Comcast Corp. president Brian Roberts quieted anyone with lingering doubts about the Philadelphia-based MSO's ability to successfully integrate its November acquisition of AT&T Broadband, reporting another stellar quarter of double-digit revenue and cash flow growth last week and appearing to reverse the past trend of subscriber losses at the former AT&T systems.
Comcast, in a seasonally slow quarter, reported basic subscriber growth of 12,100 for the period ended June 30. The increase was even more dramatic in that the growth came solely from the former AT&T Broadband unit, which saw its subscriber rolls increase by more than 35,000 customers in the period.
"When we first made the proposal for this idea [the AT&T Broadband acquisition] we were hoping to get there in several years, not in two quarters," Roberts said on a conference call with analysts. He added that the full integration of AT&T Broadband, first expected to take three years to complete, now can be finished in a year and a half.
Comcast was the exception in what is usually a slow quarter for cable. The second quarter is normally a period of subscriber decline, as students leave school and snowbirds move to their summer residences.
Other ops' losses
That was apparent at Cox Communications Inc., which lost 37,492 basic subscribers in the period, compared to the 35,101 basic customers it gained in the first quarter.
Insight Communications Co. reported basic-subscriber losses of about 13,000 in the quarter, mainly because of seasonal disconnects.
At Charter Communications Inc., the damage was even more dramatic — it dropped 41,000 basic subscribers and 47,000 digital customers in the period.
The turnaround at the AT&T systems also forced Comcast to raise its guidance for subscriber additions for the year from flat to 125,000 net additions to between 125,000 to 150,000 net additions.
Comcast cable division president Steve Burke said on the conference call that the losses at the historical Comcast systems — about 23,100 subscribers — were due mainly to seasonal disconnects and the MSO's focus on improving the results at the former AT&T systems. He expects customer growth within the pre-merger Comcast footprint to pick up in the second half of the year.
"On the margin, we have put a lot of energy and effort and management talent and marketing spend and concentration on the AT&T side," Burke said. "That may, on the margin, be affecting basic subscribers. We fully expect to gain basic subscribers on the Comcast side at a reasonable rate had the AT&T deal not been done."
Pro forma revenue for the entire company was up 10.2% to $5.7 billion in the period and pro forma operating cash flow rose by 32% to $1.8 billion, fueled by strong growth in digital cable and high speed data subscribers.
In the cable division, revenue increased 9.2% and operating cash flow was up 36%, including acquisition and employee termination costs.
As a result, Comcast increased its year-end cable operating cash flow guidance by $100 million, to between $6.3 billion to $6.4 billion. Operating cash-flow margins — operating cash flow as a percentage of revenue — were 36.5% in the quarter, compared to 29.4% a year ago.
The margin improvement was most notable in the AT&T systems: 32.3% margins in the second quarter, versus 21.2% last year. Comcast's historical systems improved their operating cash flow margins from 42.3% to 43% in the most recent period.
Burke also said that Comcast was on track to meeting its goal of reducing programming costs by $270 million for the year.
"In our minds, there is no question that we will meet that goal," Burke said. "The question is, how much we will exceed it?"
Although it reported subscriber losses for the period, Cox tallied strong revenue and cash flow growth, prompting it to increase its guidance for the year.
Revenue for the second quarter was up 14% to $1.4 billion and operating cash flow rose 20% to $532 million, fueled by digital cable, high-speed data and telephony growth.
Cox also reported $126 million in free cash flow — or operating cash flow after interest payments and capital expenditures are made — its fourth consecutive quarter of doing so. In the first half of the year, Cox generated about $156 million of free cash flow and reiterated its guidance of posting positive free cash flow for the full year.
For the period, Cox added 69,100 digital-cable subscribers, 112,452 high-speed data customers and 56,170 telephony subscribers.
Cox added that about 31% of its customers take at least two of the three-product bundle of video, voice and data.
That prompted Cox to raise its 2003 operating cash flow growth guidance to between 17% and 18% from between 15% and 16%. Full-year revenue growth guidance, previously at between 14% and 15%, was unchanged.
Basic subscriber growth guidance was reduced to just under 1% for the year from the previous target of 1%, mainly due to larger than expected basic losses in the period.
Although data additions were flat compared to the first quarter, as expected, Cox said recent moves by regional Bell operating companies to aggressively price digital subscriber line service were not having an impact.
SBC Communications Inc., which announced a video alliance with EchoStar Communications Corp. earlier this month, had its best quarter ever for DSL growth in the second quarter, adding 304,000 customers in the period. About 40% of Cox's footprint is in SBC territory.
Verizon — whose territory covers about 18% of Cox's homes passed — had slower-than-expected DSL growth in the second quarter, adding about 101,000 such customers in the period.
But none of that growth appears to be coming at the expense of Cox, which said it increased high-speed data customers by 32% in Verizon territory and by 18% in SBC markets.
While Cox appears to be winning the battle against the RBOCs, Charter seems to be losing its fight to keep basic subscribers.
Charter reported cash-flow growth of 11% in the second quarter ended June 30 on revenue growth of 7%. But most of that growth came as a result of dramatic cost cutting – it reduced marketing expenses 33% and cash requirements for the quarter were just $32 million compared to $515 million in the same period last year.
Charter also reported it lost 41,000 basic subscribers and digital subscribers fell by 47,000 customers. It was the sixth consecutive quarter of basic-subscriber losses — Charter has dropped about 450,000 basic customers during that period — and the second consecutive quarter of digital subscriber losses.
In a conference call with analysts, Charter CEO Carl Vogel attributed the basic-customer losses to seasonality. On the digital losses, Vogel said that Charter is focusing on high-quality customers.
Charter's cash flow margins of 41% for the quarter — up from 38.9% in the first quarter — seemed to back up that strategy.
High-speed data additions (76,700 in the quarter) were down 43% sequentially and 53% year-over-year. Charter finished the quarter with 1.35 million data subscribers.
In a research report, Fulcrum Global Partners analyst Richard Greenfield said the declines in basic and digital customers likely stemmed from the cuts in marketing expenses. Declines in high-speed data growth were also likely affected by the loss of digital and analog subscribers, he said.
"Marketing expense was reduced 33% in the quarter … Is this a good thing?" Greenfield asked in his report, adding that marketing cutbacks likely have affected the falloff in video penetration.
On the data front, Greenfield estimated that the decline in growth was likely a combination of several factors.
"We believe that the fall-off in marketing and the drop in basic subs is hurting data, as well as the traditional seasonality of the business," Greenfield wrote.
At Insight, cash flow increased about 6% and revenue was up 11% in the quarter, below analysts' expectations.