September 24, 2012
U.S. Telecommunications, Cable & Satellite Broadcasting
CITI State of Telecom 2012 New York, New York
Craig Moffett • Senior Analyst • +1-212-969-6758 • craig.moffett@bernstein.com
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
Subscriber and ARPU Growth Combine to Yield a Given Revenue Growth Rate
Decomposition of Revenue Growth: Broadband, Pay TV and Post-Paid Wireless, 2008 to 2011 8% 7% Video 6% '10, 5.3%
'08, 7.4% Combination of subscriber and ARPU growth that y ields a giv en rev enue growth rate
ARPU Growth
5% 4% '11, 4.8% '09, 5.1% 3%
'11, 4.5%
2%
'11, 11.1%
'10, 9.7%
Source: Company reports, Bernstein estimates and analysis
Broadband
'10, 3.3%
1%
Post-paid wireless
0%
'09, 8.0%
'09, 2.4%
14%
'08, 4.8%
'08, 10.8%
-1%
14%
13%
12%
11%
10%
12%
10%
8%
9%
8%
7%
5%
4%
6%
6%
4%
2%
3%
1%
0%
2%
0%
-2%
Subscriber Growth
Source: Company reports, Bernstein estimates and analysis
2
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
ROIC by Sector
50% DirecTV 45% 40% 35%
15%
Verizon AT&T
10% AT&T 5% Verizon Wireline
T-Mobile
Sprint
Range = 13.2%
20%
MetroPCS US Cellular Leap
National Wireless
Range = 5.9%
Comcast Cablevision Time Warner Cable Charter
25%
0%
Range = 4.2%
30%
Range =
ROIC Ex-Unusuals, Goodwill and ARILI
Dish Network
Range = 4.8%
ROIC excluding Unusuals, Goodwill and ARILI Dispersions by Sector, 2011
Regional Wireless
Cable
Satellite
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
3
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
ROIC is now much better (than historical) for cable, and worse for telecom
ROIC Excluding Unusuals, Goodwill and ARILI Minus WACC, 2011 Satellite
Cable
45%
40.1%
40%
36.2%
35% 30%
25.9%
25%
20%
15.6%
15% 10% 5%
3.7%
17.5% 13.9%
12.8%
1.2%
0% -0.4%
-5% -6.1%
-10%
-0.5% -6.1%
-7.4%
Dish Network
DirecTV
Time Warner Cable
Comcast ex-NBCU
Comcast
Charter
Cablevision
US Cellular
MetroPCS
Leap
T-Mobile
Sprint
Verizon
-15% AT&T
ROIC Ex-Unusuals, Goodwill, and ARILI Minus WACC
Telecommunications
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
4
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Share of Broadband Industry
47.4%
Q4 2 007
5
44.1%
Q4 2 009
27.4% 21.0%
Q1 2 012
79.0%
72.6%
70.5%
65.2%
63.2%
67.4%
69.2%
67.8%
69.6%
63.1%
55.9%
53.2%
100%
Q2 2 012
29.5%
Q4 2 011
34.8%
32.6%
Q1 2 011
Q3 2 011
30.8%
Q4 2 010
36.8%
32.2%
Q3 2 010
Q2 2 011
30.4%
Q2 2 010
36.9%
46.8%
Q3 2 009
53.5%
60.3%
55.7%
56.4%
52.4%
TTM TelCo Share of Broadband Net Adds TelCo Share of Broadband Net Adds
Q1 2 010
46.5%
Q2 2 009
39.7%
44.3%
Q4 2 008 Q1 2 009
43.6%
47.6%
49.0%
52.6%
51.9%
80%
Q3 2 008
Q2 2 008
51.0%
48.1%
Q3 2 007
53.2%
52.0%
50.4%
50.2%
52.0%
50.3%
120%
Q1 2 008
48.0% 46.8%
Q2 2 007
49.6%
Q4 2 006 Q1 2 007
49.8%
-‐20% Q3 2 006
0% 48.0%
20%
Q2 2 006
40% 49.7%
60%
Q1 2 006
Cable’s broadband superiority becomes increasingly incontrovertible
Broadband Flow Share: Cable versus Telecom
TTM Cable Share of Broadband Net Adds Cable Share of Broadband Net Adds
Source: Company Reports, Bernstein Estimates and Analysis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
6 Q2 2 012
Q1 2 012
Q4 2 011
Q3 2 011
Q2 2 011
Q1 2 011
Q4 2 010
Q3 2 010
(11)
(292)
(232)
(314)
(234)
(204)
(65)
(136)
(256)
(111)
(229)
(199)
(404)
-‐5%
Q2 2 010
Q1 2 010
Q4 2 009
Q3 2 009
Q2 2 009
(12)
(71)
151
2%
Q1 2 009
Q4 2 008
Q3 2 008
-‐3%
(186)
-‐2%
Q2 2 008
Q1 2 008
470
3%
Q4 2 007
Q3 2 007
686
695
552
5%
Q2 2 007
Q1 2 007
Q4 2 006
6%
Q3 2 006
8%
1,143
1,044
1,083
979
9% Subscriber G rowth Rate
1,250
1,000 750
500
250
0% 0
Subscribers G ains ( Losses) ( 000s)
1,411
11%
Q2 2 006
Q1 2 006
Subscriber G rowth Rate
