康卡斯特 (CMCSA) 2004 Q3 法說會逐字稿

Good morning and welcome to the Comcast third quarter earnings release conference call.

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 and Co-CFO, Mr. John Alchin.

Please go ahead, sir.

Thanks and welcome to our third quarter 2004 earnings call.

Today's call is accompanied by slides which are already available on our Investor Relations Web site and I'd urge you to go to www.cmcsa.com or cmcsk.com.

Just before we proceed, I would refer everybody to our Safe Harbor disclaimer and remind you that this conference call may contain forward-looking statements subject to certain risks and uncertainties which we outline in our recently filed 10-K and other SEC documents.

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

At this point, let me pass to Brian Roberts, our CEO, for opening comments.

Brian?

Good morning.

This is a really exciting conference call for us.

Jumping right in, I think the headline, at least for me, is that we added 549,000 high-speed Internet customers, the most in Comcast's history.

It brings the year-to-date to over 1.269 million, close to 1.3 million high-speed Internet connections, totally in line with our performance last year but appearing to accelerate.

The third quarter is the best quarter for high-speed Internet in the last several years, and that's as people go back to colleges and other things, but clearly there's more happening in the data market than any of us originally anticipated, and the market continues to expand and grow and, of course, equally strong news is that the average revenue per unit is in the 42 to $43 per month range.

Think back a couple years ago as competition intensified in high-speed Internet.

To be able to report accelerating growth and to now be able to have between 1.6 and 1.7 million net adds for the year, again, higher than what we thought at the beginning of the year, is, to me, just fantastic.

Similarly, digital cable had a great quarter.

This, I think, is the third straight quarter where we have had higher net adds than we did in the first three quarters last year.

We are up 341,000 new digital customers this quarter.

To me, it's a reaffirmation of our differentiation strategy, most notably ON DEMAND.

Comcast ON DEMAND continues to show great progress, and Steve will talk a little bit about that.

We also have launched numerous high-definition channels, continue to improve the quality, and we in many markets are now launched with DVRs and will continue to have a great growth in the digital category as we continue to improve the product all the time.

In our high-speed Internet business we also continue to add features which is part of our success.

This quarter alone we added really a robust video e-mail service, photo show deluxe, and for some customers a 4-megabit-speed option.

So we are focused at Comcast, as we have been for several years, on delivering multiple new products.

And not just products that our competitors have, but products that are differentiated.

And that's all built from a two-way network.

And if I could just pull out of the earnings numbers for a second and talk about kind of the bigger picture and then we'll dive into it.

I just got back with a delegation of cable labs from Korea and Japan, and we were talking with the consumer electronics manufacturers about the future of two-way and the power of the broadband network and comparing notes and laying plans for the future.

And whether it's in, all the array of devices that are coming in the future, they're all going to be there to give people an ON DEMAND experience, whether it's wireless or wired, in-home or out of home.

It is critical that the cable industry work with these manufacturers to help cable be there first and in a seamless way.

And I'm pleased we were able to sign an agreement with Samsung, the first of its kind, that all of their two-way devices are going to inter-operate with the cable industry, with the cable card, and with OCAP.

We had tremendous conversations and a great trip, and I can talk about that at people's desire.

So the industry is moving in lock-step in a two-way world so when you buy your device ultimately it's one remote control, ultimately it's a seamless experience for navigation, and it is technically secure.

As we look at ways to drive the differentiation strategy at the same time we are returning money to shareholders.

This year alone we have repurchased more than $1 billion of our stock, 38.9 million shares, and settled approximately $600 million of debt securities into cash that were previously exchangeable into Comcast stock, so we have stepped up and we'll continue to do so.

If you turn the slide, you'll see that the investments that we've made this year in the last three to four months that are in each one not necessarily the largest transaction, but when you put it together, it is indicative of a strategy, and I think a successful start to that strategy.

And that is, to continue to offer an array of choices to our ON DEMAND customers.

And in every critical category, movies, kids, and sports, you can see that we've made real progress in the programming department, whether it's Sony and MGM that allows us to have movies and television titles, some 150, and the ability to offer these movies and TV shows from both the MGM and the Sony library of over 7,000 titles to our customers in ON DEMAND for free.

At the same time we're hoping to launch new cable channels with our new partners and to find ways to add value and more VOD services.

In the kids category we had two significant announcements.

One is on our high-speed Internet, Comcast.net, we made an arrangement with Disney [background noise]

Operator, there's background noise on the line.

Could you check that out, please?

Yes, sir, one moment.

Thank you.

I'll continue.

At Comcast.net we did an arrangement with Disney for our kids channel, and recently in the last week we announced a 24-hour preschool channel to launch with Children's Television Workshop in partnership with Hit Entertainment, PBS, and Sesame Street.

In the sports category, a lot's been talked about NFL ON DEMAND and the NFL Network.

