康卡斯特 (CMCSA) 2002 Q3 法說會逐字稿

Good day and welcome to the third quarter 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. John Alchin.

Please go ahead, sir.

Thank you and welcome to the third quarter 2002 earnings call.

Just before we proceed, I would like to refer everybody to the Safe Harbor Disclaimer and remind you that this conference call will contain forward-looking statements subject to risks and uncertainties.

We refer you to the 10-K for a list of those risks and uncertainties that could impact the actual results.

I'm going to cover the operating highlights this morning, cover off the new Cap Ex disclosure that we have and the other divisions before handing to Steve to cover off the integration work that's been done over the last few months and Brian will give a preview of the closing timetable and a bit of a preview on the power of combining AT&T Broadband with Comcast.

On a consolidated basis we saw revenue for the quarter increase 12.7% to $2.7 billion and operating cash flow increase 17.8% to $826 million.

We reported net income of 75.6 million or 8 cents a share as compared to a net loss of $107 million or 11 cents a share in the same period last year.

In our press release, on page 10, we detail a buildup to operating income per share which was reported at 45 cents per share compared to a loss last year of 19 cents a share reflecting the adoption of 142 on January 1, 2002 under which we no longer amortize good will and indefinite live intangible assets.

Going further down the calculation on that page of the press release we report operating cash flow per share of 86 cents, up from 74 cents in the same quarter last year.

All of this reconciliation is done on page 10 under the heading Reconciliation of Diluted Earnings Per Share to Operating Cash Flow Per Share.

Before I review the results of our individual divisions, I'd like to take a few minutes just to highlight three key developments that strengthen the balance sheet for proposed AT&T Broadband merger.

I'll also summarize the new supplemental information that we've added to our cable division reporting.

The three key developments in the quarter that reinforce our balance sheet for the AT&T merger were; the resolution of Time Warner Entertainment, secondly, securing investment grade ratings for AT&T Comcast from all three rating agencies and finally the launch of the exchange offer to AT&T bond holders.

The effect of these developments on our liquidity position is really meaningful.

The initial financing plan that we arranged in the first quarter of 2002 did not anticipate either a resolution of [INAUDIBLE] or an exchange offer.

The investment grade ratings ensure our access to the funding required at closing.

The combination of the [INAUDIBLE] resolution and a successful exchange offer will remove any need for us to access the capital markets in 2002.

Exchange debt will have at least a ten-year maturity and will be substituted for drawings under the one-year bridge facility at close.

AOL Time Warner cash and stock sale proceeds along with the proceeds from the sale of other liquid nonstrategic assets will be used to repay all anticipated outstandings on the bridge loan in 2003.

Consequently, our liquidity has increased significantly and we expect to reduce debt in 2003 by $4-5 billion to approximately $25 or $26 billion.

This excludes any proceeds from a Time Warner cable IPO.

As a result of the anticipated debt reduction and cash flow growth, we expect to report year end 2003 leverage of approximately 3.5-1, a stronger ratio than what we had when we announced the AT&T merger in December of 2001.

Our then remaining 21% interest in Time Warner cable provides an additional cushion to further reduce leverage below the estimated 3.5-1.

Next, last week on Monday a week ago, we and ten other MFO's agreed to provide additional information relative to capital expenditures and subscribers.

The incremental Cap Ex information for the third quarter and 2002 year to date is on page 7 of the press release.

In addition, we have provided an estimate for the percentage within each category that represents recurring capital.

We provided these ranges because the numbers will vary from quarter to quarter depending on construction and new product activity.

With this information you can arrive at our estimate of maintenance or recurring capital.

As you do the math, you see that we report $30-45 of annualized maintenance Cap Ex per sub and, in addition, $15-20 per sub for line extensions.

This is consistent with our previous guidance for both maintenance and line extensions of $50-60 and also consistent with the guidance that we produced at the beginning of this year for 2002 for maintenance, capital and line extension capital of $450 million or $53 a subscriber.

Finally in our continuing effort to provide helpful additional information, I'd also direct you to page 10 of the press release where we provide a detailed buildup of the free cash flow numbers.

This is one of the key financial highlights in this quarter in my opinion.

In the first nine months of 2002 we generated nearly $660 million of free cash flow after all Cap Ex, net cash interest and cash taxes.

This number compares to a deficit of $242 million in 2001 and represents a $900 million increase.

Again, this is consistent with the range of street estimates for our free cash flow this year of $800-1 billion.

