康卡斯特 (CMCSA) 2003 Q3 法說會逐字稿

Good day and welcome to the 3rd quarter earnings release conference call for Comcast Corporation.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Executive Vice President, Mr. John Alchin.

Please go ahead, sir.

Thank you and welcome to our 3rd quarter earnings call.

We're pleased to present you with the operating results for this quarter.

We had an excellent quarter and we're extremely pleased to share these results with you.

Just before we get underway let me refer everybody to the safe harbor disclaimer and remind you that this conference call may contain forward-looking statements subject to certain risks and uncertainties.

Please refer to our investor relations website for reconciliation of nonGAAP financial measures.

For opening remarks, let me pass to our CEO, Brian Roberts.

Thank you, John.

This call really serves as the -- in a way a wonderful milestone, because it's basically the one-year anniversary of closing the AT&T acquisition.

We really couldn't be more excited about the progress that we've made in this first year.

We think, on all key metrics, we have either met or exceeded our early plans and our early thoughts of what could happen.

And Steve and John will take you through a lot of the detail, but let me just hit a couple highlights about the integration success.

First of all, basic subscriber losses.

Through this period last year, AT&T had lost 434,000 customers, we've added 101,000 in the AT&T systems, year-to-date.

Combined companies up 71,000.

We expect to hit our guidance of 125,000 to 150,000 net additions in '03.

This was critical.

This is a lot easier said than done, to take a negative momentum, completely arrest it, and actually begin to have a positive momentum.

So we're very pleased that in the 3rd quarter where we thought, typically, because of July and August, we could have lost subs, and we had thought that might happen, but actually, we basically broke even, with a few net additions in the 3rd quarter.

But the AT&T systems, in particular, are showing really good signs of progress with the rebuild, the channel lineup changes, and the customer service initiatives.

And you see that most of all when you look at subscriber results.

But our number one objective all along has been improving operating margins and getting EBITDA or cash flow growth, operating cash flow growth.

We are pleased to say we've now reached a 37% combined company margin.

We have gone from 26.4% to 33% in the AT&T systems, Comcast having a great year, going from 41.7 to 43.2 margins.

So we, basically, can sit here and say that what we thought would take several years to get this kind of forward momentum is happening much faster and sustainable and getting better each quarter.

We hit a key metric internally that we're very pleased with, which is operating cash flow annualized per subscriber of over $304.

That's $350 historical Comcast, $274 in the newly acquired systems.

That's up 34% from the 3rd quarter last year.

That is the main metric that we judge ourselves on in terms of how well the system as a whole is performing.

So we're now able to again give you confidence that this is really going to be more like a two-year process and not three years or longer, when we originally suggested putting the companies together.

And that is to get us to the kind of approaching the 40% margin combined company that Comcast has had for several – for really, as long as I've been around we've been at 40%.

So, we did not think it would take long, but it's happening faster than we had hoped.

Second point, system upgrades.

We will be 95% complete for the whole company at the end of '03.

And you'll hear detail on how many miles and what it's cost, but this is, again, putting that question behind us and really allowing us to now complete the project in '04 to virtual completion, and put the company in a position of free cash flow generation unlike at any time in our 40-year history.

At the same time, as having the margin success, putting the rebuild, and having the new products, the free cash flow that comes from the rebuild being complete, we're now in a position to sell new services across a much larger footprint.

And you're going to hear from Steve, really, our competitive positioning and repositioning of this industry to be ready for competition.

But I would be remiss if I didn't say that, in my opinion, the news of the quarter is high-speed data.

To have 470,000-plus high-speed data net adds this quarter is really a testimony to how fantastic this product is, how we continue to evolve it in terms of our speed, the portal, and you'll get an update on all of that and where we're taking it in the future.

But there's been so much concern from investors on how we would do.

This is the -- I think the numbers are spectacular, we're very, very pleased.

Finally, the balance sheet, I can't say enough great things about how John and Larry Smith and all of their respective organizations have taken us from a company that, literally, the day before closing, before the Microsoft conversion, we had $35 billion of debt.

We then converted $5 billion.

And we had $30 billion at closing.

And we are now able to, basically, believe we'll be around 23 by year-end.

Leverage at the beginning of '03 was slightly over 5 times, and will be around 3.5, 3.6 times at year-end '03.

And, of course, that does not include a lot of the off balance sheet or nonmonetized assets such as the Time Warner $1.5 billion of stock, 20% of Time Warner Cable, and some of the Liberty assets that came with the sale of QVC.

All of this is keeping our eye focused on our, you know, our fundamental goal, which is shareholder returns.

And I think we've got the company now as well-positioned as any time in our history, to continue the, sort of, significantly substantially better performance in the S&P when it comes to investor returns.

So -- very pleased.

Let me kick it over to John to take you through the quarter, and we'll be happy to answer questions later.

Thanks, Brian.

I'm going to review the consolidated results quickly, before moving into the detailed events of the 3rd quarter and our division results.

The consolidated results include all acquisitions as of the date of the closing and report QVC results as a discontinued operation.

When comparing our results to the prior year, the gain on sale of QVC and the acquisition of AT&T Broadband had the largest impact on the comparison of reported results.

So for the quarter, we're reporting $4.5 billion of revenue, and $1.6 billion of operating cash flow.

The consolidated net income of $3.2 billion compared to net income of $76 million last year, and the loss from continuing operations of $153 million compares to a $24 million gain in the same period last year.

Contributing to the loss were certain items, primarily our investment losses of $182 million, which relate, in part, to the decline in value of the 218 million shares of Liberty Media.

If you exclude these items, which are detailed on Table 7C of the earnings release, we would have reported a loss of only one cent, which is in line with analyst consensus estimates of break-even for the quarter.