I can tell you that in the first month alone we had over 2.9 million orders for NFL Replay.

On average each user ordered 5.2 titles.

That's per week on the order rate.

Also increasing our local and regional sports offering with the Mets partnership that we joined with Time Warner and the Mets, with Dallas Cowboys, in our Dallas system, and we're launching Comcast Sports Net West which includes the Sacramento Kings and other content.

All of this will provide more choice, more control on both our broadband and on our digital product.

We are excited with the quarter.

You'll get to hear a lot of the detail right now but on almost every metric I think the Company continues to show incredible progress from the AT&T Broadband acquisition.

John.

Thanks a lot, Brian.

Please, if you're looking at the Web site, move to the slide that's headed up "Third Quarter Consolidated Results", slide number five.

I'll review the consolidated and then the segment operating results, and update you on the underlying financial strength as evidenced by more than half a billion dollars of free cash flow that reflects declining Cap Ex and increasing cash flow along with an increasingly strong balance sheet reflected in the continued pay-down of our debt.

On the consolidated front, revenue grew 12.1% to $5.1 billion while operating cash flow grew 14% to 1.86 billion.

Cable revenue is up 10.6% and operating cash flow up 14.6% also to 1.86 billion dollars.

Year-to-date cable revenue growth is 10.3 and cash flow growth 18.4% directly in line with our targeted 18% for the full year.

Our content division is also reporting a strong quarter as well.

Content revenue is up 30.6% and operating cash flow up 7%.

Cash flow growth rate for content is less than the 38% that we reported last quarter, but that's due to production costs on signature programming such as Tour de France and the Gravity Games.

But again year-to-date content revenue is up 26% and cash flow 34%, also directly in line with our full-year guidance.

Growth in cable and content resulted in an increase in consolidated operating income which is up 39% to 686 million, and bottom line, the Company reported consolidated net income of $220 million, or 10 cents a share for the quarter, compared to a consolidated net loss from continuing operations last year, excluding QVC, of a $153 million loss, or a loss of 7 cents a share.

Moving to the next slide, number six, where we highlight the 10.6% growth in total cable revenue.

As Brian said it was a blow-out quarter for new product growth in our cable division, and it's this new product growth that is the principal driver of total cable revenue.

Excluding phone revenue, in fact, we grew even faster at 11.5%.

Total video revenue from both analog and digital services was up 6.6% to the $3.2 billion that we highlight on this slide.

The growth in video revenue was a result of several key factors.

First of all, a 5.5% growth in average revenue per basic subscriber.

Basic subs were up 8.5 thousand.

This represents a 105,000 turnaround from the 96,000 loss that we had in the second quarter, and in fact, if you look back to the number that we reported in the third quarter of 2003, it's 10 times the 800 that we reported in that quarter.

Steve will cover some color and background on basic subs for this quarter and for the full year.

The increase in digital revenue is also a result of the higher digital subs that Brian referred to.

We now have 8.4 million digital subs after adding the 300 [background noise] in the third quarter.

This means that we've added fully 1.1 million in the last 12-month period since September 2003, and that's what's driving the growth in the digital revenue category.

We continue to be successful in increasing the up-take in digital.

Digital sell-in rate is now almost 60%, up from 54% a year ago.

It also reflects the increasing demand for our ON DEMAND service, high definition programming, and DVRs that Steve will describe.

As we've added almost 740,000 digital subs for the first nine months of the year, we're updating our guidance to 1 million for the year, approximately 1 million for 2004.

During the third quarter, pay per view revenue increased almost 30% and we're now at a point where we're generating over $100 million of pay per view revenue in the quarter.

This is primarily driven also by the ON DEMAND product which gives greater choice and accessibility to the pay per view or ON DEMAND category.

At the end of the third quarter we also had over 800,000 high definition boxes, with over 200,000 of those installed in the third quarter, an average weekly install rate of over 15,000.

In the high definition, sorry, in the high-speed data category the 37.9% increase in high-speed data revenue reflects the competitive strength of this product and the successful marketing initiatives that Steve will describe.

We now have over 6.5 million high-speed data customers representing 17% penetration.

This penetration is up over 270 basis points year-over-year, even though we've added over four and a half million homes to the footprint that has access to our high-speed data product.

Over 94% of our homes now have access to this product, and the sell-in rate continues to increase rapidly with selling in now between 38 and 39%, up about 10 percentage points from where we were a year ago.

Year-to-date, we have added 1.269 million high-speed data subs, so we're now increasing our guidance for the year to a range of 1.6 to 1.7 million for the year, directly in line with what we did last year.

I'd remind people of what Brian said in his opening comments, that just as we saw last year, we expect the third quarter to be the seasonal peak for this product.

As anticipated, telephone revenue declined about 8 to 9%.

This reflects a 7.5% decrease in the number of subscribers.

Steve will review both the telephone strategy and have some comments about our advertising results.