Let's move on then to the individual divisions and highlight first of all the results of QVC.

QVC had another solid quarter of growth especially from the international markets.

For the third quarter revenue increased 13% to $1 billion, and cash flow increased 20.6% to $185 million.

Year to date, revenue is up 13% to $3 billion and cash flow up 17.7% to $572 million.

QVC's base business reported revenue growth of 8.7% driven by a combination of homes growth of 3.6%, up to $74.8 million, an increase in sales for FTE of 4.9% to $11.23.

Domestic operating cash flow growth was 14% shows the continued improvement from tight expense control both in the area of fixed and variable expenses.

At the same time, QVC's operations in U.K., Germany and Japan each generated double-digit revenue and operating cash flow growth during the quarter.

In fact, the U.K. had it's best quarter since the fourth quarter of 1999.

Revenue was up 16% to $69 million and cash flow up 18% to almost $5 million.

Where in Germany, we had very strong results again and for the third quarter, we're in the black in the German operation.

Revenue was up 43% to $65.5 million and operating cash flow at $500,000 versus a loss a year ago of $2.5 million.

More homes are receiving the channel in Germany now, up nearly 1.8 million to 25 million with the awareness number at about the 40% level that we've been at in the last few quarters.

Japan is trending much stronger than expected.

Revenue was up to 23.7 million for the quarter and the operating cash flow loss for the year to date is only $4 million.

As we've said in the past, QVC's results are not affected as much as other retailers by the soft economy.

We see that in the 8.7% domestic revenue growth in the third quarter.

It's up but not as much as we might have expected.

We expect the fourth quarter to also be a bit soft domestically with some effect from generally low retail sales and some additional effects from the west coast dock strike.

But, we expect international results to remain strong and still expect to meet full year guidance of consolidated revenue growth in the low double digits and consolidated operating cash flow growth in the low to mid-teens excluding the results of Japan.

With respect to Japan, we have given guidance for a cash flow loss of approximately $20 million for the year.

We are today revising that guidance as we expect a loss of less than half of that of our previous estimate.

Moving on to the content division, content reported revenue growth of 7% to $148 million and cash flow growth of 10.4% to 33.7% -- sorry, $33.7 million.

On a consolidated basis, our content businesses generated pro forma revenue growth of 7% and cash flow growth stemming from stronger advertising market and an increase in carriage offset by a decline in revenues and cash flow at Comcast [INAUDIBLE] as a result of fewer preseason gains in the third quarter.

Excluding the results of our new networks, Outdoor Life and G4, cash flow, in fact, increased almost 40% at 49 -- sorry, almost 50% at 49.3%.

All channels E!, Style, Golf, Outdoor Life and G4 reported significant gains in their subscriber count year over year.

In fact, for the third quarter, E! reined with its highest rated quarter ever in primetime and logged record-breaking stats on its Emmy programming on Sunday September 22nd as the highest rated Emmy coverage ever from E!, attracting one of the best demographics of the 18-34, and 18-39 year old category.

Let's move on then to the cable division.

We had revenue increase of 12.3% in the third quarter to $1.5 billion and cash flow up 12.2% to $645 million for the quarter.

Year to date, revenue is up 12.2% to $4.6 billion and cash flow up 13.7 to $1.9 billion.

New product growth is the principle driver of our cable business and I'll review each of the new products individually after a couple of comments relative to the revenue growth.

On the revenue front, advertising added to the growth with approximately 11.9% growth in advertising revenue.

This reflects a stronger local ad market as well as the ongoing success of Comcast Market Link, our regional fiber interconnect that's now in about 15 markets and attracting new regional and national advertising.

Adjusting for the extra week in the broadcast calendar in the third quarter of '01, revenue in the third quarter of '02 actually grew closer to 20%.

Third quarter, we saw regional and national advertising grow on a combined basis at approximately 30%.

The regional business grew 30%.

The national business grew almost 40%.

Because of the interconnects, our share of national and regional advertising dollars has increased substantially year over year.

This year in the Philadelphia market, our share is up 20%, in the Washington market we're up 50% and in national and regional advertising in Baltimore, we have almost doubled year over year.

On the operating cash flow front, as I mentioned, cash flow is up 12.2%.

This, however, includes approximately $8-10 million of costs related to the pending AT&T Broadband merger.

This estimate, by its nature, is somewhat subjective as it includes an estimate of additional travel, relocation and hiring activity, amongst other things, that would not have incurred were we not acquiring AT&T Broadband.

