康卡斯特 (CMCSA) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Comcast fourth quarter and full year 2004 earnings conference call.

All this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I would now like to turn the call over to Executive Vice President and co-CFO, Mr. John Alchin.

Please go ahead, sir.

Thanks a lot, operator, and welcome, everybody, to our fourth quarter and 2004 conference call.

I'm here with Brian and Steve, and first of all, just let me refer everybody to the Safe Harbor disclaimer and remind you that this conference call may contain forward-looking statements that are subject to certain risks and uncertainties.

In addition, we will refer to certain non-GAAP financial measures on the call.

You can refer to either our investor relations website, or the press release for reconciliation of these non-GAAP financial measures to GAAP.

Now for opening comments let me pass to our Chairman and CEO, Brian Roberts.

Good morning and we're very pleased to be hosting the year-end call and giving guidance for 2005.

And if you start with the first slide, I think we are very pleased to, once again, have achieved our targets.

We have approximately just over 10 percent revenue growth, 10.4 percent from cable, to $19.3 billion, operating cash flow.

Cable operating cash flow increased nearly 18 percent to around $7.5 billion.

John and Steve will take you through a lot of the detail.

But a fabulous foundation.

And it's the second full year since we merged with AT&T broadband and we've gone from 4.9 billion to 7.5 billion in two years.

With strong cash flow, we were able to generate 1.9 billion of free cash flow, consolidated for the year.

And we took most of that free cash flow, and we'll talk in a little bit of detail, but approximately all of it was directed to equity in Comcast stock.

We purchased in the open market about $1.3 billion of stock and we redeemed over $600 million of exchangeables for cash that were otherwise exchangeable into Comcast stock, bringing our total investment close to $2 billion in our stock.

And same time, we were able to make key investments in technology and content, to drive differentiation in our products and future growth.

As you know, we've said we want to be a new products company and I think we're fulfilling that and we had a super year, particularly in high-speed data; 1.7 million new customers.

We had -- have just recently announced, again, an increase in speed from 3 megabits to 4 megabits and our pro service from 4 megabits to 6 megabits.

In 2004, we made some 24 product enhancements to the high-speed data product and we expect more of the same in 2005.

The video business also had a good year, significant enhancements, digital penetration now exceeds 40%.

We added over 180,000 digital video recorders.

One of the reasons you'll see a slight increase in capital expenditures in '05 is our bullishness on digital video recorders.

In the fourth quarter alone we had 180,000 and we're really just getting started.

Consumers love the product.

The same thing is happening with high definition television.

All of our DVRs are HDTV, or many of them are.

We also have announced yesterday that we put in service the 1,000,000th HDTV box .

In fact, we added 800,000 HDTVs in 2004 alone.

So we went from 200,000 to a million and that's part of what we think is the consumer take rate both for HDTV and DVRs, and we expect 2005 to continue to grow at an even faster rate.

The Super Bowl, of course, for those of us in Philadelphia, we're seeing an incredible surge at 2x the rate, really nationally, for HDTV sets over this time last year.

And then, a lot of you and we've talked before and I won't spend a whole lot of time today on our ON DEMAND strategy.

But in December we added 72 million orders to ON DEMAND.

So for all of 2004, and this is kind of a new statistic, we had 567 million orders for ON DEMAND streams or shows.

Today we now have about 80 to 85 percent of all of our digital customers having access to ON DEMAND, but that really averaged less than 50 percent for the whole year.

So we're going to see a big increase in '05 in ON DEMAND usage.

Today we have 3,000 plus program choices.

We expect to double that by the middle of the year.

And to end the year between 8 to 10,000 shows that you can order, 95 to 97 percent of them will be free, for no additional cost to the consumer as long as you're a digital customer.

And in our more seasoned markets, like Philadelphia and Boston, over 75 percent of the customers who have ON DEMAND have used it in the past 90 days.

The average customer had 23 views per household per month, or 12 hours of ON DEMAND usage a month.

That's pretty staggering usage.

And we're confident that we'll exceed a billion orders this year, and that television will never quite be the same.

As we look to the next growth engine, we've talked about digital voice.

And you'll hear more but, just like high-speed data, it's going to take several years to be a meaningful contributor; but when it finally clicks in and kicks in at the-- at a full ramp rate, it will have an even faster impact, we believe.

And Steve's going to talk about that.

So we think we have a sustainable growth model.

Our multiple product strategy is working.

It's driving growth.

We believe we can sustain near double-digit revenue growth with double-digit cash flow growth and, therefore, grow free cash flow by 20 to 30 percent over the next three to five years.

And we're on course to do that.