On the next slide, number seven, headed up "Operating Cash Flow Growth", cable margins are up about 130 basis points year-over-year to 38.4%.

Operating cash flow grew 14.6% in the third quarter to 1.858 billion, reflecting strong revenue growth offset by the impact of hurricane-related losses and higher operating and marketing expenses associated with the record number of new service additions in the quarter.

The increased activity that resulted from this record product sales included everything from provisioning to installation costs to customer service requirements.

Steve will review some of the focused marketing efforts that drove these outstanding results.

But the key messages on this slide, first of all, the 8.3% expense growth which confirms our continuing success in cost cutting across a number of fronts.

One of those key fronts is, in fact, programming costs where we're well in line to meet the target growth rate for the year of about 5 to 6%.

And secondly, that margins are well in line to meet the 39 to 40% range that we expected at the, as we said at the beginning of the year that we expect to report in the fourth quarter.

Moving on to the next slide headed up "Upgraded Cable Network", Cap Ex continues to decline with about a 15% year-to-date decline as we complete the upgrade of our systems.

We're now 98% rebuild and seeing no need for rebuild going forward and therefore expect rebuild capital expenditures to continue to decline as we go into 2005.

If you look at the detailed footnote that we have at the bottom of Table 5, we show that year-to-date upgrade capital is down almost $400 million.

We've completed over 90% of our planned rebuild of the 2004 rebuild construction program in the first three quarters.

So we now have less than 2,000 miles to be completed in the fourth quarter and have already rebuilt over 20,000 miles in the first nine months of the year.

As we go forward we'll invest in variable capital for both CPE and scalable infrastructure as we deploy more DVRs and high-definition boxes and extend the VOD footprint and also expand our VoIP telephone strategy that Steve will talk about.

We expect that capital expenditures for the year will be at the higher end of the guidance that we gave of 3.3 to 3.4 billion.

So moving on to my last slide, which is headed up "Significant Free Cash Flow Generation", year-over-year, we're reporting fully $1.5 billion swing in free cash flow from a loss of $115 million in the same nine-month period last year to a reported $1.437 billion for the first nine months of this year.

The combination of the decline in capital expenditures relating to the completion of our upgrades, along with continuing operating cash flow growth, results in another quarter of significant free cash flow generation in the third quarter, our highest for the year so far, $540 million.

Bottom line, we expect to meet our $2 billion target for the year, and we're confident in the model that projects continuing significant free cash flow growth.

A final word on our stock buy back program.

Since our second quarter call at the end of July when we reported stock buy backs of $750 million, we have repurchased another $335 million, or 12.2 million shares plus, as Brian said, cash settled another $209 million issue of Comcast exchangeables, representing an investment of almost $550 million in our equity.

With that, let me pass to Steve for some commentary on the cable division.

Thanks, John.

This is another strong quarter with solid growth across all of our lines of business, and what's interesting to me is the consistency and balance of the quarter, whether it's basic subscribers or digital high-speed data, or ad sales.

It was a very strong quarter across the board.

So here are some highlights.

Moving first to basic subscribers, as John mentioned, we're up 8500 subscribers for the quarter versus 800 for the third quarter last year.

This was a little better than we forecast internally especially considering we lost about 10,000 subscribers due to the hurricanes.

We expect to gain a significant number of subscribers in the fourth quarter, seasonally our best quarter, and we're off to a good start in October.

We're now in good shape to gain subscribers for the full year of 2004.

I think there are two factors helping our video business.

One sort of short-term and one medium to long-term.

Short-term, we're being more aggressive with targeted marketing.

We've added field sales people and that appears to be working.

We've also invested money, $20 million in a targeted promotion during the third quarter launch of the NFL Replay VOD service, and we're doing a variety of things on a market-by-market basis to make sure that we gain subscribers.

And secondly, and this is more long-term, as we add digital and high-speed data customers, our analog-only base, which I think is our more vulnerable segment is shrinking.

Today about 10 million of our 21 million customers take just analog cable and that number should shrink by at least 1.5 million customers in the next year as we add more digital subscribers and have more high-speed data subscribers.

And we know when we get a digital box and VOD or a high-speed data connection into the home, those customers are more satisfied and more loyal.

So this trend of the shrinking analog-only base should help us with basic subscribers as we move into the future.

Turning to high-speed data, I think that was the real standout of the quarter.

We added 549,000 customers during the quarter, which was a record for us or anyone else in the business.

Net adds were up 16% versus the net adds last year in the third quarter, which is great.

However, as important to us as our units is how we added the units.

For the last year, people, including some of you on this call, have predicted our average revenue per unit would have to decline significantly for to us keep growing at the pace we were growing.

In fact, our average revenue per unit for the quarter was 4291, which is actually marginally higher than the third quarter of 2003.

As we've said before, we really want to focus on the value side of the equation.

We've added a lot of features to our high-speed data product from video mail, to ABC News, to Fantasy Football.

