康卡斯特 (CMCSA) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Comcast first quarter earnings release conference call.

[OPERATOR INSTRUCTIONS]

At this time for opening remarks and introduction I'd like to turn the call over to Executive Vice President, Treasurer and Co-CFO, Mr. John Alchin.

Please go ahead sir.

Thank you everybody and welcome to the first quarter earnings call.

Before we proceed, I'd 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 that we outlined in our recently filed 10-K and in our SEC documents.

Also please refer to our Investor Relations Web site for a reconciliation of non-GAAP financial measures.

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

Thanks, John.

Before we take you through the numbers and other details associated with what was absolutely terrific first quarter for us, I'd like to talk about Disney.

This morning, we announced that we have withdrawn our proposal to merge Comcast and Disney.

We told you from the outset that we would be disciplined and we wouldn't bid against ourselves.

Based on where Disney and Comcast stocks are now currently trading, consummating a transaction would have required us to give us substantially more Comcast shares than we originally proposed and quite simply this does not make good financial sense.

Particularly given this quarter's performance.

Being disciplined means knowing when it's time to walk away.

That time is now.

As we told you when we first announced our proposal, our express desire was to conclude a merger on a friendly basis as quickly as possible.

To that end, we tried to engage in a dialog with Disney to see whether we could put our two companies together.

Unfortunately it has become abundantly clear that Disney does not share our interest.

We continue to believe that combining Comcast and Disney would have benefits for our shareholders and customers.

That said, I am very comfortable with our decision to withdraw, even though it's not the result we had hoped for when we initially made our proposal.

Because the size of this transaction would have required us to put so much of our company into the deal, some of our shareholders felt that we were signaling that we had lost confidence in the cable business.

I'd like to make one critical point.

We love the cable business.

We have never been more bullish about cable and its potential for growth in the future.

That is why we are announcing today reactivation of our $1b stock repurchase program.

We know of no way to make clearer our confidence in our whole company going forward than to resume repurchasing our own stock.

As you'll see from our first quarter results, Comcast today healthiest it's ever been.

Coming off a record 2003, we have had a very strong start in the first quarter of 2004.

And the performance underscores the power and potential in the future of the cable business.

With our 21% cash flow growth this quarter, I believe we are the fastest growing media and telecommunications company in the nation.

Some key highlights that you'll hear about in a moment are 21% cash flow growth in cable, and nearly 67.9% increase on, of course, a much smaller base in the content division. 35,000 net additions in basic customers, 394,000 more high-speed data customers while growing average revenue per customer from 41.33 in the fourth quarter to 42.46 this quarter.

Our focus is and will be to balance unit growth and average revenue and I'm pleased with these results because I think we got it just right.

We had almost 400m of free cash flow after all taxes and interest.

And we're on track to meet our guidance of nearly or over $2b of free cash flow for the year.

As Steve will detail for you later, we continue to generate significant operational improvements across key areas, which are going to lead to additional margin improvement and cash flow growth.

So I'm enormously pleased with our first quarter results, the outlook for the year, and the strength of our business.

Let me turn the call back over to John and Steve to take you in greater detail through the numbers.

John.

Thanks, Brian.

I'm going to briefly review the consolidated numbers for the first quarter and then move on to the cable and content division.

Just before I do that, I reminder that in September of 2003 we sold our 57% ownership stake in QVC and that QVC's results for 2003 prior to this sale were represented as discontinued operations in the P&L.

Our consolidated results were driven primarily by the results of the Cable Division and the growth numbers look very similar as a result of that.

Revenue was up 9.9% to 4.9b, operating cash flow of a substantial 21% for the quarter to 1.73b.

This reflects robust top line growth in video, high-speed data and content coupled with significant operating improvements and scale efficiency in the operating divisions.

We have a strong foundation now for continued growth in 2004 and beyond.

Consolidated operating income more than doubled to $659m and the company reported consolidated net income of $65m or 3 cents a share compared to a net loss from continuing operations of 16 cents per share in the first quarter of 2003.

As Brian said at the beginning of the call, the Cable Division had another great quarter.

Revenue increased 9.8% to 4.65b.

Results were driven by strong growth in video and a huge 42% increase in revenue from high-speed Internet services.

Total video revenue of $3.18b was up 6.7%.

This reflects a 6% growth in average revenue -- sorry average video revenue per sub or ARPU as we commonly refer to it up to $49.31.