If you go to the next slide, you'll see that in addition to operational and stock repurchases, as I mentioned, we have really taken our free cash and our scale and focused it in two areas, technology and content.

And without going back and detailing all the things we're doing that we've talked about before, you can just see when you add it up, it was a very busy year.

We're on plan to innovate and to lead and to differentiate and those are probably three of the critical ways that the -- that the new Comcast has an opportunity to grow.

And so our customers are seeing a new guide.

They're going to see interconnected services and integrated platform.

We're going to have a digital simulcast product where you get an all digital offering.

I -- I-- we are testing that now in some markets, actually have that in my office.

It's really amazing to see the difference.

And as we get to lower all-digital boxes, sub $100, sub $75, as we've detailed before; then we're able to take the ON DEMAND product and put it into all the households who are basic only.

In the content area, we're -- we already have launched Sony movies.

Here's a new stat.

We've launched, just off the Sony movies, something called Movie Pass.

We will, of course, have MGM when the deal closes.

And with just a small sampling of free movies that we call Movie Pass.

We expect that to grow to 75 titles by the end of March, moving to 100 titles by mid-year.

When MGM closes then we'll double that to 200 constantly refreshed movies every month that you get for just being a customer of Comcast digital.

In the first month, early January results, close to 30 percent of the settop boxes used Movie Pass in January, watching roughly 2.7 titles on average.

It's the second largest VOD audience after HBO, and went right past the NFL already, and other kids programming.

Speaking of kids we do expect in the spring to expand, in April, with over 50 hours and 80 episodes of kids content from Sesame Street and Barney and our partnership with PBS and Hits.

So we have really good feelings about 2004, it's history, but it's a good history and we're focused now on 2005.

We think we're in stronger competitive position than we were a year ago.

And our goal is to build a unique, differentiated experience with multiple products; each following that strategy.

And we expect to deliver, to continue growth, in free cash flow for years to come.

With that, let me kick it over to John to take you through some of the details.

Thanks, Brian.

If you move on to the next slide that's headed up 2004 Guidance and Results.

As you see on this slide, we've got three columns here, indicating that we revised our guidance, as we did in the previous year, in a number of categories.

Increasing the outlook for operating cash flow, high-speed Internet access, and going to the far top end of the guidance for digital additions throughout the year.

Even though we've done -- we increased those, we managed to meet or beat just about every metric that was-- was out there.

As Brian noted, we continue to see very strong demand for DVRs and high definition; both of which contributed to these strong results.

And also we essentially met our $2 billion consolidated free cash flow number for the year.

So on a consolidated basis, the Company reported net income of 970 million, or $0.43 a share, as compared to a loss from continuing operations of 218 million, or $0.10 a share, in 2003.

For the fourth quarter, consolidated income was 423 million, or $0.19 a share, up from $0.17 a share in the same period last year.

Our growth in net income is driven primarily by growth in revenue, operating cash flow and operating margins in our cable business.

We're extremely pleased with the fourth quarter and 2004 results, with fourth quarter revenue growing 10.3 percent to 5.2 billion and, very significantly for us, 2004 consolidated revenue growing 10.6 percent to just north of $20 billion.

So for the first time in the Company's history we passed the $20 billion mark in top line revenue.

Just let me spend a minute, though, on content before we move on to a more detailed discussion on the cable division.

During the year, in the content division, we made two investments in the international channel and TechTV which added to our total revenue number, but negatively impacted the OCF number by about $10 million.

Excluding these two new assets, full year 2004 revenue grew 21 percent and operating cash flow grew 29 percent and, as we showed on the previous side, essentially met guidance for 2004.

Notably the Golf Channel celebrated their 10th anniversary last month and generated terrific results for 2004 about with operating cash flow exceeding $100 million.

E!'s results were impacted by higher programming, marketing and promotional expenses at both E! and Style as management has been shifting the programming focus and promoting both of these brands.

With the acquisition of TechTV, G4techTV is now available to almost 50 million Nielsen homes.

OLN is also making strong progress on distribution and the channel is now available to over 60 million Nielsen homes.

Earlier this week we announced the launch of three VOD nets for OLN.

And then just yesterday, OLN reached a multi-year agreement to televise the Boston marathon.

So let's now look at the cable results beginning on the next slide.

Pro forma cable revenue for the year was 19.3 billion, up 10.4 percent from the previous year.

Fourth quarter revenue, of nearly $5 billion was up 10.6 percent.

On the following slide, I'll show you a breakdown of revenue but just before we do that, operating cash flow also showed very strong growth for the year.

We improved by over $1 billion, or 17.6 percent, to nearly $7.5 billion.

This growth reflects the continued success that we're having in controlling operating costs in nearly every area of the business.

