康卡斯特 (CMCSA) 2002 Q1 法說會逐字稿

Good day and welcome everyone to the first quarter earnings release conference call for Comcast Corporation. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Executive Vice President and Treasurer of Comcast, Mr. John Alchin. Please go ahead, sir.

Thank you, operator and welcome everybody to our first quarter 2002 earnings call. Just before I proceed, I would like to remind everybody about Safe Harbor disclaimer and that everyone on this conference call -- this conference call contains forward-looking statements subject to certain risks and uncertainties. I would refer to you to our 10-K for a full list of those risks and uncertainties as outlined. The call this morning, we have everybody here with Ralph, Brian, Julian, Larry Smith, Steve Burke, Bill Costello. Steve will give you some additional color on the terrific results that we have out of the cable division this quarter. Bill will be available for Q&A on the great results that have come out of -- out of QVC. And we will then open to general questions and answers. The results have really been fantastic this quarter. It is one of the best ever results out of the cable division in terms of revenue and cash flow growth. Revenue and operating cash flow are driven by over 60% growth in additions of revenue -- new service revenue generating units. In fact, our digital and online products represented over 6.8 percentage points of growth. That is more than half of the 12.3% growth that the cable division reported in revenue for this quarter. And we did this even though we had a transfer of 100% or -- sorry, transfer 100% of our high speed data customers in the first quarter. QVC results remain very strong in a rather soft retail environment. I would refer everybody to the front page Wall Street Journal article this morning that just highlights how QVC continues to attract new -- new buyers, and also people who want to get their products onto QVC. Further more, we had a great quarter in our content division in the face of rather soft advertising, with almost 34% growth in operating cash flow, including our new channel, G4, which launched just recently. The final point I would make before we go into the details of the call, is that we have just about complete the final documentation on a $12.8 billion bank line of credit that, along with our existing lines of $4.4 billion, gives us over $17 billion of credit availability to meet the needs that we have at closing, and leave us with about $3 billion of undrawn availability at close. But to drill down into the results. On a consolidated basis, we reported 19.7% increase in revenue to $2.7 billion, and 28% increase in operating cash flow to over $800 million. When we adjust those numbers only to reflect the timing of acquisitions to present a pure apples-to-apples comparison, revenues increased 12% and operating cash flow, 18.3%. And every one of our divisions -- cable, QVC and content divisions -- all reported double-digit revenue and operating cash flow growth. If we drill in then to the cable division, we reported 12.3% revenue growth to $1.47 billion. That is up from fourth quarter growth of 9.1%, up from first quarter last year, 8.5%. And as I mentioned a little earlier on, fully 6.8% of the points of growth, the 12.5% -- or 12.3% growth that we report for the quarter, came from our digital product and our online data product. That is up 36% from the level of contribution made by those two products in the first quarter of last year. Other drivers of revenue include consistent subscriber growth at almost 1%, 0.9%, bringing us to a subscriber count of 8.511 million at the end of March, adding about 40,000 subscribers in the first quarter of this year. Further contribution from ad sales, which was up 13.6%, better than the 7% that decline we had in the fourth quarter of 2001. So we really couldn't be more pleased with cable's operating cash flow growth. An increase of 13.5% to $598 million for the quarter. There is a very strong trend line developing here. We were up 11% in the first quarter of last year, 12% by the time we got to the fourth quarter of last year, 13.5% first quarter of this year. Margin was -- on a pro forma basis restated for the treatment of franchise -- new accounting treatments of franchise fees -- up 50 basis points to 40.7%. That is up from 40.2% a year ago. And even if we go back to the old accounting treatment for franchise fees, you would still see an almost similar increase in the operating margin. As I mentioned before, the single most important driver in the first quarter cable revenue and operating cash flow continues to be new service, RGU growth. We added fully 300,000 new service RGU's in the first quarter, and over 1.3 million in the last 12 months. That is a 59% increase in the number of 2.25 that we had at the end of first quarter last year. Bringing us to a total number of 3.5 million at the end of the first quarter this year. In the Comcast online product, our high speed data product, we continue to see strong demand despite the fact that we had to transition 100% of our customer base from the Excite At Home network to our own network in a six-week period. We finished the quarter with an 81% increase in the number of data customers from where we were a year ago. An increase of almost 575,000 over that period of time. I'm sorry, an increase of 466,000 over that period of time from a base of 575,000 a year ago. We finished the quarter with 1.04 million customers. And if you look at what happened to our weekly ads during that period, weekly ads throughout the quarter were about 7,000 a week. But if you drill in behind that number, you find that in January, we were adding less than 5,000 a week. That increased throughout the quarter to give us an average of 7,000. We are now adding almost 10,000 a week. So the momentum has really built from the slow down that we incurred because of the -- all of the effort that was required in the transition. Furthermore, another really strong development in this product line is that you see an 8.5% increase in average revenue per unit for this product. Average revenue per unit increased to $40.10 from $36.95 in the first quarter of last year. But, in fact, if you look at the increase over where we were in the fourth quarter last year, we are up in excess of 14%, because of some promotional activity that was taking place in the fourth quarter. So, customers are now paying us $39.95 for the monthly service, plus $5 for the modem if they lease the modem from us, and over 75% of the base -- of the customer base do in fact lease the modem from us. And now that we are out of the transition, we are continuing to see very stable churn in this product, absent the impact of the transition in January, as we wrap up the quarter and went into April -- into -- yeah, April. The churn numbers stabilized at around 1.5 to 2% on the product. This is a product that is now available to over 80% of our customer base. Out of the 13.5 million homes that we have, fully 11.3 million homes have access to this product. That is up almost a million homes from where we were at the end of 2001. This is a product that by the end of this year will be available to 86% of our homes, over 12 million homes will have access to the product at year-end. It is also a product that we are seeing rapid improvement in our operating cash flow margins. Operating margins increased from about 10 to 15% in the first quarter of last year to about 25% in the first quarter of this year. And we believe that this margin can further improve into the 30 to 40% range over the next 12 months as we continue to increase the subscriber base. The four-point improvement -- four percentage point improvement in operating cash flow growth from the online product reflects our ability to cut costs from the level that we incurred when we were on the Excite At Home network, where it was costing us 12 to $13 a month, down to a level of about $7 to $8 per customer per month. Steve is going to say more about the online rollout strategy when I wrap up the commentary on the cable division. Digital had another terrific quarter. Demand was much stronger than we expected. We finished the quarter with 2.54 million digital subscribers, representing 51% growth or fully 862,000 additions over the last 12 months from the 1.7 that we reported at the end of the first quarter last year. We added over 204,000 subscriptions in the first quarter, up 29% over the first quarter last year, and essentially flat with where we were in the fourth quarter of last year. And at the same time, we continued to hold the average revenue per unit for each box at about $10.60, up sequentially by about 1%. We have added additional disclosure in our pro forma disclosure at the back of the press release at this time, showing that approximately -- each home has approximately 1.3 boxes, and this now means that we are disclosing both boxes and subscribers. Average digital customer is now paying us approximately $14.40, about 9% higher than the $13.25 we reported in the fourth quarter -- sorry, in the first quarter of last year. The margin on this product continues to remain very strong, in the 80 to 85% range. So, it continues to be a significant contributor to operating cash flow. Just before I pass to Steve to describe the next phase of digital and an update on the online rollout, let me just reiterate guidance for the quarter. All of the trends in the cable division bode well for a very strong year in this division. We have accelerating revenue and cash flow growth, declining capital expenditure. Capital expenditure in the cable division this quarter, at $358 million, is down 18% from a year ago. And in act, our Cap-x in the cable division is slightly front end loaded this year. We have completed rebuild of almost twice as much plant in the first quarter as we had budgeted some 4,000 -- or 3,800 miles of an 8,000 mile rebuild that we planned for this year, was completed in the first quarter. So we finished the quarter with 83.5% of our plant at 750 or 860 megahertz of capacity, and we are reiterating our guidance of 1.3 billion dollars for cable Cap-x for the year. The acceptance of both digital cable and the online service is far outstripping our expectations, and this is further contributing to our confidence in our ability to meet the guidance at year end. With that, I will just pass over to Steve to go into further detail before we go on to QVC.

