Fitch: US pay-TV sector looking strong despite recession

Michelle Clancy ©RapidTVNews | 16-01-2012

Wall Street analysis from Fitch Ratings has found that the U.S. telecom and cable sector's liquidity has remained strong and margins have remained solid in the face of competitive pressures and a rocky economic climate.
Competitive pressures and what Fitch calls a lack of "organic growth opportunities" has mena that pay-TV companies and telcos have not generated significant top-line revenue growth- a fact that we see borne out in ongoing subscriber churn, a lack of new revenue-generating services launches and the over-present fear of cord-cutting as online streamers like Netflix and other over-the-top (OTT) companies.
What HAS benefitted the sector however is industry consolidation and the accompanying reduction in operations overhead by combining the organizations. "Consolidation has resulted in margin improvement via expense synergies offsetting modest top-line growth," Fitch noted.
Fitch expects a modest EBITDA margin improvement in 2012 of 20-25 basis points.
When it comes to spending on network infrastructure, investment on the part of the carriers is expected to continue in order to meet the demand placed on the network by escalating bandwidth consumption. Primarily a function of evermore video usage, mobile TV, TV Everywhere initiatives and IPTV rollouts and expansions, bandwidth usage is in hockey-stick growth mode, meaning that carriers must upgrade their infrastructure and operational software in order to continue to provide a good user experience. It's a competitive imperative, and will be seen primarily on the wireless side of the industry.
"Capital expenditures have normalised from recession lows, and issuers have continued to invest to maintain competitive positions, resulting in steady capital intensity, defined as capital expenditures to revenue, of 14% in the third quarter of 2011," Fitch said in its note. "Fitch expects capital intensity to be stable in 2012. However, wireless capital spending is expected to grow, primarily driven by Sprint Nextel Corp.'s significant network investment and the majority of operators continuing their LTE footprint expansion."
Overall, "third-quarter liquidity has remained strong, with 88% of committed facilities available for borrowing and total liquidity exceeding aggregate 2011, 2012 and 2013 maturities," the firm said in a brief. "Latest 12 months (LTM) free cash flow (FCF) generated in the third quarter was $25 billion, and issuers maintained balance sheet cash of approximately $44 billion. This compares with a Fitch-estimated 2012 maturity schedule of $21 billion."
And so, despite murky economic times, the outlook is good for the sector, concluded Fitch, which has a 'Stable Outlook' rating on 90% of its stock issuers in the segment. Meanwhile 5% have a 'Positive Outlook,' and 5% have a 'Negative Outlook.'
"Margin improvement, strong liquidity positions and extended maturity profiles should provide a sufficient buffer to material negative rating changes in the face macroeconomic headwinds," Fitch analysts said.