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The following conference call was held by Comcast with its investors on
August 1, 2001:
Comcast Corporation
Second Quarter 2001 Investor Conference Call
August 1, 2001
Operator: ...Welcome to the second quarter 2001 Investor Conference
Call for Comcast Corporation. Today's call is being
recorded. At this time for opening remarks and introduction
I would like to turn the call over to the Executive Vice
President and Treasurer of Comcast, Mr. John Alchin. Please
go ahead sir.
John: Thank you and welcome everybody to our second quarter
earnings call. Just before we proceed I would like to alert
everybody to the fact that we have both audio and slides on
our web site www.cmcsk.com. So for those of you who are
listening in by phone we would encourage you to look at that
Web site to pull up the slides. They are operated manually
so you can advance them, as you want. Secondly I would refer
everybody to our Safe Harbor Disclaimer referencing any
forward looking statements in this presentation and to the
risks associated with any of those forward looking
statements. So let us proceed directly into the
presentation. We are delighted with the outstanding results
that we are reporting in all three core business segments
that we have; cable, content and QVC. We have terrific
momentum in our cable operation with RGU growth continuing
sequentially from first quarter to second quarter and we are
very confident of the second half of the year doing even
better than we have in the first half of the year. QVC has
reported yet another outstanding quarter of growth with its
second quarter results. We have expanded the Footprint and
cable significantly in the last three- month period. You
will be hearing from Steve Burke as he details the systems
that have been integrated throughout the first six months of
this year, over two million subscribers over a six month
period. On the content front we have terrific results in E,
in The Golf Channel and the Sports Channel. In the Golf
Channel we increased our ownership stake by over 30% and as
from the second quarter we are no longer reporting this
asset on an equity basis but rather consolidating it into
the numbers. So we now have 91% ownership interest in the
Golf Channel and it is reported on a consolidated basis from
here on out. We are reiterating our targets for all of the
guidance that we have given previously but I think on a more
exciting front we are increasing the new revenue generating
targets that we had for both the digital product and the
data product in the cable division. All of these results
reaffirm the reasons that we have stated over the past three
weeks for the offer for AT&T's Broadband assets. Before we
get into any issues related to that transaction let us share
the exciting enthusiasm we have for this quarters results.
If you look at the quarter alone we report $2.2 billion of
revenue, up 20% from a year ago and $700 million of
operating cash flow, up fully 16% from a year ago. We would
point out though that if you back out the losses associated
with our new business Telephony initiatives we would be
reporting operating cash flow growth of fully 20.8% for the
quarter. The consolidated results as I break them down by
segment reports for Cable fully 13% of cash flow growth, for
QVC 19% consolidated cash flow growth, content over 21%,
aggregated 16%, cash flow growth out of the core businesses
before taking into account the new business initiatives. All
of those numbers are on an apples to apples basis pro-formed
to the transaction that Steve will be detailing in his
comments. Before we go into the cable division let us first
highlight the terrific results that we have out of QVC. QVC
prior to the losses associated with QVC Japan generated
fully 24% cash flow growth for the quarter. The real driving
machine behind QVC is the domestic operation, which includes
both the television channel and iQVC. The domestic operation
accounts for fully 86% or $757 million of the $876 million
of revenue that we reported. We generated fully $167 million
of cash flow more than the total cash flow reported, which
is $160 million and reflects the losses associated with our
German and Japanese initiatives. In this domestic operation
we saw revenue growth of 15% for the quarter, cash flow
growth of 23% and an increase in the operating margin of
fully 1.4 percentage points finishing the quarter with a 22%
cash flow margin for the
2
second quarter. This cash flow margin increase is driven by
a number of factors, a change in mix, strong pricing
elements, productivity and expense containment. On the
productivity side we saw double digit growth, mid teen gains
in the dollars per minute in both the apparel sector and the
home sector. So across all fronts we are seeing very strong
numbers out of QVC. On the expense front both variable
expenses associated in a number of areas like customer
service telecoms all contained and below where they were a
year ago. Even in the fixed cost category we see expenses at
lower levels than they were 12 months ago. You may recall
that 12 months ago we had a new warehouse coming on site
with Rocky Mount, the startup costs associated there no
longer reflected in the numbers. We are really producing
optimally out of that facility now and contributing to the
increased operating margin up to 22%. As I mentioned we
launched QVC Japan. That happened on April 1st and generated
$1.6 million of revenue in the second quarter and incurred a
loss in line with our estimates of $6.6 million. That loss
is reflected in the $160 million number that we show on the
slides and in our press release. The only other news I would
like to share with you on QVC at this point is that we are
starting an exciting new marketing initiative in August,
which is later this month opening up a QVC store in the Mall
of America. This is really an opportunity for us to showcase
product, to attract new customers. It becomes like a remote
studio where we can show people who are in the Mall of
America just what QVC has on the channel. So it becomes a
whole new concept of marketing the brand and marketing the
products. Let us move on now to content. In this area E! had
another terrific quarter. E! reported revenue growth in the
mid to high teens driven primarily by advertising revenue
growth up in the mid 20% range. This is attributable to
subscriber growth and a carry over from last years up front
market. Affiliate revenues are also up because of subscriber
growth. In fact E! reported fully a 15% increase in the
number of subscribers to at total of 70 million at the end
of June. We see similar terrific results coming out of The
Golf Channel. It is growing in line with E!, 24% increase in
the number of Golf Channel subscribers. The Golf Channel is
now available to 40 million customers worldwide and about
95% of those customers are in the domestic market. Golf will
report between $40 to $50 million of operating cash flow
this year, up significantly from the numbers reported last
year. We had a very exciting second period in the sports
area as well reminding listeners that we closed the
acquisition of Home Team Sports in February. So we now have
over 50% of our subscriber base with Comcast branded sports
programming in the mid Atlantic super cluster stretching
from south of Washington DC through to northern New Jersey.