And we took all of these product features and bundled them and marketed them in a pretty aggressive back-to-school campaign that cost about $30 million during the quarter, but the result was an extra 100,000 units versus our internal forecast.

So year-to-date we're now slightly ahead of 2003's net add pace, and the good news is, this business looks like it has plenty of good growth years ahead and we see no reason why we can't grow high-speed data units well North of 10 million and do so with attractive economics.

Turning to digital subscribers, we also grew nicely during the quarter with 341,000 net adds.

We always assumed digital would plateau at about 35 to 40% of total subscribers the way our pay business has.

Last year we added about a million digital subscribers, so we projected digital adds for this year of about 700,000 to a million as we approached 40% penetration.

After nine months we're actually up 13% on digital net adds versus last year.

We now stand at 739,000 adds for the first nine months of the year.

So it's clear that the ceiling for digital is higher than we initially thought, and we should be able to go well over 40% digital subs as a percentage of total.

What's happening is that digital is getting a second wind from VOD and DVRs and high-definition television, and I'd like to cover all three.

VOD is having a major effect.

And I have a slide after this slide that covers VOD in some detail.

DVRs are as of this month available in all of our systems, and we're already adding over 10,000 DVRs per week.

We've actually had Scientific Atlanta DVRs in places like Alexandria, Virginia, for over a year, and we've seen DVRs there reach 20% of total digital penetration.

If you take that 20% and expand it nationally, that would bring us North of 1.5 million DVRs in the next year to 18 months.

Since we charge $10 a month for DVRs, that would equate to about $180 million in OCF at full-year run rates.

Moving on to high-def.

HDTV continues to be extremely popular and we're adding about 15,000 high-def customers per week.

Some of these high-def customers are also DVR customers so there's overlap.

But we spent a lot of time trying to get local broadcasters and regional sports in high-def, so our offering is actually better than satellites in most of our markets.

And at the pace we're going, we'll end 2004 with about a million high-def customers and this business shows no signs of slowing down.

Moving on to VOD, I think it's no secret that we think Video ON DEMAND is very important.

And really, one way to look at is we believe it's a killer app for our video business, and so we're spending a lot of time and money on it.

Today Video ON DEMAND is available in 60% of our footprint but that number will grow to over 80% by the end of the year.

Let me give you some statistics which that show how important this business is for us.

In Philadelphia, where we launched Video ON DEMAND first, 77% of our digital customers have used VOD, and the average household that uses VOD uses it 22 times a month.

We had well North of 50 million orders last month alone.

We now have over 1300 free programs, 500 shows available to premium customers, and 200 pay movies available at any point in time.

This assortment offers tremendous value and I feel like we're in the second or third inning in terms of filling out the assortment.

It's growing every month.

Our real focus is free ON DEMAND product, which adds value to digital customers.

Right now about 96% of our orders are at no additional charge.

Only 4% of our ON DEMAND usage is for pay movies, yet interestingly, the pay movie buy rate has increased 60% since we've launched free video ON DEMAND.

This is a product you have to see to fully understand.

We think it's changing the way people watch television.

Kids are watching Sponge Bob, teens are watching music videos, adults are watching NBC News, sports fans are watching NFL highlights, and soon NBA highlights and on and on and on.

As we add new content over time, the power of ON DEMAND programming will only grow.

Moving on the telephone, two years ago we said our plan was to focus on video and high-speed data while improving the profitability of the circuit switch phone business that came to us from AT&T Broadband.

We've done that.

It's now time to turn our attention to IP phone.

We're focusing on expanding our phone business through IP phone, and we've launched IP phone now in three markets.

The markets tests are doing very well.

We've hired corporate and regional phone teams, defined our product offerings, selected vendors, and are now billing live customers.

Our plan is to expand in these three markets this fall and begin rolling out new ones in 2005.

We've been cautious about the phone business in the past as you know.

We're now convinced this will be a good business for us.

We've already made our platform investments so the returns on capital look very good.

The technology is now proven and we think phone can be bundled effectively with our other products.

While IP phone won't be that material to us financially in 2005, we think it could be a very significant growth engine in 2006 and beyond.

Moving on to ad sales, advertising sales continues to be one of our favorite businesses.

In a choppy ad market, we've now grown sales 14% in the first quarter, 15% in the second quarter, and 15.5% in the third quarter.

It looks like that momentum is continuing and will have a record month in October.

Our regional inter-connect strategy continues to drive this growth.

Let me just take a minute to outline two new enhancements to our regional inter-connect strategy.

In the last year we've rolled out ad tag and ad copy targeting techniques in all of our top 25 markets.

These products let an advertiser change copy for specific areas or tag spots with different endings.

Advertisers love this, broadcasters can't do it, and ad tag and ad copy is now fueling our growth.

Secondly, Local People Meters, LPMs.

