Comcast swims against negative earnings tide: reports big gains in revenue and operating cash flow

Cable World, Nov 5, 2001 by Mavis Scanlon

The cable industry isn't recession-proof, but Comcast's third-quarter results showed a high degree of resistance to the economic turmoil that has caused other operators to cut forecasts recently.

The MSO continued to roll out digital cable and high-speed data at a record pace in the third quarter, and those customer additions drove double-digit gains in revenue and operating cash flow. Analysts expect the momentum to continue.

"Growth should continue to accelerate in [the fourth quarter] as Comcast leverages its rollout of digital, data and video-on-demand," said Goldman Sachs analyst Richard Greenfield in a research note. But he added that the strong momentum will be partially offset by what will be a tough year-over-year comparison for Comcast's advertising sales.

Comcast's cable unit increased revenue 10.3% on a pro forma basis, to $1.3 billion, slightly higher than some analysts expected. Pro forma operating cash flow, at $572.4 million, jumped 13% year-over-year. Basic subscriber growth of 1%, higher basic cable rates and revenue from new product additions contributed to the increases.

The performance of systems that Comcast acquired from AT&T and Adelphia Communications drove the cable unit's improvements in operating cash flow. Integrating those systems helped drive operating cash flow margins in the cable unit to 43.7%, from 42.6%, in the third quarter of last year.

"This performance is indicative of Comcast's potential ability to have the same impact on additional acquired systems if it is successful in buying AT&T Broadband," noted Lehman Brothers cable analyst Lara Warner in a research note.

Included in the cash flow figures is $3 million in losses related to Excite@Home and Comcast's transition to taking its Internet access service in-house. Although Comcast had planned to discontinue using Excite@Home in July 2002, it accelerated its plans after Excite filed for bankruptcy protection.

Comcast now plans to have all its ISP functions in-house by next June, although it will have to shell out as much as $150 million to fully effect the changeover. But rather than give up 35% of cable modem revenue to an ISP, Comcast will pocket the entire sum.

Overall, Comcast posted a net loss of $106.8 million, or 11 cents a share, compared with net income of $1.25 billion, or $1.29 a share a year ago. Last year's figures include one-time gains of $2.2 billion. Total revenue, including cable, content and commerce, jumped 20%, to $2.4 billion, up from $2 billion a year earlier.

Comcast's subscriber additions came at a price--increased marketing costs pushed up selling, general and administrative costs 30%, to $1.08 billion.

EVP and treasurer John Alchin singled out the increases in new service revenue-generating units (RGUs) as the most important driver of cable unit's revenue and cash flow growth.

The company ended the quarter with 2.9 million RGUs, up 76% from the same period last year. The momentum in new service growth continued even after the events of Sept. 11, Alchin said on the company's earnings conference call.

Comcast added 243,400 digital cable subscribers, up 21% over the second quarter. The company ended the quarter with 2.12 million digital cable subscribers; Comcast reiterated its recently increased guidance that it would have 2.3 million digital subs by the end of this year. While the company prereleased its third-quarter digital and high-speed-data subscriber numbers in early October, executives noted on the conference call that the weekly pace of digital additions the company saw in the third quarter has continued into the fourth quarter.

With the digital rollout well underway--the company expects its cable plant to be 95% upgraded by year-end, meaning capital expenditures will be far less next year--Comcast plans to focus on a broader rollout of video-on-demand next year.

Next year "our goal is to keep the momentum [we've established] in other businesses while getting heavily into video-on-demand," said Steve Burke, president of Comcast Cable.

Comcast added about 9,000 cable modem customers a week in the third quarter, or a total of 117,100. That's higher than the 90,000 modem customers added in the first quarter and the 101,000 added in the second quarter. During October, the growth trend continued. The weekly addition pace went up to about 11,000 to 12,000 per week last month. Comcast remains on track to meet its year-end goal of 950,000 modem customers, Alchin said.

Retail sales of modems remained strong in the quarter, with as many as one-third of all customers opting to buy modems at the retail level and self-install them. The success of self-installation of modems will help to alleviate pressure on the company's technicians and installers as the company drives to deploy high-speed service over as much as 85% of its footprint in 2002. At the end of September, cable modem service was available to about 9.6 million homes, or 70% of Comcast's footprint.