We remain very comfortable with the guidance that we have
out there for our content sector, which is for mid teen
growth in the revenue category with operating cash flow
growth probably in excess of 20% for the year. So with that
let us turn to the cable division. The cable division
reported 9.7% growth in revenues to almost $1.3 billion and
over $560 million of operating cash flow, up 13% from the
same period last year. With that cash flow growth we
increased our margin to 43.7%, up from 42.5% a year ago and
up from 42.6% in the first quarter this year on an apples to
apples basis. This reflects early expense savings in the
acquired properties that we will be talking about in a
minute. On the revenue front we remain very comfortable with
the range of 9 to 10% revenue growth that we have given as
guidance for the full year this year. This will require
revenue growth in the second and third quarters in excess of
12% and this is very doable. The way this is happening is
acquired systems produced over 20% of the revenue that our
entire operations produce now. We have seen slower
implementation of digital and data products in those
acquired properties, but that is now fully underway. A
somewhat later introduction of rate increases but you will
see all of the impact of that in the second half of the
year. At the same time we have the historic systems
operating on all cylinders with terrific new product roll
out, improving operating margins and a great outlook for the
second half of the year. I think I have to clarify one
thing. I said that revenue would be growing 9 to 10%. I
should have said 10 to 12%. So just reiterating that revenue
growth for the full year will be 10 to 12% and very
comfortable with that guidance. Cash flow increased 13%.
This is because expense initiatives kicked in very quickly.
We are looking at 13%; up from 11.1% growth in the first
quarter and Steve will take you through the integration
success that we have had in the first six months of the
year. Moving on to the digital product we saw fully 77%
growth in digital subscriptions to 1.84 million at June
30th. We added over 200,000 subscriptions in the second
quarter. This is up 26% from the 159,000 subscriptions that
we added in the first quarter of the year and greater than
the 193,000 that we added in the second quarter of year
2000. Average weekly additions in the second quarter were
fully 15,500 up from 12,200 in the first quarter. We have
penetration of 23% now.
3
We fully expect to finish the year between 25 to 30%
penetrations at year-end. Believe it or not we have this
product now in front of 97% of the cable subscribers that we
serve. Most excitingly we have increased our guidance for
this product at year-end from 2 million subs to 2.2 million
subs.
The high-speed data product offers an even more exciting
story. We finished the quarter with 676,000 subscribers, a
128% increase. We added 101,000 subscribers in the second
quarter, up from 95,000 in the first quarter of this year
and almost double the 51,000 that we added in the second
quarter of 2000. Our weekly rate of additions of this
product amounted to 7,800 a week, up from 4,000 in the
second quarter last year. This product is available to over
8 million homes today. That represents fully 60% of the 13.5
million homes that we serve. We have done an awful lot in
the last three months to ensure that demand for this product
continues to increase as we go into the second half of this
year and on into 2002. This demand we have seen continuing
to increase in the face of a rate increase of some to 12 to
12.5%. We have increased the rate for this product to $44.95
for those customers leasing a modem and to $39.95 for those
customers buying a modem provided they subscribe to our
cable product. All of the new customers are on this rate
card now. By year-end existing customers will move to the
new rate card. All promotional activity that we have
undertaken is working extremely well. We are now in over 960
retail outlets; up from 600 at the beginning of the year
just six months ago and we will be in 1200 retail outlets by
the end of the year. Over 400 Radio Shack outlets and 100
Circuit City outlets have been active in re-merchandising,
creating new stands, displaying new ways in which Comcast is
marketing this product. We should reap the benefits of all
of this work in the second half of the year. The network
continues to improve, contact rates from customers is at
half the level that it was six months ago and there has been
absolutely no change in the churn rate on this product. This
is all only achievable because of the stage we are at with
our rebuild. As we show on the next slide by year-end over
95% of our plant will have at least 550 megahertz of
capacity. I would draw everybody's attention to the fact
that the second quarter represents the peak level of capital
investment in our cable plant. We invested $512 million of
capital in our cable plant in the second quarter. Our
investment level for the first half of the year is $950
million. We are increasing the capital guidance for the year
from $1.45 to $1.75 billion. Of the incremental $300
million, $125 million relates to the additional modems and
digital boxes that we will deploying to meet the increased
guidance that we have given and another $175 million relates
to the accelerated rebuild. With a year-end target of $1.75
billion you will see a slow down in the rate of capital
investment. In the second half of the year we will be
investing approximately $800 million in the second half of
the year, down from 950 in the first half of the year. This
of course has implications for our ability to generate free
cash flow. At year end we will generate prior to our new
business initiatives and one time taxes that will be paid in
relation to some investment gains between $100 million to
$200 million of free cash flow. This means that we are
internally funding this year fully $2.2 billion of capital
investment across all of our business lines, $650 million of
interest and over $200 million of taxes from internally
generated funds. So in closing then I would just like to
reiterate our cable financial guidance. Revenue will grow
this year for the full year 10 to 12%. Cash flow will grow
for the full year between 12 to 13%. We will have at
year-end approximately 950,000 cable modem customers and
over 2.2 million digital subscriptions at December 31st.