Local People Meters are being introduced in nine of the top DMAs in the next 12 months.

We're big fans of LPMs because they more accurately measure cable ratings.

LPMs already exist in Boston, New York, L.A. and Chicago, and we look forward to their rollout in big Comcast markets such as Philadelphia and San Francisco in the near future.

So that's a quick run-through of our various lines of business.

We think the third quarter was great quarter, and we're well positioned for new growth.

We're now about 98% rebuilt, and in the next year should benefit from more DVRs, more high-definition television, and more people using VOD.

Our high-speed data business continues to roll along beautifully, and moving into 2006 we should have IP phone as a major growth engine as well.

John?

Thanks, Steve.

Operator, would you open the call for Q&A, please?

Yes.

Thank you, sir.

Investors wishing to ask a question may signal us by pressing star one on your touch-tone telephone.

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

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

Our first question is from Doug Mitchelson from Deutsche Bank Securities.

Please state your question.

Thank you very much.

With such strong subscriber momentum, I'm just wondering as you balance kind of the vision for the future here, the investments that are going to be required to achieve that with the current growth of your business, where do you think margins are going to settle out?

For example, in the quarter you talked about investing a little bit more to drive some of the growth.

Where are margins going to settle out over the next few years do you think?

This is Brian.

I think we've remained bullish, as John said, that the fourth quarter will be 39 to 40% in that range that we have pretty much one of our goals was to get all of Comcast to around 40% margins.

Historical Comcast continues to be above that and so it is now inconceivable that we could go higher.

We do balance these unit growth.

I think a lot of this is success-based marketing, i.e. commissions and things of that nature, as Steve referred to, but there's nothing that we see, that I see, that is troubling at this point in any negative way.

For instance, the single biggest problem that had faced the industry the last five years is the rising cost of programming.

And with the scale from the AT&T Broadband acquisition, and a lot of the negotiations that we've been doing, not only have we brought the programming cost growth rate to 5 to 6%, all of the ON DEMAND contest that both Steve and I referred to is included in that cost.

Coupled with the fact that we, you know, your second greatest costs are all your people, and all of the costs associated with better service that we have brought several thousand employees into Comcast as we've gotten rid of outsourcing for customer service at, frankly in some cases additional cost, and yet we're still on track to get to the 40% margin, so very, very comfortable with the business model.

Next question, please, operator?

The next question is from Niraj Gupta from Citigroup.

Please state your question.

Thank you and good morning.

Obviously you guys spent more money in the quarter and the payback on that was much better than expected subgrowth from, I guess, almost all perspectives.

It seems to me, given the seasonality of the business this is kind of going to become the case in the third quarter on a go forward basis.

Could you talk about that Steve, if it's just going to be strategically times, the times where you naturally have the most gross connect activity?

And as a follow-up to that, could you guys just talk a little bit about how you think your VOD content offering will continue to evolve over the next 12 months, what we can look for in terms of enrichment there?

Thanks.

Well, I think some of the activity in the third quarter, you know, when you add an extra 100,000 high-speed data customers that comes with an attendant cost in terms of truck rolls and retail commissions and so on and so forth.

So, you know, I think on occasion we will be aggressive and put together promotions when we think it makes sense.

We spent about $30 million more on high-speed data than we had planned during the quarter and got 100,000 incremental customers out of it.

Those 100,000 incremental customers will generate about $50 million of revenue per year.

So that's a pretty good trade-off, and one we'd make again if we had the opportunity presenting itself.

In terms of the VOD content, we see the content going up very dramatically over the next year, two years, three years.

We've said 2,000 hours, going to 4,000 hours, eventually going to 10,000 hours.

We now have a half-dozen or so people inside our Company in various places in the Company working on nothing but securing Video ON DEMAND content.

And you know, it's hard to say where it's all going to end up.

In a lot of ways we're creating a brand-new business here, but I think we're in the very early innings in terms of what that platform is going to be able to do.

Next question, please, operator?

Thank you.

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

Please state your question.

Hi.

I have three quick ones.

Steve, you mentioned the goal of 10 million high-speed data subs.

Could you give a time frame for that?

Also you talked about the Local People Meters rolling out, could you give an update on what happened in New York, L.A., Chicago?

Any statistics that you can give in terms of share shift or what it might mean for you.

And then finally, you just got approval, or Adelphia said that you guys can bid jointly for Adelphia.

Could you talk about what you think the timing might be, but also how much bigger do you want to get?

I mean, you have a lot of subs coming in from unwinding partnerships.

Just curious how much you need to really buy?

Three big questions bundled into one.

Let me do the first two quickly and then I'll pass to Brian for the third.

We should end this year at around seven million high-speed data customers and we'll have added 1.7 million customers this year so I think your guess is as good as ours as to exactly how long that takes but I don't think it will take too long.

It's interesting how your sights get adjusted in this business.