I would direct analysts to the earnings section of our investor relations website for a description of some of the investment items which impacted the current period earnings and may impact reported earnings in the future.

On a pro forma consolidated basis, as if AT&T had been acquired on January 1, 2002, we're reporting consolidated revenue of $4.5 billion, up 8.8%, and operating cash flow up 36.9% for the total of $1.6 billion that I just referenced beforehand.

But before we go into the division, just let me cover quickly the impact of the QVC sale on our balance sheet.

We closed the sale of QVC on December 17.

This is the sale of our 57% stake in QVC to Liberty Media.

After a series of transactions, we received the following. 217.7 million shares of Liberty Media Series A common stock, $4.35 billion in cash, and a $1 billion three-year Liberty note.

So far we've used $1.7 billion of the proceeds to reduce debt by September 30th.

The remaining cash will be used to pay taxes of approximately $800 million and to further reduce debt in the 4th quarter.

Debt, excluding exchangeables at 9/30, was $25 billion down from $26.7 billion at June 30, and down almost $5 billion since the beginning of the year.

We've made exceptional progress this year in reducing debt.

Primarily using proceeds from the sale of QVC, we will further reduce debt at year-end to approximately $23 billion that Brian referenced in his opening comments.

And we'll still have significant additional financial flexibility with our Liberty Media stock, the notes, and the Time Warner stock.

Net of those values, our net debt to operating cash flow at the end of the year will be approximately three times, as opposed to the 3.6 that Brian reported on a -- what would be a reported basis.

And that still leaves us with the 21% interest in Time Warner Cable and the joint ventures, which have a pretax value of about $10 billion on an aftertax value, probably in the $6 billion to $7 billion range, which would reduce the ratio a full turn from 3 times down to 2 times.

So let's now turn to the operating results.

The Content division, which includes our cable networks and Comcast Spectacor, continued with impressive performance by reporting combined revenues of $173 million, up 16% from a year ago.

Cash flow, though, came in at $50 million, up almost 50% from the 3rd quarter last year.

Each of the networks and Comcast Spectacor recorded double-digit revenue growth, as our cable networks continued to grow distribution and advertising revenue.

Cable, let's move on to that, reported another fantastic quarter.

Pro forma revenue for the 3rd quarter was $4.37 billion, 8.4% higher than last year.

Revenue was fueled by double-digit growth in the historical markets, historical Comcast, or revenue growth of 11%, due to steady growth in the video business, as well as strong growth in advertising of almost 10%.

And Steve will have more to say about that.

And tremendous growth in the High-Speed Internet revenues, up almost 56% for the quarter.

Revenue in the AT&T Broadband markets increased a modest 6.8% due to the impact of subscriber losses incurred in 2002, and a decrease in phone revenue of over $22 million, or 11% year-to-year.

Average monthly video revenue per basic subscriber in the historical Comcast markets is nearly $49, while the acquired markets are reporting revenue of approximately $46 per sub per month.

That $3 difference in average revenue per monthly -- average monthly revenue per subscriber, will narrow over time as we equalize sub growth and rates and bring the AT&T Broadband markets closer to those of the historical Comcast group.

For the 3rd straight quarter this year, we have positive basic subscriber growth adding over 800 basic subs in the 3rd quarter.

The 800 subscriber additions were in line with expectations of the seasonally slow 3rd quarter.

As in the past, we expect to have a very strong 4th quarter.

We gained almost 23,000 subscribers in the broadband systems as we continued to focus these markets with successful new customer initiatives.

This growth represents a significant turnaround from the loss of 131,000 subscribers in the same period last year.

The loss of subscribers in the historical Comcast systems of approximately 22,000 reflects redeployment of resources to the AT&T Broadband systems from our historical group, and continuing military deployments, as the troops have not returned from Iraq.

There's also a minor impact from hurricane Isabel as it impacted marketing on some of the Eastern Seaboard markets.

On a combined basis, over the first nine months of this year, we've added almost 71,000 basic subscribers, compared to a loss of 406,000 in the nine-month period last year.

This is a 476,000 subscriber turnaround, which is really a tremendous accomplishment in such a short period of time, and puts us well on our way to meeting the basic subscriber guidance for the year of adding 125,000 to 150,000.

But across every service within the cable division, we've just had a terrific quarter.

With respect to digital cable, we added over 318,000 subscribers, almost double the net adds for the 2nd quarter this year.

We finished the quarter with 7.3 million digital customers, up almost 17% from 6.2 million customers at the end of the 3rd quarter in 2002.

We're now reporting digital subscriber penetration of 34%.

We've added nearly 650,000 digital customers to date this year, and expect to comfortably meet our guidance of 950,000 to 1 million by year-end.

Steve's going to talk some more in his outline about the advanced digital applications such as VOD, High Definition, and DVRs that we'll be aggressively rolling out to enhance this service through the end of this year and into 2004.

On the high-speed data front we're reporting another fantastic quarter.

As Brian said, we added almost 473,000 subs, a 39% year-over-year increase, and a 35% increase over the net adds for the 2nd quarter of this year.

We finished the quarter with nearly 4.9 million High-Speed Internet subscribers.

Up almost 50% from the 3.2 million at this time last year.

We're now at a penetration rate of 14.5%, up 320 basis points from the 2nd quarter number.

We continue the steady rollout of this product into new markets, adding 1.3 million homes to our footprint in the 3rd quarter.

More than 84% of our homes now have access to the High-Speed Internet service.

That's 33 million homes have access to this service.

ARPU for the -- that's average revenue per subscriber, for the high-speed data service for the quarter was $42.25, Consistent with the year-over-year number, and in line with the expectation that we expressed in the 2nd quarter call of a 1% to 2% decline.

We remain confident that ARPU will hold at current levels.

