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TCI Tops Wall Street Estimates

TCI Group posted third-quarter results that surpassed Wall Street estimates Friday morning, but those numbers also reflected higher-than-expected costs related to the company's rollouts of digital cable, high-speed Internet and cable telephony services.

The nation's largest cable operator (TCOMA) said revenue fell 9 percent to $1.48 billion from $1.6 billion in the same period a year ago, while income from operations dropped 27 percent to $225 million from $309 million.

Cash flow from operations, a key indicator for media companies, dropped 15 percent to $604 million. But on a pro forma basis - excluding myriad divestitures of cable systems, swaps and certain expenses - cash flow rose 4 percent.

David Goldsmith, an analyst at Buckingham Research, said the pro forma figure was in line with most forecasts. "These were the numbers the company had been guiding us toward for months," he said.

Net income amounted to $52 million, or 8 cents a share, compared with a loss of $214 million, or 34 cents, in the year-ago period. Analysts surveyed by First Call were looking for a loss of 12 cents.

The shares rose 13/16 to 40 in recent trading.

But TCI President Leo Hindery was apologetic during an hour-long conference call with analysts.

He said he underestimated the "distraction" of AT&T's pending $48 billion acquisition of the company and the "one-time upfront costs" associated with the acquisition of digital customers.

AT&T has mandated higher capital expenditures by TCI, hoping to pave the way for smooth integration of the companies' infrastructures once the merger goes through.

Hindery also said he overestimated "the organization's ability to react to the low rate increases" he has imposed on TCI, even in the face of skyrocketing programming costs.

ING Barings Furman Selz analyst Fred Moran said TCI's decision to raise cable rates by just 3.9 percent in 1998 - even as the rest of the industry proves it can hike them by well over 6 percent - was intended to appease federal officials who worry about rising subscriber fees.

"Having a modest increase makes them look like a good corporate citizen," Moran said, thereby making the Federal Communications Commission and the Justice Department less likely to impede the TCI-AT&T deal. The transaction is still expected to close "sometime in the first quarter" of 1999, Hindery said.

Hindery also pointed out that marketing costs have "doubled" from the September 1997 period.

Expenses related to cable operations rose to $830 million from $774 million. Separately, launch and development costs, including digital cable, trial telephony rollouts and the TCI@Home Internet service, increased to $30 million from $9 million.

The company had about 1 million digital customers at the beginning of November, up from about 320,000 at the end of July. Much of that increase came during the third quarter, TCI said. Goldsmith called the digtal ramp-up "spectacular."

Excluding the impact of various cable partnership transactions, basic cable subscriptions grew about 2 percent from year-earlier totals, in line with analysts' expectations. TCI said it had about 12.5 million basic cable customers at the end of the September period.

Hindery said his fears about the cannibalization of pay-per-view revenue by digital cable - expressed during the June-quarter conference call - were unfounded.

Ted Henderson, an analyst at Denver-based Janco Partners, told that TCI shares are all the more attractive because they're "trading at a discount" to their post-merger value.

Observers say AT&T's financial clout would allow TCI to accelerate its upgrade program, which would allow most of its cable systems to carry as many as 440 channels with digital compression. The company could then get maximum leverage from the cable assets owned in whole or in part by its programming arm, Liberty Media (LBTYA).

Those assets include Encore Media Group, along with interests in Time Warner, Discovery Communications, Fox Sports Net, QVC, USA Networks, United Video Satellite Group, the newly private BET Holdings, Court TV, Odyssey Channel and E! Entertainment Television.

Written By David B. Wilkerson

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