The original business plan for high-speed data had us way below where we are today in terms of penetration and I think we keep raising it over time.

My feeling is 10 million is not going to be the ending point that we will go beyond 10 million and there are a variety of things that can be sort of after-burners in the high-speed data business as people develop new applications to take us beyond 10 million.

In terms of the Local People Meters, in some of these markets we've seen increases in excess of 20% for cable channel ratings versus what they had under Nielsen.

It's interesting to see the shift.

The shifts tend to be higher on lower rated cable channels that are less familiar to people than they are on the more well-known higher rated cable channels, but there's no question that when you put Local People Meters in, cable channel ratings go up.

And we've seen it in market after market after market.

That doesn't immediately translate to higher revenues, but over time it does for a variety of reasons.

I think we're very excited about just cable ad sales in general.

We have a feature in ON DEMAND called Marketplace.

You click there and we're trying some things with General Motors where we have six different product offerings from General Motors from On Star to various cars and trucks.

And you can go in and pull up video and it's free content, and it's part of the package that we [evalue], we can deliver and advertiser that again, nobody else can do.

And as eventually you can click on an ad and go right to that part of the service and other technological enhancements that are coming coupled with the more accurate measuring, coupled with the focus that Charlie Thurston and other people have brought to Comcast spotlight is pretty exciting.

On the high-speed data question, again, nobody knows, but we are at 17% penetration.

And this product, I just can't imagine the youth of America wanting narrow band when they become the purchasers as they grow older.

And it's just a long-term trend that remains all of us of cable TV in the beginning days.

And once you have it you don't go back.

And that's the reason that we look at more cable.

I don't think we have any news here on Adelphia other than, you know, we're taking a look.

We have a complicated relationships with the Time Warner Entertainment and if there are opportunities to find ways to trade minority positions or whatever, we're going to look at all that, whether we feel the strategic need do it, Jessica, I think the answer we've repeatedly said is we do not.

It's got to be opportunistic and value adding and in the long-term value proposition of the company.

But our experience is we think we're good operators that can take, you know, underperforming systems and make them better, certainly worth a look.

Thanks, Jessica.

Next question please, operator?

The next question is from Craig Moffatt from Sanford Bernstein.

Please state your question.

Good morning.

I wonder if you could update us on your all-digital transition, and in particular the kind of steps that you'll take along the way and when you think you'll start digital simultrans, how you're doing in terms of your pursuit for the $50 box and so on?

Well, we're spending a fair amount of time on both the infrastructure, the plant infrastructure and the box for what we would call the simulcast or all-digital transition.

In terms of simulcast, we're taking selected markets, and we'll do more over time, and in effect continuing to broadcast the analog and digital signals that we broadcast today, but simultaneously taking the analog signals and broadcasting them in digital.

So someone who has a digital box will be able to get all digital signals, which is, will be a quality improvement.

It will also allow us to use the less expensive digital boxes that don't have analog tuners.

And we have boxes without analog tuners that are going to be available in the not too distant future that are not $50, but they're around 70.

And so that ability to start making that transition I think is going to be there and we'll have more to report on that as we move forward.

We think, obviously, we think it's very important that we have all digital quality and Video ON DEMAND in front of as many people as possible.

And once you make that transition to a digital platform you can do that.

Next question, please, operator?

Thank you.

The next question is from Raymond Katz from Bear Stearns.

Please state your question.

Yeah, this is a question for Brian.

Could you comment on Verizon's plans?

I know you can't put yourself in their minds, but if for argument sake you assume that they're going to at least attempt what they say they're going to attempt and be somewhat successful, how do you and Steve position the Company in that environment, and what do you do for your plants specifically on the upstream to make it more competitive with fiber?

Let me point out that we can't gauge any better than anyone else whether or not that this makes economic sense, and whether this is a long-term strategy or a short-term test, albeit large dollars.

A number of us have lived through this before, and what you can do, to answer your question is, you have to, you know, rebuild your system and be technically ready, and we'll find ways to use the upstream if that becomes something necessary, but in the meantime, we're 98% done our rebuild, Ray, and I think they're at the beginning.

And that's going to take a lot of years and tens, if not hundreds of billions of dollars of capital.

So frankly, even if they do it, or when they do it, you're looking at the fourth or fifth competitor in a market.

And so if you, I think I've seen some very good analysis that shows, okay, let's play it out.

X percent defects, and how much of that's from us, how much is from Direct, how much is from Echo Star, and how much is growing the pie.

Then take our share and look at it.

I think we probably added more new products this year already than the several years worth of those kind of analyses which suggest that it's going to hurt us.

And at the same time, as a facilities-based competitor anyway, if and when we are able to successfully go into the VoIP telephony business, we're the second competitor in the market.

So we just continue to not be able to answer every possible what-if question in this Company.

We have to stay focused on quarters like this.

I don't yet personally see a business model that suggests that it's a great return on investment.