Thank you, John. When we put our budget criteria together this year in September or October, we were looking at a world that was post-September 11th, and thinking about the impact of that on our add sales and the rest of our business, consumption of new products, uptick of new products. We were looking at At Home literally disintegrating, and the need to shift to the new network. And we were also realizing that at some point, without a product enhancement, digital growth would start to slow down. The good news is now, after the first quarter, it appears in on all of those measures, all of those worries, we are in much stronger shape than we thought we would be when we put our budget together. So it has been, I think, both a strong quarter with solid results across-the-board, but I also a very strong indication that 2002 is going to be a better year than we had originally budgeted a few months ago. If you look at the key indicators that we look at whenever we analyze our business, all of our key indicators are in good shape. As John mentioned, basic sub growth of 40,000 during the quarter, or .9% growth trailing. The digital net add number of 203,000 is the strongest first quarter we have ever had for digital. And it now appears that we are going to be rolling out our Video-on- Demand product quickly enough that there is really no reason that we can see for our digital net adds to slow down this year, if we can get Video- on-Demand out to 6 million of our 13 million homes by the end of this year, which is our goal. High speed data. The net add number was comparable to last year but as John mentioned, it was really two different stories. In January -- the first two or three weeks in January, we focused 100% of our attention on getting everyone converted to the new network, and getting that network stabilized. The good news is, for the last eight weeks, we have had a very stable network. The customer contact rate in the last couple of weeks, which is a very good surrogate for service quality, is actually lower than it ever was under At Home. So we think we are in very good shape with a more secure stabilized network. And the good news is, in the month of March, after we have made the transition, our net -- our weekly net adds were 30% higher than last year. So I think as you come out of the first quarter into the second, third and fourth quarter, you are going to see an acceleration of our high speed data business, which is positive both in terms of revenue growth, but also with the improving economics that John mentioned in his overview. As it relates to add sales, we signalled in the fourth quarter that we thought or hoped that that was going to be a bottoming of the add sales business. We were down 7% in the fourth quarter. We were up 13% this quarter, and when we look out into the future, we see that those positive trends continuing into the second quarter and hopefully beyond. The good news is, the regional interconnect strategy, which we have talked about on these calls before, is really what is driving this growth. We were up over 20% in the regional portion of our business, and we see that continuing at the 16 interconnects that we have put in place over the last year or so are really starting to kick in. So when you combine all that, it leads to a cash flow growth of 13.5%, which is also the strongest cash flow growth we have had in the first quarter for a number of years. Typically our business -- the programming increases click in on January 1st, and we take rate increases through the year. So the first quarter is typically lower than where we would end up for the year. It is typically our lowest growth quarter. So I think we are well positioned for the rest of the year. Our organization, I feel is in very strong shape. 95% of our plant is rebuilt, which means we are competitive in 95% of our plant and we're also stable. We don't have the stress and strain on our call centers and organizations that rebuilds bring. It also means, as John mentioned, that our free cash flow for the quarter rose to almost $240 million. In addition, all of the integration work that we have been doing over the last two and three years is now essentially complete. So we are stable from a management point of view in terms of integrating all those systems and bringing them up to Comcast's levels of profit- ability. So as we look towards some time in the second half of the year, merging Comcast Cable with AT&T Broadband, I think we are in as good shape as we could reasonably hope to be, and we look forward to the challenges ahead. John?