By way of example, at any one point during the quarter, we had 2-300 employees on the road preparing post merger plans for the creation of two new divisions and creation of planning for following close of the merger.

Steve will describe all this activity in more detail as soon as I finish the operating highlights.

Net of these expenses, operating cash flow would have increased 13.6 to 14%.

Similar expenses at a higher level of approximately $10-15 million will be incurred in the fourth quarter.

However, we still expect to be well within our guidance for the full year for operating cash flow growth of 12-14% including the ongoing estimated merger-related costs.

Including these costs, we generated over $300 of annualized cash flow per sub for our 8.5 million subs in the third quarter and including those costs we maintained an operating cash flow margin level with that of 2001 of 41.7%.

But the real stars of the quarter were the digital and data products.

Last quarter we increased our guidance for digital and the third quarter net ads are in line with that increased guidance of $7-800,000.

In the third quarter we reported over 205,000 digital box net ads, a weekly average of $15,800 to finish with quarter with 2.94 million digital boxes representing a 39% pro forma increase over 2001.

In fact, our digital selling rate is now up to 50% from 30% a year ago.

Average revenue per unit is down slightly from the second quarter as we sell in more boxes per home but remember we are generating $10.47 for every digital box at an 80% margin.

At around 1.39 boxes per home, we have over 2.1 million digital customers and a customer penetration rate of almost 25% up from 19% a year ago.

Average revenue per sub is $14.53, 5.1% higher than it was a year ago.

We also continue to be really excited about the next leg of growth in digital.

Video on demand with access to a 1500-hour library gives us something that satellite cannot offer.

We expect video on demand to be in 7 million homes by the end of the year and we're already in 5 million of those 7 million homes.

We'll launch in Philadelphia by the end of November.

Secondly, high definition television reinforces our competitive position.

On October 14, we announced HDTV launch in Washington metro.

More than 750,000 customers have access to six channels of HDTV programming from ABC, CBS, NBC, PBS, HBO and Showtime.

We have not finalized pricing of the offer yet, but it's likely to be some combination of activation and install fees.

We expect to have HDTV in front of 9 million homes by the end of the year.

Comcast Online reported it's best quarter ever with almost 170,000 adds in the third quarter, a weekly average of over 13,000 to finish the quarter with 1.34 million customers.

This is a 69% increase over the 2001 level and 32% increase sequentially over the second quarter.

Our online selling rate, this is the number of customers to whom we sell the online product when they call in and ask for cable, is now up to between 18-20%.

A year ago that number was zero.

Average revenue per unit is $41.34 down slightly from the second quarter due to our back to school promotions that we have every year.

Our goal is to [INAUDIBLE] or the average revenue per subscriber above $40 and at the same time to continue to deliver this cost -- deliver this product at a declining cost structure.

Second statistic that is really impressive in this product for the quarter is that our customer contact rate, i.e.; the number of times a customer calls us, is now 0.45 a month, meaning that the customer only contacts us once every other month.

That's the same contact rate that we have for the video product.

And at the same time we are providing the service to the customer at a lower cost than we did before so we are handling these calls less frequently and incurring less cost in doing so.

At quarter end we had a penetration rate for the product of 11% of marketable homes up from 8.2% a year ago with over 12 million homes or more than 85% of the homes in our foot print having access to this service.

We added almost 500,000 homes to the service availability in the third quarter and we're up from 75% availability at the beginning of this year.

With that, we just like to reiterate the guidance for cable for the year, and I think I'll pass now to Steve to highlight what's been going on in the integration front.

Thank you, John.

During the third quarter, we really turned our attention to the AT&T integration project.

I think it was a good thing and an indication of the strong existing management team that we had that we kept our eye on the ball in the Comcast systems during the third quarter.

On July 10th, both companies had their shareholder votes and the week after the shareholder vote we finalized the divisional operating structure for the AT&T systems.

In effect, we created six divisions all run by Comcast executives with an average of 22 years of cable experience.

Four of the six divisions were existing ones which were managing the 8.5 million Comcast customers and in those four divisions, we added roughly 1.5 million new AT&T subscribers to each division.

We also created two new divisions, one in Denver and one in San Francisco to help manage the systems that are on the western parts of the United States.

These divisions are really key to the way that we manage the business in a decentralized way.

It was important to get those established quickly.

During the end of July and August, the divisions worked with the 16 AT&T markets to prepare what we call Preliminary Operating Plans.

