康卡斯特 (CMCSA) 2002 Q2 法說會逐字稿

Welcome to the second 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 the Executive Vice President and Treasurer of Comcast, Mr. Alchin, you may begin.

Thank you.

Welcome to our second quarter earnings call.

Just before we proceed here, let's remind everybody of our Safe Harbor disclaimer and that this conference may contain forward-looking statements subject to certain risks and uncertainties, and I refer you all to the 10-K for a complete list of those risks and uncertainties.

With me here today, I have Ralph, Brian, Steve, Larry Smith, Art Block our general counsel, and on the line with us we have Bill Costello, the CFO of QVC, we'll all be available for Q & A after we get through the formal parts of our commentary.

We had a terrific quarter, we're thrilled with the results and really proud to report the that we have for this quarter.

On a consolidated basis, we reported revenue on an apples to apples basis up 11.7%, at $2.7 billion, and operating cash flow of $867 million, up 20.4%.

We refer to that as being proforma but I remind all of the listeners that in our case proforma adjusts for nothing other than acquisitions and reflects everything on an apples to apples basis, with no items excluded to come up with the proforma numbers.

The -- each of the business segments had terrific results.

Cable reported revenue up 11.9 and cash flow up 15.3.

QVC revenue up 13.5 and cash flow up 21.7.

And our content division, if you exclude the start-up operation of our new G4 channel, reported cash flow of 26.5%.

I'd also point out that in the first six months of this year, we generated $398 million of free cash flow as measured after payment of all interest, taxes and capital expenditures.

This number compares to a deficit for the same period last year of $193 million, and represents a $590 million increase year over year.

At this rate of free cash flow generation we're well on our way to meeting our previously stated estimates for full year 2002, free cash flow, after Cap Ex, interest and taxes, of between 800 to $1 billion.

In fact, if you drill down into this number, and look at cable free cash flow for the second quarter, after all Cap Ex, all cash interest attributable to cable and our corporate division, so excluding only content and QVC, cash interest and if you apply all corporate overhead to our cable division, still on a stand-alone basis the cable division generated 75% of the free cash flow that we're reporting for this quarter.

Furthermore, as shown on the last page of our press release, if we net out after tax non-operating items, we generated $140 million of net income for the quarter.

Up from $99 million or 10 cents a share for the same period last year.

I'm also really pleased to report that as a Company, we'll be filing an 8-K today, covering the SEC requirements that we certify all previously filed reports without any modifications, and without any exceptions.

The certification required by the recently passed Sarbanes-Oxley legislation will be filed within the next few days, when we file our 10-Q.

Moving on to the cable division, and what a blowout quarter it was for the cable division. 15.3% operating cash flow growth, 11.9% revenue growth.

We installed more RGUs at 336,000, than last year, when we installed only 301,000.

We installed more than we installed last quarter, when we installed only 296,000.

Comcast Online as well goes from strength to strength.

Online subs are up 75% or over 500,000 units from where they were a year ago.

We finished the quarter with 1.17 million online units.

Net ads for the quarter were up 39% over the first quarter.

So we added 128,000 units in the first quarter.

And we continued the trend we reported in the first quarter of increased average revenue per unit for this product.

Year over year, average revenue per unit was up 14% to $42, up 5% sequentially over the first quarter.

The revenue growth of 11.9% to $1.54 billion was driven primarily by the continued success that we're having with our digital product and online product.

The two new products contributed over 60% of the revenue growth in the quarter.

The digital product alone added 198,000 units in the second quarter to finish the quarter with 2.7 million units, up 860,000 year over year.

In fact, the strength of the net adds in this category is so strong that we're increasing our guidance to 6 to 700,000 units for the year.

And we continue to see average revenue per unit hold steady at $10.60 a unit.

High-speed Internet revenues doubled in the second quarter to $140 million.

And I would compare that to a 50% increase or 48% increase in digital revenue for the quarter.

So both of them are contributing strongly to our top line results and the 11.9% growth for the quarter.

We're reflecting, the high-speed Internet revenue doubling reflects the impact of price increases that are now effective across our entire customer base, and the 75% increase in the customer base.

In fact, if you annualize the second quarter revenue from digital and online, these two products now contribute on an annualized run rate basis $895 million of revenue.

So by the time we get to the end of this year, annualized run rate revenue from digital and online should approximate $1 billion.

To think that only four or five years ago, neither of these products were available off our network and we're now approaching a billion dollars of revenue from the combined product offering.

Further drivers of revenue in the first quarter were continued strength in subscriber growth, basic subscribers up 0.9%, finishing the quarter at $8.5 million.

Ad sales were strong in the quarter, up 13.1%, reflecting stronger local ad market as well as ongoing success of our Comcast market link network, which is our regional fiber interconnect, attracting new regional and national advertising revenues.