Thanks a lot, Steve. Let's move on to QVC. As I said at the beginning, for those of you that missed it, great QVC article on the front page of the Wall Street Journal this morning. So, congrats to the QVC team for the results, and to the PR team for the timing on that article. Just couldn't have been better. The revenue increased 12.4% to $994 million in the first quarter. In fact, if you go back and look at the trailing 12-month results QVC, over $4 billion in sales over the trailing 12-month period. A new threshold for QVC. The same time, operating cash flow improved 11.4% to $192.3 million. Domestic operations delivered growth of 11.5%, driven by home's growth of 4%, now in front 73 million homes, and sales per FTE growth of 7.4%, now up to $11.46 from $10.67 a year ago. Cash flow growth in domestic operations up 11.6%, consistent with the revenue growth, and resulting in bottom line cash flow margins being stable at 22.6%. If you look back to the gross profit margin though, you see a slight decline down to 36.9%. But what is interesting with this number, this is the result of a change in mix of the products that QVC has been selling, selling more in computers and the home category, and less in jewelry, a higher profit margin business. But if you look at the trend lines though, still very, very encouraging. Going back to '98, the number was 35.1, increasing to 35.6 in '99, 36 in the first quarter of 2000, and the 36.9 in the first quarter 2002 continues that very stable upward trend line. QVC continues to keep very tight control on both fixed and variable expenses. Telecom expenses are now about a third more than they were -- a third less than we were, I'm sorry, five years ago. If you look at the numbers that they were paying five years ago, it was around about 8 cents a minute. That's now 3 cents a minute, or down from 3.7 cents a minute in first quarter last year. You take into account that in the first quarter this year, they handled over 26.7 million calls with a total minutes of 67 million minutes, you understand why having just a marginal change like that has a huge impact on bottom line efficiency. The results out of Germany. Germany is now in the black for the first time in the history of the German operation. Very encouraging to see revenue up 31% to over $60 million for the quarter, and continued increase in carriage, up over 1 million homes in the carriage to 24 million homes for the quarter. Still operating about the about 40% acquireness, given the idiosyncrasies of television channel tuning in that country. No real news out of the UK operations. Basically flat in the first quarter. Revenue at $67.6 million, essentially flat. And operating cash flow up 5% to $5.8 million from $5.5 million a year ago. And we now have QVP Japan celebrating its first anniversary at the beginning of last month. Revenue there almost $12 million for the quarter, running very strongly relative to the budget. Moving on to our content division, great results. 11.8% increase in revenue, 34% increase in operating cash flow, representing an increase or reflecting an increase in carriage across virtually all fronts in the content division. The numbers for each one. E! seeing a 6% increase in carriage for that channel, up to 71 million homes. Style up 85% to almost 20 million homes -- 18 million homes. Style is now in front of -- with contracts within a couple of years to be in front of over 40 million homes. Golf almost to 25% increase to 47 million homes. And Outdoor Life, now consolidated in our numbers, up 23% to 42 million homes. Great news out of E!. On Sunday, March 25, was the most watched day in the network's history, driven by record numbers at the Academy Awards preshow, a 3.6 rating, over 3.7 million viewers watching the channel on that day. Let me wrap up with a couple of quick comments on two important items, the free cash flow that we generated for the quarter, and just reiterating the point that I made on shoring up the liquidity requirements that we need to close the AT&T deal. We generated over $200 million of free cash flow in the first quarter of this year. And essentially all of this is driven by results out of the cash flow. I'm sorry, out of the cable division. Cash flow for the cable division increased over $70 million to $597 million, and Cap-x declined $155 million. So, when you look at the components of free cash flow, you can see the results of the completion or, you know, near completion of the rebuild as Cap-x declines and cash flow increases. We delivered the metric that has been talked about for so long in very large numbers. And the outlook for this year is for consolidate free cash flow generation between $750 million to $1 billion dollars for the year. And my final comment relates to the fact that we have now arranged a $12.8 billion dollar new financing to effect the close of the merger of AT&T Broadband. And this financing, along with the existing availability gives us over $17 billion of availability, and we will have a need of close between $12 to $13 billion. So we should have a comfortable cushion over and above the availability that we have secured. With that, let me pass to Brian for some closing comments before Q&A.