It also reflects the addition of 119,000 basic subscribers over the previous one-year, which is a 0.6% increase year-over-year and the addition of 1.06 million new digital cable customers.

The 6% increase in average video revenue per basic subscriber was driven primarily by increases in basic revenue per sub and higher revenue from digital services, which is driven by new applications such as High Def and to a smaller extent DVRs.

Excluding the 20% decline in telephone revenue, which was fully anticipated, and this is a business that we're focusing more on profitability and less on growth, our cable revenue would have in fact increased 11.5% to 4.47b.

Moving on to operating cash flow, we had an impressive increase of 21% to $1.72b.

Operating cash flow growth reflects the growth in revenues as well as the operating improvements in key areas such as technical and customer service expenses and the continuing improvement in our cable telephony expense line.

Annualized cash flow per subscriber is up 20% to $320 for the entire company compared to $266 in the first quarter of 2003.

Our cash flow margins increased over 340 basis points to 37% up from 33.6% in the same period last year.

Not surprisingly the cash flow margin was down 100 basis points sequentially.

This was due to the usual increase in programming costs and personnel expenses this take effect in the first quarter.

For the remainder of the year, we expect our operating margins to continue to increase steadily, just as we've indicated before, we should be at about a 40% operating margin in the fourth quarter of this year.

Now let's look at the numbers behind the key drivers.

As Brian mentioned, we added 35,000 basic subscribers in the first quarter to end at 21.5 million.

As in years past, the majority of basic subscriber growth in 2004 will occur in the second half of the year with the seasonally slow quarter in the second quarter.

We remained confident that we are on track to reach our guidance of growth of about 1/2 of 1%, which would result in net adds of about 100,000.

We continue to make all of our services in the video product more compelling by adding new features and applications that bring value for our customers.

Our video service offers digital cable, which we view as the umbrella product that now encompasses add-ons such as video on demand, High Definition programming and DVRs.

Steve will describe the initiatives and progress that we've made with the rollout of all of these enhancements to the video offering.

For digital cable, revenue grew 21% reflecting increased demand for these digital services.

That was an addition of 192,000 subscribers up 14% from the 169,000 in the first quarter of 2003.

We're no longer breaking out digital ARPU in our press release but we will continue to refer to it in the context of video ARPU.

As we said before, digital is a part of our core video business and all of the numbers flow through to the video revenue per subscriber.

We continue to be really happy with the rollout of video on demand.

We're adding real value to that product and the video offering and it's also having a particularly favorable effect on the impact of churn.

Video on demand is now available in 29 markets and is expected to be available in about 80% of our markets by the end of this year.

We also had a great quarter in High Definition television.

We continue to rapid roll out of this product, it's now available to over 91% of our customers on 19 million of the customers that we've had and we added fully 176,000 High Definition subscribers in the first quarter that's a 60% increase from where we were at the end of the fourth quarter.

DVRs are also being rolled out at this point in time.

They are available to about 17% of our customer base or 14 of the markets that we serve today and by the end of this year will be available to all of our markets.

We're making significant progress with these digital offerings, quarterly trends for the remainder of this year will reflect the seasonality in the second quarter that I referred to in the context of basic net adds and we fully expect to achieve the guidance of increasing our digital units about 700 to 1 million by year-end.

As Brian mentioned we had a great quarter for high-speed data.

The combination of strong unit growth and ARPU stability demonstrates that this business is in great shape.

Average revenue per subscriber for our high-speed data product was $42.46 stable with the first quarter of 2003, but up $1.13 or 2.7% from the fourth quarter of 2003.

We remain confident that average revenue will remain above $40 for the full year.

Our stable ARPU shows that we are not in a race to add units at any price.

We have an ability to balance ARPU and unit growth.

That's what's driving the 42% top line growth for this product.

The stability of our high-speed data average revenue supports this strategy.

By adding value and offering a differentiated product, we feel confident in our ability to continue to grow units at a rapid pace while maintaining strong and solid price points.

We added 1.5 million homes to the high-speed data footprint in the first quarter.

The service is now available to over 90% of the homes that we pass.

Since there's typically a lag of about 90 days between upgrade and marketing, we're expecting to see further benefit from these upgrades in the second half of the year.

In 2003, net adds for high-speed data were influenced by a number of factors.

There was some seasonality in the second quarter that drove net adds lower, followed by more promotional activity in the second half of the year.

