康卡斯特 (CMCSA) 2003 Q1 法說會逐字稿

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Good day and welcome to the 1st quarter earnings call for Comcast corporation.

Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to executive vice president, treasurer and co-CFO Mr. John Alchin.

Thank you and welcome to the 1st quarter 2003 earnings call.

Just before we proceed I would like to refer everybody to the safe harbor disclaimer and remind you that this conference call may contain forward looking statements subject to risks and uncertainties.

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

Before we get started let me pass to Brian for opening commentary.

Thank you, John.

I just will very briefly just want to say how excited and thrilled I am with this 1st quarter and how fast we are out of the box.

This was a very meaningful goal that we set that obviously life is long in having this deal work out in the long-term is the most important thing.

We're getting out of the blocks fast and showing we could turn the business, it was just cable and it's manageable and the integration is exceeding almost every expectation we set for ourselves I'm very proud and looking forward to our investor meeting next week.

And with that let me kick it back to John to take you through the details.

Thanks a lot Brian.

Well it's not often that we get an opportunity to report results as outstanding as these are.

To be able to report the following is well beyond anything that we'd originally thought we would be able to achieve in the first four months.

On an apples to apples basis we are reporting a 25.3% increase in cable EBITDA, a 630 basis point increase in operating margins of the newly acquired systems or 1,000 basis point if you include the $88 million of acquisition charges from the 1st quarter of 2002.

We're also reporting a dramatic turn around in basic subscriber losses to add almost 57,000 basic subscribers, a quarter to quarter increase of almost 200,000.

We are confident that we can now add basic subscribers this year and are increasing our guidance to between 75 and 100,000 basic subscriber editions up from flat guidance we had previously given.

We are also reporting a huge increase in high speed internet subscribers additions.

We are so confident of this trend we increased our guidance for this year.

We now project net additions of 1.6 million for the year up from the range of 1.3 to 1.4 and expect to finish the year with 5.2 million high speed internet customers.

We are also reporting progress on debt reductions and refinancings that resulted in the repayment of our bridge financing almost nine months ahead of schedule.

These achievements are in fact remarkable in our opinion.

We will review the highlights of this quarter's results for all divisions today and we will drill down into the cable results and provide additional color on our integration at next week's Cable Analyst Day in New York which will also be webcast.

Looking first of all at the consolidated results, on a pro forma basis and our pro forma numbers as announced in the press release are adjusted only to reflect the AT&T Broadband acquisition as if it occurred on January 1, 2002.

No other adjustments are made.

Revenue increased 9.7% to 5.5 billion and cash flow increased 30.8% to $1.638 billion.

The company reported a net loss of $297 million.

The increased losses reflect high depreciation, amortization and interest expenses resulting from the AT&T Broadband acquisition.

But as noted in table 8 of the press release we believe EBITDA or cash flow which I will use interchangeably on this call is the primary basis for measuring the operational strength and performance of our business.

EBITDA is up as I said 30.8% year over year or 22% when adjusted for the acquisition and termination cost I mentioned earlier.

We also consider free cash flow an additional measure of operational performance and an indicator of financial strength.

As indicated in table 8 of the press release, free cash flow for the quarter amounted to $86 million.

Before I review the operating divisions I want to highlight the significant progress we've made on strengthening our balance sheet.

In January and March we issued bonds totaling $3 billion, allowing us to refinance over 75% of the bridge facility and the new bond issuances had maturities ranging from 7 to 30 years, interest rates ranging from 5.5 to 7.05%.

On March 20 we completed the sale of cable systems to Bresnan for consideration that included $525 million in cash.

On the last day of March, we completed the restructuring of Time-Warner Entertainment transaction.

At closing we received $2.1 billion in cash that was used for immediate debt repayment.

With that debt repayment, we repaid the last out standings of our bridge facility.

We also received a closing $1.5 billion in AOL securities and a 21% interest in Time-Warner Cable.

Also at the end of March, Comcast added an additional cable subsidiary to our cost guarantee structure to further simplify the organization of the borrowing group that we have.

Subsequent to the quarter end on May 5, we closed a new bank credit facility or facilities totaling $2.75 billion with a maturity date of 2006.

This refinanced prior facilities amounting to 3.2 billion that had a maturity date of 2004.

As a result of these actions we have reduced debt by $2 billion, simplified our capital structure and on average have undrawn availability through 2006 ranging from 4 to 5 billion dollars.

Let's now move into the QVC results before getting into content and cable.

QVC's consolidated revenue increased 7.5% to finish the quarter with $1.06 billion.

EBITDA increased 9.8% to $211 million.

Domestic revenue was 848 million, flat when compared to the 1st quarter of 2002.

Results were affected by the weak domestic retail environment.

We did not do as well as we had expected against a strong quarter with growth last year in excess of 11%.

But continuing tight expense controls resulted in EBITDA growth of 2.6%, finishing the quarter at $193 million.

Domestic cash flow margin increased 60 basis points to 22.8% as we continue to see improvement from tight controls on both fixed and variable expenses.