Thank you, John, thank you, Steve. A fantastic quarter, and I think reaffirms our belief and commitment that this is a fantastic industry, and Comcast management team in the cable division and in content and in QVC and in the corporate group, I couldn't be more pleased and proud of where we are at. As we embark on what is clearly a major challenge and a major opportunity, as we get further along here toward closing. AT&T Comcast and making it a reality. We -- talking about AT&T Broadband, we were obviously disappointed with the cable subscriber losses that they reported. But in the big picture, I think the current management team is doing a lot of the hard work that we all knew needed to be done to begin to move this massive operation in the kind of direction that Comcast today enjoys. And that involves redesigning the digital package, rebuilding customer care, beginning the cost-cutting effort which they announced that they reduced the work force, and restarting and really re-energizing the all-important rebuild program to get their plant at the same level that our plant now enjoys. But they are a small team of -- a handful of senior experienced cable executives who AT&T brought in, led by Bill Schweir and others. But we can expect and count on building on their efforts once our really army of infrastructure, 250-plus strong, is able to work with their existing system management and their team to put the best possible team on the field. But it will be a much, I believe, accelerated program of getting the business moving at a direction that we want it to end up being at. But there is nothing that I see that deters us on our basic concept, which was a sub is a sub. When we made this transaction, that was basically how it was valued. And when you get to 22-plus million customers, and you talk about how to integrate it, you don't go that with 22 million at a time. You break it into small units, and that is how we are going to approach it as we begin the post-merger planning process. But the most important metric in analyzing the business is the network rebuild. And they have properly focused on getting that cranked up to begin to improve not just system reliability, but overall competitiveness. And that is what, as they pointed out, seems to be distinguishing or differentiating them from everyone else in the industry, and the sooner that rebuild completes, the better. And we are committed to that. But when I step back and certainly take any questions on any subject, John's absolutely right, all the business fundmental metrics are, -- you know, this is a fantastic moment for the cable industry, and it is ironic given where the marketplace is right now. This is the highest revenue and highest cash flow growth we have ever reported in the last five years. And at the same time, the new products are selling better than we even thought ourselves. And it's only the first quarter. So, with that, let's open it up to questions. And we have members of all the senior management, as John said, to take your questions.

Thank you, sir. Investors wishing to ask a question may signal us by pressing the digit 1 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 speaker phone, please pick up the handset before press the numbers. And our first question today comes from Richard Greenfield from Goldman Sacks. Please go ahead.

When you look at the number of boxes for digital that you are shipping or selling per home, it looks like the number was about 1.8 boxes per home versus your aggregate was about 1.3, 1.4. Is that a trend in terms of really focusing on driving multiple boxes that we should expect to continue, and what does that mean from a pricing standpoint? Or is it really more of the new product you have added to digital, like VOD and et cetera? The second, you mentioned $240 million in free cash flow. John, could you just give us a little bit of clarity on how you get to that number, and how much is cable, and how much is QVC, et cetera? Thanks.

Okay. Steve, you want to handle the box, and then I'll do the free cash flow number?

Sure. I'm not sure where you're getting the 1.8 boxes per home. The -- I think the real number is more like 1.3.

That is the number if we look at just the first quarter, the results there, Steve, show that the additions for the first quarter have customers coming on with, on average, 1.8 boxes.