In 2004, we expect smoother flow of net adds throughout the year with the strongest growth in the second half of the year.

Our target and we're on-line to -- sorry on target to meet this goal for the full year is for net adds for around about 1.5 to 1.6 million.

With telephony we saw a decline in telephony revenues for the quarter of approximately 20%.

We also reported a loss in telephone subscribers of about 20,000.

This is inline with our year-end estimate of being flat for the year to up somewhere around about 50,000.

As we've previously indicated, revenues for the telephony business will be down 10 to 15% for the year.

That's because we're focusing on profitability and should easily achieve the 20% or 25% margin that we've targeted for our-self for year-end.

Steve is going to take you through the add sales and the healthy quarter there with revenues up 14% for the quarter.

Moving on then to capital expenditures and free cash flow.

Total CAPEX for the quarter was about $814m, down 15% from 953 in the first quarter of 2003.

It feels gratifying to be reporting the downward trend of capital expenditures.

During the first quarter, we rebuilt over 8,770 miles of plant to end with 96% of our footprint upgraded to provide two-way digital and high-speed data services.

The trend towards the slow down in rebuild activity is apparent both in the plant mileage that we're reporting and in CAPEX.

For the rest of the year, we expect capital expenditures to run approximately in the $800 to $850m a quarter range although as we go through the year the percentage of CAPEX devoted to upgrades will decline.

Just before I review the free cash flow numbers for the quarter, I want to highlight the improving interest expense line that we're reporting.

Interest expense for the full year should come in at between 1.8 and 1.9b.

A reduction from the $2.02b reported in 2003.

This reduction reflects a year-over-year decline in average debt and takes into account one-time charges of approximately $40m related to the deferred financing costs associated with the refinancing that we did in the first quarter of our bank lines.

Going forward, we expect interest expense throughout the remainder of this year to run at approximately $450m a quarter.

For the first quarter, as Brian mentioned, we generated $397m of free cash flow.

This compares to a loss in the same period last year of $86m.

As reported in table 5 of our press release, operating cash flow net of capital expenditures or as we sometimes refer to it as system free cash flow, for the quarter was fully 905m.

That's $168 of annualized system free cash flow per subscriber, more than twice the number that we reported in the first quarter of last year.

For the full year, we expect to generate consolidated free cash flow of approximately $2b and as Brian outlined in his opening comments a billion dollars have been earmarked for stock repurchase.

At the same time, we also believe that the free cash flow that we're reporting at the system level should filter through and be reflected in the consolidated numbers that we're reporting.

As we've shown in a number of investor conferences, time and again we see 10% revenue growth at the system level converting to 12 to 15% operating cash flow growth converting to 20 to 30% free cash flow growth.

A reconciliation of our net income to free cash flow is listed in table 6-B of our earnings release.

We really have nothing to report this quarter on the balance sheet.

Very few changes there but we continue to hold a number of non-strategic assets that add further reinforcement to the liquidity and strength of our balance sheet.

They are namely the $1.5b of Time Warner stock, the 120m shares of the B media stock, the 21% interest in Time Warner cable and our various cable joint ventures.

Just before closing then, let me spend a brief movement highlighting the results of our content division.

This consists of our national networks including E and style that make up the E network group; the Golf channel, Outdoor Life network and G4.

We did make one change this quarter in the Comcast spectacle will be reported in corporate and others.

This and all other periods has been restated to reflect this minor change.

The first quarter our content division reported combined revenues of 176m, an increase of almost 22%.

This is primarily result of increased distribution and advertising revenue for all of our national networks.

Each network reported double-digit revenue growth and operating cash flow as Brian mentioned was up 68% driven primarily by strong growth at E and the Golf Channel.

So we're off to a terrific start for the year, great results, the stronger balance sheet in our history and almost $400m of free cash flow, which should grow to a number approaching $2b for the full year.

With that, let me hand over to Steve.

Thanks, John.

It's always a pleasure to discuss results that are as good as our results were the first quarter.

Let me just cover some highlights because John gave you a lot of the numbers.

Operating cash flow was up 21%, which was significantly ahead of our budget and we are particularly with this that was on top of a 25% increase last year during the first quarter.

The good news about this improvement is it's coming from a number of areas.

Let me talk first about our two biggest cost items, programming and head count, which represent about 2/3 of our cost structure.

On the programming front we're making excellent progress containing rate increases.

