Comcast Triple Play Scores Big

Jul 31, 2006  •  Post A Comment

With its digital phone service flying off the shelf, cable television giant Comcast Corp. said it expects better results for the rest of the year.

“We’re accelerating, and you don’t want to use overhyped words like an inflection point, but we really feel the phone business is now coming into its own and is going to drive an era of growth that we haven’t seen in a very long time,” CEO Brian Roberts said last week on an earnings conference call.

In addition to chalking up double-digit gains in revenue and operating cash flow in the second quarter, Comcast announced that it was raising its financial guidance for investors for the rest of the year. Those numbers mark a win for Mr. Roberts, who bet that the cost of building up an Internet phone system would pay off when the service was bundled with high-speed Internet access and cable television.

Comcast, the biggest U.S. cable TV company, increased its forecast for revenue growth to 10 percent to 11 percent, up from 9 percent to 10 percent. Growth in operating cash flow, a key cable industry metric for measuring performance, will be at least 13 percent, up from 10 percent to 11 percent earlier, the company said.

The earnings report signals that cable companies that offer a so-called triple play of TV, Internet and phone service should increase revenue and profit margins, possibly at the expense of their satellite competitors, said Bear Stearns analyst Spencer Wang.

“The triple play is having a nice halo effect across most of the business lines,” Mr. Wang said. “That generally bodes good things for Time Warner and Cablevision. We’re generally positive on cable relative to DBS.”

Philadelphia-based Comcast also increased its forecast for revenue-generating units-the number of subscribers who sign up for its video, high-speed data or phone service. Those additions will be about 20 percent higher than the previous guidance of at least 3.5 million additions. In 2005, the company added 2.6 million RGUs.

“Today’s results strongly position Comcast for the rest of the year,” Craig Moffett, VP and senior analyst at Sanford C. Bernstein & Co., said in a report.

Mr. Roberts also said he expects that the acquisition of cable systems from Adelphia Communications would close in a few days.

“It is a great transaction because we are able to convert a passive investment in what originally was Time Warner Entertainment . . . into cash flow generating systems that fit us quite well,” he said.

The Adelphia systems will generate more than $600 million in operating cash flow in 2006, and they will require capital expenditures of $300 million to $350 million, said Stephen Burke, president of Comcast Cable.

“We’ve had business plans in place for months and management teams assigned and ready to hit the ground running,” Mr. Burke said. Comcast expects the systems to add to the company’s cash flow in 2006.

“Longer term, as we add Comcast digital voice, or our version of VOD, to these systems, we would expect them to increasingly look just like ours,” Mr. Burke said of the Adelphia assets.

Mr. Burke also said that the company will be testing interactive advertising.

“We are doing some small-scale trials,” he said. “You’re going to see us start to put our toe in the water in terms of interactive advertising.”

Last week, Cablevision said it would test advertising that can be targeted on a household level in 100,000 homes in New York.

Analysts were encouraged by Comcast’s earnings report.

Comcast’s improvements to its profit margin in the second quarter impressed Mr. Moffett. The failure of a high-speed Internet access price war to erupt contributed to the gains, he said.

Comcast is getting $43.78 on average from each high-speed customer, up from a year ago.

Comcast’s decision to build up its voice over Internet protocol facilities for Internet phone service is also helping margins, Mr. Moffett said.

That cost them time to market, but they’re now reaping the rewards of lower variable costs and therefore higher margins as VoIP contributes more and more to total revenue.

Mr. Burke said Comcast’s triple-play marketing was responsible for keeping high-speed prices up.

“Due to the triple play, we’re seeing the benefit of less discounting on our video” and high-speed data, he said. “We’re also seeing the benefits of scale and running three products over the same infrastructure.”

Comcast offers its triple play of voice, data and phone for a base price of $99, but the average triple-play customer is paying more than $120 per month because they add on products such as HBO and other premium channels.

The company had a record 150 million video-on-demand sessions in June, a 33 percent increase compared with the same period a year ago.

“We’re constantly adding VOD content, and we think that makes our digital service supe rior to our competition, Mr. Burke said.

While most of Comcast’s VOD offerings are free, pay-per-view revenue is up 30 percent year over year. The company said PPV revenue has doubled since the second quarter of 2003, when Comcast On Demand launched.

Customer demand for advanced TV features is also growing, Comcast said. About 30 percent of the company’s digital video subscribers now pay for high-definition digital video recorder service, up from 28 percent in the first quarter and 20 percent a year ago. Those customers generate revenue in the range of $65 to$70 a month on average.

Comcast’s second-quarter net income rose 7 percent to $460 million, while operating cash flow-the primary measure of operational strength in the cable industry-rose 12 percent to $2.4 billion, the company said.

Revenue rose 11 percent to $6.2 million as the company posted the biggest second-quarter increase in revenue-generating units in its history. Operating income rose 17 percent to $1.2 billion.

For cable TV operations, revenue was up 11 percent to $5.9 billion, and operating cash flow rose 14 percent to $2.5 billion. Comcast Cable added 227,000 new phone customers in the second quarter for a total of 1.7 million. Phone revenue rose 23 percent to $214 million.

Advertising revenue rose 8 percent to $394 million in the second quarter, helped by political spending. Revenue for Comcast’s cable networks rose 17 percent to $273 million, but their operating cash flow declined 35 percent to $60 million due to expenses related to OLN’s coverage of the National Hockey League.

The company said it bought 22 million shares for $685 million in the quarter as part of its share repurchase program. So far, the company has bought back about 10 percent of its shares for $6.4 billion and has $3.9 billion left to buy additional stock.