Comcast Sizzles In First Quarter, Ups Its Guidance

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Comcast Corp. kicked off the 2005 earnings season with a bang, reporting 17% cash-flow growth and upping its full-year guidance, fueled by continued growth in advanced services.

The No. 1 U.S. MSO on April 28 reported revenue of $5.4 billion in the quarter (up 9%) and operating cash flow of $2 billion. Those numbers were fueled mainly by high-speed data additions (414,000) and digital subscriber additions (200,000) in the period.

Basic-video subscribers declined by about 29,000 customers in the period, in line with expectations.

Investors, possibly focusing on the basic-subscriber number, weren't bowled over: Comcast's share price was down 11 cents to $31.48 in 4 p.m. trading April 28.

Circuit-switched telephone customers declined by about 3,000 in the period, but were offset by a gain of about 7,000 Internet-protocol telephone subscribers. That was expected as Comcast moves toward rolling out IP telephony this year.

In the next 30 days, Comcast plans to roll out IP telephone service in Boston and Hartford, Conn. That will expand in the next 60 days to Chicago and Portland, Ore.

Comcast also expects to take advantage of the 18 million to 20 million homes in its footprint that are not video subscribers by offering a high-speed data and telephone bundle for about $69 per month. The company did not say when it would begin offering that package, but said that trials of the bundle are encouraging.

On a conference call with analysts, Comcast chairman and CEO Brian Roberts said he was further encouraged by the fact that even at a price point of $69, the MSO can make money from the service because it provisions and services IP telephone and data on the same network.

“We make good money,” Roberts said. “And I think we're going to see a lot of success with that, and our initial trials in places like Indianapolis have suggested that that's going to have a tremendous impact.”

The gains moved Comcast to increase its full-year operating cash flow growth guidance to between 14% and 15% from the 12% growth estimated earlier this year.

Net income in the quarter rose to $313 million (14 cents per share) from $65 million (3 cents) in the same period a year ago.

MIXED REACTION

Analysts were mixed on the results, though, with most praising the growth in high-speed data but showing concern about the continued basic-customer losses.

Sanford Bernstein & Co. cable and satellite analyst Craig Moffett wrote in a research report last week that while Comcast's results were solid, they were “unspectacular.”

While Comcast played down the basic-subscriber decline — most were low-quality analog customers and represented about one-tenth of 1% of Comcast's total subscriber base — Moffett wrote in a research note that while trivial, basic-customer growth is still the litmus test for the competitiveness of the business.

“The lack of basic subscriber growth could well be the most significant drag on Comcast's share price,” Moffett wrote.

But Moffett was encouraged by the plan to launch a double-play voice and data offering targeted at non-video customers, adding that plan could take up the slack from lost basic-video customers.

The analyst pointed to Cablevision Systems Corp., which returned to positive basic-subscriber growth after launching its triple-play voice, video and data service last year.

“Comcast has the same opportunity in its markets,” Moffett wrote.

2 POINTS ON MARGIN

Moffett was also encouraged by the cash-flow margin expansion in the quarter. Cash-flow margins — cash flow as a percentage of revenue — increased 2 full points to 39.1% in the period.

“The margin expansion is especially impressive given the seasonal headwinds that have traditionally restrained cable margins in Q1,” Moffett wrote. “Programming-expense increases typically hit in January, while price increases generally follow during February and March. As a result, further margin expansion can be anticipated during the balance of the year.”

Comcast's board of directors also approved a $2 billion increase to its stock buyback program. The MSO bought back about $326 million of stock in the first quarter and $1.6 billion in the past 15 months.

Aside from the high-speed data and digital subscriber growth, Comcast chief operating officer Steve Burke said on the conference call, results were spurred by increasing demand for HD-DVR set-top boxes.

Burke said that Comcast distributed about 428,000 HD and/or DVR set-tops in the first quarter, or about 200,000 more than it expected. Comcast charges between $5 and $9.95 per month for the service, representing an important revenue stream for the MSO.

“We look at this as a business that we should accelerate, not decelerate,” Burke added.

Comcast said it expected to increase capital expenditures for the year by between $200 million and $300 million, much of which will be going toward the purchase of more HD-DVR boxes.

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