DSL is Now in Decline
DSL Net Additions (Losses)
Susbcriber G ains (Losses) 1,750
1,500
(250)
(500)
(750)
Source: Bernstein Analy sis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
The Reversal of DSL has Exacerbated the Rate of Decline for the Wireline TelCo
Composite TelCo Broadband Net Additions (Fiber plus DSL) 5,000
Subscriber G ains (Losses) (000s)
4,000
3,945
3,000 2,307 1,909
2,000
1,072
1,012
1,000
450
201
-‐ (321) (1,000)
2015E
2014E
2013E
2012E
2011
2010
2009
2008
2007
(692)
Source: Bernstein Estimates and Analy sis
7
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
8
24.8%
23.9%
22.6% 23.1%
2Q 2012
23.8% 1Q 2012
4Q 2011
21.4%
23.8%
2Q 2011
3Q 2011
23.6%
18%
1Q 2011
Verizon
23.5%
22%
4Q 2010
22.7%
24%
3Q 2010
2Q 2010
1Q 2010
25.5%
26.2%
26.9%
24.8%
26%
4Q 2009
AT &T
3Q 2009
2Q 2009
20%
26.2%
28%
1Q 2009
28.0%
28.1%
27.8%
35.1%
35.7%
33.9%
33.5%
33.4%
33.4%
32.1%
33.1%
33.4%
33.4%
33.9%
32.6%
31.6%
31.6%
32.5%
32.3%
31.0%
35.9%
34.9%
33.7%
31.5%
29.4%
34%
4Q 2008
3Q 2008
2Q 2008
1Q 2008
4Q 2007
28.2%
27.7%
32%
3Q 2007
30%
35.3%
36%
28.0%
38%
2Q 2007
1Q 2007
Wireline EBITDA Margin
As Volumes Fall, Wireline Margins Are Deteriorating
Verizon and AT&T: Wireline Margins
Source: Bernstein Estimates and Analy sis
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
FiOS: Nearing End of Growth Cycle
FiOS: Projected Video Subscribers and Subscriber Growth 4,500
2,000
*estimated based on market penetration curv e estimated f rom 1Q 2006-2Q 2012 results; assumes 18M home passings by end of 2015 and that marketed v ideo homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analy sis
0.3%
1.5%
4.6%
50%
2015E
2014E
2013E
0%
2006
2015E
2014E
2013E
2012E
2011
2010
2009
-
2008
-
100%
8.7%
1,000 500
2007
150%
1,500
100
2006
200%
2012E
200
2,500
14.1%
300
250%
2011
400
300%
3,000
27.9%
500
3,500
2010
600
350%
49.2%
700
4,000
2009
FiOS Video Subscribers* (000s)
800
400%
Estimated* Y oY % Subscriber Growth
103.4%
Estimated*
Actual
2008
900
FiOS Video Net Additions* (000s)
5,000
Actual
355.6%
1,000
2007
FiOS: Projected Video Net Additions
*estimated based on market penetration curv e estimated f rom 1Q 2006-2Q 20012results; assumes 18M home passings by end of 2015 and that marketed v ideo homes/passed homes = 90% by end of 2015 Source: Company Reports, Bernstein Estimates and Analy sis
9
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
U-Verse: Nearing End of Growth Cycle
300% 250%
4,000 200%
3,000 150%
1,000
100% 7.3%
2,000
*estimated based on market penetration curv e estimated f rom 1Q 2007-2Q 2012 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analy sis
50%
2015E
2014E
2013E
2012E
2011
2010
2009
0%
2007
2015E
2014E
2013E
2012E
2011
2010
2009
2008
2007
-
5,000
11.0%
200
350%
14.4%
400
6,000
20.8%
600
400%
Estimated* Y oY % Subscriber Growth
27.2%
U-Verse Video Subscribers* (000s)
U-Verse Video Net Additions* (000s)
800
Actual
44.6%
Estimated* 1,000
7,000
97.5%
Actual
2008
1,200
U-Verse: Projected Video Subscribers and Subscriber Growth
352.4%
U-Verse: Projected Video Net Additions
*estimated based on market penetration curv e estimated f rom 1Q 2007-2Q 2012 results; assumes 33M home passings by end of 2015 and that marketed homes/passed homes = 85% by end of 2014 Source: Company Reports, Bernstein Estimates and Analy sis
10
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
A Cable Company Is an Infrastructure Provider, not a Media Company
The Transport Function
$90
$90
$80
$80
$70
$70 Dollars per Month
Dollars per Month
Status Quo
$60 $50 $50
$40
$80
$60
$50 $50 $40
$30
$30
$50 $20
$20
$30
$30
$10
$10
$0
$0 Content
Margin
Content
ARPU
Margin