It seem like two or three years ago we are redundant to have rate increase programing cost increases in the 13% range, we should be below 10% this year and based on the deals we have in place the programming cost rate increase should come down to mid single digits.

And I think that's fantastic news given the fact that we spend over $4b on programming and with price increases to our customers moderating in the single digit level, it's very, very important that we get our biggest cost item increasing at roughly the same rate, which looks like it will be the case.

Our second largest expense item is head count.

And I went back and looked at our head count the day we closed the deal with AT&T about 18 months ago versus where it is today.

And when I'm talking about head count, I'm talking about our employees plus contractor full time equivalents.

When we closed the deal we had about 79,000 employees and contractors.

Today we have about 69,000, roughly 12% less people.

But what makes the efficiency of the business even more impressive if you look at our revenue generating units adding up our cable customers, high-speed data, digital and telephone, we actually have about 13% more units today than we did 18 months ago.

So 12% less people are doing 13% more work, in other words, our workforce is about 25% more efficient than we were just 18 months ago.

That's reflected in the numbers.

If you move beyond programming and head count, we have made a number of great progresses in a number of areas, from telephone efficiency to digital profitability.

The cost of operating our high-speed data network, which is declining significantly with scale on a per unit basis to pay cash flow, we have a number of structural improvements that are now in place and should continue to be in place in the future.

If you move from cash flow to margins, when we announced our deal with AT&T Broadband we said that over time our goal was to improve AT&T's margins from about 20% to industry norms of 36 to 38%.

And our projection at the time was it would take us about three years to do this.

The good news is we're there right now in about half the time we predicted.

Our margin this quarter was 37% and we should hit a 40% margin by the third quarter and certainly by the fourth quarter of this year.

As importantly we also believe our margin should continue to improve beyond the 40% level.

The original Comcast systems now have margins of roughly 43% and over time we don't see any reason why we can't bring the AT&T systems up to the same margin level.

And that would be our goal, one of the great things about a cable business is you can compare individual systems with each other to determine areas where you have further opportunities.

And our goal is to raise all boats up about the 40% level and therefore increase our margins beyond 40% over time.

John mentioned basic subscribers were up 35%.

This is the fifth straight quarter -- 35,000 subscribers, this is the fifth straight quarter where we've increased subscribers.

The year before we merged the two companies, the two companies lost 400,000 subscribers, 2002.

We gained 141,000 last year and if you add the 35,000 we gained in the first quarter, we're now up over 175,000 subscribers since the deal closed and we feel very confident that we'll gain over 100,000 subscribers this year.

Moving on to digital, we gained 192,000 digital subscribers during the quarter, which is up from the 169,000 we added last year in the first quarter.

About 36% of our customers now have digital cable, which we think is very, very strong performance and good news competitively.

We continue to be very bullish on VOD and High Def.

VOD is now available in over 50% of our subscribers' homes and the usage numbers are nothing short of fantastic.

VOD is also clearly impacting digital churn.

You can tell the markets where we launched VOD first because those tend to be the markets with the lowest churn.

High Def is now available in over 90% of our markets and the good news is here we have strong local programming that satellite doesn't have both regional sports networks, the Boston Red Sox, the Philadelphia teams, Chicago, many of our major markets we have High Definition programming that satellite does not have.

We also have network affiliates in High Def that satellite does not have.

And finally to make sure that our digital customers can navigate through all these choices, about 90 days ago we purchased 51% of TV Guide interactive programming guide business.

We're now operating that and working to evolve the guide so that it's easier for our customers and increases the value of our digital service.

Moving on to our fastest growing business, high-speed data, not only did we add 394,000 subscribers but as John mentioned, our ARPU actually went up over $1.

Obviously the key to this business is finding the right balance between unit growth and revenue per unit.

Just to illustrate how important revenue per unit is, if you assume we have on average about 6 million customers in 2004, $1 in ARPU is worth $72 m in cash flow during the year.

If you then assume that an average high-speed data customer generates about $250 per year, $1 in ARPU equates to 250,000 customers.

So as much as we're interested in growing units and tracking market share and driving the number of customers we have, it is vitally important, particularly as the business gets bigger, that we strike the right balance between unit growth and rate.

Due to the fact that we struck that balance, this business is now growing and grew in the first quarter over 40%, which is extremely high growth rate for a business that is as big as our business.

And this year we're on track to add well over $750m of revenue just from our high-speed data business.

That's the growth that we're going to be adding just in '04.