I understand. Okay. So the basic strategy on digital that we have right now is to continue to extend digital with the existing assortment, and then in the second half of the year to really start to push Video-on- Demand. And our feeling is that is something that is going to happen at exactly the right time when we would normally be plateauing digital. For the first quarter, what we did is sold a certain number of AO, additional outlet units, most of which were at $6.95, to sort of further solidify our very top end customers. And we'll continue doing that in the second or third quarter. But we to would see that 1.3%, 1.3 boxes per home average maybe nudge up a little bit, but not dramatically.

Yeah, one of the things we are not sure of, Rich, is what was that number in first quarter last year? We put this out as just additional disclosure, because others were doing it this way. But what is really, really important to us is to measure the average revenue per unit. And, you know, in the fourth quarter, average revenue per unit for digital boxes was about $10.45. And here we seen an increase to $10.61. So, however these box are selling, on average across the entire base, we are generating $10.60 of revenue per box for each and every box. To hit the question on the free cash flow, $212 million, that is after gross Cap-x of $399 million, cash taxes of about $30 million, and net cash interest of $167 million, delivering $212 million for the quarter. That is split approximately 50/50 between cable and QVC, with virtually 100% of the growth in that number coming from cable, because of the metrics of increased cash flow and declining CAP-X, as I described in the formal comments.

Let me just close with one other point on that question. One of the things that we have now gotten better at is something that is intuitive but took -- it requires a lot of training and having your operation up, and is having the call centers sell the new products. With the amount of volume of phone calls that we take, that -- for new customer orders we keep track of something called the DSI, the digital selling rate. Our DSI was over 40%. So, whether we are better off selling multiple sets of digital or higher product, these are -- there is no real sales commission, no marketing costs. Our HSI, our high speed selling rate, is now over 10%. So, all the people calling up to get cable television, we are selling the new products much better. And that is something we track every month in every call center around the country. And that may also contribute to our ability to now be moving more of these boxes, both first and second set boxes, and high speed data.

Thanks a lot. The additional disclosure is really appreciated.

Thanks, Rich. Next question?

I have Niraj Gupta from Salomon Smith Barney. Please state your question.

Hi, good morning. First question. John, you talked about how the -- just the provisioning costs were down to $7 to $8 a month, which is largely consistent with what you guys have been saying recently. Could you give us a sense of what an all-in inclusive incremental cost for each high speed data customer is, if you include marketing? Could you guys take a stab at that? And I guess the other two questions is, given what we saw with respect to the QVC domestic margin in the first quarter, i.e. flat year over year, should that be the assumption we carry for the balance of the year? Or should we expect, you know, a [INAUDIBLE] modest expansion on the top line? And lastly --

Niraj, how many parts are there to this question?

Just three, John, so this will be the last one. On QVC, second question is, do you guys pay cable [INAUDIBLE] up front distribution fees each year like HSN does? And if so -- in addition to your 5% of revenue. And if so, how do you guys treat that? Is that something you guys capitalize and amortize below the EBITDA line, or take through your cash flow line? Thanks.

Let let me handle the data questioned, and the up front paying question on QVC. Or maybe I can give it to Bill as well, and have Bill handle the margin part of the QVC question. If you look at the data product, we generated all in, including acquisition costs and everything, approximately 25% operating margin. Reflecting a month or six weeks of so of having relatively smooth operations on our own network. That's an operating cash flow margin on that product that we expect to continue to see improvement throughout the remind over the year on a run rate basis. We are currently probably just north of about 30, 33%, and by year end, we expect that number to increase to about 40%. So without getting into any other break down, that is the profitability that's coming out of that product. Our business in QVC, and I will have Bill kind of add further color to this, is a retail model driven by a 5% commissions to each of the MSO's who carry the signal. It does not rely on other launch payments or anything else that is made. Anything else that is done in that model is all relatively immaterial to the overall scheme of things, which is driven by the 5% commission line. Bill do you want to pick up anything else on that, and also add color on the margin?

Yeah, I think that is correct, John, with regard to the launch fees. Once in a while -- you know, every agreement with the cable operator is different. And once in a while, we might give some additional payments for channel placement. And if we do -- as John mentioned, it is not that material -- but when we do that, that would be for getting a lower channel position, if you will, over a period of years. And that would be amortized and included below the line. It is not really a launch fee, per se. With regard to the question on the margin, and I assume you are talking about our EBITDA margin, you know, which was flat. 22.6% this year versus 22.6% last year. Assuming we hit our top line goal, which is revenue increases for the base and qvc.com business, in the low double digit area, we should see some improvement in the margin improvement and the -- in the EBITDA margin. But I would expect somewhere in the area of 25 to 35 basis points throughout the rest of the year. We won't see the phenomenal increases that we have had in the past, because I think that we are operating the business right now at a very, very high efficiency rate. And all though there is some other cost benefits to be had, we have really done a good job over the last several years of bringing out as much as we can. So I think the leveraging of the fixed cost over a higher revenue base, should continue to boost our margin, bottom line, EBITDA margin by about 35 basis points a year.