QVC International had just outstanding results for the quarter with a 53% increase in revenue and cash flow increased 4.5 times to $18 million from $4 million.

As showing in table 7 of the press release, each of the UK, Germany and Japan generated double-digit revenue in EBITDA growth during the quarter.

Currency fluctuations contributed to some degree, but even on a local currency basis, we saw revenue increase 6% in the case of the UK 30.8% in the case of Germany and over 216% in the case of Japan.

Germany reported $6 million of cash flow up from break even last year and Japan reported an even larger cash flow improvement year over year and reached break even faster than any of QVC's international operations.

Despite the weakness in the domestic business, we are reafirming guidance for a consolidated QVC for the year.

As outlined in the press release, we and Liberty have begun the appraisal process as outlined in the partnership contract subsequent to Liberty's execution rights under the exit provisions of that contract.

Moving on to the content division, while content is a strong performer with EBITDA growth of the fully developed channels in excess of 30%, we decided to collapse the results of content, corporate and other into one business segment, given the relatively small size of this group.

For this year we will continue to offer additional disclosure as we have in table 4 to show the content division so you can match our results to the guidance we gave earlier in the year.

On a combined basis our content and other businesses generated revenue of $224 million, representing growth of 12.6%.

Content and other EBITDA declined 60% to $6 million.

This decline was attributable to three primary reasons.

Increased player compensation and fewer events at our arenas, continuing investments in new networks such as G4 and an increase in corporate overhead to $39 million.

At the same time E! and Golf individually delivered double-digit growth in both revenue -- sorry in revenue and over 30% growth in EBITDA for the quarter.

Moving on to the cable division, I will review the financial metrics and handoff to Steve to comment on status of the integration and our excitement about the outlook for the entire group and most particularly the outlook for the high speed internet access service.

On a pro forma basis, the cable division revenue for the first quarter was $4.2 billion, a 10% increase while EBITDA for the 1st quarter was $1.4 billion, an increase of 35.8%.

As noted in table 4, the pro forma results include $88 million of acquisition and employee termination costs incurred by AT&T Broadband in the 1st quarter of 2002.

Excluding the $88 million to create a real apples to apples, year over year comparison EBITDA grew 25.3%.

In table 5 we segment the historical and newly acquired systems.

Excluding acquisition and other costs, margins on the newly acquired systems increased to 28.9%, up from 22.6%, a 630 basis point improvement.

This improvement was driven by a number of factors, principally the significant reduction in personnel costs associated with the removal of the AT&T Broadband headquarter operation in Denver.

Also contributing to this 630 basis point improvement were savings in areas such as customer service, bad debt, bad debt at AT&T Broadband alone improved 18% year over year, marketing, pay programming about which Steve will have more to say.

All of this was in the context of improving basic subscriber growth which added to the profitability of the segment.

Two of the key highlights are basic subscriber growth and high speed data subscriber growth.

Relative to basic subscribers we ended the quarter with 21.3 million basic subs.

We added 57,000 basic subscribers during the quarter, a terrific accomplishment.

We saw some slow down in the historical Comcast basic sub growth, but this is directly attributable to the military personnel relocations out of a couple of our markets.

Military deployments, specifically the Third Infantry Division out of Fort Stuart, Savannah and 101st Airborne Division out of Fort Campbell near Nashville accounted for approximately a 15,000 subscriber loss as families relocated subsequent to the deployment.

The good news is we expect to regain these subs once our troops come home.

Over 42,000 basic subscriber additions came from the former AT&T Broadband systems.

As a result of our integration and marketing initiatives, some of which Steve will outline today all of which we will drive into at our meeting in New York next Friday.

In the 1st quarter and last year, AT&T Broadband lost 180,000 subscribers.

This represents a 220,000 subscriber swing when compared with the 42,000 basic net adds in the quarter.

Furthermore, the quality of our subscriber growth increased significantly.

Installation revenue increased 16% as we have discontinued or substantially reduced the past practices of free installations.

In addition we have seen significant improvement in bad debts.

I mentioned AT&T Broadband saw an 18% improvement on a combined basis we saw over a 10% improvement for the combined historical and newly acquired groups.

As a result of this performance, the company is increasing our guidance for basic subscriber additions for the year.

As I mentioned at the out set we now expect to add 75 to 100,000 basic subscribers, a significant improvement from the previous guidance of flat growth for the year.

However I would point out that growth will be seasonal with some loss to break even results should be expected for the second and 3rd quarter, but our usually strong 4th quarter will result in a lift for the year to the target of 75 to 100,000.

With digital cable we finished the quarter with 6.787 million subscribers, up 23% year over year.

The real news for digital is on the profitability of this product and Steve will cover this in his comments.

Average revenue per subscriber increased almost 4% or almost 50 cents per subscriber to $14.96.

This change was attributable to the repricing of digital and pay packages.

Digital subscribers are significant buyers of pay, but we will in addition to this repricing and repackaging, we've also slowed down the deployment of digital as we waited for cheaper boxes that became available to us on April 1.

We've also prepared to expand a robust launch of video on demand.