As anticipated, programming costs increased 6 percent year-over-year and declined as a percentage of revenue.

For the fourth quarter, operating cash flow increased by $260 million, or over 15 percent.

As expected in the fourth quarter, we delivered operating cash flow margins of just under 40 percent.

We came in at 39.6 percent, and that's absolutely consistent with the prediction that we made at the beginning of the year.

Full year 2004 margins were 38.7 percent, up fully 240 basis points from where we were in 2003.

So on the next slide, we show a breakdown of the various revenue components which, in the aggregate, rose 10.3 percent-- 10.4 percent, sorry, for the full year.

Video revenue increased 6.5 percent, driven by price increases and continued strong growth in our digital category, reflecting the 990,000 additional digital subscribers that we added throughout the year.

Growth in video revenue also reflects increasing demand for the new digital features that Brian referred to, including ON DEMAND, high definition television and DVRs.

Digital subscriber penetration is now north of 40 percent, up from 35.6 percent at the end of 2003.

And our digital sell-in rate is now up to 55 percent from about 53 percent in the previous year.

As a result of, primarily, the launch of ON DEMAND, Pay-Per-View revenue is growing rapidly, up almost 21 percent in 2004 to just shy of $400 million, $393 million for the year.

Looking at basic subscribers.

In the fourth quarter we added over 60,000 basic subscribers, bringing to us a full year, essentially, flat basic subscriber position, adding 8,000 for the year.

In 2005, we expect to maintain basic subscribers at approximately 21.5 million.

Revenue for high-speed Internet service increased almost 39 percent, surpassing $3.1 billion.

This reflects the addition of a record 1.7 million subscribers.

Average revenue per subscriber was 42.--$42.41, up slightly from the 2003 number.

Phone revenue declined just as we'd expected, by about 12.5 percent.

This is-- continues to be consistent with our plan of capping the circuit switch business as we prepare to roll out Comcast Digital Voice.

The decline in revenue is a result of a 44,000 decrease in subscribers for the year and a 5 percent decrease in average monthly revenue per subscriber.

As Steve will indicate, as soon as I'm finished, phone revenue in 2005 will decrease when compared with 2004, as we transition to Comcast Digital Voice.

Excluding the decline in phone revenue, our total cable revenue would have grown 11.5 percent.

Additionally we had another great year in advertising, which continued to grow at a very strong rate, increasing at almost 16 percent to $1.3 billion.

Our -- the 2004 growth reflects local advertising growth of 7 percent, but over 20 percent growth in regional and national advertising as a result of our ongoing success in the regional interconnect strategy.

We saw a five-fold increase in political advertising during the third and fourth quarter of approximately $45 million.

Obviously that amount will not recur in 2005 and will have an impact on growth numbers for '05.

Moving to our capital expenditures slide, capital expenditures declined over $500 million, or 12 percent, to $3.6 billion in 2003.

This reflects over $500 million, or a 36 percent, decrease in upgrade spending for the year as we've essentially completed the upgrade.

As we show on the CapEx slide, we expect further capital decline in 2005, $700 million of which relates to upgrade.

Upgrade capital will decline to a nominal $200 million in 2005.

As a result, total CapEx for the consolidated entity will-- is expected to come in at about $3 billion for 2005.

And we believe that this is a sustainable number, as we go forward and you'll see further declines over time.

Investments in cable CapEx will be more in the variable capital as we -- category as we go forward, as we deploy more and more high def and DVR boxes and extend VOD and Comcast Digital Voice throughout our-- our networks.

We'll be investing about 200 to $250 million in Digital Voice capital in 2005, and approximately $200 million in projects such as our national backbone, converged infrastructure, and digital simulcast.

Again, as Brian indicated, we're investing for growth and differentiation.

On the free cash flow slide, we highlight the total free cash flow generated of $1.9 billion and, as Brian said, virtually the entire amount was dedicated to the repurchase of 47 million shares for $1.3 billion plus, additionally, we redeemed for cash over $600 million of exchangeable securities that negated the need for an additional issuance of 23 million shares.

So in total, we removed from float effectively 70 million shares throughout the year.

We continue -- we expect to continue to repurchase shares from time to time in the open market and have about $600 million of availability under the existing buyback program.

On the balance sheet, we are in a very strong position, as shown on the next slide.

You see debt reduction of approximately $800 million for the year, and a decline in -- further decline in our debt, net of exchangeables to operating cash flow ratio, to 2.9 to 1 for the year.

Our guidance for 2005 is highlighted in the next slide.

I would point out one-- two things on this slide.

Consolidated numbers are presented for revenue, operating cash flow growth rather than breaking out content and cable the way we have in the past.