The pay-per-view revenue is up almost 24% as a result of the Tyson-Lewis fight.

We sold approximately 180,000 units for this fight at about $55 a unit, resulting in incremental revenue of about $10 million for the quarter.

That's less than half of one percent of the growth for the quarter, and $4.7 million of operating cash flow.

This approach is approximately 1% of the growth in operating cash flow.

So if you were to net out the full effect of the Tyson-Lewis event, cash flow would decline from 15.3 to 14.5, which is probably more in line with our second half outlook for revenue in the cable division.

Operating cash flow of $653 million, I would point out that this represents $307 of annualized operating cash flow to each and every one of our 8.5 million subs.

The primary contributer to operating cash flow is the rollout of new products.

The increased cash flow from both digital and the high-speed Internet access offering.

As we continue to scale Comcast Online on our own network, we continue to see increased profitability from this product offering.

Furthermore, the positive contribution from ad sales and we continue to see on all fronts basic digital, and data, slight declines in churn across each one of those categories.

These together result in an improvement in our operating cash flow to 42.4%, up from 41.2% a year ago.

With that, let me pass to Steve for any commentary that he has on operations and the stage of integration with AT&T.

Thank you, John.

It really was a strong quarter across the board.

And I think what I'm most pleased about, which is really a tribute to our operating team, is the breadth of the strength.

If you look at cash flow, it was 15.3% which is the highest we've had in any quarter in years.

And as John mentioned, we're looking at the second half being in the 14 to 15% range.

But in addition to the strong operating cash flow, we had strong free cash flow.

While preserving basic subscriber growings, basic subscribers on a trailing base is .9%.

When you then move on to digital, John mentioned we're increasing our guidance, we're increasing it to a range of 700 to 800,000 units for the year.

But as important as the increase in units, I believe is the increase in -- or the strong RPU level.

We have a very high RPU relative to other people in our industry and on a household basis we've actually grown average revenue per subscriber from $13.70 to $14.50.

So we're getting units and we're also getting very high yields.

High-speed data is the same thing.

Business is picking up but our RPU is going from 37 to about $42, and while we're doing that, we're getting very, very strong reliability of our own network.

Which is enhancing customer satisfaction and also the profitability of that business.

The same thing could be said for ad sales.

Ad sales are up 13%.

The vast majority of that increase is coming from the interconnects that we've talked so much about.

Those are really starting to click in.

So I call this a strong quarter but also a very broad quarter in terms of its strength.

Perhaps the best news, and I think the thing that bodes best for the future, is one of the concerns when we announced our deal with AT&T in December, that many of you expressed was how do you start the process of integration and planning for the combined Company without taking your eye off the ball?

And the good news in the second quarter, not only did we post these results, but we did so in a stage in our process vis-a-vis AT&T, where we are intensely focused on the integration process.

So we were able to keep the momentum going in our base business and start to lay the foundation for a successful process integrating with AT&T.

Let me brief you on that.

Bill Schlier [ph] and I agreed that for the first six months after the deal, was announced, there should be literally no contact.

That the best thing for both companies was for AT&T management to run their business with literally no contact.

About three months ago, we started doing the post-merger planning process, and the caveat I give here is that AT&T is very much in control of their business, they're responsible for their results, and they are driving the business until the day we close.

However, we have begun planning for life post-merger, and that process has really kicked into gear at a very high level over the last two or three months.

We've had multiple trips to Denver.

I personally have visited systems representing over 50% of their subscribers with my senior management team.

And I think we now have a much clearer sense of the challenges and opportunities that AT&T broadband is going to bring to the combined Company.

I'm more confident than ever in what I would call the Comcast approach.

Which I would characterize as very strong decentralized management, with people who have very clear priorities and a real focus on cash flow.

And I'm more confident than ever that that kind of approach can yield very, very big dividends, once we put the two companies together, and believe there are real upsides in terms of improving margins, the phone business I believe is a significant upside, and of course the scale that comes when you have 21 or 22 million subscribers.

Last week, we announced our field management structure for life post-merger.

Let me briefly tell you what you that entails.

We're going to have six operating divisions that will manage the 21 to 22 million subscribers.

Four of those divisions are existing Comcast divisions.

So what we're doing there is taking existing management teams that run two or three million subscribers and giving them another two million or so subscribers.

We're creating two new divisions for the western system.

One will be run by Joe Fisher, who's from Comcast, and based in San Francisco.

He'll be running the California systems.

He will create a new divisional management structure in the next 30 to 60 days.

And another division will be run by Trey Smith, who is currently with AT&T Broadband but has extensive cable experience and he's putting together a division in Denver.

All of these executives, all six of the division Presidents, plus all of their management team, have done this before.

