Basic-Subscriber Losses, Slow Data Growth Stall Comcast

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Despite turning in another strong quarter of revenue and cash-flow growth, Comcast shares plunged Thursday -- down 5%, or $1.47 per share, to $27.07 each -- as investors paid greater attention to basic-subscriber losses and slower-than-expected growth in high-speed-Internet additions.

Comcast stock fell as low as $26.40 per share Thursday (down 7.5% or $2.14 each) before rebounding slightly to close at $27.21, down 4.7% or $1.33 each.

It was a tough day for most publicly traded companies -- the Dow Jones Industrial Average finished the day down 300 points, mainly because of concerns about the subprime credit market.

Comcast wasn’t even the biggest loser in the cable sector -- Time Warner Cable finished Thursday down 4.3% ($1.77 per share) to $39.53. Rounding out the sector were Charter Communications (down 34 cents or 7.8%); Cablevision Systems (down 91 cents or 2.5%); Mediacom Communications (down 50 cents or 5.1%) and Time Warner (down 62 cents or 3.1%).

Among direct-broadcast satellite service providers, EchoStar Communications lost the most ground, declining $1.47 each, or 3.4% to $42.26 per share. DirecTV fared better, finishing the day at $22.98 per share, down 89 cents or 3.7%.

Comcast reported cable revenue of $7.33 billion in the second quarter (up 12%) and cable operating cash flow of $3.03 billion (up 13%), driven largely by strong growth in digital-subscriber and telephony additions. It was Comcast’s 28th-consecutive quarter of double-digit operating-cash-flow growth.

Comcast added 823,000 digital customers, the highest level of digital additions in company history, and 670,000 Comcast Digital Voice customers, its highest level to date, during the second quarter. But 95,000 basic-subscriber losses during the period -- an increase over the 90,000 subscribers lost in the prior year -- and 330,000 high-speed-Internet customers (below the 350,000-450,000 additions some analysts were expecting) pointed to the possibility that the triple play of voice, video and data was losing some of its halo effect.

In a conference call with analysts, Comcast executives downplayed the basic-subscriber losses, adding that the second quarter is usually a tough one for basic additions as college students and snowbirds leave for their summer residences. Last year, Comcast lost about 91,000 basic subscribers during the second quarter.

“That Comcast lost basic subscribers in a seasonally weak second quarter is not a surprise,” Sanford Bernstein cable and satellite analyst Craig Moffett wrote in a research report. “That the size of the loss didn't improve from last year, however, is a disappointment.”

Adding pressure to the basic-subscriber losses was Comcast’s admitted focus during the period on adding digital subscribers ahead of the July 1 Federal Communications Commission ban on digital set-top boxes with integrated security features. About 621,000 of the 823,000 new digital customers signed on for Comcast’s digital starter package -- its lowest digital tier.

“I think there is no question that when you prioritize digital and have as much activity as we did, that prioritization takes your eye off of other things,” Comcast chief operating officer Steve Burke said on the conference call. “Our systems are structured so that there’s a certain amount of move activity in places in the South and in college towns that no matter whether you have the triple play or increase your marketing, people are leaving town.”

Burke added that Comcast has regularly lost subscribers in the second quarter, only to see those customer rolls come roaring back in the third and fourth quarters. There is no reason to believe that won’t happen this year, as well, he said, adding, “We don’t consider it a cause for concern.”

Burke blamed the flat high-speed-Internet additions on Comcast’s focus on converting new properties acquired from Adelphia Communications and Time Warner.

“During those conversions, we actually add a lot less subs than the year before,” Burke said. “If you look at the trends in the classic Comcast systems, they’re actually pretty good. I think the second half of the year is going to look a lot like the second half of last year, and maybe even a little bit better.”

In the second half of 2006, Comcast added a total of 120,000 basic customers, erasing its second-quarter deficit and finishing the year with 24.2 million customers, an increase of 80,000 over the prior year.

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