I look at where the most of the dollars appear to actually be going, which is toward their wireless platforms including yesterday's AT&T Wireless purchase.

There's lots of regulatory noise about the desire of the Bells to completely rewrite the telecom law, and so there's a bit of questioning as to how sustainable this is, but in those markets where it happens, it's a meaningful competitor and it's number four or number five and you have to deal with it.

Next question?

The next question is from Jason Bazinet from JP Morgan.

Please state your question.

Hi.

Good morning.

I guess if I rolled the clock back maybe two years we would have thought that given the robust results you're having in the high-speed data business that maybe there would have been more of a pull-through on the basic subside on video.

And I was wondering if you guys could just comment on, are you surprised that you're not seeing more pull-through on basic, and is there something going on where maybe a larger portion of your data customers are buying data only as opposed to the data/video combination?

Thanks.

Well, I think it's hard to, as Steve said, makes the data product for the analog-only customers.

And so, in that respect, perhaps if we hadn't had the data customer, it would be a different outcome.

I mean, you know, the glass half full/half empty way of looking at these results.

Frankly, we are in a competitive business, in basic video, and we are totally aware of that and we've been doing everything to position our product to be different than our competitor and that differentiation is only for our digital and high-speed data customers right now.

So one of the things that Steve was just talking about is, in terms of getting the analog service broadcast in digital and getting the ON DEMAND feature available to more customers, is really what I think will have even a more of an impact than 17% of people taking high-speed data.

Secondly you had, frankly, you definitely have some customers who take satellite and take cable high-speed data, and we certainly make that available to them.

So over time we do hope to win back some of the dishes, and we've gone out and begun, you know, more targeted aggressive dish win-backs.

So, you know, I think we're pretty satisfied in that every one of the years since the launch of satellite we have managed to grow and, you know, at least hold our own, and at the same time, this year alone, at the rate we're on, we'll sell over two and a half million new products, and we did so last year.

So just what's coming into the Company's coffers versus what is going out is so dramatically different, I think we're very pleased, but I can't deny that we have real good competition from satellite that's certainly spending a lot more marketing dollars than ever before, and we're doing our best.

Next question please, operator?

The next question is from Douglas Shapiro from Banc of America Securities.

Please state your question.

Thanks.

You had a relatively large basic video footprint expansion in the quarter of, I guess, a couple hundred thousand.

I guess things on that.

One is, how sustainable do you think that is, you know, if interest rates back up and housing starts fall do you think that number is going to have to come down?

And then the second thing is, as soon as you report those as homes passed, are they also marketed, or is there some kind of lag between being reported as passed and actually marketing them aggressively?

No, I wouldn't obsess on homes passed numbers.

Typically the databases are much cleaner for actual.

They are much cleaner for actual subscribers than homes passed.

And as people move in and out of cities, you might have a building completely abandoned but stays in your homes passed ratio and moving out to the suburbs as you add line extensions and people go further into the plan.

The amount of money that we spend on line extensions and adding homes passed in new build areas relative our overall Cap Ex is not a very material number and really hasn't changed too much over time.

I think there's no question that the penetration comes down a little bit, but we find that we're able to look at this in the sum total of the whole business and part of the ongoing capital budget is building to new developments, and hopefully getting a decent share.

So all in all, you've got to take the whole thing as a package I think.

Next question please, operator?

Thank you.

Our next question is from Aryeh Bourkoff from UBS.

Please state your question.

Hi.

Good morning.

Thanks very much.

Just two quick questions.

You mentioned that the third quarter is going to be sort of the peak quarter for data adds.

Your guidance still looks a bit conservative given that statement.

It looks like the range would be 330 to 430,000 data adds in the fourth quarter.

Which one is the right run rate going forward or is it sort of in the middle?

And the second thing is, there was an article in the Journal about, I guess, Comcast hiring or naming a backbone provider, whether it's Level 3 or Sprint.

Can you comment on that and whether you're close to finalizing those voice plans given your comments about the rollout?

And then lastly about voice, you mentioned the financial impact on terms of growing on the voice side is really going to be 2006 not 2005.

But as you start up the service, should we expect any sort of margin impact in 2005?

Thanks.

Let me tackle the high-speed data first, Aryeh.

We don't want to give any more precision than we've already given that gives, I think, a reasonable margin around those estimates and we just want to sit with that number.

Brian?

Steve?

I think on the article in the Wall Street Journal about Level 3 and Sprint, we're doing a number of things to get ourselves prepared for VoIP and also to make our high-speed data business more efficient and more profitable than it already is.

But beyond that, we don't really want to comment on other public companies, agreements with other public companies.

And in terms of margin impact two years out as we get into the voice business?

I think it's a little early to say, but the beauty of the voice business, compared to the circuit switch business, is that it is significantly less capital intensive and significantly better in terms of margin because it rides on your IP infrastructure.