With that please let me pass over to Steve.
Steve Burke: Thank you very much John. If you look at our business
objectives for the quarter we really had four major
objectives. First to continue to increase cash flow and
hopefully accelerate it. Secondly to accelerate RGU growth.
Third, to continue our aggressive rebuild schedule. Fourth,
to continue to integrate new systems. I think the good news
is after the first half of this year the bulk of that
integration process is now behind us. All of our pending
deals are closed and now all of those systems are part of
Comcast and as you can see on this slide we have brought in
1.9 million subscribers to the company. That is the gross
amount of subscribers that came from other companies and are
now part of Comcast. The net number is 769,000 but the
digestion if you will is really 1.9 million. We have had a
great deal of activity regarding these new subscribers and
new systems. The good news is right now, all of the
management teams are in place. The re-budgeting process,
which we have referred to on previous calls, has been
completed. I am pleased to say in
4
all of the major systems we are seeing a four to six point
margin improvement in all of the systems that we have
brought in. We believe there is obviously more to come. If
you look at the next slide you will see that over the last
five quarters while we have taken in 1.9 million new
subscribers while we have rebuilt literally a quarter of our
company; a faster rebuild then we have ever had in the
history of the company through all of that we have had very
solid margins. In fact in the second quarter of calendar
2001 our margin increased over a percentage point up to
43.7%. A big part of that improvement is due to our
integration success. The good news is I mentioned we had
four business objectives. Two of those objectives by the end
of this year will be largely complete. In other words
integration and the rebuild process. So we can really
concentrate on increasing RGU growth and free cash flow and
operating cash flow growth and acceleration. Now moving on
to future new products. We believe we have a very strong
foundation in place. As John mentioned by the end of this
year we will be 95% rebuilt and so that gives us the
platform for growth. Importantly we will have 2.2 million
set top boxes in field, which will be a way to introduce new
products on a proven technology that is in people's homes.
Of course 950,000 cable modems in people's homes, as well.
Video On Demand I think represents one of the key ways that
we are going to be leveraging this platform. We think Video
On Demand as we have mentioned previously is very important
strategically. First it is a way to drive out digital
penetration deeper and faster than otherwise would be the
case. Secondly it is a great competitive differentiator
versus satellite. It is something that cable can do that
satellite cannot. Third we believe in time this will be a
real moneymaker. Today we have about 200,000 Video On Demand
enabled homes and we expect that number to ramp to over 2
million Video On Demand enabled homes by the end of this
year. We have made good progress on our tests and
integration with billing systems and so on and so forth. We
are also very encouraged by the Universal In Demand deal,
which was announced last week. We believe more studios are
waiting in the wings and so product will become more
available in the future. We are also encouraged by the Time
Warner SVOD tests and believe that SVOD is going to be a
very important part of making the Video On Demand platform a
positive for cable. We think this is a chance for us to take
a leadership position versus satellite and we certainly
intend to be at the front of the industry in doing that.
Moving on to @Home, while the business is in great shape and
continuing to ramp and accelerate I want to make a few
points about what we will be doing in the second half of the
year and into next year to keep that going. The retail
accounts that we have now, we have a large number of retail
accounts that we have had for over a year. Many will be
going through their second Christmas season. We will be
launching a very important back to school promotion this
fall in August and September. So a second holiday season if
you will for the at home business and retail is a big part
of that. At the same time we spent a lot of time over the
last few months working with at home to restructure our
relationship. We ended exclusivity; it will end in the month
of December. We have announced that and we are also trying
to work on a deal that would restructure the way we handle
the consumer interface and also some of the financial
aspects of that deal. We have mentioned previously, we are
committed to multiple ISP's. We are doing a trial in
Philadelphia; that is going well. Finally we are very, very
encouraged about the potential represented by Docsis 1.1,
which should be out some time later this year. We think that
will give us a chance next year to not only have one high
speed data service but be able to introduce a less expensive
lower speed service and a more expensive higher speed
service and bring new users in and help accelerate that
business. Much in the same way that Video On Demand is going
to help us accelerate our digital roll out. The third new
product area that we have been working on and is clearly a
big part of our plans in the future is Telephony. We
continue to manage the Michigan operations and Virginia
operations that we have inherited through acquisitions.