These are the people who have taken us from 4 million subscribers to 8 million subscribers over the last three or four years.

They know exactly what to do.

And they have begun the process of planning for life post-merger.

We needed to do this now because that process takes about 60 days and then we want to get out and review all the post-merger plans before the deal closes.

But our goal is to make sure that we hit the ground running.

And we want to be very aggressive about all of the planning and all the procedures that have to take place between now and then so that the day we close, we're ready to go.

During the month of August, we'll be reviewing the Denver infrastructure, marketing, finance and engineering and all the other non-field positions, and we'll be making more announcements as we get closer to the deal.

But I would say the spirit among my management team and myself is very confident.

I don't think we're naive in terms of the size of this challenge.

But very confident that the approach that we have to the business with some help from a lot of good people at AT&T is going to end up making this a very successful deal.

Thanks a lot, Steve.

Let's move on to QVC and it really was another spectacular quarter for QVC.

They generated $995 million of revenue, a 13.5% increase over last year, and $195 million of cash flow, a 21.7% increase over the same time frame last year.

The domestic operation continues to perform really strongly.

Revenue up 10.6% for the quarter.

This is driven primarily by continued homes growth, up about 3 1/2%, continued increase in sales per FTE, up 7%, to almost $11.30, that's up from $10.56 a year ago.

The same time they are continuing to deliver results down to the cash flow line with cash flow up 16.1%.

It's driven by a number of components, first of all continued improvement in the gross profit margin, up about 30 basis points as a result of better initial gross margins and a change in mix, a slight increase in the jewelry mixed component for the quarter, up to about 29% from 26% a year ago.

Furthermore, the cash flow margins have improved to 23.1%, up 110 basis points from the second quarter in 2001.

And we see this is as a result of continued tight controls on both fixed and variable expenses.

In the variable category, everything in QVC relates to volume.

When you have 64 million minutes of phone usage in the quarter, the fact that phone costs now to QVC are at 3 cents versus 3.7 in the second quarter of 2001, and 8 cents five years ago, has a dramatic impact on variable expenses.

At the same time, the amount of time each CSR spends on each call has an impact.

With 4.2 million calls in the quarter, the fact that the new software in the customer service package resulted in call time being down 20 seconds to 190 versus 240, results in improvement that drives the cash flow margin to the level that we're at now of 23.1%.

Furthermore, we see continued improvement in strength in international operations.

Germany is in the black for the second quarter in a row, they've now generated about a half million dollars of cash flow in the first half of the year.

In the second quarter, it was just slightly better than break-even, up from a loss of $2.7 million in the second quarter of last year.

Revenue increase in the second quarter approaches 50% at $62.5 million, and the number of homes almost up 6%, almost 1.7 million to 24.8 million, with awareness continuing at about 40% in Germany.

Japan is off to a very, very strong start.

Revenue of $17 million in the quarter, and a loss of only -- less than $1.5 million, a significant improvement from the $6 1/2 million loss reported in the same period as last year.

It appears that the strategy of building infrastructure earlier than we did in the U.K. and Germany and the resulting tighter operational controls that results from having our own infrastructure may well be paying dividends, but still too early to tell.

Nonetheless, Japan is off to a very strong start.

In the content sector, every one of our channels, E!, Style, Outdoor Life and Golf have all benefited from increased carriage and a stronger advertising market.

As I mentioned, in my opening commentary, the bottom line cash flow growth excluding the $6 1/2 million loss that we generated out of the startup G4 channel was 26% year over year, cash flow of $62.1 million, netting out G4 we had $55.6 million of cash flow for the quarter.

Each one of the channels enjoyed better carriage in second quarter over '02.

E! finished the quarter with carriage of over 70 million subscribers, up 3% year over year.

But really strong growth in the carriage of Style, up to 19 million homes from 13 million, almost a 50% increase a year ago, both Golf and OLN reported 20% increases year on year in their carriage.

Each one of the channels reported improved operating cash flow as a result of aggressive management of a expenses across all departments to offset the slower ad environment, where we're continuing to see improvements.

In talking about OLN, OLN has just completed three weeks of coverage of the Tour de France, which finished in Paris on Sunday.

They had 41 hours of live coverage, early indications are that primetime household ratings for the three weeks of coverage were up significantly, reflecting the enormous buzz and excitement that was created around Lance Armstrong's 4th victory and we're delighted to have had that coverage on OLN.

I think with that, let me pass to Brian for additional commentary and a wrap-up on the quarter.

Okay.

I will try to get to your questions right away.

But I didn't want the moment to pass without making a couple of observations.

First of all, we're pleased as John reported to be able to make the securities filing recertification.

Two, we will be complying post-haste with all the provisions in the Sarbanes-Oxley legislation.