We now have video on demand in front or we will have video on demand in front of 50% of our markets by the end of this year.

We should have stated that video on demand is in front of 6 million subscribers not 11 million as we stated in the press release.

We will be in front of 11 million subscribers by the end of the year.

We continue to be very excited about the next leg of growth in digital and reiterate our guidance for the year of between 950 to one million net additions.

What an amazing quarter for high speed internet access.

Steve will follow-up with commentary on the strength of our competitive position here, but I would like to highlight that we added 417 thousand subscribers and 11.5% sequential increase and 82% increase year over year.

At the same time average revenue per unit is $42.82, an increase of $1.77 or 4.3% year over year.

At the end of the 1st quarter, high speed data was available to 31 million homes or almost 80% of our footprint.

In the 1st quarter we added over one million homes to the high speed data footprint and ended with penetration of 13%, up from 12% at the 4th quarter and 10% a year ago.

New guidance is for a year end result of 5.2 million subscribers, representing an increase of 1.6 million units year over year.

We have a better product, better cost structure and a superior distribution platform.

When we upgrade our systems, we can offer the service to 100% of the markets and we continue to make strides in reducing our cost and seeing the platform perform better and better.

We have a significant retail distribution platform now with over 2,000 stores and Steve has much more to say in his commentary on high speed data.

Brief closing comments on the telephony product and add sales.

We ended with 1.4 million subscribers on the telephony product up 22% year over year, but down 20,000 quarter to quarter, 4th quarter to 1st quarter.

Pro forma phone revenue totaled $224 million a 28% increase year over year, reflecting the higher customer count and a 1 point offset by a 1.4% decline in average revenue per subscriber.

Our focus for this product is on better execution and better profitability.

We have lower head count and as we take out cost, we will further improve the profitability of the product.

With respect to advertising revenue, we are reporting an 8% increase in revenue year over year to $235 million.

This represents a 13.9% growth in the Comcast historical group to $92 million and 5% growth in the AT&T Broadband group to 143 million.

In the historical group the results reflect the ongoing success of Comcast Market Link, our regional fiber interconnect which is now available in over 15 markets.

In the first quarter we saw local business which accounts for 48% of our business grow 4%, but the real driver of growth in the advertising sector was regional and national which together grew 28% with national growing even more than the regional sector.

On the Cap-X front, we're trending along directly in line with the guidance that we gave for the year and will have no difficulty meeting our target of completing the upgrade of 46,000 miles of plant for the year.

With that, let me pass to Steve for further commentary.

Thank you, John.

Let me start by saying it's hard to believe that six months have already gone by or close to six months since the close.

We are obviously feeling pretty good about things.

I think if we did this 10 times, we would never get off to a better start than we've gotten off to this time.

Let me start by referring to the priorities we discussed on previous calls that is we set out for our cable business over the next year or two.

Party number one obviously reversing basic subscriber loss, concentrating on the video business which is really the foundation for everything all of our new services.

Number two rebuilding the infrastructure, taking all of the AT&T markets and completely rebuilding them by the end of 04.

Number three, accelerating the growth of high speed data and number four repackaging and remarketing digital and pay.

Number five, increasing the efficiency and profitability of our phone business.

Number six, improving customer service and number seven, increasing operating cash flow or EBITDA by about 25% from $5 billion last year to a range of 6.2 to 6.3 billion this year.

I'm very pleased to report we are meeting or exceeding each of these priorities and let me go through some of these in detail.

First basic subscribers.

The turn around was really more rapid than we anticipated.

We knew that we were off to a good start in November and December, but we are projecting internally to lose subscribers in the 1st quarter.

We obviously had to swing from a major loss last year and combined company losing about 140,000 subscribers to gaining 56.9 thousand subscribers this year.

I'm particularly pleased with the performance in the exAT&T systems.

What you see is virtually all of the ex AT&T systems gained subscribers.

So this is a very broad scale turn around.

Really the improvement was due to a number of factors, it really started with focus.

It had a lot to do with management and execution.

One of the questions I would anticipate on this call is OK, what were the specific programs?

It's really more complicated than that.

If you look at the 1st quarter, we connected 1.7 million new customers and disconnected 1.65 million customers who moved or decided to leave us for other reasons.

You have a tremendous amount of activity that is the guts of a cable business and a variety of programs addressing, getting more connects and also reducing the disconnect volume.

Some of those programs I will list, but it's hundreds and hundreds of things that are the block and tackle day to day of running a cable business.

The first thing is focusing on video and not telephone.

Also making sure the promotions are locally driven and locally oriented as opposed to centrally driven.

Changing commissions to so that we really concentrate on promoting video whether the commissions are the people who work in the call center or field sales.

Making sure that each call center has save programs so if someone calls up and is frustrated for whatever reason and thinking of disconnecting we bring them to an area in the call center where someone addresses their concerns and tries to save those customers.

We have a very aggressive new home build program and our goal is any time a new home is built in our footprint, we want to be there with service and a live wire the second the person moves into that home.

Theft of service has been a big issue.

We've found a lot of people have been stealing service and we are doing a very broad cap audit program to change that.

