January 14, 2015 Cablevision Systems Corporation. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 02/10/2014 Current Price (01/13/15) $20.00 Target Price $21.00 SUMMARY (CVC-NYSE) Cablevision reported strong financial results for the third quarter of 2014 with both the top and the bottom line surpassing the respective Zacks Consensus Estimate. While ARPU increased significantly, the launch of a high-definition voice service and the Optimum TV app will help check subscriber churn. Increased Wi-Fi deployment, higher TV to GO network rollout and uninterrupted dividend payments will also spur growth, moving ahead. On the other hand, Cablevision continues to lose video subscribers. We believe that stiff competition from satellite TV and telecom operators coupled with mounting programming expenses will also impede growth for the company. Cablevision is fairly valued at current levels. We thus maintain our long-term Neutral recommendation on the company. 52-Week High $21.32 52-Week Low $15.85 One-Year Return (%) 22.69 Beta 1.05 Average Daily Volume (sh) 2,829,049 Shares Outstanding (mil) 291 Market Capitalization ($mil) $5,825 Short Interest Ratio (days) 19.08 Institutional Ownership (%) 83 Insider Ownership (%) 7 Annual Cash Dividend $0.60 Dividend Yield (%) 3.00 5-Yr. Historical Growth Rates Sales (%) -4.6 Earnings Per Share (%) -23.6 Dividend (%) 5.5 using TTM EPS 31.3 using 2015 Estimate 24.1 using 2016 Estimate 18.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock N/A Industry Cable Tv Zacks Industry Rank * 194 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,524 A 1,570 A 1,568 A 1,583 A 6,245 A 2014 1,576 A 1,628 A 1,626 A 1,626 E 6,456 E 2015 1,599 E 1,632 E 1,634 E 1,645 E 6,510 E 2016 6,700 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 -$0.06 A $0.09 A $0.26 A $0.08 A $0.37 A 2014 $0.05 A $0.25 A $0.26 A $0.18 E $0.74 E 2015 $0.19 E $0.24 E $0.23 E $0.17 E $0.83 E 2016 $1.06 E Projected EPS Growth - Next 5 Years % 2 2009 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1985, Cablevision Systems Corporation is a leading cable MSO (multi service operator) in the U.S. and is headquartered in Bethpage, New York. Cablevision offers triple-play cable video programming, high-speed broadband (Internet) and voice (telephony) services to both residential and commercial customers under the Optimum brand name. The company also provides Ethernet-based data, Internet, voice, and video transport and managed services to health care, financial, education, legal and professional service industries, as well as the public sector and telecommunication providers under the Lightpath brand name. Additionally, Cablevision has business interests in newspaper and magazine publishing, online websites and regional news programming services. Cablevision Systems operates through three reportable segments such as: Cable: This segment primarily consists of the company s video systems, high-speed data and voice over IP (VoIP) operations. The segment accounted for 89.7% of the total revenue in the third quarter of 2014. Lightpath: This segment provides Ethernet-based data, Internet, voice and video transport and managed services to business enterprises and accounted for nearly 5.4% of the total revenue in the third quarter of 2014. Other: Other revenues consist of Newsday daily newspaper, amnew York, Star Community Publishing Group, and online websites including newsday.com and exploreli.com, News 12 Networks regional news programming service, Cablevision Media Sales Corporation and certain other businesses. The segment generated the remaining 5.4% of the total revenue in the first quarter of 2014. REASONS TO BUY Cablevision has undertaken several initiatives to enhance the quality of its video offerings. During the second quarter of 2014, the company increased its TV to GO services to more than 125 networks. Management has revamped the company s Spanish language programming and sports and entertainment packages. In Apr 2014, Cablevision strengthened its Multi-Room DVR service which enables customers to record up to 15 programs simultaneously while the launch of Optimum TV app will allow users to access Optimum content from anywhere. The company has witnessed revenue growth across all its segments. In the third quarter of 2014, quarterly average monthly cable revenue per customer stood at $154.50 compared with $146.11 in the year-ago quarter. Meanwhile, average monthly cable revenue per video customer was $177.17 against $164.61 in the prior-year quarter. Cablevision is consistently focusing on its WiFi network, referred to as the Optimum WiFi Network, for future growth. The company has decided to speed up the expansion of its WiFi network in the New York metropolitan area and intends to launch innovative WiFi products to gain market traction. The company s customers now have access to more than 1 million WiFi access points. At least half of all Optimum Online customers have access to Optimum WiFi accounts. The company has also decided to deploy WiFi-equipped smartrouters in the premises of broadband customer s. The deployment of smartrouters will convert each customer s residence into a public WiFi hotspot, which other broadband Internet customers can utilize. Moreover, the company continues to boost shareholders wealth by paying regular dividends and continuously buying back shares. Presently, Cablevision has nearly $455 million shares under its stock repurchase authorization. Equity Research CVC Page 2