Year-to-date, we've added 1.24 million high-speed data customers.

Because of this accelerating growth rate, we are again increasing guidance for High-Speed Internet subscribers from $1.6 million, up by $100,000 to $1.7 million, and expect to end the year with $5.3 million customers.

On the telephony front, the telephone revenue declined $22 million, or 11.5% to $189 million.

This decline is a result of fewer subscribers because of the reduced marketing effort, and because of our focus on profitability.

This quarter we saw a net loss of almost 55,000 subscribers, and as a result, we're increasing our guidance slightly for the loss for the year up to 175,000 subscribers.

But the focus on profitability is really paying off big time.

Phone operating cash flow margin today exceeds 15%, and we're looking to grow operating cash flow margins in 2004 to 25% and beyond.

On the ad sales front, advertising revenue increased 7%, results reflect the ongoing success of Comcast Market Link, which is our regional fiber interconnect, primarily in the historical Comcast markets.

Steve's going to have a lot more to say in his segment about the advertising business.

So let me move to operating cash flow, which, for the quarter, on a pro forma basis, was up 35% to $1.6 million -- billion, I'm sorry.

Included in the 3rd quarter operating cash flow in 2002, with a $107 million charge related to the acquisition and employee termination charges in the AT&T Broadband systems.

If we add back those one-time charges, cash flow year-over-year grew 24.2%.

As Brian said in his part of the opening comments, combined annualized cash flow per sub is now $304 per sub for the year, up 25% for the -- up 25% from where it was a year ago at $244.

In fact, our historical markets have actually reached an annualized cash flow per sub of $350.

The combined cash flow margins in the 3rd quarter grew over 730 basis points to 37%.

Margins in the historical markets have increased to 43.2%.

Our acquired markets have shown dramatic improvement and are now at 33%, which is fully 1100 basis points above where they were a year ago.

In relation to cap ex and rebuild, we rebuilt over 14,800 miles in the 3rd quarter, with 92% of our footprint now providing two-way digital and high-speed data service.

The newly acquired systems are now 89% rebuilt, and on a combined basis will be 95% rebuilt by year end.

We expect to upgrade almost 53,000 miles of plant this year, that is fully 15% above the goal that we set for ourselves at the beginning of the year.

And we expect to do this within the cap ex guidance that we gave of $4 billion.

In my closing comment, I want to refer to a slide that we've used in a number of conferences and meetings recently that highlights the system free cash flow for our Baltimore area systems.

Since the time that we completed the rebuild of the Baltimore area systems in 1999, we have converted operating cash flow growth of 11% per annum into compounded growth of system free cash flow, which we define as operating cash flow minus cap ex, of over 20% per annum.

So that's 11% cash flow growth converting to 20% system free cash flow growth compounded over a 5-year period.

On a per subscriber basis, system free cash flow on a consolidated basis has increased from $325 million last year to over $418 million this year, a 29% increase.

In the historical systems, on a basis of the historical systems for 8.5 million subs, we've converted a 15% increase in operating cash flow to almost a 30% increase in system free cash flow.

So in every respect, this has been a terrific quarter.

We've exceeded all of our operational expectations, and we're beating the original timing estimates on when we would achieve certain goals by a very wide margin.

With that, let me pass to Steve.

Thank you, John.

It's an interesting time for us, coming up on our one-year anniversary of closing the deal with AT&T Broadband, and also, looking ahead toward 2004.

As John said, the numbers are strong, and strong numbers have a tendency to speak for themselves, so what I thought I'd do today is really talk about how we've also made progress positioning our company for the future.

Some of the things I'm going to talk about have a benefit in 2003, but really, most of what I'm going to talk about is how we are going to benefit the company in 2004 and beyond by the investments and the strategies we put in place this year.

I think the bottom line is that we feel like we are a much stronger competitor going into 2004 than we were going into 2003 a year ago.

We start with our deals with programmers and other suppliers.

We were told a year ago, by many people, some of whom are undoubtedly on this conference call, that due to Legacy deals, particularly Starz, Encore, and CSG, it would be impossible to ever bring our margin to 40%, because there were two to three margin points in those deals that we could never go after.

I'm pleased to say that as of today, both of those deals have been restructured, and, therefore, we now have rates that we consider to be market rates.

Starz, we signed a new deal with Starz/Encore on September 19th.

We are no longer paying a company-wide flat fee.

We are paying the Comcast rate, which is a per-unit rate.

We also received rights for subscription Video On Demand and High Definition Television.

We're very pleased by the amicable resolution of this deal, and we've been working with Starz to relaunch Starz/Encore in the months ahead.

CSG, for those of you who don't know, CSG is the billing vendor for the 13 million subscribers that came from AT&T Broadband.

On October 7, an arbitrator ruled in our favor on the CSG agreement, finding that CSG was in violation of the MSN provision in our contract, and awarding us roughly $120 million in back payments.

We now have market-based pricing, and this will result in significant savings to the company for years to come.

The judge also clarified the fact that we can terminate our CSG agreement with a damage cap of $44 million.

So we feel we now have fair pricing going forward and should have more flexibility, as well.

I want to underline that it is not our intent as a company to be litigious.

We just want fair terms, and it doesn't make sense to us to pay more for deals with a combined company than we were paying as Comcast at 8.5 million subscribers.

Turning to other deals, I think we've made good progress in the last six months or so.

The entire pay category has now been renegotiated.

We announced a renegotiated deal for the combined company with HBO on August 12, Showtime on April 8, Starz, as I mentioned, in September.

In all of these deals we've received subscription Video On Demand and High Definition Television rights, which we think are very appealing to our customers.

We have significantly lower payments, primarily due to Starz, and going out into the future, these deals will increase at a very low percentage rate, approximating CPI for many years to come.