These are operating plans for Life post merger.

During the process we got to know the management teams in each of the 16 markets quite well.

We also identified the key issues facing each market on a market by market basis and we developed a game plan for each market for life post merger.

During the month of September, I and my senior management team visited these markets and reviewed all 16 preliminary operating plants.

As a result of these reviews, we've developed new priorities for Life post merger for the entire company in each of the 16 markets.

We also had basic subscriber 100-day turnaround plans and have identified cash flow opportunities in each of the markets.

As a result of this process, we moved 120 Comcast executives into AT&T systems with new assignments.

All of these 120 Comcast executives have been identified and agreed to their new assignments and they either reside in the systems or have plans to move in the not-to-distant future.

Meanwhile, in August and September, we completed our reviews of the Denver headquarters operations and as a result of this identified 1,700 redundant positions.

These 1700 people were identified two weeks ago and informed of the fact that after the close or shortly after the close, their services will no longer be needed by the combined company.

Our goal when we started this process was to have a comprehensive business plan that we had completely vetted before the close and we now have that.

Based on the work that we've done, here are our integration principles.

Principle number one is to move rapidly and decisively the day after close.

We now have our plans in place and with this we can hit the ground running.

Secondly, we want to leverage the Comcast structure and people.

We have tremendous expertise and experience and as a result with the divisions, our budgeting process and the people that we're putting in place along with a fair number of good people that we have identified at AT&T, we believe we have the process and systems and structure and people to succeed.

The third principle is to immediately change the priorities of the combined company.

Cash flow will be job one.

We will focus on video, not telephone, and we will move quickly to rebuild the rest of AT&T in two years.

The next principle is to have an intense focus on stopping the basic subscriber loss.

We believe this is definitely achievable and after cash flow will be our highest priority.

The next principle is to increase revenues by repackaging and remarketing digital and premium services.

Further we plan on improving customer service and transactional selling by bringing calls back inhouse and inmarket as soon as possible.

The next principle will be over time to right-size staffing in the field in line with Comcast benchmarks and the final principle is to closely follow the progress by disciplined financial reporting and monthly reviews.

So in summary, I think we've made a lot of progress putting together an operating structure, we have the people in place for Life post close and a very clear sense of what we have to do to improve cash flow and stop basic subloss.

So at this point, we are looking forward to getting the deal closed and getting moving.

Brian?

Okay, thank you, Steve.

And thank you, John.

I'm very excited that we have been able to have the complete thorough operating results as successful as we have in the third quarter, double-digit in every one of our categories, cable, commerce and content and the model works.

This has been a big source of investor question going back and revisiting their comfort with the EBITDA to free cash flow model.

And I think for this, our third straight quarter with more than half the free cash flow coming from cable, $262 million of free cash flow and $660,000 million year to date, I am convinced the model really works.

Our new company, we believe, will be able to generate free cash flow on a combined basis by '04.

So we really have taken that model and said, okay, let's rebuild the AT&T systems, let's approach our business process and hopefully on a post merger basis be able to hit the ground running as quickly as possible.

None of anything has been able to begun yet obviously until we get to closing, but we are hopeful that that is going to be sometime in November.

Let me just comment on that.

At this point, there really are only two major issues remaining on the long checklist that when we started on this journey and they are obviously the final governmental approvals, the FCC in particular, and the bondholder exchange and consent process.

And both of those hopefully point to, as I said to sometime in November closing.

We also are fortunate that we haven't taken our eye off the ball for the other parts of the company.

The content division, as John described, if you do it on a pro forma basis, had a terrific quarter and even with start-up new networks and some of the investments we are making, we continue to believe as advertising rebounds and the networks you can grow from lower distribution to more distribution as we've done in every one of our networks that that model really pays dividends.

QVC, what can you say about another incredible quarter of EBITDA growth even in these challenging environments.

QVC finds a way to, once again, be a star of Comcast business.

So all in all, we are at the hopefully the final stages.

We are very excited about what Steve talked about having our priorities focused, having the management team committing people to uproot their lives and help integrate the AT&T opportunity.

We'll certainly learn more as we go.

One of the lessons that we went and talked to many executives who had been through large integrations and said if you had to do it over again what would you do differently.

We got one answer everytime: I wish I had moved faster.

And that's one of the mistakes that we hopefully will not look back.

Doesn't mean you get everything right.

But we are very excited.