Cablevision was the first landline telephone company to introduce high-definition voice service Litchfield in the second quarter of 2014. The service had been initially launched in the Connecticut region. The company is also offering its innovative 100 Gbps Optical Transport service. This product is currently available throughout the total footprint of Lightpath s operations. Nowadays, larger business enterprises are trying to expand their 10 Gbps architecture. Cablevision intends to capitalize on this opportunity with 100 Gbps offerings. The business enterprise segment has become a significant growth opportunity for the cable TV industry. Considerable improvement in business data and video traffic is expected to act as a growth catalyst for the industry. We believe Cablevision can also gain significantly from this opportunity. REASONS TO SELL In the reported quarter, the company lost 56,000 video subscribers, 23,000 high-speed data subscribers and 33,000 voice subscribers. Cablevision is persistently losing video customers despite the implementation of several growth-oriented strategies. Customer penetration rate for video, highspeed data and voice has also declined on an annual basis. The multi-channel video market in the U.S. is almost saturated. Roughly 87% of the total 114 million TV households in the U.S. are multi-channel TV subscribers. Furthermore, gaining customers from competitors is a difficult task as most pay-tv operators offer innovative packages. Additionally, penetration of digital video customers is almost nearing saturation in the U.S. with 98.2% in 2013 as compared to 96.6% in 2012. Moreover, the company exited the second quarter of 2014 with $906.8 million of cash and cash equivalents and $9,875.6 million of debt outstanding. Hence, we believe such low cash balance and a highly leveraged balance sheet may impact the company s future dividend payments and share buyback plans. Online video streaming service providers such as Netflix Inc., Hulu.com, YouTube etc., have become severe threats to cable TV operators. Online videos provide an extremely cheap source of TV programming unless the customer is eager to view real-time programs like sporting events. This business model is gaining momentum, especially in volatile economic conditions. RECENT NEWS Cablevision Beats Q3 Earnings, Revenues on Higher ARPU Cablevision Systems reported strong financial results for the third quarter of 2014 with both the top and the bottom line surpassing the respective Zacks Consensus Estimate. Notably, average revenue per user (ARPU) increased significantly. Quarterly GAAP net income from continuing operations was $71.9 million or 26 cents per share compared with $59.8 million or $0.23 per share in the prior-year quarter. Third-quarter adjusted earnings per share of $0.26 were well above the Zacks Consensus Estimate of $0.16. Total revenue in the third quarter came in at $1,626.2 million, up 3.7% year over year and also ahead of the Zacks Consensus Estimate of $1,610 million. Quarterly operating income was $252.4 million against $225.4 million in the comparable quarter last year. Operating margin was 15.5% compared with 14.4% in the prior-year quarter. Quarterly average monthly cable revenue per customer stood at $154.50 compared with $146.11 in the year-ago quarter. Meanwhile, average monthly cable revenue per video customer was $177.17 against $164.61 in the prior-year quarter. In the first nine months of 2014, Cablevision generated approximately $1,029 million of cash from operations against $813.6 million in the year-ago period. Free cash flow in the reported period was $399.4 million against $77.3 million a year ago. As of Sep 30, 2014, the company had $813.9 million of cash and cash equivalents and $9,718.3 million of debt outstanding. Equity Research CVC Page 3
Segment Wise Revenues The Cable segment s revenues stood at $1,459 million, up 3.7% year over year. Within this segment, Video revenues totaled $800 million, up 0.4% year over year. High-Speed data revenues were $356 million, up 6% year over year. Voice revenues were $233 million, up 11% year over year. Advertising revenues totaled $43 million, up 7.5% year over year. Other revenues were $27 million, up 12.5% year over year. The Lightpath segment s revenues came in at $87.9 million, up 6.3% year over year. Other revenues were $88.6 million, up 1.1% year over year. Subscribers Statistics As of Sep 30, 2014, Cablevision had 2.715 million video subscribers, 2.756 million high-speed data subscribers and 2.240 million voice subscribers. In the reported quarter, the company lost 56,000 video subscribers, 23,000 high-speed data subscribers and 33,000 voice subscribers. VALUATION Cablevision is currently trading at 24.1x our 2015 earnings estimate. This is at a premium to the S&P 500 but at a discount to the industry average. With respect to our 2016 earnings estimate, the stock is trading at 18.9x, again a huge premium to the S&P 500 but a discount to the industry average. We believe that Cablevision is fairly valued at this stage and will not provide above market gain anytime soon. We therefore, assign a Neutral recommendation to the stock with a target price of $21 based on 19.8x our 2015 earnings estimate, approaching the industry average. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low CABLEVISION SYS (CVC) 24.1 18.9 2.0 5.5 31.3 59.8 12.4 Industry Average 37.5 27.6 7.3 9.7 35.2 169.8 16.6 S&P 500 16.2 15.1 10.7 15.9 18.6 19.4 12.0 LIBERTY M INT-B (QVCB) 10.1 29.6 32.3 10.8 ROGERS COMM CLB (RCI) 14.3 13.7-0.5 5.9 14.8 15.4 10.8 SHAW COMMS-CL B (SJR) 16.2 15.9 6.2 7.8 15.6 16.7 11.5 TIVO INC (TIVO) 44.7 25.7 10.0 6.9 41.1 92.2 42.7 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA CABLEVISION SYS (CVC) -1.8 2.9 7.8 Industry Average 4.6 4.6 4.6 17.1 1.7 0.9 4.5 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research CVC Page 4
Earnings Surprise and Estimate Revision History Equity Research CVC Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CVC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1106 companies covered: Outperform - 15.2%, Neutral - 78.7%, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CVC Page 6