On many other contracts, we are making good progress.

Our goal is to get long-term deals at reasonable increases, which we would consider to be in the CPI range, and secure new technologies so that we can offer these to our customers.

In total, we have more than met our target of $270 million in 2003 savings, but as importantly, we believe we've moderated future increases and secured new products which will help us grow our business in the future.

Moving on to high-speed data.

This is a case where we are clearly leaving 2003 in much stronger shape than we entered it.

In fact, the momentum is increasing.

We added 1.2 million subscribers last year.

This year we should add around 1.7 million subscribers.

That means our growth rate, sequentially, is up right around 40%.

Adding 472,000 subscribers this quarter means we set a record for Comcast, and I think anyone else in the broadband industry, for quarterly net adds.

Our ARPU declined about 2%, in line with what we anticipated, which shows we are really winning the battle on metrics other than price.

We're winning because we're ubiquitous.

We're winning because our speed is better.

We're winning because our promotion is strong.

And we feel very good about this business.

We will be leaving 2003 with over 4 million more homes available to market to than we had going into the year.

Our portal, Comcast.Net, is significantly improved, and we're coming out with another edition of Comcast.Net in November.

We have also taken the AT&T Broadband subscribers and moved them over to the Comcast.Net portal and are moving over the plumbing as well.

About 50% of our customers use our portal frequently, 60% use our E-mail.

And we think having a portal that is strong and robust is a significant competitive advantage, particularly when our competitors are using portals from 3rd party suppliers and not developing their own.

Our new portal rolls out next month, and we're very interested to see how that helps us continue to grow the business.

Talking about high-speed data at retail, during the quarter we added 1,685 points of distribution during the quarter alone.

We now have over 4,000 points of retail distribution, which is a critical competitive advantage, because in many of these stores, we're the only provider of high-speed data.

So net-net, I think, despite the fact that DSL pricing has been reduced, we are accelerating our business, we are clearly maintaining share, and this should be a great business with more growth to come in years ahead.

As a side benefit to the high-speed data business, at 5.3 million high-speed data customers by the end of this year, I think it's interesting to note that over 20% of our video customers will be bundled with data.

And we think data is as sticky a product as we have ever seen, and, therefore, those 20% of our customers are that much more likely to remain customers with us for many years to come.

Moving on to the video business, we have also made, and are continuing to make, investments that will make us more competitive, most notable being the rebuilds.

At the end of September we were 94.4% rebuilt.

The real headline is that AT&T has gone from being 77% rebuilt to 92% rebuilt since we did the deal.

And, of course, the entire company should be 99% rebuilt by the end of '04.

This is really critical, because it is very hard, no matter how well run a system is, to gain subscribers unless you're rebuilt.

So the 15% of the AT&T footprint that has been rebuilt since close, approximately 2 million subscribers, would have lost customers by almost any measure had we not rebuilt that footprint that fast.

And it's easy when you read over statements like we're going to rebuild 53,000 miles of plant this year.

I think even the people sitting on this side of the conference call would have said that -- that is such a huge number, it's impossible, had we not gone out and had the kind of success we've had this year.

Once you've rebuilt, we think it's vitally important that you get as many new products out to enhance your video product as possible.

Video On Demand is now available to 31% of our footprint.

We'll take that to over 50% by the end of the year, and over 75% by the end of next year.

Video On Demand, in our terminology, is really very heavily focused on providing a lot of time-shifted programming, over 1,000 hours, at no cost to our digital customers.

50% of the people who have this model of Video On Demand who are digital customers use it regularly.

Last week alone, just in Philadelphia, we had over 1 million orders for Video On Demand and free Video On Demand just during the week.

So, think about a product that changes the way people think about cable.

We think it's a key competitive weapon, and as we expand this throughout the company, there is no doubt in my mind that it will help us grow our business in the future.

Moving on to High Definition Television, today 65% of our customers can get High Definition Television from Comcast.

That number will be 80% by year end.

We already have about 150,000 customers, and we're growing around 7,000 customers a week.

We think High Definition Television is a real advantage versus satellite, because we can provide local channels that, by and large, satellite cannot.

So right now, in most Comcast systems that offer High Def, we can provide ABC, NBC FOX, in many instances regional sports, and many other popular programs.

Good example is, we launched Red Sox games in High Def this fall up in Boston.

It is the talk of Boston.

And there is no doubt in my mind that that has caused us to gain not only High Def customers, but customers back from satellite.

Our intent is to continue to press this local advantage in an aggressive manner in the future.

During their conference call, Cox presented what I thought was a very interesting figure, which is the percentage of people who are High Def customers who are new to the company.

We went back and checked our percentage, very similar to Cox, 24% of our High Def customers are coming to Comcast new, 24%.

Which we think is a key competitive statistic.

High Def is also a very important way for us to have a presence at retail which compliments our high-speed data presence.

We now have High Def at retail in Best Buy, Circuit City, Radio Shack, so it's a way for us to be there when people are making decisions when they are buying their television sets.

Moving on to DVRs.

We have rolled out Scientific Atlanta DVRs in many of our systems that have Scientific Atlanta.

It's only about 8% or 9% of our footprint.

But we've rolled out in the SA markets, and plan to roll out in the Motorola markets in the very near future, meaning the next 60 or so days.

We think DVRs are very complimentary to VOD.

We think customers want both, and our model is to offer DVRs for $9.95 a month in addition to the $14.95 digital package.

So, we believe there's a very good ROI for the uptick in the price of the box, and we think this is an important product, competitively and long-term, as a way to build revenue.

Our goal is to have the majority of our subs have the ability to get not only a fully rebuilt robust channel lineup, but also VOD, High Def, and DVRs by the end of next year.