ARPU
Transport
Source: Bernstein analysis
Source: Bernstein analysis
11
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Projected Industry ROICs
Industry ROICs Excluding Unusuals, Goodwill and ARILI, 2009 to 2016E 50% Industry ROIC Excluding Unusuals, Goodwill, and ARILI
45.1%
45.9% 43.0%
45%
38.9%
Wireline
40%
37.5%
National wireless 35%
32.7%
36.6%
36.1%
Regional wireless Cable
33.8%
Satellite
30%
31.7% 29.2%
25%
26.2%
20%
23.3%
23.4%
10.3%
10.4%
5.0%
4.9%
24.3%
20.0% 15% 9.4% 10%
6.5%
4.6%
2009
2010
0%
12.0%
12.2%
12.2%
4.8%
5.1%
5.4%
5.7%
4.3%
4.4%
4.6%
4.8%
4.8%
2012E
2013E
2014E
2015E
2016E
4.6%
5% 4.8%
11.2%
10.6%
4.8%
2011
Source: Capital IQ, corporate reports and Bernstein estimates and analysis
12
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix
13
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Valuation Methodology We value AT&T and Verizon on a combination of P/FE and a sum of the parts analysis. Assigned multiples are based on historical performance, colored by the company's current allocation of capital. We value AT&T on a combination of a target P/FE multiple of 13.0x applied to our estimated forward earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.6x after adjusting for postretirement liabilities. We add the probability-weighted expected value associated with the proposed acquisition of T-Mobile USA. We value Verizon on a combination of a target P/FE multiple of 13.0x applied to our estimated earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended EV/EBITDA multiple of 5.7x after adjusting for postretirement liabilities. We value the DBS sector on the basis of Steady State Cash Flow (SSCF) multiples, adjusted for market value estimates for nonDBS assets. SSCF multiples have historically clustered around 9-11x trailing SSCF for DirecTV and Dish Network, with higher multiples reflecting higher growth expectations, and lower multiples reflecting lower growth expectations. We currently apply a 7.5x SSCF multiple to our forecast forward 12 month SSCF for DirecTV and a 6.0x multiple for Dish Network, reflecting a 12 month look forward as the basis of our 12 month target price, and lower-than-historical SSCF multiples to reflect the sector's and the companies' diminished longer term growth prospects. We value the company's Latin American assets using a forward SSCF multiple of 6.5x for PanAmericana and Sky Brazil, and a 10.0x trailing EBITDA multiple for Sky Mexico. We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 6.25x for the core cable distribution business, 8.0x forward EV/ EBITDA for the cable networks businesses of Comcast and NBCU, and 6.0x forward EV/EBITDA for NBCU's broadcast business. We value other consolidated and non-consolidated operations and nonpublic equity investments on various bases as appropriate. Publicly traded investments are carried at current market value. In order to derive our price target for Time Warner Cable, we use a target multiple of 6.5x forward 12 month forecast EBITDA, and add back the NPV of Time Warner Cable's deferred tax asset. We estimate that Time Warner Cable will realize approximately $330 million of tax savings per year for fifteen consecutive years from the 2006 acquisition of Adelphia as a result of its step-up in basis. When calculating the net present value of these tax shields, we apply an 7.50% discount rate, which corresponds to Time Warner Cable's estimated weighted average cost of capital. We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 6.5x for the core cable business. We value other assets and liabilities on various bases as appropriate.
