Telephony Hangs Up Comcast

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Comcast Corp. stock took a hit Thursday after the MSO said its planned accelerated rollout of digital-phone service would lower operating-cash-flow growth for the year and despite strong growth in its cable operations.

Comcast shares were down as much as $1.02 each (3.7%) to $26.89 per share before rebounding slightly in early afternoon trading to $27.12 each (down 79 cents).

Comcast added about 134,000 digital-telephone customers during the fourth quarter, ending 2005 with 202,000. The cable operator said it will significantly ramp up that rollout this year, projecting that it will add another 1 million phone customers in 2006.

But the additional cost will likely put pressure on cash-flow growth, which Comcast estimated would be reduced by about one percentage point in 2006. That compression is not expected to extend into 2007, chairman and CEO Brian Roberts said on a conference call with analysts to discuss financial results.

Roberts added that given the choice of pushing revenue-generating-unit growth or cash flow growth, he would pick the former. RGUs are a combination of digital-cable, high-speed-data and telephony customers that are a benchmark in tallying the growth of new services.

“Our belief as we put this budget together [is that] 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 [capital expenditures] 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 at 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, the same or better growth rates for the company,” he added.

Phone revenue -- including its circuit-switched business, inherited from the company’s acquisition of AT&T Broadband in 2002 -- declined 2% during the quarter. But as the MSO adds scale to its digital-voice business, Comcast said it expects digital-phone revenue to increase in the mid-teens in 2006.

While Comcast has been slower to roll out phone service than other cable companies -- Time Warner Cable ended the year with 1.1 million phone customers and Cablevision Systems Corp. had 601,000 at the end of the third quarter -- it is in a different situation.

On the conference call, chief operating officer Steve Burke said Comcast remembers too well the difficulties AT&T Broadband encountered when it pushed its circuit-switched-phone business ahead of its other products. While phone customers grew to more than 1 million, it lost hundreds of thousands of video subscribers and its cash-flow margins were the lowest in the industry at around 20%.

“It is a massive undertaking to take a business and ramp it the way we’re going to ramp our phone business,” Burke added. “We saw firsthand 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 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. Comcast added 40,000 basic subscribers during the quarter (60,000 if losses as a result of recent hurricanes are not included), and it grew its digital-customer base by 342,000. High-speed-Internet customers increased by 378,000, and Comcast added 134,000 digital-phone customers during the quarter.

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