Moving on to telephone, I think 12 to 18 months ago we set our goal for the next 12 to 18 months, regarding phone, was to take costs out of the business, to increase efficiency, lower bad debt, and we have done all of those things.

We've renegotiated our deal for the circuit switch business with AT&T Corporate, and all of those things together have resulted in the margin improvement that John talked about.

We now are traveling at a 15%+ margin in our telephone business.

But again, we've also spent a lot of time getting the business ready for 2004, 2005, and beyond.

And I think the biggest development for our long-term growth is the work we've done in the last six months, getting our voiceover IP Phone business ready for prime time.

Because of the way we treated the phone business, I think sometimes people lose sight of the fact that we are, in fact, the biggest telephone operator over a cable plant of anyone in the world.

And because of that, we have a lot of people inside the company now who are quite knowledgeable about the phone business and its economics.

We spent a lot of time grafting the circuit switch phone economics on to what we believe will be the IP Phone economics, and we can now say, without a shadow of a doubt, that IP -- the IP Phone business should have very attractive economics and could be a very large business for us.

We've made significant progress putting together our plan, refining the technology, and we're right in the middle of putting together a very senior management team that will be quite aggressive with rolling this business out.

If you look into 2004, 2005, 2006, this could be a significant engine of growth for us in the '05 to '06 and beyond time frame.

And I think once we turn up IP Phone, with the kind of scale that we have right now and the talent that we have and are building internally, there's no reason why our revenue growth rate in 2005, 2006 and beyond shouldn't be right at the top of the industry.

Moving on to advertising, I think this is another case of good work in 2003 that should pay off in years to come.

During 2003, we've launched 26 interconnects, primarily in the AT&T markets.

We now have 50 interconnects in total.

Today we manage 17 of the top 25 interconnects in the United States.

These interconnects have 40+ channels that we can insert on, in all of the top 25 markets.

We've also created EDI to clean up the back office, which is a very important thing for advertisers.

In 2004, we'll have Nielsen local People Meters in the top four markets, which are very important for selling locally.

Nielsen People Meters tend to more accurately ascertain the demographics of cable networks, which, obviously, is an advantage when you're selling cable advertising.

We'll also have ad tag and ad copy, which are important ways for us to target market in all of the top 10 markets by the end of '04.

We also, at this moment, are starting to sell VOD and portal advertising, which we were not a year ago.

All of these moves had a minimal benefit in '03.

And, in fact, we didn't want them to have a benefit in '03.

Our goal this year was to get all of these things in place, so that we weren't in a position of promising something that we couldn't deliver.

They're all now in place, we're now going out to advertisers, and selling all of those things for 2004.

If you look at our advertising business for the quarter, we were up 7%, a number which we wish was higher, but if you break that number apart, it was really up 9.7% in the classic Comcast systems and 5.8% in the ex-AT&T systems.

I think you'll see that disparity between performance on the ex-AT&T side and the Comcast side, I think you'll see that disparity gap close with the kind of initiatives we're talking about.

I also think with a little help from the economy, political ads, and the Olympics, we could have a very strong year in our advertising business in 2004.

So whether it's programming deals, new products, high-speed data, advertising, I think our overall message is, this is a marathon, not a sprint.

We're off to a good start.

I think the integration is going very well by any metric, but the integration is really just the beginning.

We're making the investments in capital, people, and programs to not only have a good 2003, but to make sure we have solid growth for years to come.

John?

Operator, could we open the call for Q-and-A, please?

Thank you, sir.

(Operator instructions)

Your first question is from Jessica Reif Cohen from Merrill Lynch.

Please state your question.

Hi.

Thank you.

I have a question on data, I guess a multipart.

Could you comment on the potential for tiering high-speed data, there's a little bit of a [surprise] from Cox, the potential to layer on new services?

And maybe you could discuss in a little more detail what your new portal will look like?

And finally, are you seeing any difference in share in the more competitive -- price competitive DSL markets?

You know, are you seeing difference in share in markets, but there's less price competition versus where there's more.

Let me take a shot at answering those four questions in reverse order, Jennifer --

The fact of the matter is, SBC is more aggressive in terms of DSL promotion, pricing, and net adds than the other Bell companies, and that is reflected in their figures.

The two areas of our company that have the largest footprint that's competitive with SBC are our Midwest and Western area, and it just so happens that Midwest and Western had the fastest growth rates of our six divisions.

Now, there is no question that we feel that SBC is a more aggressive competitor than the other RBOCs, but I think we're standing up well.

If you take our footprint and look at RBOC reported DSL growth rate, it appears to us that we are maintaining share, if you weighed it and compare it to our 39% year-over-year sequential growth rate.

Moving on to the portal, the portal -- the biggest improvement in the portal this time around, I think, is in, what I believe, a very creative way to show streaming video.

And you'll see it when it comes out, but it really is a very interesting way to aggregate.

We do not have a Legacy narrowband business, so our portal can really feature the advantages of broadband, and I think that our team has really done a spectacular job.

By the way, our team is working on things for 2004 and beyond, video chat and other ideas that we're very excited about.

So this rev, as they call it, is the first of many.

In terms of new services, we've said this before, I think.

We look at the high-speed data business being much like the cable business was 20 or 30 years ago.

We, essentially, have a basic business, which is $42.95, always on.

And we would very much like to layer on incremental services for customers who want those services, and we're working on developing packaging and packages for it, and should be launching those in the first half of 2004.

In terms of tiering, we still think it's too early to tier.

I really like our strategic positioning.

I think when you go down market and you compete on the basis of a lower price, and the product that you're offering is a product that in many instances has lower speed and lower service, I think you're at a competitive disadvantage versus someone like ourselves who says we have a faster product, we have a more reliable product.

I would take our hand versus the Bell companies,

I think there will come a time when the market gets -- our growth rate slows down and the market gets to a point where we should have a lower speed in addition to a higher speed product.