We're probably more excited today about what we think we can do than we were at the time we signed up just because of the additional knowledge that we have.

With that, let's turn it over to questions.

Operator, if you could open up the Q&A.

Thank you sir.

Investors willing to ask a question may signal us by pressing the digit 1 on your touchtone phone.

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

If you are using a speakerphone, please pick up the handset before pressing the numbers.

Our first question comes from Douglas Shapiro, Bank of America.

Please state your question.

Thanks.

I guess I had two quick things.

One is if you just talk about the basic subscriber numbers which were down a little bit sequentially I think typically in the third quarter you're up a little bit, if you could just talk about what's going on there.

And then secondly, it seems like you're on track to pretty much flow through the guidance you'd give on a high speed data units by the end of the year unless you think things are going to be down a fair degree sequentially in the fourth quarter.

So I was wondering if you could talk about that as well?

Well, I think in the case of basic subscribers, we think we're on track to hit our numbers.

We had a very strong September.

Over 50,000 subs net add.

We are right where we want to be in the October start to the fourth quarter.

I think we're right in line with where we thought we'd be and feel pretty confident about the rest of the year.

In terms of guidance on all of the other metrix, we continue to be bullish about the business, but I think, at this point, it's premature to change.

That doesn't imply any softness in the product in the fourth quarter?

No.

We will expect a very strong fourth quarter but the change wasn't meaningful enough from the 4-500 to warrant an expansion of that.

I think every expectation is for a very strong quarter.

The product is doing extremely well.

And the fourth quarter is a good high-speed data quarter because there is some seasonality related to Christmas.

Great, thank you very much.

Our next question comes from Nourage Gupta [PH] of Salomon Smith Barney.

Please state your question.

Thank you.

Good morning everybody.

Steve, just following up on Doug's question on basic subs, could you just talk a little bit in terms of just how you see the competitive environment [INAUDIBLE].

And just in general, do you think the competitive environment has gotten a little bit tougher since the, I guess, the permanent implementation of the new Wow campaign with Dish and whether or not you see any varied performance among the individual Comcast markets?

And second, some time ago you said that you expected VOD to ultimately allow you to recapture material basic subs.

Do you still hold that view and over what time do you think that plays out?

And then I have one followup, thanks.

Okay, Nourage.

I totally understand the question and it's a question that we've been asked as other MSO's have lost subscribers, I think there's been a concern on the part of Wall Street, some on Wall Street that perhaps what's going on between satellite and cable is dramatically different than it was, and therefore, we have problems.

We do not believe that that is the case.

We think we're in very good shape.

If you look at our subscriber growth, it was 1% 2 years ago, 1% last year and .7% this year.

The delta between .7 and 1% on our business is about 25,000 subscribers, so we do not believe that it's a material difference and we believe that our business continues to be in good shape if you take care of the fundamentals which we've been doing over the last five years, rebuild, digital, customer service, et cetera, and the notion that somehow the competition has dramatically changed our competitive landscape we don't think holds true.

Our pricing over the last few years has been moderate, sort of in the 5-6% range.

We think we can continue to stay in that range in the future and the real key to our business is to focus, if you're looking at price value versus satellite to really start to focus more on the value side of the equation.

What we really want to do is take the offensive.

I think the cable industry traditionally has been on the defensive as satellite has had things whether it was 200 channels or PBR's or something else that we could not provide.

Our feeling is that video on demand with the kind of expansive model that we're talking about and rolling out in Philadelphia as we speak, potentially allows us to go on the offensive and our goal would be to find some kind of consumer proposition that would allow us to win back more customers from satellite and we think potentially that could be video on demand.

But I think, if you look at the companies that have taken care of their customers, who have rebuilt, who have rolled out digital in an intelligent way, they're gaining subscribers and we are certainly in that category.

And Nourage I hate to cut you off but we've got a lot of other questioners here, so rather than taking a followup, if we could go on to the next question please.

Thanks.

Our next question comes from Richard Velottia [PH], Morgan Stanley.

Please state your question.

Good morning.

A question for Steve and Brian.

Thinking to the next step of pricing strategy, what's the ability to bundle digital and data?

In other words, the data product is very strong, what's the capa -- how many of these customers that have data also take digital and then from another angle of bundling, if your [INAUDIBLE] goes well, how quickly could you begin to bundle a voice product with the data product?

In other words, is that a relatively rapid roll-out of the bundled voice and data or a longer term one?

So, really a question about bundling.

How can you use the strength of the data product to drive other services?

