>>Because of this, Wall Street has deemed cash flow a better measure of a cable company's health than earnings. Media analysts use a gauge of cash flow known as EBITDA, or earnings before interest, taxes, depreciation and amortization. This tool is used to give a picture of how much cash a company generates from ongoing operations to pay debt, interest and capital expenditures.
But the measurement is not foolproof. Companies can book some expenses as capital expenditures, treating them as assets that can be depreciated over time. Doing so improves EBITDA and in the case of WorldCom was the difference between a profit and a loss.
Improper Accounting
WorldCom originally reported a profit in 2001 of $1.4 billion instead of a loss by improperly accounting for $3.9 billion in operating costs over the last five quarters. Instead of recording fees paid to local telephone firms for connecting its long-distance calls as operating expenses immediately, WorldCom accounted for them as capital expenditures--or assets--and depreciated those costs over several years.
Adelphia did much the same thing. The cable firm took certain marketing, labor and programming costs that should have been recognized immediately and spread those costs over many years. As a result, Adelphia overstated its fiscal 2001 cash flow by $210 million.
"There are a zillion things you can do to fool with the numbers," said Frank Biondi, an investment advisor and former chief executive of Universal Studios and Viacom Inc. "The problem is, there are guidelines but no standard rules for fixed-asset accounting."
UBS Warburg media analyst Christopher Dixon said, "Companies [that use] EBITDA are coming under pressure. This is part of the WorldCom meltdown."
Some analysts said investors are overreacting to the accounting scandals and are unfairly punishing entire industries for the abuses of a few companies.
"It's irrational that cable stocks are off by 60%," Dixon said. "This is a great business with very stable revenue and cash flows. This is panic behavior. People are running scared."
Dixon said it is widely known on Wall Street which companies most aggressively use EBITDA. Cohen and Dixon said Cablevision and Charter fit into this category.
Shares of Comcast and rival Cox Communications Inc., considered to be the most conservatively run cable operators, fell only 3% and 5%, respectively, last week.
One debate within the cable industry is how to account for labor costs to install new services.
"Ask seven cable companies how they do it and you'll get seven different answers," Biondi said.
Another area prone to manipulation is accounting for fees collected by cable operators for launching new channels.
Industry executives said these fees must be booked over the life of the contract, but some cable operators account for them immediately by booking them as advertising income, thus propping up sales.
A firm's number of subscribers, which is used by Wall Street to value cable, phone and Internet business, also is subject to interpretation. America Online Inc. has long been suspected of giving free Internet service to customers who ask to be disconnected to continue counting them as subscribers. Adelphia, DirecTV and AT&T Broadband recently have revised their subscriber counts downward.
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