But I believe we are a ways away from that point.

We can do that fairly quickly, any time we believe we need to.

But rather than accentuate that, we like our competitive positioning, and plan to stay with one product, with a high-speed product, which we call Comcast Pro, on the top end.

Next question, please.

The next question is from Raymond Katz from Bear Stearns.

Please state your question.

Yeah, good morning.

Your video ARPU on a sequential basis ticked down from Q2 to Q3, both at the historical systems and the AT&T systems.

Now with -- you obviously added revenue, sequentially, on the digital product.

Could you give us the dynamics as to what's happening there with flat sequential basic sub growth?

Yeah, Ray.

We're down just a very small amount of $16 million on a consolidated basis.

And in the historical systems, we're actually reporting year-over-year increase of 5.8% driven primarily by the rate increases.

The slight offset there is the 22,000 subscriber loss that we're reporting for the quarter, and then on an ongoing basis in the AT&T Broadband systems, there's the impact from last year.

So it's really just a very minor impact from the sequential decline in the historical group.

If you look at the year-over-year growth in video revenue for the historical group, it's 5.2%, 5.8% in the -- sorry, 5.2% for acquired properties, 5.8% for the historical group.

The major impact on total revenue decline year-over-year is the $22 million decline in telephony revenue.

That's impacted a little bit, to the extent of about 50%, by access revenues, and that, in turn, is divided almost equally between volume and rate.

Next question?

The next question is from Niraj Gupta from Smith Barney.

Please state your question.

Hey, John.

Just a follow up on Ray's question.

I guess, if you look at the AT&T Broadband properties, if my math is right, the subscription and transaction video revenues were down 8 million sequentially, whereas they were up sequentially in 2Q, and I know your rate increase was probably boosted in the 2nd quarter.

But it looks like they were down sequentially, and I was wondering, does any of this have to do with discounting, or downgrade activity, or, maybe, pay-per-view revenue, et cetera.

No, nothing at all, Niraj.

I mean, the big impact sequentially, there's about a 16 million decline in telephony revenue from the acquired systems quarter-to-quarter.

That's 22% year-over-year, and that's really what's driving the 6.8% increase in the broadband revenue year-over-year, as opposed to the 11% increase in the historical systems year-over-year.

Let me.

This is Brian, let me just kind of take that -- those two questions a little bit higher up.

The revenue at Comcast historical systems was about 11% growth, and we're very pleased.

Revenue was never an area in our major metrics, it's been all about getting cash flow growth, not having large rate increases, winning back basic customers, creating a value proposition to consumers.

The fact that there are 480,000 less customers, one year over the next year for basic, and 150,000 telephony subs, or so, that are no longer there, we're making more money because of the telephony decline, as Steve mentioned, we do plan to turn that around, at some point, when we switch to the voiceover IP.

We're very excited about what we're seeing happen there.

So, we're not -- you know, you have to look inside, what's our traditional business doing, revenues, absolutely the way it's always been.

In fact, better than usual because of the high-speed data growth.

At AT&T, I think you have some one-year dislocation, and because of a loss of subs, that begins to -- you know, it's hard to have year-over-year growth, but it hasn't in any way slowed down EBITDA goal, which was the main objective for next year.

Next question, please, operator.

The next question is from Richard Rosenstein from Goldman Sachs.

Please state your question.

Thank you.

Good morning.

Two questions, one is -- is there any difference that you've seen in either satellite penetration or DSL penetration in your bundled markets?

And then second, could you tell us what your churn is in -- I'm sorry, in bundled homes and what your churn is in bundled homes, as well.

Thanks.

The biggest difference in terms of satellite penetration would be the unrebuilt versus rebuilt.

And there you see, in some of the Legacy AT&T systems, satellite penetration of 20 or 30% in those homes.

And, you know, to me, the main thing you need to do is take care of your video customers.

The high-speed data churn is so low, that anybody who's got high-speed data tends to be a lower churning customer.

But the real competitive, sort of, thing that we had to accomplish was getting these places rebuilt and getting the service better, that's really what's arresting the satellite growth.

Satellite growth in the AT&T systems was off the charts as you would imagine in 2001, 2002.

And in 2003, we turned that.

Satellite is still growing on the AT&T side of the house, but much, much, more slowly than before.

Next question, please, operator?

The next question is from Ari Aburkra from UBS Warburg.

Please go ahead.

Yes, thanks.

Good morning.

You talked about being the largest cable telephony provider out there currently, and voiceover IP being your big growth engine, potentially, in '05 and '06.

Maybe Steve and Brian, could you talk about what the dynamics are about moving that forward or backwards?

And is that a competitive issue where you start seeing some slowdown on data, your older voiceover IP, or is it just normal course of business as an '05 strategy?

And how do you think that really plays into the telephone ARPU?

Is that going to continue to fall?

Thanks.

Let me say, that I think we're going to have more to talk about telephony in '04.

And on today's call, I think we're pretty focused on the quarter and sort of where we've come from.

But Steve may want to comment a little bit on some of those questions.

But I just want to say that I think, as we roll out voiceover IP, we're going to have experience, we're going to see how the equipment performs, and everything else.

But a lot of work has been done.

You're hearing this from not jut Comcast, Time Warner, CableVision, Cox.

Almost every MSO has -- has I think, seen that this platform is stable and can work, and now the vendor community is getting involved and prices are going to fall, and it's a -- it feels very much to me like high-speed data when we first went out and we got to the beginning of it.

There are very few products that don't use up much bandwidth.

The amazing thing about high-speed data, is that from 1.5% of our bandwidth, we're now getting 15% of our revenues, give or take.

And there's very few things that can do that.