Well, if you look at a situation where 15% or so of our video customers have high speed data, there's no question that that product makes people think differently about their cable company and feel more loyal to their cable company.

We have always had a strategy of encouraging people to take both products.

If you're a video customer and take high speed data, you pay a lower price than if you're a nonvideo customer that takes high speed data.

And I think over time we'll get more sophisticated as we cross-market these products.

I do not believe that bundling and cross-marketing is necessary to stave off competition but I think it's a real upside in our business used intelligently.

Many customers, when you do the research, look at bundling as really a way to get a bigger discount, but I think using bundling in a positive way, proactive way is going to be a big part of our future.

This is Brian.

I believe that the opportunity with the data customers also to create enhanced versions of the data business.

If you think to the early days of cable as basic expanded, more and more programmers got created and it was a cycle of success.

And the question is how do we replicate that cycle of success in the broadband business, in the broadband space, broadly defined.

We're now beginning to see content companies thinking of ways and other broadly beyond content applications for that broadband platform.

So we are excited about the multiple ISPs, we are excited about some of the enhanced versions of those ISPs to offer richer content to the user and so it goes beyond the bundle, I think, Rich, as to how the revenue model for the business goes the next few years and what's so exciting is that, right now where as we thought there might have been a slow down in new products, there's actually been in some a continuation and in data an actual acceleration of the rate of growth.

It is wonderful moment and I will attract more people to stand up and take notice of the categories and invest R&D as to how to take advantage of the new platform that's getting rolled out everywhere.

Thank you.

Next question, please Operator.

Our next question comes from Raymond Katz of Bear Stearns.

Please state your question.

Good morning.

Brian, as a follow-up to what you just talked about, to create the next generation of data product, could you or Steve or someone talk to us about the roll-out of 1.1 right now in your systems, when you think you can phase that in, and, Steve, looking down the road, how you can leverage that to do exactly what Brian said about the next generation?

Well we're starting to roll out 1.1 as we speak and that'll continue.

We're not in a tremendous rush.

We want to do it in an intelligent way.

Just to amplify what Brian said, if you look at the high speed data platform, I don't think it's altogether different than the cable platform in that there's a percentage of the customers, and maybe it's half, we don't really know, that just want high speed connectivity and always on, but there should be a percentage of those customers who want incremental services and we've spent a lot of time working on a product road map, some of which would require [INAUDIBLE] 1.1 and eventually some of which would require 2.0, that will allow us to offer people more than just their basic $39.95 service and layer in new products over time and eventually allow us to package and grow that platform.

And when you have 1.3 million speaking for Comcast and after the deal closes, 3.5 million or so there abouts high speed data customers, if you can then start to layer in the next HBO and Showtime whether it's video gaming, video streaming packages, home networking, video chat, that business starts to get very attractive.

Then you've got growth from there.

We have a version of the product we rolled out in some of the markets, @home pro that for the work at home market that gives you higher speed and more IP addresses and, you know, whether it's wireless home networks which are really getting cheaper and more reliable, it makes the cable modem product more attractive.

These are all the things that we're working on.

ESPN made an announcement, a number of us saw where they're going to have sort of a television station concept going with ad and their broadband content.

Other programmers have talked the same way.

You can just feel momentum building around the space, around the success of cable modems.

And when you add 100 and almost 70,000 new net subscriptions in a quarter, you're getting in one company, you're going to see scale just as when basic cable got going.

Thank you.

Next question, please Operator.

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

Please state your question.

Thank you, good morning.

I just wondered, Steve or John, if you could update us on your results in telephony.

In Detroit I know that you were obviously applying the approach that I would imagine you will apply to AT&T systems once the deal is closed.

Has your net ad rate grown, shrunk, and what has happened to the cash flow per sub in that territory?

We just reviewed the midwest division's budget for next year so I'm pretty familiar with the numbers.

Two major efforts that we put in place in our business in Michigan which, for those of you who don't know, is a fairly small telephony foot print of about 20,000 subscribers, slightly more than 20,00 subscribers.

Job number one was improving the profitability and that's a business now than in terms of operating cash flow is throwing off $3-4 million a year.

Job number two for us has been to experiment with hybrid IP phones which is basically using a circuit switch and then having a Gateway between the switch and the customer's premesis that allows you to then use IP technology and experience the benefit of having IP economics at the customer premesis.

The good news is that's working and that test so far has been successful.

