Comcast Phones In Strong Results

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The “halo effect” of voice-over-Internet Protocol telephony services was in full beam last week after Comcast reported yet another stellar quarter, propelling its stock and shares in three other cable operators to new 52-week highs.

Comcast reported overall revenue growth of 22% to $6.4 billion and operating cash-flow growth of 25% to $2.4 billion for its third quarter, which ended Sept. 30.

At its cable systems, revenue rose 12% to $6.6 billion and operating cash flow increased 15% to $2.6 billion.

TRIPLE-PLAY POWER

Driving those results were strong growth in digital-cable subscribers at 558,000 in the period versus 315,000 adds in the same period last year; 536,000 additional high-speed Internet customers (versus 507,000 in 2005); and 483,000 Comcast Digital Voice telephony customer additions (compared to 72,000 in the same period last year).

That far outpaced the estimates of Wall Street analysts, who had expected Comcast to add 400,000 to 450,000 digital customers, 400,000 to 470,000 high-speed Internet subscribers and 420,000 to 430,000 phone customers.

The digital growth numbers included about 423,000 new enhanced digital customers — the low-end digital package included in its $99 triple play of voice, video and data.

Comcast also added a total of 10,000 basic subscribers — 24,000 basic customers through its historic Comcast systems, offset by a loss of 14,000 basic customers within properties added through the recent Adelphia Communications acquisition and related swaps with Time Warner Cable.

That stronger-than-expected growth pushed Comcast shares past the $40 milestone for the first time in almost five years and helped lift the entire sector. Comcast stock reached a new 52-week high of $40.51 per share on Oct. 26 — the day it released third-quarter results — closing the day at $40 even, up $1.24 per share. It was the first time since December 2001 that Comcast shares passed $40 each. The stock is up 52.5% ($13.77 per share) since the beginning of the year.

Other cable stocks benefited as well, with three other operators — Time Warner Inc., Charter Communications and Mediacom Communications — each hitting new 52-week highs. Time Warner rose as high as $20.08 each (up 25 cents) on Thursday before closing at $19.99 each (up 16 cents); Charter rose to $2.19 before closing at $2.12 (up 23 cents); and Mediacom rose to $8.27 per share before closing at $8.20 each (up 43 cents).

In a research report, Banc of America Securities analyst Doug Shapiro said the third-quarter results show Comcast exhibiting its strongest momentum in 15 years. And the reason for that surge is simple: VoIP.

In his report, Shapiro noted that Comcast added nearly 500,000 voice customers, even with digital phone service marketed in only 65% of its footprint and net additions expected to grow faster than that footprint next year. Moreover, Shapiro estimated that Comcast added about 200,000 voice customers in September, which translates into a 600,000 subscriber quarterly run rate. That implies that run rates could approach more than 800,000 customers by the third quarter of next year, Shapiro wrote.

Shapiro added that the results were particularly encouraging, given the disappointing third-quarter digital subscriber line results at two of its telco competitors, AT&T and BellSouth.

AT&T added 374,000 DSL customers in the third quarter, down 29% from the prior year. BellSouth added 174,000 DSL subscribers, down 14% in the same period.

“The results suggest that cable is taking back some flow share from the Bells,” Shapiro wrote.

Janco Partners analyst Matt Harrigan said the phone additions — which exceeded his estimates by about 50,000 subscribers — are “evidence that they are getting much more triple-play traction than the Street thought.”

'INFLECTION POINT'

Comcast chairman and CEO Brian Roberts said, “This well may be the inflection point for the cable industry and particularly for Comcast this year.”

On a conference call with analysts last Thursday morning, he said, “the cable business is healthier than it's ever been.”

Comcast's telephony business — which reported $252 million in revenue in the quarter and $653 million for the first nine months of the year — is on pace to finish the year with $1 billion in total sales. That number has the potential to grow even larger as the Adelphia markets become phone-enabled. Phone service is currently not available in the former Adelphia systems Comcast picked up in July, via its $17.4 billion joint acquisition with Time Warner.

“The underlying story is that the momentum is significant and we believe sustainable,” Roberts said.

Harrigan said that much of the upside resides in the former Adelphia systems. Comcast acquired about 1 million Adelphia customers in Florida, New England and Pennsylvania as part of the joint acquisition.

AT&T REPLAY

Harrigan compared the Adelphia systems to properties Comcast acquired through its purchase of AT&T Broadband in 2002, where Comcast doubled cash-flow margins from about 20% to nearly 40% in less than two years.

Comcast said that digital penetration in the former Adelphia systems is about 41%, compared to 50% at the legacy Comcast systems.

“I don't see any reason why they can't replicate the results eventually in those areas,” Harrigan said. “The video penetration in Adelphia is even lower than the video penetration in legacy AT&T Broadband when they got it. When they have a cable customer, there's certainly no reason they can't upsell and cross-sell to the same extent as in the other areas.”

Miller Tabak analyst David Joyce noted that the former Adelphia systems are only 85% upgraded and Comcast plans to spend about $500 million to bring those properties up to speed. With better upgraded plant, Comcast will be able to push new services.

“There is a lot of upside to come in margins and penetration of those products,” Joyce said.

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