14
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Risks The risks to our target price for AT&T include: Failure to gain regulatory approval to close the proposed T-Mobile USA transaction, adverse financial or other consequences associated with any conditions required to garner regulatory approval, or the inability to wring the expected synergies out of a combined entity. A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower growth, and would likely be met with severe multiple contraction, in our view. Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment. Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider) would yield lower ROIC and consequent multiple contraction. Overpayment in an acquisition, which could be a variety of potential targets. Our target price for Verizon is below the current trading range. Upside risks to our target price include: Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current dividend yields more attractive relative to investment alternatives. Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal wireless market penetration than we forecast. Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the Enterprise segment. Subscriber gains as a result of fiber expansion (FTTX) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion. Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins. A faster-than-expected recovery in Enterprise revenues and margins. Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares.
15
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Risks, continued Upside risks to our target price for Dish Network include: Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost. A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU. An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and would raise valuation multiples for Dish Network. Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster. Downside risks to our target price for Dish Network include: Slower-than-expected subscriber growth would likely yield multiple contraction. A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU. A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in these expectations could result in multiple contractions. Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may also yield negative returns. An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material. Risks to our price targets for the Cable operators include the risk that the competitive pricing environment will be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. New pathways to the home for video or other entertainment could also reduce the value of cable's video distribution bottleneck. Deep fiber deployments by the RBOCs will impact cable subscribers and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. Comcast Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Time Warner Cable Video pricing could come under pressure as growth for the satellite operators and TelCos slows. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation. Cablevision Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured. Cablevision faces a very substantial overlap with Verizon's FiOS that could result in greater share loss or lower prices than anticipated. The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. Longer term, cable's advantaged position in broadband could result in regulation.
16
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix
17
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix - Valuation Methodology Verizon We value Verizon using a combination of P/FE and a sum of the parts analysis. Assigned multiples are based on historical performance, colored by the company's current allocation of capital. We use a target P/FE multiple of 13.0x applied to our estimated forward earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended forward EV/EBITDA multiple of 5.7x after adjusting for postretirement liabilities. AT&T Inc We value AT&T using a combination of P/FE and a sum of the parts analysis. Assigned multiples are based on historical performance, colored by the company's current allocation of capital. We use a target P/FE multiple of 13.0x applied to our estimated forward earnings, as adjusted, and a sum of the parts analysis which yields a warranted blended forward EV/EBITDA multiple of 5.7x after adjusting for postretirement liabilities. DISH Network Corp We value Dish Network using a Steady State Cash Flow (SSCF) multiple, adjusted for market value estimates for non-DBS assets. We currently apply a 6.0x SSCF multiple to our forecast forward 12 month SSCF for Dish Network, and value its spectrum and Blockbuster assets at adjusted cost. DIRECTV Group Inc We value DirecTV using Steady State Cash Flow (SSCF) multiples, adjusted for market value estimates for non-DBS assets. We apply a 6.5x SSCF multiple to our forecast forward 12 month SSCF for DirecTV US. We value the company's Latin American assets using a forward SSCF multiple of 12.0x for PanAmericana and Sky Brazil, and a 12.0x forward EBITDA multiple for Sky Mexico. Comcast Corp We value Comcast on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 7.0x for the core cable business, 8.0x for NBCU's cable networks segment, 6.0x for NBCU's broadcast segment, 6.0x for NBCU's film segment, and 8.0x for NBCU's parks segment. We value other assets and liabilities on various bases as appropriate. Cablevision Systems Corp We value Cablevision on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 6.0x for the core cable business. We value other assets and liabilities, including the company's significant tax assets, on various bases as appropriate. Time Warner Cable Inc We value Time Warner Cable on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 7.0x for the core cable business. We value other assets and liabilities, including the company's significant tax assets, on various bases as appropriate. Charter Communications Inc We value Charter on a sum-of-the-parts basis. Our target is based on a forward 12 month EV/forecast EBITDA multiple of 7.5x for the core cable business. We value other assets and liabilities, including the company's significant tax assets and the liability associated with the meaningful number of options and warrants outstanding, on various bases as appropriate.