We think a voice, possibly a video telephony, or chat business has that potential.

We're going to get one shot to do it right, and we're going to be careful about that.

But all the momentum's in the right direction.

Steve?

I would only add that I think that the single biggest decision that we make is timing and priorities.

And if you think about it, we want to make sure as we roll out IP Phone that we roll it out professionally.

And, therefore, whenever we do these launches and go into new markets, we want to make sure that we have the right provisioning, the right billing systems, the right technology, the right marketing.

You know, as I said, this is a marathon, not a sprint.

And we will be doing a significant amount of work in '04, but the real numbers will start to appear in '05 and '06.

In terms of the, sort of, need to do this competitively, we're interested in doing this because we think the IP Phone business is a good business.

I think you can run into -- you can run into walls if you start to launch businesses because you think you need to competitively.

We think there is clearly a competitive advantage when customers have more than one product.

That's undeniable.

But we like the IP Phone business because we spent all this money rebuilding our plant and we think it's a good business.

It is also, I think, and this is really more serendipity than anything else, a business which is likely to become significant in its size at about the time that high-speed data will slow down its galloping growth rate.

We clearly believe there are another few years of very big high-speed data growth rates to come.

And whether that takes us to 2006 or 2007, by that time, organizationally, we'll be able to concentrate on making IP Phone the next big thing.

That was not by design, but I think it's going to end up working out, you know, like serendipity, and should be something which helps us continue to have a very high growth rate.

Next question, please, operator?

The next question is from Richard Greenfield from Fulcrum Global Partners.

Please go ahead.

Hi.

Two questions related to data.

One, any way that you can give us a sense how much the increase in data footprint helped your data adds in the quarter?

And where, by when, do you see that topping out?

And then, just related to Steve's comment on data ARPU, it did decline about 2% in the quarter, but I believe you had a year-over-year price increase.

Could you just give us a sense of what your pricing power is going forward for data?

One thing we think is that we're going to end the year about where we began the year, and yet we'll have added 1.7 million. customers -- had a, you know, a $15 price cut from some of our competitors, and whatever prognostications people made, I think that is substantially better than any of us imagined back in January.

So we are clearly -- we have new customer promotions, as we've said, between 3 and 4, 5, 6 months sometimes, where it's a discount on the price.

But then we're able to get people up to the $42 or more, if they rent the modem, price point.

So we are -- you know, the point about the new homes area growth, again, I think that's been going on every year, so there are markets we have in the company well north of 20% penetration, and they had a fantastic growth this year, better than they did last year.

We have not -- it's very hard to predict, and I don't think we should necessarily be in the predicting business, there's no way any of us know, as Steve just said, how high the tree grows.

But this product, I would argue is a must-have for the next generation.

And that means it goes on for a long time.

It reminds me of cable TV.

In the beginning, people looked at an MTV and said, well, I'm not sure I need to be in the MTV generation.

Today, multichannel video, it's more than just cable, is, you know, 80%.

An entire high-speed business, DSL, cable modem and wireless combined is a fraction of that.

So we are just saying, let's be in every retail location we can, let's get every home wired up as fast as possible.

But the product does not need to, you know, guess work -- because it's selling better than any of us have expected.

Let me just add a couple points.

We think the $42.95 price point is the right price point for this product.

If you look at the cost of another service provider like AOL, plus the cost of a telephone line, 42.95 is right there, and so we don't think -- we think the pricing is right, we think people who price lower than $42.95 are underpricing the product if they have a comparable product.

We don't necessarily think it ought to go up, we think it's right.

In terms of sequential net adds, we were up 39%, 3rd quarter this year to 3rd quarter last year.

The majority of that did not come from footprint.

Footprint probably added about 15% of the business.

We were up 39%, so that means there was another 24% that was in footprint growth that was accelerating year over year.

My friend, Julian Brodsky, reminds me that we're 14.5% penetrated, even at the end of the 3rd quarter, I mean, it is still -- when we went into cellular, everyone questioned, you know, where it was headed, and we now, of course, everybody wants a cell phone.

And I just think that's what happened to cable and that's absolutely going to happen to high-speed internet.

Next question, please, operator?

The next question is from Richard Bilotti from Morgan Stanley.

Please state your question?

Good morning.

The area where I think you all have vastly exceeded the original expectations of the street -- maybe not your own expectations, but of the market, has been in the area of programming cost reductions, and you made allusions to that.

Obviously, the sports situation is getting out of hand.

Do you all have an official view, or a view, of whether or not tiering of sports, or any other content for that matter, is A, a practical idea, and B, if it isn't?

Given that you're the industry leader, where would you suggest is the right approach for the industry to bring programming cost inflation in line with your own ability to raise basic rates?

Well, it's a -- you know, obviously, a critical question, Rich.

I think we have steadfastly said we're not going to negotiate publicly any individual situation, you know, at this time.

And at any time in the future, we hope.

But one of the reasons we stretched as hard as we did to make this new company a reality was the opportunity to have a scale.

Thus far, I really think this has not necessarily come through clearly with the various press reports.

All we have been doing is trying, except for in a couple of the situations that Steve referred to where the contracts were actually up, Just because we put the two companies together in the last year, doesn't mean either company's contract allows them to just renegotiate.

In most cases, In over 90% of the cases, the contracts are not up, and, therefore, we were merely trying to interpret what the pre-existing contractual rights were, and over the next several years, each year is -- if we have an average life of five years on a contract, 20% a year will expire each year.

And so this is going to go on for many years, these conversations.

Our goal is, as Steve articulated, I thought extremely well, the -- to get towards CPI, and to use new technology to have a partnership between ourselves and the content companies.

Sports is clearly an area where, due to the nature of the content, and the nature of the sort of, you know, special nature of a local sporting team, that has created, you know, a higher cost structure throughout the entire sporting system.