Those operations were cash flow positive for the quarter;
contributed to our results. We continue to make good
progress in terms of our tests of voice over IP and
obviously remain committed to Telephony as a big upside in
cable's future. John?
John: Let us pass it over to Brian.
Brian: Thank you John and Steve. I am going to mostly focus on our
proposal to AT&T and talk about. I will talk a little bit
about our proposal to AT&T but I want to begin by just
echoing that we feel this was a fabulous operating quarter.
I am very proud in what John and Steve just outlined.
5
Thirteen- percent cable cash flow growth is an acceleration
and demonstrates that these new products really do deliver
an increasing cash flow. I am very pleased with the
increased operating margins back to 43.7%, which we took in
systems with lower margins and were able to pull the margins
up and that is a pretty dramatic increase quarter to
quarter. The acceleration in our data business, which is
really quite rapid and therefore leading to the revised year
end guidance both for data and digital but quite dramatic in
data is very encouraging. It is the second increase in
guidance this year. The first quarter of course we increased
our cash flow and we remain comfortable that we can grow the
new products and meet the revised upward cash flow guidance
that we have already given you. Really when you think about
doing that on the heels of what Steve said, an integration
effort of over two million or about two million customers in
the last six months alone. It really encourages me that we
are up to the challenge for AT&T Broadband and what we have
proposed. I would be remiss if I did not acknowledge my
friends at QVC because it is one amazing quarter to have 23%
operating cash flow growth in the United States ten years
into a business with no acquisitions. It continues to do it
and amazes every quarter and our hats off to Doug Briggs and
Bill Costello. I do think it positions us as the world's
leader in electronic commerce and is a great asset for the
combined potential company. Let me talk a few words about
our proposal to acquire AT&T Broadband. We have proposed a
transaction that has the potential to be great for both sets
of shareholders. We hope to begin a dialogue promptly with
AT&T about the details of our proposal. Much has been said
that our proposal does not reflect what AT&T paid. I am not
sure that that is the most relevant current reflection of
the value of a business. I would like to point out that if
you look at the AT&T Investor Presentation when they
purchased Media One and the AT&T TCI merger proxy when they
purchased TCI according to their own filings they paid
around $3,400 to $3,500 per subscriber on average. Our offer
is north of that. Secondly and perhaps more importantly our
offer represents substantially comparable per sub, sub for
sub value for AT&T Broadband relative to Comcast even though
there is a meaningful difference in today's metrics and
people's view of the short term and medium term future for
the two businesses. Of course the market has responded and
maybe this is the most important metric of our proposal and
people's response to it is that the AT&T stock has gone up
in approximately $13 billion post offer to date. Another
point I would like to make is that 80% of AT&T's close to
700 institutional shareholders also own Comcast. I think
that shows a remarkably broad acceptance of our company, our
voting structure by AT&T's largest owners. Remember under
our offer a majority of the value creation goes directly to
the AT&T shareholders because of course they are going to
own a majority of the resulting company. But there is
significant value creation opportunity for the Comcast
shareholders as well. With only 20% of the total synergy
potential realized in year one and 30% in year two the
transaction would be near EBITDA even break even for Comcast
shareholders in year one and EBITDA accretive in year two.
Unlike other buyers in other lines of businesses our only
focus is on value creation through the broadband business.
We have perfect alignment with the shareholders of AT&T
Broadband. Finally a word about Telephony and our Telephony
vision as Steve mentioned a little bit on it. We are
committed to the cable Telephony opportunity and as we learn
more about AT&T's efforts we are sure that we can bring our
financial approach and disciplined approach to roll out of
new services to enhancing their existing offerings and find
a way to create significant shareholder value. We think
Telephony is a big part of cable's future. We are fully
committed to seeing our proposal through and hope that
today's fantastic results demonstrate that we have the
management team and the focus to realize the exciting
business combination that we proposed. With that we will
open it to questions.
John: Operator if you could open up the Q&A. Please.
Operator: Thank you sir. Investors wishing to ask a question may
signal us by pressing the digit one on your touch-tone
telephone. If your question has been answered and you wish
to be removed from the queue please press the pound sign. If
you are using a speakerphone please pick up the hand set
before pressing the numbers. One moment please. We have
Niraj Gupta from Salomon Smith Barney on line with a
question. Please state your question.