Obviously the regional bells are getting more aggressive with DSL.

However, our analysis indicates we are still getting over 60% of new residential broadband customers in our footprint.

I think its worth to note if that somewhere around 20 to 25% of RBOC DSL adds we believe our commercial customers, not residential customers.

This group represents less than 2% of our sub base.

So when you look just at residential, we believe we're clearly over 60% market shares.

At the end of the quarter, we report 5.7 million high-speed data customers versus 3.9 million for SBC and 2.7 million for Verizon, so we are far and away the largest broadband supplier in the United States.

Based on our growth rates, we see no reason why we won't top 10 million high-speed data customers over the next few years.

Moving on to advertising, one of our fastest growing areas is ad sales.

As we discussed on previous calls, we're big believers in cable advertising and have invested a lot of time and people and money to create a quality alternative to broadcast television.

The good news is that this investment is now paying off as our advertising business increased 14.5% during the quarter.

Our local business was up 7%, which we think is good performance compared to general broadcast station increases.

But the real highlight was that our regional and national business, based on the interconnect strategy we put in place over the last few years was up over 20%.

If you then look into the rest of the year, with political and Olympics, we think the 14% range is a reasonable target for the rest of the year and we're continuing to remain very bullish about the long-term growth prospects for the advertising business.

Moving on to rebuilds, obviously one of our major challenges and overhangs to our company when we purchased the AT&T Broadband systems was the state of their plant.

And we made a decision about 18 months ago to go as quickly as possible with the rebuilds.

The good news is today, we're almost complete, with the exception of Chicago and San Francisco and a little bit of fill-in work that should be done within the next 6 months or so we have rebuilt our physical plant.

John mentioned we rebuilt about 8,700 miles during the first quarter.

We're actually 15% ahead of schedule.

Finishing these rebuild so quickly hasn't been easy and it hasn't been cheap, but the good news is it's now almost completely behind us and our platform is as competitive as ever.

Finally let me give you an update on our phone business.

The first phase for those of you who listened to previous calls, with our phone business was to take the circuit switch business that we inherited from AT&T and improve its efficiency and profitability and we believe we've done that.

We're now looking forward to the second phase, which will be to get more aggressive and more growth oriented with IP phone.

We're making excellent progress in three rollout market, the sub-urban Philadelphia, Indianapolis and Springfield and we're on target to have fully 50% of our plant ready for IP phone by the end of this year and 35 million homes ready for IP phone by the end of next year.

We're now positioned for rollouts in major markets such as Boston, Chicago, Denver and Philadelphia in '05 and we feel confident that IP phone will be a major source of growth for our company in the next few years.

So in closing, we made a big bet when we bought AT&T Broadband that we can improve the performance of their cable systems and today, less than 18 months later, we've reached all the targets we set for ourselves.

And in addition, we're more confident than ever that we'll be able to continue to improve the AT&T systems and capitalize on scale economies, such as programming, advertising and content creation in the future. 2004 is shaping up to be a great year for us.

We're stronger than we were 18 months ago and now as an integrated management team on almost fully rebuilt physical plant and the right products we need to compete in the future.

We look forward to continuing to put the numbers on the board during the rest of 2004 and beyond.

John.

Thank you.

Operator, could we open the line for Q&A, please?

Thank you sir.

[OPERATOR INSTRUCTIONS]

Are there no questions.

Yes, the first question is from Richard Bilotti from Morgan Stanley.

Please state your question.

Given that you are -- making -- stated few comments - that you are ready to make a big push in to voice-over IP.

Could you also talk about when you would be willing to think about introducing a lower priced high-speed data service?

And whether or not that would be bundled with voice-over IP.

I realize, there's no plans to offer it now.

But I'm wondering if at that point using a low speed product that more deeply promotes the voice product and also to more deeply penetrate the data market might become a reality?

Rich, this is Steve.

One of the great pleasures of these calls is going to guess what questions you are going to ask and that is one that none of us bet on.

I'm glad to be unpredictable.

I think the answer is with the business growing at 40% a year, with the kind of momentum that we have in our high-speed data business, we don't think a lower speed tier makes sense.

It is clear to us that a lot of the regional DSL ads happen to be lower speed.

We dope nope the precise number.

That's a question we'd love to know.

But clearly in the high end of the business with high-speed product which is really our competitive differentiation, we're doing great.

So at this time, we have no plans.

When I say at this time, you can look out 12 months or so and we really have no plans to go lower speed.