Bundling with high speed data we think is a major way to attract subscribers and keep them.

Hispanic programming in a lot of the markets where there's a significant Hispanic presence and of course dish win back strategies.

But it really comes down to local management teams driving the business on a day in and day out basis.

And I'm pleased to say all of these programs in the vast majority of the markets are now starting to kick in and yield that result.

Moving on to the rebuild, our goal is to accelerate the rebuild so 90% of the exAT&T plant is finished by the end of this year and virtually all by the end of next year.

When you break that down, it equals about 65,000 miles of plant and what we would like to do is do two thirds of it this is year that works out to about 46,000 miles of plant for 2003.

In the 1st quarter we rebuilt 12,200 miles.

Which if you just annualize that would put us ahead of our 46,000 miles goal for the year and we are now ahead of schedule and plan to increase the variance versus budget and end the year with significantly more than 46,000 miles of plant rebuild, which would bring us over 90% in the ex AT&T plant.

Just to give you a reference for how many homes this is affects, in the 1st quarter we rebuilt 1.8 million homes as a combined company versus about 585,000 homes last year during the 1st quarter.

So we have really accelerated.

We talk a lot about operating cash flow, but we are focusing on using capital wisely.

One way we're doing that is by trying to be as efficient as we can with this accelerated rebuild.

Our cost per mile last year combined company for rebuilding was $40,000 per mile.

Our cost in the 1st quarter and we would project this would continue throughout the year is 31,000 miles.

What that means is we are rebuilding 41,000 dollars.

We are rebuilding at $9,000 per mile less this year than last year.

Just to keep the math easy, if we end up rebuilding 50,000 miles this year, that will be a savings of $450 million.

Despite the fact that we are accelerating, we are rebuilding more efficiently.

Some of that has to do with the fact that there are crews that are now available on the market because so many other companies have finished their rebuilds.

In addition to saving money in terms of the rebuild, we are starting to see scale savings in other parts of the capital side of our business.

I'm pleased to announce that effective April 1, we will be buying digital set top boxes, the low end digital set top boxes for less than $140.

This represents a savings of about $90 per box from where we were.

On one million boxes that's $90 million.

So a significant savings in terms of the efficiency of our capital deployment on the digital side.

We are also buying modems at a significantly lower cost than we did last year or two years ago.

Clearly there are scale savings and on the capital side of the business we are doing more than ever but we're doing it in a way that I think is very wise in terms of capital deployment.

Moving on to high speed data, as John mentioned, it was a record quarter and we have over four million high speed data customers, up about 52% versus the same time last year.

That's why we are confident and willing to shoot for a raised projection for the year of 5.2 million subscribers.

There has been a lot of talk about Bell company pricing.

What I I would like to do is address that,digress for a minute.

I will start by saying we always take the competition seriously particularly when it's with companies as well funded and large and powerful as the Bell companies are.

We take that competition seriously on a day to day, market by market basis.

One of the questions I always ask when we're going through a budget review, as great as we are doing on high speed date, what is our share.

What percent of new high speed data connects are we getting?

We are really trying to make sure that share stays as high as possible.

Historically it's been 75-80% of new high speed data connects.

We take the competition seriously and have been very carefully monitoring what's going on.

That said, we do not see a major change in the competitive environment.

That's because there has been very aggressive promotional price competition from our two major Bell competitors on the DSL business, Verizon and SBC really for the last year or two.

We have been very aggressive right back in terms of our promotional pricing as well.

For the last number of months in almost every one of our markets, Verizon has been offering DSL for 29.95 for six months.

During the same time period, SBC is offering DSL service for 34.95 for 12 months.

In the vast majority of our markets, and Verizon and SBC cover about 77% of our footprint.

For the 1st quarter, we had very significant price competition from these two competitors and still added 400,000 plus subscribers.

That begs the question, how did we do that?

The first point I'd like to make is we are aggressive right back on price.

We have introductory offers in some markets of $29 for three months, in other markets the promotions varied depending on the local competition.

We have always been very aggressive and that aggressiveness is built into are [inaudible].

The reason why we have an [inaudible] of $41, $42 per subscriber is because we are being aggressive in terms of promotions and over time moving people up to the normal price points.

Second point I would like to make is we believe our product and our platform gives us some real advantages versus DSL.

We service 100% of the customers in an area once we rebuild the cable system.

When you call for cable in a rebuilt Comcast system, we know that you can get a cable modem and we instantly try to cross sell you in the same call.

About 20% of the time when someone calls for cable, during that call we also sell that customer a cable modem and arrange for the install during that call.

Most of the Bell companies can only service 60% or 65% of the customers in their footprint for DSL.

Many of the customers are serviceable for DSL are not serviceable for DSL at the kind of speeds we offer, 1.5 down.

In fact Verizon in their announcement mentioned to get their 34.95 offer for 1.5 speed, you had to live within 12,000 feet of their central offices.

The effective universe for a Bell company in many of our markets is well below 50% of their customers being able to get DSL at speeds comparable to our product.

That's obviously a problem because the addressable universe is half what it could be.