Niraj: Thank you and good afternoon guys. The question was really
mostly on QVC. The growth as Brian pointed out is somewhat
remarkable, almost boring how consistent it is but given the
6
growing number of channels that we are seeing for home, the
ability to do 15% domestic growth is just a big number. I
was hoping that Doug or Bill could speak to the number of
new customers that you added in the quarter and how perhaps
online is contributing to that and maybe just a little
discussion on that front. Then I had one I guess conceptual
question for Brian. When you guys talked about the strategic
benefit of having 22 million subscribers in terms of
launching new services, whether that be content, interactive
TV, Internet Telephony etc. I think that the scale part of
it clearly rang loud and clear with everyone. I know it is
early and you are not at the finish line in terms of AT&T
Broadband but I was just curious Brian if you could talk
about perhaps inquiries into those kinds of opportunities
that may have come from third parties. I am just curious if
people have expressed interest in that even though we are
obviously far from any kind of conclusion with that affair.
John: Niraj you got in under the wire. I was going to restrict
everybody to one question each but you got in before I had a
chance to say that. So we will take both and see where we go
from here. Bill, are you on the line?
Bill: Yes.
John: Could you speak briefly to the first question?
Bill: I think Niraj had a very good comment. Given the historical
results that we have had looking forward is always a concern
because can we keep it up? I will tell you from a management
standpoint, at QVC our long-term objective is to grow the
base and iQVC business 13% and get an additional 2% from the
international subs over the next five years. That could vary
from year to year but that is our five-year plan. With
regard to your question on iQVC obviously their growth rate
is quite a bit faster than QVC however, we do not tout that
as many other folks do because we believe and our research
has shown that many people are using iQVC just as an
ordering mechanism for QVC. In other words instead of
calling us on the phone they will use the Internet to place
their order. Having said that the iQVC growth from second
quarter last year to second quarter this year is up 50% and
currently represents about 7.5% of the base and iQVC
business. Our strategy is continue to push people towards
iQVC because we think it offers them a more useful and user
friendly shopping experience but to combine the show with
the shopping experience on iQVC. It certainly gives them a
lot more alternatives to view from and easy ordering. That
is it. I would be less than honest with you from a financial
guy's perspective to see the kind of numbers we put up
quarter after quarter is just very, very rewarding. We do
not see any shortfall coming any time soon. That does not
mean that it will not come but as I said the management team
is united and feels very strongly that over a five year
period we can grow consolidated revenues at a 15% rate
annually.
John: Thanks Bill.
Brian: I will say that QVC has been fabulous and recession or not
the company is powering through. As to your second question
it is not something that we have got specific plans on how
things would happen but I think as a philosophical matter if
you have a larger footprint there are going to be two types
of opportunities. Independent entrepreneurs and companies
who have new ideas of which there seem to never be a lack of
new ideas for what can be done with broadband and cable and
interactive. Some are good and some are not but this would
be a great value creation opportunity for the shareholders.
I think working with other cable companies is a big
opportunity to galvanize some of the swaps that will round
out clusters and to find ways to create these new services
across multiple systems. So that this is a win, win for the
industry as we face more and more competition in the years
ahead. I also would point out that I think there is a tie
from QVC and commerce in the next long period of time. These
sophisticated set top boxes on your TV sets and QVC's
ability to find the products people want, execute and
fulfill should be a marvelous asset for this combined
company as well. Next question please.
Operator: Our next question comes from Richard Bilotti from Morgan
Stanley. Please go ahead.
7
Richard: Good afternoon. Obviously the question of the month or of
the past months has been the sustainability of growth for
the cable sector. Your new service RGU addition both on
digital and cable modems were up from last quarter and they
were also up massively on a year over year basis. I know you
indicated your year end trends but could you talk a little
bit about 2002 for those two products? Whether or not
digital is still capable of being accelerated and whether or
not the acceleration that we have seen in modems that we are
going to see something proportionate to that in terms of
acceleration 02 versus 01.
Brian: Let me pre-empt my colleagues here and start by saying that
we are not going to give any 02 guidance because we have
not. I think from a philosophical standpoint we feel very
good about the direction of modems and that business your
guess is as good as ours. We thought we would have 7%
penetration three years from now and we are getting pretty
close to 10% this year alone. So I think that we feel that
we are just scratching the tip of what might be possible
with data in this country and the industry is extremely well
positioned. As with digital we are giving it a major
facelift if you will be adding VOD capabilities, whether we
match that up exactly right and whether there are a few
periods where it does not keep growing as fast and then it
comes back. That is guesswork and frankly for the longer
term investor irrelevant. What is relevant is by adding the
features, by the fact that certain studios appear ready to
do the kinds of deals that might be day and date with home
video for some of their product. That people like HBO and
others are talking about really creative ideas with
subscription Video On Demand that that should power digital
into beyond pay television levels, which is where you would
begin to think it might peter out at some point. I think it
is really great that we have got ready to go the next
version. Steve do you want to add anything?
Steve: I think that is very well said. Essentially a lot of the
future for both of these products is going to be determined
by our ability to freshen them and add new dimensions and go
after new niches. Clearly the high-speed data business is on
a faster growth ramp than digital but I think digital is
going to have a very strong year next year. That is why we
are spending so much time and attention getting the Video On
Demand platform in place.