This was a fabulous quarter, and delighted to get into the specifics of each of our businesses, but continues to reaffirm in one of the most depressed stock market environments that I can remember, and particularly nervous about either the future of cable or the fundamentals of cable.

I just can't think about any better results having been produced for this Company.

In the last five years, this was the best OCF EBITDA quarter.

QVC had its 21st consecutive quarter of double-digit cash flow growth.

And the Content division is the fastest growing division of the three.

If your benchmark is free cash flow, John articulated how strong and how consistent the free cash flow growth is.

And you will see additional disclosure in the press release that John will talk about around capitalization policies, but we're trying to continue a trend of complete openness, with a comfort that this business, no matter what valuation method you want, continues to show great health and great progress.

The AT&T update, Steve talked about the post-merger operation plans, which are taking great shape, are increasing excitement and comfort with getting closer to closing.

We now have received over 95% of all the local franchise authorities' approval for this transfer.

We are waiting for the Department of Justice and the Federal Communications Commission, as well as the I.R.S. tax ruling, and we continue to be optimistic that some time in the fourth quarter this deal will close.

On Time-Warner Entertainment, there was a press release between AT&T and Time-Warner, which I can only illuminate by saying that we are encouraged and hopeful that this process will yield a very positive outcome for all parties concerned, and we are very much engaged and hopeful.

And unfortunately, I think it's appropriate not to negotiate publicly but think that this again is potentially good news on the horizon.

And finally, I just again want to reiterate with all that's happened in the last 12 months and sort of the most extraordinary times in our industry and in our financial system, that we think this Company is focused, has a plan that we are marching toward regarding the integration of AT&T Broadband, and we're excited and confident about the future of the cable business and whether its the new product sales or the potential for the margin improvement or the future of a company with 21 to 22 million customers.

While there are a lot of distractions at many companies right now, at our Company there is a complete focus and a task that is large but manageable that is consuming our people full-time, and so I think that morale and excitement is actually, despite all those other negatives in world, never been better.

John.

Thanks, Brian.

Let me just add a little commentary to one point that Brian made that I overlooked in my comments.

As you can see at the foot of the supplemental business segment data, as appended to our press release, we're providing a lot more clarity with expanded disclosure of capital expenditures to include an itemized capitalized costs for initial or new subscriber installations.

Remember FAS 51 requires that we capitalize new installs.

As we show in this table, capitalized installs for the second quarter totaled $116 million, with only $33 million of that amount representing overhead or indirect costs.

Capitalized overhead represented only 5% of the total Cap Ex, year to date, so that's $38 million as a percentage of the $689 million.

We hope that's helpful for the street in understanding this issue that seems to have developed some scrutiny over the last little while.

With that, operator, let's open for any Q & A.

Thank you, sir.

Investors wishing to ask a question may signal us by pressing the digit 1.

If your question has been answered and you wish to be removed from the queue, please press the pound sign.

If you're using a speaker phone, please pick up your handset before pressing the numbers.

Our first question comes from Richard Greenfield from Goldman Sachs.

Please go ahead.

Hi.

Good morning.

Two questions.

First, Steve, could you just touch on advertising.

It was quite strong in the quarter.

Could you give us your initial sense of visibility in Q3 and beyond?

And then separately, John, looking at free cash flow, which improved on our numbers looked like from $100 million for the core cable business to $300 million for this quarter, was there any significant changes in working capital that drove that change and will we see that -- any effect from working capital in the second half?

Thanks.

Just let me answer the free cash flow numbers.

The significant difference between first and second quarter was the $122 million tax payment by QVC.

QVC generally pays their cash taxes in the second quarter.

That's the significant difference between the two quarters.

And in terms of advertising, if we were up 13% in total, over 10 of the 13 was from these interconnects we've talked so much about.

So we're clearly gaining share from the local broadcasters.

And we would expect that to continue.

We don't see anything that suggests a slowdown.

But I think, I got to be honest, in this kind of market -- with the jitteriness of the financial markets and everything else you're constantly on guard.

But if you look at bookings that we see, as far as the eye can see, it's good news.

If I can follow up, Steve, any initial reaction from advertisers as you're talking to them about how things will change post the merger?

No.

Although we've given it a lot of thought.

The ability to offer more markets and more of a one-stop shopping and the ability to gain the trust of advertising agencies in some of those markets is all a positive.

We have put together a team and are opening a fairly substantial New York office.

New York advertising office to really compete the way the traditional broadcasters and big cable content companies have.

So we've given it a lot of thought, and we'll start making those pitches once we close the deal.

Next question, operator.

Our next question today comes from Norage Gupta from Salomon Smith Barney.

Please go ahead.

Thank you.

Good morning.