Thanks a lot, Bill. Next question, operator?

Our next question from Jeff Dorsey from Wellington Management. Please state your question.

No question, sorry.

Thanks, Jeff. Next question?

Our next question from Richard Bilotti from Morgan Stanley. Please state your question.

Good morning. Obviously, margins improved in the overall cable business. And some of that is the acquired properties from last year. But one you didn't mention on the call was programming costs, and I'm specifically interested in understanding, now that you're almost done with the rebuilds, what are your programming cost trends looking like going forward? For instance, are program cost increases on the basic, or the video side, lower in systems that have been rebuilt, where you are no longer adding channels? Does that apply therefor to next year? Meaning, when we look [INAUDIBLE] in there are no new launches on the analog side, do we see some abatement of the growth of programming cost pressure? I'm talking about basically, programming cost trans X whatever savings that you might get from the AT&T merger. More related to your channel addition strategy and the underlying organic growth of programming.

Okay, this is Brian. Let me take a shot at that. I think you're absolutely right that when the rebuild activity abates -- and I don't have a specific breakout done that way -- the Expanded Basic, if you will, which is not then adding lots of new products, will logically begin to slow down. And I think we've, you know, seen some trends that are -- that are encouraging. But what is really part of the equation, is constantly trying to tweak the digital to come up with more and more appealing digital content, such that the digital package can continue expand in its revenue, as John was outlining earlier, each year. And so we have found ways -- we have layers of digital. We have Digital Basic and Digital Plus. And now we are beginning -- and what I'd like to shift that question to a little bit, if I might, is our excitement with VOD, Video-on-Demand. We really see somewhat of a replication of the cable model, and perhaps an improvement on, if you will, the internet model. And that is that there will be three buckets of VOD content. For years we have all talked about movies on demand. And we are making great progress -- and think we'er going to see some announcement this week and next -- on major studio relationships with various VOD providers. Which is going to [INAUDIBLE] our benefit. But impulse on demand product is one bucket. The second bucket is subscription VOD, which is -- you know, the best example is if you buy HBO Plus -- whether we charge more for that or not is a separate issue, or they charge us more or not is a different question -- you can access any of the HBO movies or Sex and the City, or Sopranos, any time you want, and maybe earlier than it's broadcast. And these kinds of experimentations are going to be very exciting. But the latest category is what we are calling "Free VOD", or free video on demand. Where if you come into digital -- and this is what Steve was talking about. Giving folks a reason to take a digital box who maybe don't want to subscribe to HBO or Starz or Showtime, or who haven't yet done movies on demand. That in our 1500 hours of content that we can put on a digital server that we'll have running this summer in our first market, 750 hours of that 1500, we are going to offer to the same content companies you are talking about in your question. To say, would you like to take, you know, the best biographies on A&E and have them available to customers, including the commercial. Or would you like to have the nightly news broadcast rebroadcast any time the consumer wants it, until the next night. Or a sporting event that they couldn't watch live, but they want to get it any time. It's a controlled personal video recorder, where there is a relationship between the content company and the cable company to create the best of experience for the consumer. And in that mix -- and the reason I bring that up now -- if you take the combined AT&T/Comcast, around $3.5 billion of content purchasing, can we find ways -- win/win ways, to expand the content to this new platform? Do it in a way where we begin to get the consumer to want to buy or want to push the okay or the buy button, and pay nothing for it. If you look at the internet, every time you clicked, if it cost 10 cents, we all would not be out there surfing the net the way we are today, where it is "Free." And think that it is a marvelous model that we are now in conversations with the content company. So we don't break out the relationship just by Basic or VOD or new launches or now digital. It is a relationship at how to make the best value add using the cable technology to expand their reach and to make a compelling consumer proposition. All in all, we are quite satisfied with the progress we are making, look forward to testing this new product this summer.

Thank you very much.

Next question please, operator.

Our next question comes from Jessica Reese Cohen from Merrill Lynch. Please state your question.

Thank you. Your data growth was phenomenal. Where do you think peak penetration as a stand alone ISP will be, and how much further can multiple ISP's take your business? And can you also comment on, given the growth in margins throughout the year, what do you think peak margins on this side of the business will be?

Well, let me kick it over to Steve after one up front comment on data growth, because I think you are absolutely right. Given the transition -- and in fact, if you look at the weekly add rate in January was -- John?

We started out at less than 5,000, and we're now doing very close to 10,000 a week.