As it relates to voice-over IP we're working very hard right now to try to come up with products and features regarding voice-over IP that make that product not a commodity product.

We're very interested in unified messaging and videophone and our things we can offer on an IP platform that the regional builds can now.

Obviously there's offensive and defensive side to IP phone.

But the good news is we've done a lot of the of work on the plumbing side and we're ready to move that business in any way we see fit in 2005 and beyond.

It sounds like what you're saying when you do roll out voice-over IP it will also be higher and higher priced product.

I think the idea would be to not enter a commodity business where we're the fifth or sixth entrant and computing on the basis of price.

Wouldn't you like to have two or three features that make your product bigger and competitive for reasons other than price and we're spending a lot of time on that and we have some ideas that we're pretty excited about.

Thank you.

Next question please.

The next quell is from Douglas Shapiro from Bank of America.

Please state your question.

Hi.

With the Disney bid behind you and the potential divestiture, I don't know could you give us a sense of where your leveraged targets are and how you intend to avoid becoming under levered I guess to put the question another way, with the repurchase authorization I guess you're alluding to, I guess it would be an effective 50% pay out ratio.

Do you think that's the kind of dash that kind of pay out ratio is sustainable?

Doug, we have not set any specific target on a leverage ratio or a specific targets on a pay out ratio for the buy-back program.

We would certainly like to seem our credit ratings improve from the levels that we're at now.

Every one is aware of the split rating with still one rating agency holding us at the lowest level of BBB.

We think there's room to move that up.

But we said on a number of times beforehand we would like to see our ratings at higher levels than the BBB category.

I think what we are aiming for is to use up a good portion of the billion dollars that we have identified but beyond that, no other target at this point in time.

We did in the -- up until we were shut down in the buy-back program by the lawyers as we were looking at Disney, buy-back approximately $50m of stock at an average price of about $32 share and we should be in a position within a day or two to be back in the market again.

Thanks.

The next question is from Iria Berkhoff from UBS Warburg.

Thank you.

One financial and one strategic.

On the strategic side, you have assets still on the market now, distribution like Adolphe and content, much smaller scale than Disney.

Brian maybe you could talk about what's next.

You love cable and that's come across clear in the numbers.

But what do you think that the company would like to add to its portfolio assets?

And is there an interest in these assets in the market today?

On the financial side, obviously there has been some successful deals with ESPN done recently.

You guys don't have the contract up just yet I guess.

But do you think that you now go back into Disney and negotiate from a business standpoint?

And try to get a better ESPN deal?

Thanks.

I think as a matter of course we always are going to look for new opportunities for growth, whether we can build partner or buy the Adolphe situation did not factor into today's announcement.

But the reality is the world keeps moving forward and that's a new development for sure.

And we've always looked at cable systems.

And so I suspect we'll look at those.

But it's also -- a number of their systems fit our footprint so whether that's acquire, swap or partner, again we've always tried to be financially disciplined and creative.

With 22 -- almost 22m customers I, I think we're in the position where we don't have to make any acquisitions.

I think we have a fantastic company that a lot of people want to work with in a lot of areas, including content, including high-speed Internet and including through our distribution.

So, you know, we've always in the past said we want to be opportunistic, entrepreneurial and have the financial capability to do what we think is going to build shareholder value and it all comes back to that single metric that I think drives the management team here, which is long-term value creation for shareholders.

As to your question on ESPN, we've never negotiated any supplier contract on a call like this and so there's nothing to say except again I think Steve has indicated that the trend generally has been to secure lower cost increases and actually equally important is additional distribution capability.

So for instance, in an agreement which we've talked about before after the fact, in the Viacom agreement we got significant amount of video on demand and high definition.

If you get them from Comcast, we have not just a commodity but a better version of those products, Show time, MTV and other products and we hope to achieve a similar outcome with similar transactions.

To add to that we think the Cox ESPN deal was a big event.

We do have certain rights as a result of buying AT&T and also certain MFN rights.

So I think it is a significant event in the cable industry's evolution that Cox got the deal they got.

And that should be to our benefit and other cable operators as well.

Thank you.

The next question is from Rich Rosenstein from Goldman Sachs.

Please state your question.

Thank you.

Actually questions in two areas, but related, how do you see yourselves differentiating your products, your product over the next few years in two areas, high-speed data and in DVR's.

And by that I mean in high-speed data, obviously you've been ramping up your download speeds significantly to 3 megabits a second.

