Phones Now 'Rocket Engine’ of Growth

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Comcast Corp. plans to beef up its digital voice rollout this year, at the expense of some operating cash-flow growth.

The largest cable-systems operator in the country, with 21.4 million subscribers, ended the year with about 202,000 phone customers. But Comcast chairman and CEO Brian Roberts, who has called the Comcast Digital Voice product the rocket engine for future growth, said that is expected to rise to more than 1 million subscribers in 2006.

Beefing up its voice-over-Internet Protocol customers will result in some cash-flow growth compression, though — something that caused more jitters on Wall Street.

A POINT OF CASH FLOW

On a conference call with analysts last Thursday to discuss fourth-quarter financial results, executive vice president and co-chief financial officer John Alchin said that the additional costs associated with the voice rollout could reduce cash flow growth in 2006 by about one percentage point.

That, however, is not expected to extend into 2007, he said.

Roberts said that given the choice of pushing revenue-generating unit [RGU] growth or cash-flow growth, he would pick the former. RGUs tally up digital cable, high-speed data and telephony customers as a benchmark of new services’ growth.

“Our belief as we put this budget together, if you look at various things management has to look at — push for the maximum [cash-flow] growth, push for the maximum RGU growth, minimizing capex and other variables — if you had to pick one we want to accelerate, we are accelerating RGUs,” Roberts said.

“If at some level that is putting some downward pressure on [cash flow], in my opinion if you can be double-digit cash flow [growth], convert 25% of that to free cash flow and at the same time have a 30% increase in your growth rocket engine for the future years, it should then in logic lead to in the years beyond ’06 to the same or better growth rates for the company.”

Investors didn’t feel the same way: Comcast dipped as much as $1.02 (3.7%) in early trading Feb. 2, but rebounded to $27.12 in afternoon trading, down 79 cents.

Phone revenue — including circuit-switched customers acquired with AT&T Broadband in 2002 — declined 2% in the quarter.

NOT RUNNING FOR UNITS

But as the digital voice business grows, Comcast said it expects digital phone revenue to rise in the mid-teens in 2006.

Chief operating officer Steve Burke told analysts Comcast remembers very well the difficulties AT&T Broadband, which the cable company acquired in 2002, encountered when it pushed circuit-switched phone service ahead of other products. The phone roster grew beyond 1 million customers, but hundreds of thousands of video subscribers fled and cash-flow margins were a meager 20%.

“It is a massive undertaking to take a business and ramp it the way we’re going to ramp our phone business,” Burke said. “We saw first hand what happened to AT&T Broadband when they ran the business for [phone] units. We’re not going to run the business that way.”

Overall revenue in the fourth quarter rose 9%, to $5.7 billion, and operating cash-flow increased 8.5%, to $2.2 billion.

In the cable segment, revenue was up 8.4% in the quarter, to $5.4 billion, and operating cash flow rose 10.1%, to $2.2 billion.

Comcast added 40,000 basic subscribers in the quarter — estimating the number would be 60,000 if losses as a result of recent hurricanes were excluded — and the digital-video customer base rose by 342,000.

The high-speed Internet business added 378,000 subscribers and Comcast added 134,000 digital phone customers in the quarter.

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