But it's also a problem because when a customer calls in, many times the person answering the phone doesn't know whether that customer can get DSL service.

It's hard to cross sell a customer when you don't know if they can get the service.

What typically happens is a person is told we will check and call you back to see whether you can get DSL and the installation gets arranged later.

That's a bad thing in terms of getting the serviceable universe moving.

What it really means is you can't sell transactionally.

This year we think we will get about one million high speed data customers selling transactionally when people move into an area and call for cable, it's a very important part of our business.

It also means most of the Bell companies in most markets cannot sell at retail.

That's a very important part of our business with 2,000 points of distribution growing every day and the ability to sell at retail we think is a big part of our future that makes it very difficult in many markets where DSL can't sell at retail to compete as effectively as we can.

In addition, when you install DSL, many times if you are in the wrong area, you get slower speed than you think you will get.

We believe in many markets, DSL is experiencing very high churn rates that obviously increases disconnects and puts more pressure on the connect side.

When you wrap it all together, it is a competitive market and we anticipate the market continuing to be competitive, but it was competitive in the first quarter when we added 400,000 subscribers.

Looking over the next three quarters and into 2004, we are very comfortable with where we are and think we have a better product.

This is a very important part of our business.

It has tremendous focus for me and the senior management team and we are confident going ahead.

When you then move on to the digital and pay business, what we mentioned at the start of the year is we would concentrate on profitability and not unit growth.

That's what we have done.

We believe that AT&T was under pricing digital and pay so what we've been doing is selling a new customers with Comcast packaging and adjusting the existing packages for existing customers.

What you are seeing in the first quarter is slower digital growth than we have had traditionally, but we would stand by our guidance of one million net adds during the entire year.

I think you will see digital pick up in the second, third and fourth quarters.

Some of the highlights of the quarter, we increased revenue per digital subscriber by 61 cents.

We reduced expense per digital subscriber by 56 cents and increased revenue per pay customer by 76 cents.

These changes seem small, but when you add up the impact of these changes on the millions of customers we have for digital and pay, the result is that during the quarter, we increased cash flow by about $100 million on our existing digital and pay business.

We would see that $100 million repeated or grown in the second, third, and 4th quarter for a net improvement for the year of over $400 million in our digital and pay business, which is what we set out to do.

I would be remiss when we talked about digital and pay that if I didn't talk about video on demand.

We are incredibly excited about what we are doing in Philadelphia with video on demand with a high component of free video on demand and free SVOD.

We are very much looking forward to expanding throughout the footprint.

First we have to rebuild the AT&T systems, but over time you will see what's happening in Philadelphia spread throughout the company.

We see this as getting our company ready to be even more competitive with our digital product.

In Philadelphia, time shifting is so popular over 50% of our customers are time shifting.

We found when people use the time shifting functionality it becomes a very sticky function that significantly reduces digital churn.

You will see us get aggressive and start to really roll this product out in more markets throughout the rest of this year and throughout next year.

Moving on to telephony, there is no question in our mind that this business was expanded too quickly.

As a result there a lot of inefficiencies in the business, lots of issues that touch customers, problems with bad debt and so forth.

We spent a lot of time during the last five or six months attacking the efficiency and profitability of the business.

Frankly we lost units in the quarter, but less than we thought.

We lost about 20 thousand and thought we would lose more.

The good news is we have significantly reduced bad debt which was running at about 15% of total sales to about 8%.

I consider 8% way too high, but it's a big improvement from 15%.

We also reduced activity levels we were discounting too much.

We're discounting a lot less.

When you reduce those activity levels, the customer gets a better experience and it's much more efficient for us.

We restructured our contractual relationship with AT&T Corp.

They provide the switching equipment the circuit switching equipment for the telephone business and we'll continue to concentrate on profitability and units for the remainder of this year.

If you move to customer service, with everything going on an obvious question would be all these streets being ripped up all these changes in management changes in priorities, what's going on with customer service?

The good news is our call centers in the 1st quarter had the highest levels of customer service in the history of our company and we believe the history of AT&T Broadband.

A very significant improvement versus last year at this time.

We are making real progress due to local management tightening up installation procedures and all the other things that touch customers.

I will say there is still a lot of work to be done in terms of procedures and policies and making sure things get done smoothly and on time.

I think we are off to a strong start.

We also have real estate-secured plans in place to open eight new call centers this year and expand seven more.

The goal is to get all video calls in house by the end of this year.

When we first announced the goal, our people thought it would be impossible.

The good news is we are ahead of the very tough schedule.

Just as a measure of the progress we are making, in the 4th quarter, 40% of all video calls for AT&T were handled out of house.

That number went from 40% to about 30% in the 1st quarter.

In one quarter we took 10% more calls in house and by the end of that year, we plan to drive it to zero.

The priority that brings it all together is EBITDA.

John mentioned we are improving profitability and that improvement will continue throughout the year and in many areas of the business increase during the year.

That's why we feel highly confident we will meet or beat the guidance of 6.2 to 3.3 billion.