18
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix - Risks Verizon Upside risks to our Verizon target price include: - Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current dividend yields more attractive relative to investment alternatives. - Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for Verizon, or higher terminal market penetration than we forecast. - Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the Enterprise segment. - Subscriber gains as a result of fiber expansion (FTTH) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion. - Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins. - A faster-than-expected recovery in Enterprise revenues and margins. - Acquisition of Vodafone's 45% stake in Verizon Wireless at an attractive price would be accretive to value and would remove a significant overhang from the shares. Downside risks to our Verizon target price include: - A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower growth, and would likely be met with severe multiple contraction, in our view. - Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment. - Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider) would yield lower ROIC and consequent multiple contraction. - Investors could view stocks with high dividend yields, like Verizon, as being less attractive if interest rates rise. - Overpayment in an acquisition, which could be a variety of potential targets. AT&T Inc Downside risks to our AT&T target price include: - A steeper, or more sudden, deceleration in wireless subscriber growth – as a consequence of wireless saturation or economic weakness – would lead to sharply slower growth, and would likely be met with severe multiple contraction, in our view. - Faster-than-anticipated penetration of the Small and Medium Business market by the MSOs would undermine revenue and EBITDA recovery in the Enterprise segment. - Additional spending on fiber expansion (FTTX) projects, or acquisitions targeting the Consumer Wireline segment (including purchasing a Satellite Pay TV provider) would yield lower ROIC and consequent multiple contraction. - Investors could view stocks with high dividend yields, like AT&T, as being less attractive if interest rates rise. - Overpayment in an acquisition, which could be a variety of potential targets. Upside risks to our AT&T target price include: - Lower-than-expected inflationary pressures in the macro-economy, which could result in generally lower interest rate expectations, and consequently, make current dividend yields more attractive relative to investment alternatives. 19
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix - Risks - Faster growth in wireless subscribers than we anticipate, which could be a result of stronger economic growth, increased market share for AT&T, or higher terminal market penetration than we forecast. - Slower-than-anticipated penetration of the Small and Medium Business market by the MSOs would help to preserve revenue and foster an EBITDA recovery in the Enterprise segment. - Subscriber gains as a result of fiber expansion (FTTN) projects could be greater than we forecast, yielding a higher ROIC and possible multiple expansion. - Access line and DSL losses in the TelCo segment could be less severe than we forecast, leading to better than expected revenues and margins. - A faster-than-expected recovery in Enterprise revenues and margins. DISH Network Corp Upside risks to our Dish Network target price include: - Faster-than-expected subscriber growth would likely yield multiple expansion, almost irrespective of economic cost. - A stronger-than-expected economic recovery could result in renewed demand for premium services, providing upside to ARPU. - An acquisition of DirecTV by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived "scarcity value," and would raise valuation multiples for Dish Network. - Potential value creation resulting from Dish's recently acquired assets, namely their spectrum holdings and Blockbuster. Downside risks to our Dish Network target price include: - Slower-than-expected subscriber growth would likely yield multiple contraction. - A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU. - A premium of some amount is likely baked into Dish's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in these expectations could result in multiple contraction. - Attempts to build a terrestrial network based on the company's spectrum holdings would likely be a value destructive activity, and attempts to turnaround Blockbuster may also yield negative returns. - An unfavorable resolution to Dish's litigation with AMC Networks and Cablevision with regards to VOOM could be material. DIRECTV Group Inc Downside risks to our DirecTV target price include: - Slower-than-expected subscriber growth would likely yield multiple contraction. - A weaker-than-expected economic recovery could result in reduced demand for premium services, providing downside to ARPU. - A premium of some amount is likely baked into DirecTV's share price based on the widely-held expectation that an acquisition by AT&T or Verizon is likely. A change in these expectations could result in multiple contraction. - DirecTV's Latin American businesses are subject to significant macroeconomic risks. Upside risks to our DirecTV target price include: - Faster-than-expected subscriber growth would likely yield multiple expansion. - A stronger-than-expected economic recovery could result in increased demand for premium services, providing upside to ARPU. - An acquisition of Dish Network by AT&T or Verizon, which has been the subject of speculation for years, if it were to occur, would likely create perceived 20
U.S. Telecommunications, U.S. Cable & Satellite Broadcasting