You know, we already have all these high-speed data customers, we have teams that really understand how to provision high-speed data customers, all of that can be leverage with IP phone and I think it may have added peak negative cash flow, it may have a modest negative impact, but I think it's going to turn positive much more quickly than the circuit switch phone business and in the whole scope of this Company I don't think it will be a material negative.

I just want to add to that that I think that last point is the critical differentiation between the question I just got asked about the phone company's investment and their return versus our opportunity to take the existing network.

I remember slides we used to show investors that showed it would be a series of steps, that the first foundation was this hybrid fiber coaxial rebuild.

And then all of the new products that we'd be able to offer would be success-based capital that would pay for themselves, we wouldn't have to do it.

As we look at other companies results that are in the VoIP business in some markets, I think everything supports what Steve just said.

We're cautiously optimistic that this is going to be yet again another new revenue for this industry in not very many years to be a meaningful contributor.

Could we take the last question please, operator?

Yes.

Our last question will be from Richard Bilotti from Morgan Stanley.

Please state your question.

Mr. Bilotti, your line is now open.

Please state your question.

This is a first.

We've never known him to be speechless before.

Is there somebody else who has a question then?

Yes.

We'll move on to the next question.

The next question is from Kathy Styponias from Prudential Equities.

Please go ahead.

Thank you.

This question is for Brian.

Brian, I thought it was very interesting that you made the investment in MGM alongside the financial investors because to me, it signaled that you're basically looking for the same type of returns that they are, and that part of the reason that you were willing to do that, or had believed that those types of returns were achievable was because in fact, you were helping them create a new revenue stream by doing the Video ON DEMAND deal that you did with Sony and MGM.

And I'm just wondering, what do you think is going to be the turning point, what is the milestone that other content companies are looking for in order to do similar type deals with you?

Because I do think, I agree with you, I think this is a key differentiator for cable versus satellite.

And I'll be perfectly honest, there's a selfish reason I'm asking because I've missed a few episodes of "Desperate Housewives," and it would be great if we ABC VOD so that you can watch them whenever you want.

Thanks.

Wow, we could probably get you some tapes.

But I think there's a lot of things there that come out.

First of all, one of the questions that got asked earlier in the call was, what are we going to do to enhance VOD this coming year, and one of the things we're doing will be that at least Sony will be up and running with their part of that VOD offering very soon, and then when the MGM deal closes, you would add their content because the Sony content can come on sooner.

We're also doing original programming for VOD that Steve didn't really talk about so there's new programming like NFL that's never before been available in quite that way.

There is original programming, and we're doing everything from, you know, yoga lessons to all sorts of an array of niche, kind of passionate viewing alternatives.

And then there's the big ratings generators like the "Desperate Housewives."

And you know, we're in conversations with a number of content companies, and I think they're looking at, you know, kind of a bit of a choice.

On the one hand, DVRs, whether it's from the satellite companies, the cable companies, or direct purchases from consumer electronics companies, and, by the way, every company in Korea and Japan intends to bundle DVRs into, whether it's televisions or set-top boxes or DVD players or whatever.

So you're going to see many, many more of the, you know, just flat-out storage devices, and so that content is going to be able to be stored by a consumer for free, and pause live television at any time, and that feature and function is coming, and so do they, does the content company accelerate and try to, you know, license the right to do that to a company on whatever terms they can do so, or do they just wait for the consumer to get that functionality in their home.

And so we're going down both roads.

You can today have "Desperate Housewives," in fact, now, I'll share my admission, I too, watched it this week, and we did store it.

With your wife.

With my wife on a two-tuner DVR that we have from Comcast that Steve said is now available on all our markets.

And it was one click, easy to store, and if you, you know, want that product, you're going to be able to get that from Comcast and we're selling thousands a week.

At the same time, it would be nice to make that feature available to more customers and have some commercial relationship to try to offer that functionality, which, by the way, is going to only make that show more in the conscience of America.

So we're out trying to have those conversations now.

Certain types of content companies will not want to do, but I think more and more, we're seeing whether it's the Tom Brokaw Nightly News or whether it's shows from CBS that we were able to secure, a number of more high visible programs, but the big win for cable, frankly, is probably not just around the big shows because you can do that with a DVR.

The choice, as Steve just said, was to give 2,000 choices, and hopefully some day 10,000, if not more, and begin to replicate the breadth and depth of the Internet brought to your television with you in control in a very simple, easy to use guide, which is what our strategy is.

Thank you very much.

Thanks, Kathy.

That was a great way to wrap up the call.

Thank you all.

Bye.

We have no further time for questions.

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

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The dial-in number is 630-652-3000 and the passcode is 9980173.

Once again the number is for the replay is 630-652-3000 and the passcode 9980173.

A recording of the conference call will also be available on the Company's Web site beginning at 12:30 p.m. today.

This concludes today's teleconference.

Thank you for participating.

You may all disconnect.