How do you see the development of applications and programs and content that will truly differentiate that in the minds of consumers, vis-a-vis DSL and in DVR's where are you in terms of moat row la and having a two tuner DVR out and will that be a comparable to satellite or do you see that being differentiated to satellite?

You used the word competitive differentiation and that is really what wear all about right now whether it's our video product or high-speed data product or voice product.

We are operating in a competitive world for all three lines of business and we see a big part of our job is making sure that we not only have what our competition has but we have things that they don't have or things that are better than what they have.

And you've sort of mentioned two areas, but it really goes across everything we do from video on demand to high did he have television et cetera.

There's two ways to be better than DSL, the first way is speed and reliability of your product.

We think we have advantages there now that are, primarily due to the fact that our network is more ubiquitous and more stable.

We went to three, we can go really quite a bit hire should we make a decision to do that and we're looking at that.

But in addition to just the raw speed and the functionality of the pipe, we are spending an increasing amount of time and money and effort on our portal.

And I think those of you who haven't seen it we have a very elegant way of navigating through the portal that we call the fan that allows you to pull your streaming video in a way that I think is very attractive and we are now starting to strike deals, have struck deals with FOX sports and CBS and doing more deals to make sure our portal has things other people don't have.

We're particularly excited about video chat.

We're particularly about streaming video packages.

And I think this really, this phase we've used the analogy with cable before, cable for many years had very few channels and really started to take off when brands like HBO and CNN and MTV came along.

We think a lot of that we're going to see in the high-speed data front in the next few years.

Regarding DVR's we have single tuner Motorola boxes out now and dual tuner boxes out sometime in the early fall time frame.

And our goal there and this is a big part of why we purchased TV Guide, is to make sure that the experience of using our DVR's or the experience of using our VOD is something that's better than you can get from satellite.

And that's a big emphasis within our company right now.

I would just add some of these products are easier to differentiate yourself.

Take the DVR we're all buying the same sort of memory and things.

But when you complement it with video on demand, you then have a complete experience for the consumer that it's not even close.

So to be able to pull our live television where pause any show and then to pull it up and have the same functionality and begin to get that, that's any kind of television you watch, and we have thousands of hours on video on demand and hopefully eventually, you know, 100 hours or DVR, it's a -- I think a knockout advantage for the broadband provider and that's what we are stepping on the pedal.

Next question.

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

Good morning.

I have a question for Steve and also for John.

Steve, could you give us an update on video on demand usage and also do you think it makes sense at some point to as digital penetration increases to take some of your systems all digital?

And John, could you review your cable partnerships with some of the trigger dates and the size of the subscribers you'll be taking on the balance sheet?

And regarding Liberty, you can now text efficiently and exchange the stock you exchange for assets.

Regarding VOD usage, our model for VOD is to deliver as many hours for free as to be to encourage them to use it.

The real goal is to increase usage and competitively differentiate what we do.

So, for example, if you are an HBO customer, you get HBO on demand at no additional cost.

So in theory if you love the sopranos and want to watch them on Wednesday night, our HBO is better than DirecTV's HBO.

So we have 1500 hours of VOD programming for free if you are a digital customer in the Philadelphia area, for example.

And right now over 55% of our digital customers have used VOD in the recent past and on average, they are using it 14 or 15 times a month, which we think is just a staggering statistics and I think bodes well for our strategy and trying to rollout what we were doing in Philadelphia elsewhere.

We have similar numbers by the way in places like Boston, where we launched shortly after Philadelphia.

You mentioned all digital, one of the reasons to go all digital someday to be able to deliver VOD to everyone.

To deliver an elegant programming guide and all the functionality that a digital customer gets today to the 60% of our customers who are analog customers.

We are spending a lot of time on all digital, we are going to start doing some market tests this summer of something we call simulcast, which a way to do digital but keep your analog operation.

But I think if you look out over the next three, four, five years you're going to see Comcast and other companies go all digital and some if not the majority of their footprint.

One of the things I'll jump in for a second.

Lot of us are all headed now to New Orleans for the national cable convention.

And again I think as we go there, that's going to be the kind of -- you always get a chance to preview the future a bit.

And I think looking at the advancements from last year in terms of both going upscale for digital and VOD, what can be done, what features, how do you integrate DVRs and High Def and PVR, which by the way I think is an advantage cable has over satellite back to the previous question and at the same time going down scale to the all digital vision and seeing where people are at, and, you know, our sense is that there's been some real progress made that is very real.