Disclosure Appendix - Risks - "scarcity value," and would raise valuation multiples for DirecTV. - DirecTV's Latin American businesses could outperform expectations. Comcast Corp Downside risks to our Comcast target price include: - The competitive pricing environment could be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. - New pathways to the home could reduce the value of Comcast's distribution bottleneck. Additional deep fiber deployments by the RBOCs could impact subscriber and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. - Video pricing could come under pressure as growth for the satellite operators and TelCos slows. - The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. - Longer term, cable's advantaged position in broadband could result in regulation. - NBCU's cable networks may not be able to raise prices at rates in-line with historical averages. Cablevision Systems Corp Downside risks to our Cablevision target price include: - The competitive pricing environment could be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. - New pathways to the home could reduce the value of Cablevision's distribution bottleneck. Additional deep fiber deployments by the RBOCs could impact subscriber and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. - Video pricing could come under pressure as growth for the satellite operators and TelCos slows. - The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. - Longer term, cable's advantaged position in broadband could result in regulation. - Cablevision has a history of erratic corporate governance. A return of cash to shareholders cannot be assured. Upside risks to our Cablevision target price include: - Market share gains by Verizon's FiOS within Cablevision's service areas may be less than expected, or competitive intensity may lessen, resulting in improved subscriber and ARPU performance for Cablevision. - Cablevision carries significant leverage, so modest improvements in underlying financial performance or the enterprise value multiple applied by investors could yield outsized increases in the share price. - Management could close the performance gap between the acquired Bresnan properties and the core New York Metro properties. - An acquisition of the company by another cable operator, or an MBO by the controlling Dolan family. Time Warner Cable Inc Downside risks to our Time Warner Cable target price include: - The competitive pricing environment could be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of 21
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Disclosure Appendix - Risks - evidence of price competition, may continue to weigh on the stocks for some time. - New pathways to the home could reduce the value of Time Warner Cable's distribution bottleneck. Additional deep fiber deployments by the RBOCs could impact subscriber and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. - Video pricing could come under pressure as growth for the satellite operators and TelCos slows. - The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. - Longer term, cable's advantaged position in broadband could result in regulation. Charter Communications Inc Downside risks to our Charter target price include: - The competitive pricing environment could be more aggressive than we expect. Notwithstanding our analysis of rational pricing strategies, players may adopt irrational pricing behavior. Alternatively, mere expectations of a more challenging pricing environment, even in the absence of evidence of price competition, may continue to weigh on the stocks for some time. - New pathways to the home could reduce the value of Charter's distribution bottleneck. Additional deep fiber deployments by the RBOCs could impact subscriber and revenue growth rates, and could occur more quickly, or have a more significant pricing impact, than we have forecast. - Video pricing could come under pressure as growth for the satellite operators and TelCos slows. - The fear of disintermediation (video over the internet) may continue to depress terminal values indefinitely. - Longer term, cable's advantaged position in broadband could result in regulation. - Tax-related assets comprise a significant portion of Charter's value, and changes in tax rates or the inability to utilize these assets could impair their value.
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Disclosure Appendix SRO REQUIRED DISCLOSURES References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively. Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead. Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. As of 09/10/2012, Bernstein's ratings were distributed as follows: Outperform - 42.1% (0.5% banking clients) ; Market-Perform - 49.6% (0.4% banking clients); Underperform - 8.3% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies TWC / Time Warner Cable Inc. Bernstein currently makes a market in the following companies DISH / DISH Network Corp, DTV / DIRECTV Group Inc, CMCSA / Comcast Corp. This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.
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12-Month Rating History as of 09/11/2012 Ticker Rating Changes CHTR CMCSA CVC DISH DTV T TWC VZ
O (IC) 06/07/12 O (RC) 12/14/10 M (RC) 05/10/10 M (RC) 10/10/08 O (RC) 01/11/12 M (RC) 10/25/11 O (RC) 11/02/10 U (RC) 10/12/10
M (RC) 04/24/08 O (RC) 03/24/11
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC -‐ Initiated Coverage, DC -‐ Dropped Coverage, RC -‐ Rating Change
OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority.
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is registered under business registration number 53193989L. To our readers in Australia: Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and Sanford C. Bernstein (Hong Kong) Limited are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients: providing financial product advice; dealing in a financial product; making a market for a financial product; and providing a custodial or depository service.
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Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved. This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete.
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We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.
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