Obviously we have a huge vested interest once the two companies are put together to figure out a way to make IP phone or hybrid IP phone work.

And so we've been using this Michigan system as a test bed, and I think the initial results are good.

So both on a cash flow basis and a technology basis, things have been good.

Our goal has not been to aggressively ramp subscribers so subscribers are essentially flat over the last quarter or two in Michigan.

Okay great, thank you.

Next question please Operator.

Our next question comes from Richard Greenfield of Goldman Sachs.

Please state your question.

Hi, good morning.

Steve, could you comment as you've gone around and looked at the systems all across the country that AT&T has, could you maybe just give us a greater sense of what is driving the under performance of those systems versus how Comcast is doing.

What are the key things that need to be changed out and then maybe just also talk about -- you mentioned the success that you've had in Michigan, maybe apply that to what you see your strategy toward telephony being now that you've looked at their telephony operations across the country.

Well Rich, I gave a list of priorities when I spoke during the introduction and if I really wanted to give you all the details, it would be much longer than this call could afford so I think I'll pass in terms of giving you too much more color commentary until after the deal is done.

And that would apply to both how we would manage the video business and telephony.

I just want to state that in Steve's priorities, what you can sense is a sense of urgency around basic subscribers which I think was the thrust of your question, perhaps.

And as he said, each market has a different dynamic, a competitive dynamic or some state of the rebuild or whatever.

And as to telephony, I think the Michigan experience in the previous question still is our view that this business longer term is going be a profitable part of the company.

The question is you're seeing a technological shift occurring right before our eyes and how to take advantage and use that shift while we know this company has a major set of priorities to integrate right now post merger and I think what rightfully we are trying to suggest is that keeping our eye on the basic sub ball is job one.

Thanks.

That was perfect.

Next question please Operator.

Our next question comes from Karim Zia, Deutsche Banc.

Please state your question.

Thanks.

For Steve, if I look at the video revenue, it looks like our [INAUDIBLE] analog specifically is growing about 3% which is below the price increase rates you mentioned before.

I'm wondering if there's any economic effect you're seeing on pay revenue or anything else unusual that would explain that.

And secondly, for John or Steve, could you just give an update on the AT&T systems you picked up last year and then talk about how that may translate into your expectations for the margin evolution over the next 12 months.

Karim, we haven't broken out the AT&T systems that we acquired at the beginning of last year more than we have in those slides that we've done in recent investor presentations.

So, I don't want to go any further on that at this point in time.

I think in terms of [INAUDIBLE], average video revenue per sub in the third quarter is $46.29 up from $43.93 a year ago.

So, you're not seeing the 5.4% increase year over year.

I was pulling digital revenue out of that, John.

Okay, you pulled digital revenue out and you're seeing a little modest decline, it's coming a little bit out of the equipment sector and to a lesser degree out of pace.

But we're not seeing anything in our run rates, Karim, that are out of the ordinary that would cause any reason for concern.

Thanks, and any comment on the margin outlook for next year on AT&T?

No.

Okay.

Thanks.

A unanimous no.

Everybody in the room here.

Thanks, thanks.

Next question please, Operator.

Our next question comes from Jessica Reeve Cohen from Merrill Lynch.

Please state your question.

Thanks, two quick ones.

With seeing extraordinary strength in advertising, [INAUDIBLE] broadcasting and cable, could you discuss trends that you're seeing in the fourth quarter and secondly, I hate to do this to you, but if you could go back to the basic sub issue.

Penetration is down 120 basis points.

Is there something going on -- [INAUDIBLE] were up 2.7%.

What happened in July and August that September was so strong?

Let me start with advertising.

Because of the calendar year, difference in terms of number of weeks had a very strong third quarter.

We look at the fourth quarter as being sort of split between October and early November which is before the election.

Then the second half of the quarter being a little bit harder to figure out at this point.

So I think our sense is the fourth quarter is going to be in line with the third quarter.

Frankly the visibility once you get out beyond the election into December is just too early for us to know.

The good news is and John mentioned it during his introduction is that the regional and national business is what's driving a lot of our growth.

That was up over 30% and that's a share increase and really sort of driving our business in the future because we're not only enjoying the benefit of the business turning around but also the benefit of gaining share.

And then in the penetration issue, Jessica, we saw homes growth quarter over quarter of 2.7, subscriber growth 0.7.

We're certainly in a competitive marketplace but when you look at the rate in which new products are growing, that's the driver of the business now and going forward.