Jessica, just moving onto the partnerships.

As you are aware we struck a deal with Time Warner that we're in the process of closing.

That's going to add somewhere in the neighborhood of about 800,000 subscribers with the unwind in the mid 2006 time range.

Early 2006 we have proportionate interest in about 650,000 subscribers with insight that's around the January '06 time frame.

Adolphe is timing because of the bankruptcy very hard to predict but we are in the 300, 325,000-subscriber range with that grouping.

And then we have other smaller partnerships that in total add up to somewhere shy of 200,000, about 175 to 200,000 subscribers.

With respect to Liberty we still own about approximately 120,000 shares.

There have been some discussions.

Obviously there are some assets that have interest on both sides so we'll see what those discussions lead to.

Next question.

Thank you.

The next question is from the Niraj Gupta from Smith Barney.

Please ask your question.

Thank you.

Good morning.

Question for Steve about the opportunity to broaden the high-speed Internet subscriber base obviously without price discounting, if you look at your video penetration rate it's about 54% currently, so I guess 46% of your homes don't currently subscribe to video.

And based on our estimates, about 5 to 5.1m of your high-speed subs at the end of '03 were bundled with your 21.5 million cable video subs.

Assuming that's right and to get your comments on that Steve that would be helpful.

That would suggest that the remaining 200 to 300,000 cable modem subs, you know, represents about 1 to 1.5% penetration of the other 18.5 million homes in your footprint.

Now historically, you guys have taken the approach of charging the incremental $15 for Alacart pricing for speed.

I just want to get your thoughts in terms of whether or not you think that makes sense on the going forward basis given how big an opportunity this seems to be is not tapped into.

The answer is yes, we think it makes sense.

I'd be happy to talk with you off-line about it.

You know, for a variety of reasons, we think it's smart to bundle our products when it makes sense and this is an instance we think it does.

Can I ask one quick financial question for John on Microsoft.

John, Microsoft last week reclassified their stake in Comcast as financial.

Could you talk about your interest to the effect they want to sell that 115 million share block?

I think that's up to them.

We have no idea what their agenda is.

I don't think we have any comment on that Niraj.

They are big investors in our server time.

They had made a lot of money.

I don't know what their investment criteria is at this stage.

One more question, operator and then we'll finish the call.

Thank you.

Our last question is from Craig Moffat from Sanford C. Bernstein.

Please state your question.

Good morning.

I wonder if you would briefly talk about some of the new growth opportunities that are in the portfolio.

I'm thinking in particular of potential to add pricing to your VOD offerings.

And then also your potential to enter the commercial market around either high-speed data and/or voice-over IP.

Well, I think one of the great things about our business is that we have so many growth opportunities that a big part of our job is making sure we don't pursue too many at the same time too quickly.

When you have 70,000 employees you really want to think through your priorities are and make sure you are doing things in a logical way.

Commercial we still believe is a real opportunity.

It is 1% of our revenues or less than 1% of our revenues and we tapped a lot of small and medium-sized businesses and so that's an opportunity waiting to be capitalized on.

Obviously the next big one for us is voice-over IP.

Every home in America has a phone.

It's a bigger market than video.

So that's a big one.

We obviously believe we have many more years of high-speed data growth.

Video on demand and DVRs I think represent growth areas.

Day and date is going to happen at some point.

We wished it'd happened already.

When that happens that's going to be a growth opportunity.

And with 11 million digital boxes, $1 rate increase is a big, big number.

We have tried I think so far to make sure that our products are competitive fiscal year From a price point of view so it's not something we would do without considering it seriously.

But there's a lot of growth potential.

And as I mentioned during my remarks earlier, we also feel there's a lot of growth potential in the AT&T systems.

So if you look out over the next 3 to 5 years, we think we've got lots of ways to grow the company at rates that are as high or higher than they have been.

This is Brian.

I think it's a great place to end the call.

For all those reasons we're bullish as we are to have 21% cash flow growth in the quarter, you know, we have a guidance for the year that we think we can meet and hopefully do better.

Things are in fantastic shape.

We do have those kind of opportunities, whether it's add ad sales to it or going commercial, hearing how we're not really a factor in that business to business market.

These are things we'll look at in the future and we're pretty excited with the performance at all levels of the company.

John.

Thank you, operator.

Thank you all.

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