John, earlier on the call, you said that over 60% of year over year revenue growth in cable was from new services.

Do you have a corresponding figure as it relates to cash flow growth for cable?

No, we don't, Norage, because we don't go through the allocation exercise to create individual cash flow, but both of these products on a run-rate basis are a very high incremental margin at this point in time, with incremental margin on digital probably north of 85% and on the online product we're probably on an incremental basis north of 75% at this point in time.

Does that include allocation for marketing costs and whatnot?

We haven't drilled down to that level.

But that does include some allocation of marketing.

Okay.

And just two more quick ones, first, on, I guess maybe for Bill, your principal competitors said business is quite weak in July as it relates to electronic retailing business, so I was curious if we could get your take on how QVC is doing and seems fairly clear that QVC continues to take incremental market share.

And secondly, appreciate the transparency created by the Cap Ex breakdown, John.

Capitalized installation costs were $116 million for the first half of the year.

Do you have a figure of the total capitalized -- sorry, total installation costs?

Obviously $116 was what was capitalized, but do you have a number for what was actually expensed for the first half of the year?

Thank you.

Bill, let me answer the expense and I'll pass over to you for the July commentary.

I don't have the amount that's expensed, that's all fully reflected in the $653 million of cash flow that we recalled for the quarter but what we were trying to do here was to offer transparency on the amount that was capitalized.

Bill, can you take the next point.

I thought were you going to get me off the hook, so I'll answer it.

And that is, usually we don't give any guidance with regard to --

Thank you, Bill for those results.

Either good or bad.

Next question, operator.

Thank you.

Our next question today comes from Richard Pellottey from Morgan Stanley.

Please go ahead.

Morning, gentlemen.

Looking at the Cap Ex budget, and for the year, it appears that you all successfully finished off all the rebuilds, but most of that activity would be related to the new service installations and ordinary maintenance.

Could you break it down that way -- I realize it's an additional cut on the Cap Ex budget, and would you -- or could you identify what you're seeing, what you're thinking about in terms of cost per new addition for data and for digital?

Last part of the question, Rich, regarding data and digital?

Yeah, if you could break the Cap Ex first down between maintenance and, you know, --

You guys are all the same, we give you an inch and now you want to take a mile.

We've tried to offer extra transparency on the capitalized items.

We break down at the beginning of each year the amount of upgrade, maintenance, and so forth, and as you recall out of the $1.3 billion that we have for the year, approximately $225 million is upgrade, $450 million is maintenance, and $650 million relates to new products.

What we have not done historically is to give you a quarterly breakdown, but I think all of our Cap Ex is running very close to budget and in line with those proportions.

John, taking that for a second, the cost per new RGU, if you look at the average of digital and data, appears to be about $600.

Could you kind of give us an idea what -- you know, how that compares between digital and data?

It's obviously higher on the data side.

Just because of the cost of the install.

But that's offset.

On the digital side, we've got a more expensive box.

But you know, we haven't done the -- the breakdown between the two so I would have a tough time doing a reconciliation back to your number and I don't know I necessarily agree with the $600 number.

I'd have to do that off line and understand where you're coming from with that number.

Okay.

Thank you, Rich.

Next question.

Our next question today comes from Laura Warner from Credit Suisse First Boston.

Good morning.

John, I'm not going to ask a capital question.

I wanted to talk about video.

You had very strong digital results and obviously been very bullish on VOD.

I guess this question goes both to Steve and to Brian, you've also raised your outlook while a few other of your peers have become a little more focused on the margin on high-speed data versus video.

A, could you tell us what is going on in digital in your mind and that is continuing to drive such strong demand and maintain the RPUs?

A brief update on where you stand with VOD.

And Brian, maybe if you could give us some sense in your mind of the relative importance of continuing to invest in video versus high-speed data and how you think about that trade off as you invest capital Thank you.

Let me start and then I'll pass to Brian.

I think our digital results in the beginning of the year we trees don't grow to the sky and we assumed at some point the penetration would start to be more and more difficult before we fully launch VOD.

That has not proven to be the case.

The things we're doing are pretty much the things we've been doing regarding digital sell-in at a very high level over 40% of all new installs that call our call centers, take the digital service, the type of marketing we're doing.

We've actually had some very good progress in terms of churn reduction, churn is coming down.

We believe our real churn netting out moves and upgrades and downgrades is now below 2%.

So there's some block and tackle things we're doing that we're pleased about, but nothing out of the normal course.

In terms of Video On Demand, that's consuming a tremendous amount of our time now.

We -- as we mentioned before in the fourth quarter of this year, are going to do a very major rollout of Video On Demand with about 1500 hours of product, much of which is at no incremental charge to the consumer, about half that product time shifted NBC news, time shifted sports programming, so on and so forth, and that launch is on track for the fourth quarter.