We reduced total head count by over 5,000 and restructured high speed data and telephone arrangements with AT&T corporate.

We are making good progress on programming cost savings.

Add sales I think will have a stronger second half of the year when we move away from the effect of the Iraq war.

The interconnects are clicking in, that business has very good prospects.

We launched the Comcast brand in all the exAT&T markets.

That's gone extremely well.

The expense of those launches is now behind us and the positive impact in terms of morale and culture is clicking in.

I would say in summary across-the-board, very strong results.

We are totally aware that one quarter doesn't make a year, one year doesn't make a decade.

This is a marathon and not a sprint.

We are off to a very strong start.

We are on track for the year as a combined company to hit the 6.2 to 6.3 billion in cash flow, which would mean a margin for the combined company of 36%.

When you break that down, that will be 32% on the AT&T side, about 41% on the Comcast side for a blend of 36% for 2003 which we think will be a very solid start.

Let me close by saying I really want to thank the many, many people in our team.

We had hundreds and hundreds of people relocate, pick up families and move and those are the people that are really creating this kind of performance.

With that group doing the things they are doing in the start we have, I have no doubt we will have a great 2003.

John.

I think we are ready to go directly to Q&A.

Thank you, sir.

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

If your question has been answered and you wish to remove from the queue, press pound.

If you are using a speaker phone, pick up the hand set.

Our first question is from Nora Warner from credit Suisse first Boston.

Thanks and good morning.

On the high speed data front the numbers looked very good.

I wondered Steve if you could talk about longer term, what are your thoughts around differentiating the product?

You have much better speed and service today but as you look at moving into 2004, what are some of the strategies you are thinking about to highlight that speed to customers and some of the benefits that can bring?

If you can address that, it would be great.

That's a good question.

Ultimately you would like to have a number of things that very significantly differentiate you.

I think right now if you live in the right place, the DSL product is comparable with our product.

If you are too far away[inaudible], we are superior as I discussed.

You would like to get to a point where no matter where you live, Comcast high speed data is a better product.

There two major ways to do that.

One is with the architecture itself and we believe we can do things with the down speed and downstream and upstream speed that DSL cannot do.

We are looking at that right now.

In addition to that, the other way to differentiate yourself is with your portal and the kind of content that you offer.

We are hard at work on that as well.

On both of those fronts, I would not anticipate anything happening any time soon if you define as soon as the next three weeks.

We want to come out in 2004 and 2005 with increasing differentiation and ultimately what we would like to do is gain subscribers from DSL.

Right now we have a product if you live in the right place that's comparable, we'd like to have a product that no matter where you live is clearly better and we can start to win customers back from DSL.

Thank you.

Our next question is from Richard Baliotti from Morgan Stanley.

State your question.

Good morning.

In the past three weeks when Viacom, AOL and Disney reported, their average [inaudible] growth for their cable programming divisions has been realistically in the 5-7% range, AOL near the bottom and Viacom in the middle and Disney at the upper end of the range but still fairly low despite ESPN.

Could you talk about what your programming cost looks like in the 1st quarter relative to that 5-7% they were showing and more importantly, what do you think now that you've had control of this for a couple of months.

What do you think a realistic growth rate in terms of total programming cost for the company would be in 2004 given normal inflation offset by some of the things you have done to restructure programming cost?

Rich, we are not going to drive down to that level of detail, but as we said, our programming costs increased at a high single digit level.

In the first quarter we were a little more than the mid-to high range.

I don't know whether we want to say anything more about where we see programming costs going from here.

But obviously that's an area we see for savings and Brian, do you want to add?

I think in this quarter and I think we want to stay focused and maybe this is some of the things we can get into at the investor conference in longer term outlook of the business, but in this quarter there was nothing unusual.

This quarter is really being driven as you heard with John and Steve on a variety of small initiatives when added together moved the needle quite substantially and programming is not a major part of 270 million of a billion-350 million improvement goal for the year.

We are on track.

So in a couple of months, we've made some very good progress and I'm basically pleased that we were able to sign a long-term agreement with Showtime and think a couple other networks.

We launched some new channels but we have very close to new agreements with some renewals for other channels.

So it's happening.

It's just a long slow process when you have 200 channels to ultimately constantly have new conversations with.

Some are doing better than others, but in all, I don't think there's any substantial change in the quarter.

Next question, please.

Our next question is from Raymond Katz from Bear Stearns.

Can you give us a feel for what satellite penetration looks like in your franchise areas are, concentrating a little bit on the AT&T franchises and any sense as to whether you have seen any change in customer downgrade activity.

Regarding tiers of service.

Especially in relation to satellite.

It's all over the ballpark.

There are certain markets like Atlanta where satellite penetration is in the 30s.

There are other markets where satellite penetration is single digit.

In general, I think it's an accurate description to say satellite penetration is higher in the AT&T Broadband systems.

Some systems significantly higher and cable penetration of total homes is lower in the AT&T systems.

We look at that as long-term an opportunity.

It's obviously hard to pull somebody back from a competitor.

There is real inertia in the business, but to me that's long-term an opportunity and we're spending a fair amount of time and effort on dish win back programs and other things like that to try to get more customers back.