John: Next question please, operator.
Operator: Our next question comes from Doug Shapiro from Bank of
America Securities. Please go ahead.
Doug: Thanks. I wanted to drill down a little bit on the data
business. I was wondering if you could talk about how
subscriber additions were tracking towards the end of the
quarter. I will make it one long sentence to make it sound
like one question and as part of that if you could talk
about what specific contributions both retail and self
install had maybe in terms of the proportion and net
additions in the quarter.
Steve: Let me answer the end of the question and then the
beginning. Self-install was about a third of the business
during the quarter and we are still getting 75% plus success
when people attempt to do a self-install. Retail we look at
the business in two halves and really see the second half as
being the big retail push both with back to school, which we
are quite excited about and then of course with Christmas.
Retail was about 15% during this quarter. We think that is
going to pick up dramatically. Inside the quarter there was
a ramp during the quarter. We ended stronger in June then we
started in the beginning of the quarter and we would expect
that ramp to go through and then have a very strong August
and September.
Doug: Do you actually feel like specifying what that June number
was on a weekly install basis?
Steve: John do you have the average weekly install for June?
John: I do not know that it is necessarily representative of where
we are going in the third quarter so I am not inclined to
break it out.
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Doug: So you do not want to tell us.
John: Next question operator and thanks Doug.
Operator: Our next question comes from Jessica Reif from Merrill
Lynch. Please go ahead.
Jessica: I cannot quite figure out how to make two questions into
one. The advertising number looks phenomenal again. Please
tell me if I am right. It was 19% growth. I am wondering how
you achieved that in this environment and can you comment on
capital expenditures for 2002?
John: Jessica that advertising number is approximately 10% and
this is in a really soft advertising market. The only reason
we got that was because we now have about a dozen markets up
with Comcast market (inaudible) and in the market like
Philadelphia we saw about a 20% decline in advertising
revenues in that market. But we actually saw a 25% growth in
our own business in that marketplace. That was because we
attracted over 30 new names. That is on top of the 54 new
names that we attracted in the first quarter. So we are
seeing a really decided shift from the broadcasters to
ourselves. So the share is coming from them to us. In terms
of capital expenditures for next year I can only speak to
cable. In the second half of the year we are going from $510
million in the second quarter to probably $450 million in
the third quarter going to $350 million in the fourth
quarter and finishing the full year at $1.75 billion for
cable capital investment. As we get into next year you will
see further declines from that $350 million level with the
proportional amount of rebuild capital down dramatically as
we get into the second half of next year.
Jessica: John what was the (inaudible) on the advertising number for
2000? I have 74 million and that is how I got 19%.
John: Maybe I can look that up while we are answering the next
question.
Operator: Our next question comes from Tom Wolzien from Sanford
Bernstein. Please go ahead.
Tom: Good afternoon. Brian you talked about how Comcast can
bring...a financial approach can augment value in Telephony.
Could you talk about how you have done that in Michigan and
I think it was in Virginia systems where you have acquired
phone systems and how you were operating them. Are you
cutting back on what is happening or are you just managing
them differently?
Brian: We have inherited some small samples where we have slowed
down the rush to get certain penetrations that are maybe too
aggressive to show short term cash flow but we are intrigued
to learn more about it. Let me say that what we signaled at
the launch was that it has got to be an absolute financial
discipline around the process and that we think it is one of
the quick ways to get our EBITDA substantially higher in the
merge company. I think I am uncomfortable getting too
specific on how we would do that until we really have a
chance to sit down and understand more about it. We are
studying the results out of Cox and others with the
business. I think longer term we feel that the opportunity
is in the critical part of the growth. One of the questions
that was asked earlier was how do you sustain growth in this
industry. Obviously you go and throw a lot of new ideas over
this broadband and see what consumers want. Is it going to
be Video On Demand? Is it going to be interactivity? Is it
going to be e-commerce? Is it going to be Telephony? It is
certainly going to be data. Data with Telephony could become
IP Telephony. It could be that circuit switch suddenly turns
the corner. Our message is that what over arches our
strategy and the purity of the strategy is that EBITDA
driven nature to put the kind of results out that we put out
tonight. I think that is where I would say we would start
but I think we certainly are not pretending to have all the
answers at this point.
John: Just finishing up on your question Jessica. If we go back to
the back of the press release to the pro-forma unaudited
cable segment data that is apples to apples year to year
advertising revenues
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for the second quarter this year; $87.9 million up from $80
million in the second quarter in 2000. Could we take the
next question please operator?
Operator: Our next question comes from George King from Alliance
Capital. Please go ahead.
George: Thank you. Free cash flow is always great to see. You gave a
small caveat saying...excluding new business initiatives.
Can you maybe outline what you would include in that and
what you may be thinking along those lines?
John: George what we have in mind there is the guidance that we
have given for the business communications operation here
domestically and Broadnet in the European market. We have
guidance of between $100 and $125 million between deficit
cash flow and capital for Broadnet and an operating cash
flow deficit of between $50 to $60 million for CBC here in
the domestic market in addition to $200 to $250 million of
capital expenditures for that same line of business.