By the end of this year, we should have close to half of our customers Video On Demand capable and then we'll be expanding that next year.

And to us, that's critical because at some point, it hasn't yet, but at some point digital net ads will start to plateau.

We've made great -- this is Brian.

We've made great progress on some of the content deals on VOD since we last spoken.

We have a better feel in our own mind of where ultimately, not necessarily right out of the box, what the look and feel could be like, and we've begun to work on that and put some resources behind that, and the question that you asked of how you manage both the capital structure and I broaden the question to how you manage the business -- in terms of new products versus video -- we -- and I credit Steve's leadership for this, have kept our eye on the video ball.

And we are reporting continuation of year over year subscriber acquisitions of both basic and of digital video.

It's how we built the culture of the Company and at the same time high-speed data represents a tremendous opportunity which we are going very quickly on and we're working on multiple ISP relationships, and we're trying to get more and more marketing of that product as it also continues to take off.

And so how can you do you both?

How do you allocate the capital?

We've done all of that and we got free cash flow at the end of the story.

So we have not put ourselves in a position of having to make those kind of hard choices.

We have the right capital structure and one of my focuses and I think it's going well and on plan is to have the ultimate new Company have the proper capital structure so that we are able to immediately rebuild the new properties, to be able to get them to perform like the Comcast properties, and at the same time not change the financial characteristic of the overall Company.

So I hope that answered the question.

Yeah, that's great.

And we're pretty excited.

Next question please.

Our next question comes from Doug Shapiro from Bank of America.

Please go ahead.

I had two things.

The first one is I was wondering if you could quickly elaborate on the announcement of a couple weeks ago about your IP voice rollout in Philadelphia, and whether you have made any more definitive decisions about how you're going to proceed generally with voice.

I guess regarding the preferred technical approach and whether it's primary or secondary line, that kind of thing.

And then secondly, quickly, if you could tell us what in your discussions with the remaining -- what timing you've discussed with them regarding the potential monetization of the [inaudible].

On the IP voice question, what we announced was beyond a test, I would call it a rollout in the western Philadelphia suburbs.

Obviously, the combined Company is going to have a very large telephone base and telephone is going to be a very important part of our future.

So we felt it was time to really start the process, really put the money and the effort and the people into making these limited small-scale IP phone tests into a real rollout.

So that process has been started, and I think you'll see in 2003 some real acceleration.

With regard to the rating agencies, Doug, we've made it very clear to them that it's not a case of if but just when, so they know and understand that this is not a strategic asset.

The asset will be monetized as soon as we can economically and from market conditions practically do that.

There's no question but that this will happen when, as and if as soon as we can.

I guess just a follow-up on Steve's answer, you haven't -- in terms of making decisions about what extent you'll leverage the AT&T switch infrastructure or pursue IP, have you made those decisions on a company-wide basis or is this just a commercial -- I guess you say it's not a test but a commercial deployment of IP but you're going to use a variety of approaches.

We have not made that decision but I think it goes without saying we want to make sure that IP is a robust alternative when the time comes.

Great.

Thank you.

We have our next question from Jessica Reef-Cohen from Merrill Lynch.

Please go ahead.

Thank you.

A couple of questions.

First on the data revenue, the 14% growth per sub was extraordinary.

Is this all a price increase?

And will there be future price increases?

Would you expect that?

It's a component of two things to -- I'll leave Steve to embellish or expand on this, Jessica.

But it's a component of two things, the price increase had rolled out fully by the end of last year, so you are seeing that applied to all customers and to a much larger base.

Remember we added about 98,000 customers in the first quarter.

We added another 125,000 this quarter.

We're looking at a 500,000-base larger in the second quarter than we had a year ago.

Clearly, a big part of it was the price increase, but also Jessica, our feeling is you can put on almost as many units as you want if you're willing to drop your price all the way down to zero, and we haven't done that.

We -- this is a fantastic, growing business, it's growing 50% a year, and one of the things we've tried to do is be measured in the way that we handle our promotional offers, measured in the way we deal with retailers, and what we found is we can continue to grow the business without being overly promotional.

And a future price increase?

In the cards?

There's nothing planned right now.

This price increase was the first one we had taken, I believe, really ever in the history of the business.

And there's nothing in the cards right now.

And then Steve, on the advertising question, you said you'd taken share from broadcasters and the revenue growth is extraordinary there as well.

Do you expect broadcasters who - particularly those who own cable networks to fight back, like a Viacom or Fox, to combine TV stations and cable networks and market or something?

I don't think so, Jessica.

These are big pools of money, and what we're trying to do is get our fair share of eyeballs.

And we're a long way away from that point, and I think it's five, six, seven broadcasters in each major market competing with each other, and we want to be an addition.