And as Steve then gets into the point of rolling out video on demand and HDTV, I think we're going to see a bit of a shift in those statistics.

I have to just add one point, Jessica, between the last question and this question, we are pretty pleased, very pleased with this quarter.

Basic revenue growth for the company is fantastic from the cable division.

Cashflow, which John said, is if you take some amount of integration cost, it wouldn't have happened without the deal which I think is certainly realistic.

You're around 14% cash flow growth.

We're adding basic subs but the new products as Steve pointed out, 10-20,000 basic skews these percentages fairly dramatically.

We're adding 400,000 give or take new products a quarter is a fairly dramatic healthy business which is what's driving revenue growth.

In fact, if you really look at modems and I suggest that you focus on modems as to what happened this quarter and realize that there's no programming cost in the cable modem business and that basically as we scale, we are able to then get lower cost over the network.

Putting our focus on modems when there is a competitor in DSL and in wireless and getting the kid of market share we are getting as a company and as an industry, we have our emphasis just right.

So you can all see what you want to see in the quarter, but I personally saw it as a solid quarter on all fronts but modems setting the ground work that when you actually look at modem revenue for full year basis, it's a bigger category than pay television.

Next question, please, Operator.

Our next question comes from Aria [INAUDIBLE] of UBS Warburg.

Please state your question.

Yes, thank you, good morning.

Just one quick question, really it's related to the bridge financing.

How much, roughly, do you expect to have drawn on the bridge financing at closing and then you mentioned no need to access the capital markets this year.

How do you expect to fill that bridge of facility outstanding?

Thank you.

Aria, that will depend upon the success and the degree of success on the consent and exchange offer to the extent that we're somewhere at or just above the minimum level that would be needed to get the consents that we need.

You can expect a draw of or an an exchanged amount of about $4 billion which the way the math works, that would be about the amount of the draw then under the bridge facility.

The other point that I was making in my commentary was that from the proceeds of AOL Time Warner cash, from the proceeds of modernization of AOL Time Warner stock and from the sale of other nonstrategic assets such as the AT&T stock and the Sprint PCS stock that we hold, you see somewhere between $4-5 billion of proceeds generated from those sales that would be more than sufficient to pay off the bridge and the bridge is the only 12 month maturity that we'll have in our capital structure and that is why we're saying that we wouldn't be in a position where we would need to go to the Capital Markets in 2003.

So the components of the asset modernizations above and beyond the AOL stock are related to AT&T stock and what else?

AT&T stock, Sprint PCS stock, and the cash from modernization of the AOL Time Warner cash and stock position.

Okay, thank you.

Do we have time for one more question Operator?

Yes, Our last question today will come from Tom Stearns of Chieftain Capital.

Please state your question.

Hi, I wonder if you could comment on what your expectation is for your cash flow deficit next year from your operating businesses and I also wonder if you could comment at this point on what you think capital spending will be for the combined company over the next 2-4 years.

We will be giving guidance for 2003 sometime probably during the first quarter of 2003 or maybe around the time that we do an investor meeting soon after the first quarter.

I think at this point in time to be giving any further detail than that is premature.

I just would like to add to that that our plan here has been -- we've been very consistent with not changing any of our guidance from when we first announced the merger.

We hope to get to closing in November as I mentioned.

We are optimistic that all the hurdles are going to be met.

There will not be any significant changes in our optimism of what we can do.

Continues to look at the 22 million sub foot print and think that this is pretty exciting opportunity.

We are starting to think about ways that the business can change and grow.

Steve's team is ready to hit the ground running.

You've got a pretty good update on that exercise.

That has all gone well and our plan would then be to take a couple of months to make sure we know everything and then to sit and have a longer full day kind of investor meeting where we're able to go in great detail into all of the markets as well as all the business updates.

That's sort of the blueprint that we're operating on. and John, back to you for the final word.

On that point, we stand by comments that we've made at previous investor meetings where we expect on a consolidated business to report negative free cash flow for 2003 but fully expect 2004 will generate a strong positive number for the full year.

In fact, we may even be at a point on a run rate basis in the fourth quarter of 2003 where we could be free cash flow positive but we stand by those statements made at previous meetings.

I think with that, thank you for all joining us and see you next quarter.

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 passcode is 6252271.

Once again, the number for the replay is 630-652-3000 and the passcode is 6252271.

A recording of the conference will also be available on the company's website.

This concludes today's teleconference.

Thank you for participating.

You may all disconnect.