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Cloudy Cablevision

Q2 results overshadowed by audit issues

Cablevision’s second quarter offered up a mixed bag, with healthy subscriber gains and big advertising growth at its Rainbow program nets offset by more anemic cash-flow gains and warnings of reduced expectations for the latter half of 2003.

But it’s what lurked at the end of the quarterly recitation of financial metrics that made investors nervous Tuesday. Cablevision disclosed that the law firm retained by its internal audit committee to investigate improper accounting practices at its Rainbow Media cable program unit had identified additional improprieties within the original-production units at AMC and WE: Women’s Entertainment.

So far, company said, some $3.4 million has been identified as improperly recognized between 2000 and 2002.

Also, auditor KPMG Tuesday told Cablevision it could not finish its review of the company’s quarterly financials, given the ongoing internal and external investigations into inappropriate production expense accounting procedures. This will delay the chief exec’s ability formally to sign off on the statements, as required by new Securities & Exchange Commission rules.

“There were an awful lot of roaches coming out of the woodwork there today,” said one analyst.

Cablevision stock fell 8.24% on Tuesday to close at $19.27.

Company execs would say only that they are cooperating fully with SEC and cannot predict the outcome or timing of the investigation.

New wrinkles

The probe could delay refinancing plans and its proposed satellite spinoff, though chairman Charles Dolan insisted the tax-free spinoff of the fledgling Rainbow DBS satellite platform and Clearview Cinema chain is on track for the end of the year. The Rainbow DBS 1 satellite launched successfully July 17 and a commercial service of unspecified content is due to commence in October.

A one-time gain on the $750 million sale of its wireless telephone franchise during the quarter helped Cablevision swing to a net profit of $162.1 million for the three months ended June 30, compared with a net loss of $98.2 million the previous year.

Operating cash flow, adjusted for restructuring charges and noncash expenses, grew 5% in the quarter to $300.5 million.

The metro Gotham cabler, programmer and sports team owner got hit by higher program costs relating to the YES Network, for which it incurred $8.4 million in legal fees and other expenses stemming from its temporary agreements to carry the Yankees-owned sports web on its premium tier.

Operating income fell 32% to $74.3 million, due in part to an employee stock plan expense compared with a credit of $231 million in 2002.

As a relative newcomer to the digital cable game, company touted digital video sub growth of 196,200, with 68,300 high-speed data additions. And while some of its rival operators lost basic subs, Cablevision managed to add 12,200 in the quarter, reversing five straight quarters of losses.

Cable coin

As a result, cable revenue grew 10% over the year-ago quarter to $624 million, with total consolidated revenue up 8% to $973.3 million. Cable group head Tom Rutledge forecast Cablevision will add between 875,000 and 900,000 new digital video subs by the end of the year.

One of the highlights of Cablevision’s quarter was the strength of its Rainbow Media core networks group, which includes AMC, the Independent Film Channel, WE: Women’s Entertainment and regional sports nets. Revenues among the nets jumped 33% from last year to $152.7 million, with operating income up a healthy 46% to $52.1 million.

Part of that gain is due to an allowance for bad debt from Adelphia last year, which exaggerated the improvement. But company also noted significant increases in ad revenue at AMC and WE as well as solid growth in affiliate fee revenue.

Divisional chief Josh Sapan said the gain showed Rainbow’s developing duel-revenue stream (eight minutes of ad time were introduced in October on AMC) had been more successful than expected.

WE, which tripled its ad revenue from last year, also saw a 12% jump in total subs to end the quarter at 45.5 million. IFC was up 15% to 27.7 million subs. Advertising now comprises 24% and 37% of sales of AMC and WE, respectively.

While the company reduced its cash-flow forecast for year’s end to 14%-16% growth from 16%-18%, it increased its guidance for the core Rainbow nets, from which it expects to generate more than 17%-19% sales growth and adjusted operating cash-flow growth of 26%-28%.