In terms of downgrading in the quality of subscribers, it's actually the 1st quarter went the other direction.

What we found is we are discounting less.

We believe that AT&T Broadband was discounting too much.

That a lot of the subscribers that were coming on as discounted subs were churning off and causing a lot of activity.

We are discounting less and I think you can see that in the ARPU and some of the internal economics of the business.

We feel comfortable that a lot of what is clicking in now is just blocking and tackling.

Steve, is there any discernible change in those satellite penetrations from Q4 to Q1?

I don't know the answer to that.

A lot of the satellite stuff we get from Sky Trends and I'm not sure we get it on a quarterly or monthly basis.

We concentrate on our business.

I don't know the answer.

I would say we laid out as the main priority, if you have to pick one, it was to stop the subscriber losses.

You cannot lose 500,000 subs.

Most of that has to go to satellite and the fact that we stopped that, I don't know that it changed the percentage, but it certainly changed the direction of the percentage and I think getting 57,000 subscriber growth, some of that obviously is coming back and some of that is marketing new homes and all the things Steve described.

We are quite pleased and think that this is obviously by upping the guidance not a one-time event.

Next question, please.

Thank you.

Our next question is from Jessica Reif Cohen from Merrill Lynch.

State your question.

Thank you.

I have a question on advertising.

You out performed the market both in cable and broadcasting in the quarter.

But it sounds like it came more from Comcast.

Can you talk about what you are doing differently on the AT&T properties and when you would expect some of your efforts to take hold.

An easy way to think about it is that the AT&T markets are about a year behind the Comcast market and some more than a year in place of the interconnects.

I can't over stress how important that side of the business is.

The real engine here is the regional/national interconnect side of the business and in many of the AT&T markets, the interconnections didn't exist and in many other markets they were what we called soft interconnects.

They worked, but not well.

Charlie Thurston and his team spent time a tremendous amount of time putting interconnects in place.

I think they're up to 45 interconnects total the two sides of the company and we are pleased with that, but I think what that means is the real engine of the business on the AT&T side will come over the next year where as the Comcast side it's in place and clicking away.

Just a follow-up.

How many networks are you currently selling in and the increments on margin?

I think the majority of the company is 36 or 48.

They come in increments and we are upgrading all the time.

The total margin on add sales is mid-60s.

I think on an incremental basis it's probably a little bit higher than that.

Thank you.

These are some of the things that we will be going into more specifics next Friday.

We will be highlighting add sales and Charlie Thurston.

I think when you get a sense for the richness and the significance market by market of what these guys are out to do, it's an impressive story.

The numbers are great.

Thank you.

Next question, please.

Our next question is from Niraj Gupta from Citigroup.

State your question.

Thanks and good morning.

In the margin improvement slide that you put out at the end of the year, it showed the 1.35 billion dollar increase that Brian alluded to.

If you strip out the growth in historical systems of 300 million, that was about a billion 50 coming from improvements at the new systems and I guess the question if you look at overhead and the field op savings the telephony, customer service and programming, etc., could you discuss which items have yet to fully impact the P&L, i.e.: Which items did you get a full quarter of benefit on and which did you not?

On the other side, Steve, you alluded to the quarter was impacted from the one-time cost associated with launching the Comcast brand and I was wondering the magnitude of that.

The Comcast brand is easy and the magnitude was $10-15 million.

It was not a major thing.

There are a number of costs that we recognized in the 1st quarter and we will recognize in the 2nd quarter that I think are somewhat temporary.

For example, we have reduced the overhead in Denver dramatically, but we're not changing our payroll systems until June.

There are a number of people helping with transitions.

There are a variety of costs I would call transitional that are still on the books that will decline fairly dramatically in the second half of the year and at the same time as you know, cable business tends to accelerate during the year because you have your rate increases from programmers in the beginning of the year and you have price increases coming through.

So I think you will see margin expansion mostly driven I think by the normal dynamics of the cable business as you progress through a year.

But also somewhat because some of the costs that are embedded in the first half will not be there in the second half.

Next question, please.

Our next question is from Ari Burgoff of from UBS Warburg.

Good morning.

Thank you.

You are way ahead of schedule on the integration and on track on the deleveraging.

You can talk more about the next few data points on the deleveraging, one is obviously the second component of the [inaudible] AOL stock you inherited as well as the Paul Allen put which I guess is in process.

If you can talk about that and when we think we will see that.

Those components and more detail on the dish buy back programs.

It sounds like it's a little bit different from what we think when we hear dish buy backs.

Thank you.

Sounds like a double headed question.

We will try to get to both questions.

Let's start with the dish question, Steve.

Okay.

The way it works is we go to a customer and say we will in effect buy back your dish.

You have to sign up for 18 months of service and during the 18 months, we will give you a credit amortized on a monthly basis of $400.

We say we're buying back your dish for $400.

What it means is that your cable bill will have a credit over the next 18 months.

We added about 30,000 customers through dish win back in the 1st quarter and our projection is we will do somewhere between 100,000 and 150,000 dish win backs during the year.