Brian: I think the question though was that is all we have included
in new business initiatives.
John: That is all there is yes.
Brian: Is that it is the two Telephony ventures. We have previously
stated that we are dramatically slowing down the
international initiative. We are, as you know looking for
ways to re-deploy the free cash flow in businesses where we
think we can get a good growth rate. One of the things that
seems to marry well with the AT&T proposal is the timing of
our significant future generation of free cash flow and the
opportunity to put it into business that we are very
familiar with which is Broadband Systems and Cable. So the
fact that some of those systems will still require rebuild
is fine because we think you get a quick pay back on that as
we are demonstrating with the RGU growth but it is a totally
clean analysis as to what is in and what is out.
John: Thank you. Next question operator.
Operator: Hi. Next question comes from Karim Zia from Deutsche Bank
Alex Brown. Go ahead with your question please.
Karim: Thanks. John and Steve I guess...implicit in the guidance
for high speed data was an encouraging assumption for
acceleration in that add rate from 100,000 in the second
quarter to it looks like 140,000 for the third and fourth
quarter. But in contrast with that with Digital Cable the
guidance would seem to suggest a bit of a slower add rate to
get there. Could you just reconcile the two? I guess you
talked about it a little bit but is the difference somewhat
in relative conservatism or is there something in data that
makes you more optimistic in the second half in contrast
with digital. Then relatedly just basic subs, can you talk
about second quarter net ads this year versus last year?
Thanks.
Steve: I think on the digital side there is no question that our
penetration is reaching a point where we are until we go out
with video on demand at some point there is going to be a
plat pulling of our growth rate. I think that is the reason
for the digital side. We do not see anything right now on
the horizon but I think it is prudent to assume at some
point that as business starts to plateau. Then on the high
speed data side again very encouraged by all of the retail
distribution, all of the fundamental trends, all the
marketing programs most notably the back to school and
Christmas season.
John: What you may see there Karim is more of a skew to the fourth
quarter rather than evenly spread at 140 or so between the
third and fourth quarter so it will be a significant step up
from the second but we will have a bang up fourth quarter.
Then on the subscriber front Steve, do you want to make a
comment there?
Steve: In terms of basic subscribers?
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John: Yes we had 1% growth and I think we remain very, very
comfortable with the full year guidance of 1% growth now and
I do not think there is any other commentary on that.
Karim: I meant more in terms of the net ads being down versus last
year.
Steve: Well the net adds for the systems that we owned were
actually up versus last year. There was some digestion
things going on but I think the key index to look at is
trailing subscriber growth, 12 month trailing subscriber
growth which was up 1% and as John said we would stick with
that through the end of the year.
Karim: Okay thanks.
John: Thank you. Next question operator.
Operator: Our next question comes from Raymond Katz from Bear Stearns.
Please go ahead.
Raymond: Yes thank you. Steve if you are successful in getting the
AT&T systems you will have the functional equivalent reach
for a TB household greater than the G-Net O&O's* and almost
to the level of the Disney O&O's. Given what you have been
talking about with advertising can you tell us what you do
with that reach?
Steve: Well I think the important thing that we have been working
on and it really is masked by the advertising environment is
putting in place these interconnects. The first thing you
have to be able to do is go to an advertiser and say, "You
can buy virtually 100% of a DMA. We are a credible
alternative to a broadcast station. Your add is going to
run. You are going to get one bill as opposed to buying from
five different cable companies and who knows whether the add
runs." We have done that. I believe we are up to 15 or 16
interconnects in the last year. I think the advantage of the
combination when you are in 8 of the top 10 DMA's, 15 of the
top 20 DMA's with such a strong position you can then go to
an advertiser and much like the ABC, NBC, O&O group and say,
"Would you like to do a spot buy in 8 of the 10 major
cities?" What that does is that opens a completely new
category. The first category of cable advertising has been
the pizza parlors and the local car dealerships. The second
category is really doing it on a city by city basis. The
third category is really doing it on a national basis and
the beauty of that is you are layering in dollars that are
completely new to the equation. So we think that is a
significant upside and eventually once you get that and then
have the ability to make the advertising truly interactive.
I think there is just a tremendous future if we can make
that happen.
Raymond: So if you are able to go after national spot dollars now in
these markets where...I guess the question is what in your
advertising mix, what is national spot now?
Steve: Right now it is a relatively small percent of the pie but it
is by far the fastest growing percent, national and regional
spot. The local business actually if you look at our local
business now it is actually down slightly because of the
economy but the regional and national is growing quickly
albeit off a smaller base.
Raymond: So you are back in the O&O business Steve?
John: Next question. Sorry Ray I am showing favoritism. Next
question please, operator.
Operator: Our next question comes from Richard Greenfield from Goldman
Sachs. Please go ahead.