So I don't really see that there being any coordinated counterattack.

This is Brian.

I think this is mostly, obviously, this one big pool.

So what is our upside is someone else's downside.

But our advertising continues to be relatively small, and one of the growth opportunities of the new Company is to really try to accelerate even better than what cable is doing on its own, because of our tremendous geographic presence.

And what Steve has touched on a little bit but I can say is, his experience and the people like Charlie Thurston, who he has recruited now you to Comcast, and the people they're recruiting, we are going to take a major initiative and try to make advertising a bigger part of the Company, and it's all upside because as you know it's only about 5 or 6% of our total revenue.

So over time, I don't expect to it to happen quickly, I do think this is one of the benefits of this merger.

Thank you.

Next question, please, operator.

Our next question today comes from James Harkinson from Oak Value Capital.

Please go ahead.

I have two questions.

How many years do you amortize the capitalized installation costs?

It's about eight years, Jim.

And could you break up churn by basic sub, digital sub, and digital and data sub?

We haven't -- there really hasn't been any significant changes.

I referenced in the commentary we've seen slight decline in each one of the categories.

And we've given broad indicators of what those categories were in the past that the churn rate in the basic category is around the 2.7, 2.8 range, that the economic churn in digital is about 2 1/2.

That's netting out between 2 to 2 1/2, that's netting out the categories of changing between services, and the basic that is already embedded in the number, and in the case of modems, you know, we just continue to see very strong demand for the product and very few customers interested in getting it up.

Our next question comes from Raymond Katz from Bear Stearns.

Please go ahead.

Good morning.

Steve, now that you've been to AT&T Broadband systems representing over 50% of their subscribers, how do you feel about the synergy numbers that you guys gave out way back when?

Are these still good numbers and could you also go through with us what are you finding?

In other words to the extent something is broken at AT&T, where is it, and how easily and quickly can you fix it?

You know, Ray, I think at this point I'm going to let my comments in the beginning stand.

We're very confident in our projections and our ability to add value.

AT&T has 40 or 50,000 employees, AT&T Broadband, who are trying their best and doing a wonderful job in many instances.

And for me to sit here in Philadelphia and tell you things based on my experience at this point I think is unfair.

Thank you.

Our next question comes from Fred Moran from Jeffries & Company.

Please go ahead.

Thank you very much.

Seems like we're getting some mixed reviews on basic subscriber growth with AT&T down a little bit worse than expected, but Cox increasing guidance.

Can you share thoughts on trends there and when specifically we might expect improved basic growth for AT&T?

And then separately, given the price increase on data, has there been any increase in competition from DSL?

And what do you think pricing will look like going forward in that sector?

And then Brian, maybe you can comment generally about valuations in the cable sector, given seemingly modest interest in the Adelphia properties.

Let me start which the basic sub disparity that you're talking about.

I think it's really, it's sort of a tale of two cities.

You've got companies like Comcast and Cox who are -- and Time-Warner I would put in this category, who are essentially rebuilt 95% or 100% rebuilt, who have been very methodical in rolling out digital insight.

There are a bunch of companies that have basically adopted that strategy.

And are now seeing I think very stable growth.

And then you have other companies such as AT&T that are not as fully rebuilt, and it's very difficult to address competitive loss when you're not fully rebuilt.

And Bill Schliers [ph] has been clear about that in his talks with all of you.

I will say the good news is we've looked at the AT&T plant, and if you take their plant miles, they have 240,000 plant miles, and if you assume they're going to be about close to 70% upgraded by the end of this year, which would mean we'd have another 25% of the work to do, which would be about 60,000 plant miles, we upgraded 30,000 miles of I believe it was last year at the peak of our rebuilt.

So we see no reason why we can't get all of the remaining AT&T business rebuilt inside of two years.

So I think that would be a very, very top priority focus of mine because you really need to compete effectively, you need a product assortment that is competitive.

I think those cable companies that have that product assortment are doing just fine.

Obviously, the valuations that are -- you know, it's not our job to be able to make people have different perceptions of value.

So we've got to run the business and put the numbers on the board like I think we've done this quarter, and for the first half of the year, and you'll have to make your own judgment.

Whether -- when we're buying systems for our own accounts, we continue to believe EBITDA with a fully and fairly thought-through Cap Ex is a very valid measurement.

At the same time, we look at eventual free cash flow generation.

If you look at our stock at these levels, based on anybody's model that's on the call, I won't even use a specific number -- I've read in the range of 7, 9 EBITDA or so for the cable division at these levels, without AT&T and including AT&T proforma with no synergy and no change, just numbers on numbers, around 10 times.

I believe the combined Company will have a faster growth rate, substantially faster growth rate.