Regarding the balance sheet, I think it is and was a major priority to reduce the debt this year and to more importantly or as importantly to get out of the bridge loan and put in place permanent financing and have significant stand by bank facilities so the company can finance itself without any kind of intense pressure of the moment.

The fact that we are living in an all time low interest rate environment or one of the all time lows interest rate environments, ideally suits us for this kind of taking temporary financing and turning it into permanent.

We have been doing it steadily and obviously very, very excited with where we are.

The AOL stock that we get a billion and a half dollars, we have always said that will be something we will attempt to find ways to monetize.

The Paul Allen put we have said we have delayed or negotiating period while, and there's an interest being earned during this period on that put so there is no financial delay.

As to whether there are more creative outcomes and possibly in discussions with Charter to and Paul Allen to see if there is ways to come up with win-win outcomes for all sides.

There is no progress to report, but that is relatively a small amount of cash when put against the 3.3 or $3.5 billion between AOL and Time-Warner, between the cash and the stock and the Bresnan sale that is already completed as well as the sale of some of our other securities.

We are pretty happy to be at 27.2 billion of debt at the end of the 1st quarter down from 29 and change at the end of the year.

Our goal is to be in the 26-25 billion range without any expansion of assets.

As you can see, we have a variety of ways to accomplish that in the balance of the year.

I will also mention that I think it's time we and the investors also recognize that there is give or take around $8 billion, that's an estimate various analysts have said, of other partnership assets after everything we just talked about that will still be on the books and they include the 21% of Time-Warner Cable.

I think we made a good decision to invest in Time-Warner Cable and restructuring the Time-Warner Entertainment partnership as cable values have risen this year and our knowledge and belief in the cable business are bullishness for it.

So that is a growing asset in 21% we obviously will monetize it over the next several years.

It's a wonderful asset.

Two, we own 50% of these are things that of course that came with the AT&T acquisition that I don't think a lot of us focused on we were focused on the EBITDA and subs and other things.

We have 50% of Insight and 50% of the Kansas City and the Texas cable partnerships.

All in, and several other smaller partnerships that are typically 50-50.

None of those income and cash flow subscribers are reflected in any of the numbers John and Steve have talked about.

It is a goal to find ways to restructure those partnerships and come up with either additional assets or pay down additional debt.

I just if you go back to where we were on the balance sheet when we signed up AT&T to what we said we felt we could do by the 4th quarter, we said by the 4th quarter two things would happen.

We would be free cash flow positive and we would be less leveraged at that time than we were when we met AT&T.

We are free cash flow positive in the first quarter and we're well on our way to making that statement come true.

Thank you.

Next question, please.

Our next question is from Douglas Shapiro from Banc of America.

State your question.

Two quickies.

Steve, you mentioned the impact on demand on digital churn.

Wondering if you can quantify that and maybe also say whether or not if you see impact in digital selling in those markets.

And just a clarification, you mentioned it's a $140 box.

Are you talking about that as the primary box or is that more of an additional outlet?

On the box that's the primary box, that would be the equivalent of the DCT 2,000 that we have 10 million of or whatever the number is.

That would be the primary box.

We also have a price we that think is attractive for high def boxes which we haven't talked about.

We are have two or 3,000 are going out a week.

It's an interesting phenomenon, we think high def is starting to ramp.

It's a $140 work horse box.

In terms of digital and the effect of digital churn from VOD and sell in, I think it's early.

We will give you color that at the analyst meeting next week.

I think it's early to say here's exactly what happens and we are projecting that nationally.

But it is a significant difference.

Whether that difference is self selection because heavy user are using the time shifting or whether people really do find a tremendous increase in functionality when digital includes time shifting remains to be seen.

I think it transforms the product.

What we're finding in Philadelphia and one of the reasons why we did the test in Philadelphia is so we can get a sense from word of mouth.

It changes the way people think about digital and changes the way people think about Comcast and that obviously is going to be important as the world gets more competitive.

Thank you.

Can we take one last question?

Our last question is from Kathy Styponias from Prudential.

Hi.

Thank you.

Jonathan when your definition of free cash flow does not include working capital changes.

For forecasting purposes, can you give us a sense of what free cash flow would look like if we did include working cap changes this year which will obviously be a big working cap use given the severance payments you have to make and more importantly how we should think about it going forward.

A couple of points.

The severance payments we made, we did make some payments in the first quarter they amount to about $100 million.

We had accrued for those on the balance sheet and the liability reduced and the payment was made that will be clear in the Q when that is published.

Secondly our definition of free cash flow as we state in table 8 of the press release does not include the impact of working capital, however as we also state in table 8, we highlight for you the working capital impact.

If you want to look at that, we think that it is a much cleaner, fairer, and honest definition of free cash flow to start with EBITDA and deduct interest, Cap-X and taxes and now business, the working capital numbers are really not something that fluctuate all that much, but the real cash payment that we take out of the cash flow that we generate are interest capital expenditures and taxes.

We have the working capital number there in table 8.

Thank you.

Thank you very much.

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