Richard: Hi thank you. We were following up on Richard's question
from earlier. One of the other key questions that have come
out of the other companies that have reported results has
clearly been seasonality. You do not seem to show anywhere
near the seasonality that the others talk to in terms of the
second quarter with college disconnects and some of the
excuses given for second quarter slow down and new service
additions. Could you talk to that and then just related to
that the issue
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of your full year guidance for cash flow. Your first quarter
was up 11%. Your second quarter was up 13% yet your guidance
for the full year is 12 to 13%. Given the normal
acceleration should we just assume that your guidance is
conservative? Thanks.
Steve: Well in terms of the seasonality traditionally the second
quarter is a slower quarter. That having been said I think
we have enough programs in place and acceleration in the
business that we were able to come out just fine in terms of
RGU growth. I think it does point for the fact that we are
quite well positioned for a strong second half.
Brian: I think all we can say is we are going to let the numbers
speak for themselves as to any future prognostications. I
think we will stand by our guidance but we think that the
entire industry is very healthy and various companies have
different mixes of subscribers and things and we have had
some seasonality. That does happen but we have been able to
put these results out there and we are quite comfortable
that we are going to have a great second half. Next question
please.
John: Operator this should be the last question I think.
Operator: Thank you. Our final question comes from Jeff Wlodarczak
from CIBC World Markets please go ahead.
Jeff: Thank you. Echostar just announced a fall promotion, which
includes a $9 monthly charge for 100 plus channels. Clearly
I think they are getting much more aggressive on pricing, a
trend that is probably going to continue. How do you respond
to that?
Steve: Let me take a shot at that and then maybe John and Brian
would like to weigh in. My understanding about that
promotion is that you are required to pay for the dish and
pay for the box. The second point I would make is by and
large our key markets particularly Philadelphia and to a
lesser degree Baltimore and Washington are not markets that
Echostar has been targeting promotionally. We believe that
having digital subscriptions up as high as they are with our
key customers has really been one of the reasons why we have
continued our growth. Satellite penetration in our markets
is way below the industry average and we try to be as
competitive as we possibly can be.
Brian: I would just take that and say that competition is part of
what our business plan is about. That is why we are now
trying to operate all of our call centers with a different
level of customer service and our entire business in the
Comcast universe and all the things that Steve and his team
are doing. We will deal with that like we have dealt with
many other promotions but the business is really healthy. We
think if we can make this AT&T transaction happen in a way
that is fabulous for the AT&T share holders and fabulous for
the Comcast share holders this is the ultimate win, win. We
hope we are going to stay focused and visual in on that but
we are not taking our eye off the ball in how we are running
the company. Thank you all very much.
Operator: There will be a replay immediately following today's
conference call. It will run through tomorrow night at
midnight. The dial in number is 630-652-3000 and the pass
code is 4403651. Once again, the number for the replay is
630-652-3000 and the pass code is 4403651. A recording of
the conference call will also be available on the company's
Web site. This concludes today's teleconference. Thank you
for participating. You may all disconnect. Thank you for
participating.
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Note: The following notice is included to meet certain legal requirements:
FORWARD-LOOKING STATEMENTS
This filing contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of those words and
other comparable words. Comcast Corporation ("Comcast") wishes to take
advantage of the "safe harbor" provided for by the Private Securities
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results may differ materially from the expectations expressed in such
forward-looking statements as a result of various factors, including risks and
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could cause actual results to differ materially include, but are not limited to
(1) the effects of legislative and regulatory changes; (2) the potential for
increased competition; (3) technological changes; (4) the need to generate
substantial growth in the subscriber base by successfully launching, marketing
and providing services in identified markets; (5) pricing pressures which could
affect demand for Comcast's services; (6) Comcast's ability to expand its
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(8) Comcast's continued ability to create or acquire programming and products
that customers will find attractive; (9) future acquisitions, strategic
partnerships and divestitures; (10) general business and economic conditions;
(11) other risks described from time to time in Comcast's periodic reports
filed with the Securities and Exchange Commission (the "Commission"); and (12)
with respect to statements relating to the proposed combination of Comcast and
AT&T Broadband, factors that could cause actual results of the combined
businesses of Comcast and AT&T Broadband to differ materially from expected
results for such businesses, including failure to integrate the businesses
successfully or to achieve the expected combination benefits.
ADDITIONAL INFORMATION
Subject to future developments, Comcast may file with the Commission (i) a
preliminary proxy statement for solicitation of proxies from the shareholders
of AT&T Corp. ("AT&T") in connection with AT&T's broadband tracking stock
proposal and (ii) a registration statement to register the Comcast shares to be
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any other relevant documents filed with the Commission, as well as any
amendments or supplements to those documents, because they will contain
important information. Investors and security holders may obtain a free copy of
the proxy statement and the registration statement (when and if available) and
other relevant documents at the Commission's Internet web site at www.sec.gov.
The proxy statement and registration statement (when and if available) and such
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Comcast, its directors and certain other Comcast employees and advisors
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of the participants in the solicitation is contained in a filing made by
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