Going to the salaries of the players right through the whole economics of new stadiums to municipal subsidies, et cetera.

And so, I think a focus on sports is warranted, because I'm not sure whether you make the product optional or whether you try to arrest the higher than CPI-type of -- way, way higher than CPI-type of increases.

So -- but finally, and I think the CSG point that Steve made, perhaps has not drawn enough focus, it's not specifically the CSG.

But in over half of the company, or programming contracts that we inherited, we have said previously that AT&T was paying more money than Comcast.

In the case of CSG, we prosecuted the right through a previous arbitration that had been filed to question whether the most favored nations, MFN, if you will, provision in the contract, which said that they would be getting the most favorable pricing, because they were the largest customer, had been honored.

In that case, the arbitrator judge ruled they had not been, and ordered restitution.

And so, a lot of the conversations that are taking place have to do with just interpreting what was there, what is right, and then we'll have a go-forward conversation case-by-case.

I'm optimistic on a go-forward basis because I see new technological opportunity to put cable in a better position than satellite by using Video On Demand and High Definition, and other technologies as they develop with broadband.

So we are on track.

I always end these kind of points by saying, this was not the reason to put the companies together this year.

You know, it's $270 million projected -- was our initial projection, of savings, out of an improvement now, we're on track to be between the 635 billion EBITDA, or cash flow -- I have to keep remembering it's cash flow -- 635, that's 1,450,000,000 improvement in one year, and 270 is programming.

It's not a lot about rate increases or, you know, revenue shift or something like that.

This was about good old blocking and tackling, of fantastic integration.

Steve and his team have done, you know, a superlative job, can't say enough great things, and positioning us, and I think that's the message on today's call, for what we think will be a great year next year, as well.

Next question, please, operator.

We have time for one last question.

Thank you.

The last question is from Craig Moffat from Stanford Bernstein.

Please go ahead.

Yeah, good morning.

Can you talk a little bit about, with respect to basic subs and high-speed data, what things you do differently in a market when you finished the upgrade versus when you're in the upgrade.

You know, I think about markets like Chicago and San Francisco, for example, where you're nearing completion of the upgrade.

Do you have a fundamentally different marketing profile in those markets after the upgrade is completed?

I think the upgrades change everything.

You go from having a basic, you know, a basic program count that is just not competitive with satellites to one that is, if a person takes analog.

If they elect to upgrade to digital, it allows you to offer a much more robust digital package.

It allows you to do VOD, High Def, and all of the positives.

You really can't offer what the high end of the market wants, or the low end of the market wants, without being upgraded.

So that is a major thing.

And then ultimately, you want to have the same channel lineup in a city, take Chicago or San Francisco, we're coming up on that in the next 12 months.

In terms of high-speed data, you just flat out can't offer high-speed data until the plant is rebuilt.

And if you've got the plant half rebuilt, I think in the Bay area, we're about 62% rebuilt, which is the slowest.

We're the furthest behind in the Bay area, we will finish next year, but it's certainly a shame in that part of the world that we're only 62% rebuilt.

Until you are functionally fully rebuilt, you don't like to buy broadcast advertising, you don't really like to go out and get billboards, you don't really like to go out and telemarket you're the best place for high-speed data.

So, a lot of good things happen to the video and the high-speed data business once you rebuild.

Let me just end the call with taking that question and broadening it.

What happens when you get done with a rebuild?

Not just from a marketing standpoint.

John, I just want to underscore a couple things he said. 15% cash flow growth turned into 29% free cash flow growth this quarter in the historical systems.

We are going to be able to balance the three principle objectives that I think you have to have if you're running a company like this.

One is to increase cash flow.

Obviously, that was probably our number one objective for 2003, and we've upped the guidance, and we've, you know, I think exceeded everybody's -- as some folks said on the call, initial plans.

At the same time you've got to position yourself for competition.

Now not all of that is going to be necessarily value add to the cash flow.

You're going to make investments, and you're going to have to improve service, you're going to have to spend money on technologies that are unproven, you're going to have to do things to be more competitive.

That competes necessarily with the short-term cash flow goal.

And the third is to really, I think, for investors, be able to demonstrate that this business is going to have a free cash flow growth rate faster in any media or telecommunications company that exists.

And as we look at the free cash flow part of our story, and we look at a Baltimore system, or the historical Comcast systems, and with a modest cash flow growth, which is not what we're having, we're having a sizable cash flow growth, once the rebuild's done, that system cash flow, free cash flow, has a -- call it 30% compounded rate of growth, it's been for 5 years in Baltimore, 4 or 5 years over 20% at the system level.

Then you take it to the corporate level, and you apply leverage to the story, where you now have, you know, call it 3 to 1 leverage and dropping, as John pointed out, we're somewhere in the swing of drastically reducing the leverage.

And you will see substantial, after all expenses, interest and everything, a free cash flow engine.

And that was what we were so excited about, coupled with the competitiveness that we've now been able to invest.

The competitiveness evidences itself in the scale, in the new technology, in the improved service.

We've hired thousands of people and brought them back into the cable system markets to answer the phones, 10 new call centers are now all up and running, we're on track for all of the competitive initiatives, DVRs, VOD, High Def, and voiceover IP in the future.

So again, quarter-to-quarter matters, but also, I think balancing these three objectives, we're really pleased with where the company's at.

We'll talk to you again next quarter.

thank you all.

There will be a replay immediately following today's conference call.

It will run through tomorrow night at midnight central time.

The dial in number is 630-652-3000.

And the pass code is 7746406.

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

And the pass code is 7746406.

A recording of the conference call will also be available on the company's website beginning at 12.30 p.m. today.

This concludes today's teleconference, thank you for participating, you may all disconnect.