Comcast Reports Strong Q2

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Comcast kicked off the second-quarter earnings season Wednesday by reporting strong results ---revenue and cash flow were up about 6% each.

And though the nation's largest MSO may have missed analysts' targets for basic and high-speed data growth, they appear to be attracting higher margin customers.
Overall, Comcast had a strong second quarter financially - beating analysts' expectations for revenue and cash flow growth for the period. Free cash flow, up 15.8% to $1.4 billion in the quarter, also outpaced consensus estimates. Overall, operating cash flow margins remained stable at 41.3% (vs. 41.1% in 2009) suggesting that although Comcast has fewer customers, they are spending more.
The Philadelphia-based MSO seemed to miss the mark on basic customer losses - Comcast shed 265,000 basic customers in the period, vs. the consensus estimate of 169,000 losses - and high-speed data additions (118,000 customers vs. consensus of 204,000), but stayed ahead of the pack on telephony additions (230,000 in the period vs.consensus estimates of 200,000).
In a research note, Miller Tabak media analyst David Joyce wrote that the high-speed data growth was "surprisingly light," but could be explained at least in part by typical second quarter seasonality as college students and vacationers leave for their summer homes and strong growth in the first quarter when high-speed additions were about 399,000. Joyce also pointed that profit margins were maintained at 41.3%, meaning that the customers that remained are spending more.
Sanford Bernstein cable and satellite analyst Craig Moffett wrote in a research note that while Comcast missed consensus for high-speed data additions, they still outpaced their telco competition.
"Comcast's gain of only 118,000 broadband subscribers was a bit light of consensus expectations of 204K... but is a clear game, set, and match win versus subscriber losses for the TelCos," Moffett wrote. "Our long term bull case for cable - at least, before regulatory concerns clouded the picture - is that cable will win the broadband wars."
On a conference call with analysts, Comcast executives said that the national digital transition also played a role in basic- subscriber losses. Chief operating officer Steve Burke said that many of the customers that were added were part of deeply discounted offerings. When those promotions rolled off, Comcast was disciplined in the new offers it presented.
"These are price-sensitive, high churn customers and we elected not to chase them," Burke said.
Later, Comcast Cable Communications president Neil Smit estimated Comcast added about 100,000 customers through the digital transition last year.
Breaking out the segments, cable revenue was up 5.1% in the period to $8.9 billion and operating cash flow increased 5.4% to $3.7 billion. Programming segment revenue rose 18.1% to $454 million and OCF was up 34.4% to $152 million as advertising revenue rose across all properties coupled with additional ratings strength at E! Entertainment, Versus and G4 helped drive advertising growth.
Burke said the resurgence of the advertising market -- he estimated ad revenue was up about 23% in the period -- bodes well for its pending NBC Universal joint venture. Burke estimated that today, advertising represents about $2.5 billion in annual revenue for Comcast (both cable and programming). Once NBCU is added to the mix, ad revenue jumps to about $10 billion annually.
"Having the advertising market rebound is a very good thing for the combined company," Burke said.
On the NBCU front, Burke said that Comcast executives are meeting with NBCU execs weekly to identify growth opportunities and that they anticipate receiving regulatory approval for the joint venture by the end of the year.

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