So the trend is only getting better. And one of our problems, Jessica, is really knowing where does data, where does digital end? Our goal is to keep coming up with compelling propositions in the description of the product that just makes that answer unlimited or unanswerable at this moment. So what are we going in data? Well, one thing would be multiple ISP's. And we, as you know, announced United Online, NetZero, AT&T Broadband announced Juno, and a regional Massachusetts ISP, we really do believe that if the -- again, in a win/win, non-governmental mandated way, multiple ISPs can help us. We are working with other broadband content, just as with VOD to enhance digital, whether that is VoiceOver IP, or whether that is folks like Real Networks and what they are doing, or whomever, we want to create the experience. But the first job was to stabilize the network, to get it to perform better than the At Home network was performing, to allow us to have multiple ISPs, and finally, probably most importantly, was to get it to DOCSYS 1.1, so that we can begin to differentiate the experience by charging people who are interested in more consumption, more -- and people who are interested in more speed, or people who maybe interested in always on but not high speed, less. And to have, you know, bandwidth on demand. And to also have the ability to have two-way at higher bandwidth rates, which is what Cable Labs is working on. All of that is what was the benefit of this painful conversion that we had to go through, and I think we did a fabulous job. Steve?

Well, if you look at our mature markets, we have penetrations significantly in excess of 20% now. We also have in many of our markets, our online sell in rate. In other words, the percentage of people who are new to cable who have moved in, who also take online, is over 20%. So I think going over 20% for the existing configuration should be no problem at all. We look at this in a similar way to digital, in that you keep evolving the product, and you need each evolution to occur before the lifecycle starts to flatten. And the type of things we are working on now that we have our own network, Brian mentioned tiering, introducing a tier above the $45 rate. And also eventually introducing a tier below. Although I think you have to be careful with cannibalization before you do that. Multiple IP's we see as being additive to the business. I think the track record at Time Warner Cable with EarthLink and AOL would suggest that they really are getting a lift, so we are excited about that. And then new products. Home networking we think is clearly an opportunity to get an extra $10, $15, $20 a month in recurring revenue. Security, we had some ideas on a security product. And then audio, gaming, streaming media, et cetera. And I think the idea is, as with digital, once you get a cable modem in someone's house that is just the beginning. And you keep refining and making the product more rich, so you can layer on more revenue and drive penetration deeper.

Next question --

Thank you.

I'm sorry, Jessica. Next question please, operator.

Our next question comes from Raymond Katz from Bear Stearns. Please state your question.

Yeah, good morning. Two things. First of all, digital penetration looks like it is going to be close to 30% by the end of year, and I'm sure there are systems where you're at that now. Could you talk to us about spectrum -- analog spectrum recapture? Can you start that soon if you are 30%, and you're pushing all your premium customers now onto digital? Can you get that recapture soon? What should we expect rolling forward, say a handful of years? What would you use that spectrum for? And Brian, can you just elaborate a little bit more on the model VOD that you talked about, specifically with movies on demand and release windows?

Steve, go ahead.

Well, in terms of digital penetration growing, and recapturing analog spectrum. Our feeling is that the cable business is a gradual business So what's been happening to us as we have had individual systems reach penetrations up in the 25, 30% range, is we have started to recapture analog spectrum already. And we have done it, we have taken back pay-per-view channels, we've taken taken back in some cases, analog pay channels, and so that is a process that has been occurring. That process will accelerate as digital reaches a higher penetration level. In terms of uses, I think the most immediate major use is going to be video on demand, where we have allocated four analog channels to video on demand, but have a feeling that our video on demand product, as Brian described, could be robust enough that you may went to allocate more than four analog channels. Which I think ultimately would be a good problem to have, because it could would indicate that simultaneous usage would get above 10% and into the 15, 20, 25% range. Which would indicate that the product would be going into a completely different level of attractiveness, which after all is really the purpose of the on-demand strategy that we are looking at expanding.

I think one of the things with movie windows is, obviously, the desire in the cable industry to over time find a model to move them from where they are today, closer to home video. And in some event type cases, even try to play around with some special events only on cable where, who knows, maybe it's earlier or sneak preview or whatever. In order to do that, we have got to get the product going. And I think we are going to show some real progress in that regard. And the model will allow for the studio, movie by movie, company by company, to determine if it wants to begin to experiment with different ways of making this more attractive. At the same time, what we are talking about in the free world, is getting people used to pushing and getting what they want now. Give them a sample, give them something that they want. And of course with the broadcast network, if I just did 60 Minutes, I'm throwing it away until next week, and it doesn't have a shelf life value, and they can resell the advertising and [INAUDIBLE] up their rating. Isn't that something, and to advertise their network, why wouldn't we want to offer that product? And that gets people used to click and watch. And then one day they see a movie, they click and they buy. And I think it is -- if you could do the Internet all over again, you would have a lot of surfing around, and you'd a lot of levels of clicking that would have some fees. But the free nature of it is -- was critical to its success. And think that is a little bit what we are thinking about while we are waiting for the volumes and the dollars to allow for more meaningful events to premiere on cable.

Next question please, operator.

Our next question from Allen Gould from J.P. Morgan. Please state your question.

Yes, thanks. Two questions. [INAUDIBLE, POOR AUDIO ON QUESTIONERS END]

Allen, we're having trouble hearing you. Can you speak up?