I think we've shown in prior slides and in presentations that if you make certain assumptions, it's north -- could be 20% or north EBITDA growth for the first three years.

If you look at Comcast, without AT&T, we're growing year 13 1/2% in the first quarter, 15 and -- 15.3% in the second quarter, you'll have to tell me whether a 7 multiple is fair or not.

That is up to each investor.

The other point is whether the deal between the two companies, was there a value leakage from the Comcare shareholders in doing this transaction?

And again, I think we thought about, didn't know that the market would change this radically but thought about, what if stocks change?

How do you make a sub as a sub then look like a --something close to a sub as a sub or something in that range at closing?

And the methodology that we settled in with AT&T was no collar in the transaction, so we issue 1.235 billion shares or so, and assume debt.

Our debt goes with the deal.

And we had our outstanding shares.

So there has been just pure empirical math, a significant reduction in the price that we are paying to put the two companies together.

We're not happy about that fact, and -- but in the long-term for our shareholders, we think that that is the fairest way to do a merger when you're trying to say basically a sub is a sub.

So a bit of a long answer, we look at the business and say the growth looks to be better and accelerating.

We think the opportunity at AT&T looks and feels as Steve reported to be doable, and we've already begun the work.

And the valuations, the average cable stock, as I don't need to tell everybody, is down 75% since a year ago.

And yet, the business has never been healthier.

This is a time, as management, since we're not looking to buy cable systems, to put our head down, stay focused, and just execute.

Next question, please, operator.

Next question Karim Zia from Deutsche Bank.

Please go ahead.

Thank you.

For Steve, on the digital RPU increase, can you say how much of it is coming from continued upselling of the digital-plus product versus say some contributions from Video On Demand?

Or multiple boxes?

And along those lines can you just talk with the Video on Demand experience you've had where you've rolled it out in terms of buy-rates and things?

The contribution from Video On Demand is not a meaningful part of it.

I think what I was referring to is revenue per home, so a lot of that is multiple boxes.

Because on a per unit basis, as I mentioned in my comments, Karim, we're at $10.60 as opposed to $10.61 in the first quarter, so we're holding steady at that $10.60 level.

I think the key thing on digital is there are ways that we could dramatically accelerate our digital growth by reducing price dramatically.

We have not done that.

Our feeling is that digital in addition to being a strategic initiative, vis-a-vis our primary competition of satellite should also be a significant money-maker and what we found is that if you strike that balance, you can continue to grow the units and keep your RPU at a high level.

And secondly, a lot of the operators have moved to bundling digital with data, and discounting that combined product.

Is that something you're looking at or considering to drive digital?

We do a lot of bundling.

We try to lay off on the discounting.

I think you can really convince yourself on these products that you're making progress on units, and lose sight of the fact at the end of the day what you want is units times RPU.

So yes, we're obviously using every opportunity to sell on a bundled basis, but we're very careful not to overdiscount, particularly when these products are at the beginning of their product life cycle, which is the case for high-speed data.

Next question, please, operator.

I think we'll make this the last question as well.

Thank you.

Our final question comes from Ray Forcof from UBS Warburg.

Please go ahead.

Yes, hi, thank you.

I was wondering a little bit further on the merger progress.

You mentioned it's on track to close the fourth quarter.

Can you just articulate what the hurdles we should look for are going to be over the next few months or so, and in terms of consents and so on, and then also could you talk about, a little bit more about the rating agencies and what you expect on your discussions with them in the near term.

Thank you.

Thank you.

I don't think that there's anything that hasn't been previously illuminated that we are anticipating.

We have a number of regulatory the DOJ, FCC, I.R.S. tax ruling, there will be some bondholder consent, there will be -- need to be obtained in certain cases other -- you know, the balance of the regulatory process and the financial process.

But we don't anticipate -- there's no new event, nothing has changed.

It is always been a process that we've always take about a year since last December, if anything we are kind of hopeful that it is going a little faster than that.

Certainly, getting 95% of local franchise authorities which was something like 4,000 when we started, was a Herculean task.

On the rating agency front, Aria [ph], there's continuing constructive dialogue there, and I think they're both being very clear and very supportive in any commentary they have made to the street.

And I think also clear on the timing of their ratings announcements, which will probably be timed closer to the closing of the merger.

Lastly, is it possible to discuss quickly if the Microsoft conversion is a done deal yet?

It's a -- been a signed contract from the moment we announced the deal.

And closes at the time the deal closes.

It's part of -- it's actually an AT&T product that gets converted into shares of the new Company.

So there's nothing new there either.

The contract speaks for itself.

Thank you all.

Thank you.

There will be a replay immediately following today's conference call running through tomorrow night at midnight.

The dial-in number is area code 630-652-3000.

And the pass code is 5903374.

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.