarter, the revenue decline was due to spin-off of TCI’s satellite business and a reshuffling of Liberty’s stake in electronic retailing services such as HSN.

More significantly, TCI’s cable operations produced a 25.2% higher cash flow of $741 million on 1.4% higher revenue of $1.6 billion. The strong growth in cash flow was a result of better advertising sales, higher cable subscription revenue per customer and a return to customer growth, as well as a cost-cutting program put in place by TCI president Leo Hindery shortly after his appointment just over a year ago.

Street satisfied

Wall Street welcomed the quarterly result, pushing up TCI stock 69¢ to $32.56 while Liberty stock jumped 6¢ to $32.

TCI said total expenses in its cable operations fell 12.4% in the quarter, driven by 20% lower overhead costs. The one expense area to increase was programming costs, which rose 6% to $366 million. TCI told analysts programming cost increases would drive an increase in average rates of 4% to 4.5% this year.

The marginally higher revenue in the quarter masks a 15% decline in non-regulated revenue, such as premium channel subscription revenue. On the other hand, basic cable revenue rose 9.1% to $1.1 billion.

Subscriptions rise

TCI’s cable systems lifted their customer base by 155,000 to 14.4 million in the quarter, largely as a result of “renewed and enhanced marketing activity” in the second half of last year. Under Hindery’s direction, the cabler beefed up its spending on marketing.

Hindery told analysts and reporters at a briefing in Denver Tuesday that marketing and digital cable are the best investments the cabler can make right now. Hindery predicted subscriber growth this year would be between 2% and 2.5%.

He also said TCI had targeted 800,000 to 1 million subscribers to take digital service by the end of this year, up from 150,000 currently. Digital service increases the number of cable channels available from an average of 60 to 70 to as many as 140, TCI execs said.

“The digital platform is key, not only for TCI, but for our industry,” Hindery told the analyst and media briefing.

To handle the digital rollout, TCI plans to spend $400 million on upgrading its systems for digital this year, and $700 million in each of the next two years.

That spending will more than double TCI’s total capital expenditures this year to as much as $1.2 billion, up from $538 million last year.

The cabler will finance that increased spending from cash generated internally. TCI generated $913 million of “free cash flow” last year — the cash flow remaining after payment of interest, preferred stock dividends and capital expenditures — which was used largely to reduce debt.

TCI finished the year with debt at $14.1 billion, but the cabler’s debt will be reduced by another $4.6 billion this year as a result of a series of system sales to other cable operators announced, but not yet closed.

In these deals, TCI is selling certain systems in exchange for transferring debt attached to the systems and stock in the buyer. All up, TCI said the system sales would transfer 3.8 million customers out of its subscriber count.

TCI chairman John Malone told analysts “we feel pretty good about how this company sits today,” with the all-important debt-to-cash-flow ratio having fallen below the 5-to-1 level. Malone promised analysts that this ratio would continue to decline “rapidly.”

In an SEC filing, TCI said Liberty Media’s net profit plunged to $124.5 million in the year to Dec. 31 from $1.05 billion in 1996. The company had a big one-time gain in the 1996 earnings.

Late Tuesday, TCI announced an alliance between its AtHome Internet service, BankAmerica Corp. and software company Intuit to make home banking available for consumers.

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