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Technology Stocks : C-Cube -- Ignore unavailable to you. Want to Upgrade?

To: Peter V who wrote (48550)	2/5/2000 10:47:00 AM
From: John Rieman	Respond to of 50808

Sounds like a bad commercial Peter. Time-Warner starts spending..................................... broadcastingcable.com Date Posted: 2/4/2000 Levin has set-top fever Time Warner chief now sees huge, looming consumer demand for digital By John M. Higgins After seeking for the past two years to constrain capital spending, Time Warner Cable plans to sharply boost its budget in order to rush more digital set-top converters and cable modems into subscribers' homes. Time Warner Inc. Chairman Gerald Levin said last week that he is so hot on the prospects for digital cable that he is allowing the cable unit to boost its 2000 capital spending budget by 25% (that's $400 million) to $2 billion, in order to speed deployment of the digital set-tops. The units will allow subscribers to tap fat packages of conventional cable channels, plus allow some interactive services basic internet connectivity and video on demand. The initial units being deployed are Scientific-Atlanta Inc. Explorer 2000 models, relatively limited, first-generation digital converters. The next generation of digital set-tops will have greater memory and processing power plus a high-speed cable modem that allows for more-sophisticated interactive and Web services through the TV. Levin said that strong consumer acceptance of digital cable has prompted him to dramatically revise his expectations for digital cable. Two years ago, Time Warner executives expected digital cable to settle in at about the same penetration rate as pay TV--around 30% of basic homes. Now, Levin projects that, after several years, digital penetration will hit 70%. "Digital is the most exciting thing I have seen in cable in a long time," he said. About 430,000 of Time Warner's 11.5 million basic subscribers ordered digital packages by the end of 1999. Levin expects to more than quadruple his digital customer base to 2 million by the end of 2000. Because long-term investments in cable hardware are accounted for as capital spending rather than an operating expense that penalizes an MSO's operating results, Time Warner executives say it will not be sacrificing short-term profits. They predict that the cable division's cash flow will grow 13%-15% for 2000, up from 11% in 1999, though less than the 15%-16% posted in 1998. The executives' remarks came in a briefing following the release of the company's fourth-quarter financial results, in which the company posted $2.4 billion in cash flow, a strong 15%, adjusting for one-time gains, and an 11% gain in revenue to $11.7 billion. The move was planned before Time Warner's agreement to sell out to America Online Inc. for $181 billion, but dovetails with the Internet service giant's plans. Advanced digital set-tops will permit high-speed Web surfing through the TV set as well as through the PC. AOL Chairman Steve Case, who is also slated to be chairman of the combined companies, wants TV and computer junkies to have as much connectivity as soon as possible to enable AOL Time Warner to offer a richer package of interactive and video products. Some Wall Street executives are critical of cable operators' new product rollouts, believing that operators are losing business to DBS companies selling video services and telcos deploying high-speed digital subscriber lines. But Levin contended that the heavier spending is fueled not by fear of competition but by the financial opportunities. "It's not because we're in a footrace," he argued. "It's because I think demand is there both on the digital side and the data side." The move is a departure from Time Warner's recent plans. To calm anxieties that the company was spending to heavily on its cable systems, Levin once promised that he would hold capital spending flat while trying to keep cash flow growing. While that would not pare debt, it would trim the company's debt-to-cash ratio--what analysts consider a company's leverage--from almost six times annual cash flow to a far more comfortable level of less than four times cash flow. But Levin senses that investors will be more forgiving today if they see money put directly into expanding the customer base, as long as the strategy is not a threat to cash flow. And with the merger, Time Warner's debt is less of an issue than its growth. Half of the new $2 billion in capital spending will go for system upgrades that have long been on the books. That would allow the systems to carry a full range of digital video, data and ultimately telephone services. But the other half is variable capital, spent on modems or digital set-tops only when there is an actual customer immediately generating additional revenue. Digital services are generating an extra $15 in revenue per subscriber monthly and about $9 in cash flow. That quickly covers the marketing and labor cost of grabbing a new customer--costs that do depress cash flow. While he wouldn't detail those costs, Levin did say a digital subscriber is profitable in its first year and should generate a fat cash-flow margin approaching 50% in subsequent years. As for covering the $325 capital investment in the converter itself, Time Warner executives bragged that they're expecting a 30% after-tax return on investment over several years. On the modem side, average revenues are running about $36 monthly, but costs are heavier. Levin would not say how much penetration or profitability he expects on the step up in the data sales this year.