View Full Version : Comcast Calls on Power of the Bundle

07-31-2006, 10:51 PM
Stock Hits New High as Voice, Digital Cable and Internet Subscriptions Exceed Expectations

Comcast Corp. offered a textbook example of the power of the triple-play bundle last week.

The nation’s largest cable-system operator turned in its best second quarter ever, driven largely by better-than-expected increases in subscriptions to telephone service.

All told, Comcast added 306,000 Digital Voice customers in the quarter, far outpacing analysts’ estimates. Also growing strongly: digital cable and high-speed Internet subscriptions.

Overall, revenue rose 11% to $6.2 billion and operating cash flow by 12% to $2.4 billion in the quarter. For the cable unit, revenue was up 11% and operating cash flow increased 14%.

Shares of Comcast stock hit a new 52-week high, reaching $34.24 on July 27. Shares closed at $33.94 that day, up 4.2% or $1.38.
SNAPSHOT: Comcast’s Second Quarter
The No. 1 U.S. cable operator’s record quarter, by the numbers:
Segment Change
Basic Subscribers (Loss) (66,000)
Digital Subscriber Increase 350,000
High-Speed Internet Subscriber Increase 305,000
Voice Subscriber Increase 306,000
Revenue Increase, Year Over Year 11%
Operating Cash-Flow Increase 12%
Source: Comcast Corp.

Rising Up
Comcast stock has risen more than 30% since the beginning of the year, most since the Q1 release.
Date Share Price
1/3 $25.93
2/3 $27.07
3/3 $27.28
4/3 $26.25
4/27 $30.44
5/3 $29.92
6/5 $32.51
7/5 $32.21
7/27 $33.94
Source: NASDAQ


Comcast stock has already been riding a wave of optimism since it released first-quarter results — which also beat expectations — on April 27.

Prior to last Thursday, the stock was up $6.63 or 25% since Jan. 3, when a share cost $25.93. After last Thursday’s close, the stock has risen 30.9%. That means the company’s overall worth has risen $6 billion, from $19.1 billion to $25.1 billion, since the beginning of the year.

The good news helped lift other stocks. Cablevision Systems Corp., scheduled to report earnings on Aug. 8, enjoyed the biggest gain as its stock rose 64 cents, or 3%, to $22 on Thursday. Time Warner Inc. shares rose 8 cents to $16.21; Charter Communications Inc. was up 2 cents, to $1.25; and Mediacom Communications Corp. was up 11 cents to $6.11.

“Comcast remains the valuation bellwether for the cable sector,” said Sanford Bernstein & Co. cable and satellite analyst Craig Moffett.

On the conference call, Comcast chairman and CEO Brian Roberts said the quarter was driven primarily by phone services.

“The phone business is coming into its own and is driving an era of growth we haven’t seen for a long time,” Roberts said.

Also growing: the company’s cash flow. According to Comcast, the cash-flow margin for the quarter was 41.4%, a full percentage point ahead of the 40.3% margin in the same period last year and nearly 2 percentage points ahead of the first-quarter margin of 39.6%.

Miller Tabak & Co. media analyst David Joyce said the margin was half a percentage point ahead of his estimates.

“The market is recognizing that the larger cable companies are really in the catbird seat” in the competition between satellite, telephone and cable operators for TV, Internet and phone customers, said Joyce. He increased his 12-month price target on the stock from $35 to $38 per share.

Some analysts — and even Comcast itself — had believed the funding of the growth of digital calling services would drive down margins, at least temporarily.

The opposite has proven true.

“A year ago, we thought that the phone rollout would be a drag to our 2006 operating cash-flow growth rate by about 100 basis points,” or 1%, Comcast chief operating officer Steve Burke said on a conference call with analysts.

“In reality, due to the triple play, we’re seeing the benefits of less discounting on our video and high-speed data business. We’re also seeing the benefits of scale and running three products over the same infrastructure. As a result, operating cash flow growth has accelerated from 10% to 13% and that acceleration should continue as we add more triple play customers in the future.”

In a research report, Moffett noted that monthly revenue per unit in high-speed Internet services was up to $43.78 in the second quarter, from $43.34 a year ago.

“The action in broadband now seems to be at the high end, not the low end, of the market,” Moffett wrote.

Another factor in the margin growth: Comcast decided to build its own system to interconnect and transport digital voice traffic, rather than outsource the job.

That might have compounded a delay in rolling out voice service — Comcast lagged behind Cablevision and Time Warner Cable — but “they’re now reaping the rewards of lower variable costs, and therefore higher margins,” Moffett wrote.

Comcast also has higher expectations for the rest of the year. On its conference call with analysts July 27, Comcast said it expects revenue to rise 10% to 11% this year (versus previous estimates of 9% to 10% growth), operating cash flow should rise at least 12% (versus previous guidance of 9% to 10%) and revenue-generating units (a combination of digital, voice and data customers) to rise 20% to 3.5 million for the year.

On the cable side, revenue should rise 10% to 11% (previously 9% to 10%) and operating cash flow should be at least 13% for the year (up from previous guidance of 10% to 11%).

Comcast also said it expects to add 1.3 million to 1.4 million digital phone customers for the year, instead of the previously estimated 1 million additions.

Comcast has been adding about 23,000 phone subscribers per week, up from 10,000 weekly a year ago.

Basic subscribers were down 66,000 in the period, typically a poor quarter for the industry as college students and vacationers disconnect service as they move to summer residences.

Burke said Comcast typically loses 50,000 to 60,000 customers in Florida alone, as snowbirds move north. He said roughly 40% of all U.S. college students are within Comcast’s footprint, making the company susceptible to such seasonality.

Boston: The Basic Test

Even with gangbuster growth in phone subscribers, Comcast Corp. lost ground in the second quarter in terms of video customers, with 66,000 basic subscribers disconnecting.

By contrast, Wall Street analysts would like Comcast to match Cablevision Systems Corp., which has deployed phone service and enjoyed eight consecutive quarters of growth in basic subscribers, in the process.

That may happen when Comcast has been in a market selling phone service longer.

Comcast chief operating officer Steve Burke said Comcast’s most mature telephone market – Boston – went from a loss of 16,000 basic customers last year to a gain of 1,000 basic subscribers in the most recent period.

“In Boston, I think it’s fair to say we’re seeing a greater uplift in high-speed data and basic subs than other markets,” Burke said. “As a whole, we don’t think the triple play is materially affecting our basic subs now, but we’re clearly seeing trends that would suggest it will, once you get out a couple of quarters.”

—Mike Farrell

Reigster at SatelliteGuys