Is that better?

Oh, that's way better, thank you.

Okay. Can you tell us a little bit about the debt line that you have? What the average interest is, what the debt maturities are? How much you plan to eventually have fixed floating? And secondly, when do you expect your price increases of basic cable to be this year?

Steve, want to handle the price increase? I think most of that is through already.

Yes, I think in terms of price increases we'd be in the same range that we have been the last few years, which is 5 to 6%.

And those went in the first quarter, Steve?

No, those come in throughout the year. We have a lot of increases in the August through November timeframe, they sort of come in [INAUDIBLE]. We don't have a particular day and time when all $8.5 million subscribers take increases. It comes in over time.

And Allen, our average cost of debt is under 6%. At the end of the first quarter, it was about 5.89%. We have a relatively high ratio of fixed to floating at the moment in the 85 to, you know, 15 range. I think going forward, you know, we -- that is something that we manage constantly. We have had ratios more consistently over time in the 60/40 range. Obviously, what we draw down at closing of the merger, at the outset, absent any activity in the bond market in anticipation or in advance of closing, would result in initial drawings being 100% floating, taking this number down dramatically from the 85/15 that we are at now. And then subsequently, if we did any bond offering into the marketplace, we'd have the ability through hedging to do swaps back from fixed back to floating. So, somewhere between, you know, 60/40, 75/25 is where we have historically been.

Okay, thank you.

Next question please, operator.

Our next question from Tom Wohldean from Sanford Bernstein. Go ahead.

Good morning, gentlemen. Related in two parts. One, how you are on maturity of the debt going forward. And secondly, does the fact that you have resolved the cash needs for closing, are you okay for the next -- the following year for your cash needs, and does all of this reduce any pressure on you to try to do a fast resolution, perhaps having to pay taxes [INAUDIBLE]?

Sorry, Tom, I did not mean to duck the maturity issue. We have very modest maturities on our own balance sheet in the '02, '03, '04 timeframe. The facilities that we have put in place for the AT&T merger are involved financings that are about 50/50 split between longer term, sort of two to five years, and short term being 364 day facilities. The 364-day component of the financing arrangement is directed primarily at giving us a bridge into the bond market. And, yes, the financing that we have arranged takes into account virtually any need that we conceive from here through about the next 18 to 24 months. And, Brain?

Yeah, I don't want to comment on [INAUDIBLE] publicly, except that we are hopeful to get a, you know, private resolution. But that conversation I think is best left to private discussions. It's ongoing.

Do we have one last question please, operator?

Our final question from Michael Kapenski from A.G. Edwards and Sons. Please go ahead.

Thank you. With the company's focus on advertising, given the merger and the platform you had so eloquently talked about, how interested in getting those L.A. systems and consolidation in the L.A. market, especially with the prospect of having Adelphia L.A. Systems on the market? I know that AT&T owns an interest in those. Could you acquire those Adelphia Systems prior to the approval of the merger? And are lawmakers looking at the aggregate number of subscribers given the AT&T partnerships and ownerships that you might have? Could you roll out some of those companies and systems without the ire of Congress? And, so maybe if you could just give us an update on maybe some of your hearings, what the senators had concerns of yesterday?

Right, last week -- this is Brian. Let me say that we were, you know, what you are referring to is the Senate Judiciary Subcommittee hearing that took place on the merger, and people have to draw their own conclusions. Although, a number of of the senators commented that they did not see an anti-trust issue with the merger. So, we were pleased with that. And I think it was a very good, fair hearing, and do not anticipate anything that would have changed our estimate of when the deal will close. If anything, we are hoping to make it happen a little sooner not a little later, not a little later. But we will stand by our estimates at this point. Rather than get nothing any specific market and potential transactions about other companies, I would just say that the government, I think, is looking at it in aggregate. There could be lots of swapping that goes on. We are not any -- at this point, we have plenty to work on. If we can make it less markets with more concentration in those markets for the way we run the business in the clusters, that is always desirable. Whether that is adding one particular cluster or getting out of a particular cluster and adding systems that are contiguous somewhere else, we'll leave that to others. But we are not looking at anything except how to get the new company to have the kind of margins that our company today enjoys, with the kind of new product success and with the kind of focus on operations that I think has made results like today possible. That is really where we are focused. And any one individual market, you know, is not the center of attention at this point.

Thank you all. We are available for anybody who has any followup questions. So look forward to another great quarter and a terrific year. Thank you.

Thank you. There will be a replay immediately following today's conference call and it will run through tomorrow night at midnight. The dial-in number is 630-652-3000, and the pass code is 5605377. Once again the number for the replay is 630-652-3000, and the pass code is 5605377. A recording of the conference call will also be available on the company's website. This concludes today's teleconference. Thank you for participating. You may all disconnect.