But essentially, the revenue and operating cash flow growth numbers of 10 and 12 percent are consistent with those that'll be reported for the cable division.

Obviously, our cable division is the lion's share of our business and the growth numbers are consistent with those shown on this slide.

Second point I would highlight, is that rather than breaking down the individual unit metrics for digital, basic, high-speed data and phone we're forecasting a consolidated revenue generating unit addition of $2.5 million for the year.

But I want to reassure the market that at each and every quarter, we'll break down each and every one of those metrics to report the individual numbers and then report the total as we have in past quarters to -- in the-- the footnote of our slide.

So the number that we're forecasting for the year is at least 2.5.

You should expect performance that is very consistent with what we've seen historically and we're projecting free cash flow growth of 35 to 45 percent over and above the level that we've reported this year.

With that, let me hand over to Steve for his comments.

Thanks, John.

Looking back at 2003 and 2004, I think 2003 we were primarily focused on the AT&T integration.

And following that, in 2004, we-- we were really focused on making sure that our financial results were on solid footing.

And I think when we look at 2004, we feel we've clearly achieved that and the numbers speak for themselves.

In addition to the financials, though, I think it's -- it's important to note that we are simply in much more competitive company today, than we were a year ago.

We're 99 percent rebuilt, about 40 percent of our customers now have digital, and about 30 percent of our customers now have high-speed data.

VOD is launched in about 85 percent of the Company.

High-definition television and DVRs are launched in close to 100 percent of the Company and high-speed data subs have grown from 5.3 to 7 million.

So we-- we-- in my opinion, are clearly much more competitive and we've made great strides in terms of improving our VOD content, our IPG, our high-speed data portal and a lot of our focus during 2004, in addition to the financial results, was making sure the Company would be in better shape competitively in 2005 and I think we've done that.

If you look at our focus in 2005, it really is, in many ways, just more of the same.

Now that VOD is in front of 85 percent of our markets, we want to make it even better.

We want to continue to roll out high-definition television, way beyond the 5 percent of our customers that currently have VOD -- or high def.

I believe we are the largest provider of high-definition television in the country right now and we intend to keep --keep our acceleration, pedal to the metal on that. 2005 will also be a very big year for DVRs and I would not be at all surprised if we installed over 1 million incremental DVR units during the year.

What's happening with our digital business is it is shifting from low-end boxes and rolling out low-end boxes to really rolling out these higher-end, high def DVR boxes; and you'll see that be a big part of 2005 and beyond.

High-speed data, every year we sit down and do our budgets and wonder what year our net adds the fall below our net adds the previous year.

Very difficult to predict when the net adds will slow down.

We don't see any sign of a slowdown now and so we're expecting another very strong year with unit growth that is -- that looks a lot like this year, and ARPU that is consistent with this year.

Our ARPU actually increased during this year.

We would not anticipate it increasing next year, but we certainly don't think it should go down in any material way.

This is a great product.

Our competitors are discounting as much as we can imagine them discounting.

We think, in many instances, they are not making money on high-speed data.

And we're still maintaining a very healthy share and our rollout is going great in our opinion.

Phone, I think phone is really the big news inside our company for 2005 and 2006.

Those of you who have followed us know that we try to limit the number of priorities the Company has to one or two key initiatives at a time so that we don't overload the system.

And in 2005 and in 2006, phone will be one of those very top priorities and I'll spend some more time going into phone in a second.

The last theme of the year, really is investment.

We're going to continue to invest to make sure our products are as competitive as possible.

And we believe those investments will pay off in 2005, but really pay off in 2006 and in 2007.

So let me now just zero in on the phone business which we call Comcast Digital Voice; our next major growth engine.

In a lot of ways, Comcast Digital Voice looks to us to be very similar to high-speed data.

And, in fact, the Comcast Digital Voice product is going to leverage the high-speed data infrastructure, the provisioning and the network, and the way we take care of the network and maintain and when we go into someone's home and set them up for Comcast Digital Voice, they'll be using a cable modem.

So the business has some technical and operational similarities to high-speed data.

We also think, interestingly, that the growth trajectory, which I will get to, is similar to high-speed data and in some ways faster and more attractive.

We've been clear, I think, for the last two or three years that our strategy with phone was to contain the phone business that we inherited from AT&T, which was losing a couple hundred million dollars a year, not expand it, make it more profitable, learn about phone and get ready for VoIP; and we have done that.

But while we weren't expanding the phone business, we were learning a lot about it and improving it and building a solid foundation for the future.

People, I think, lose sight of the fact that we-- we have 1.2 million phone customers.

We have been and still are, or maybe we're tied now with Cox, the largest cable phone provider in the country.

We have about 1,000 people working on our phone business.

We're in 18 different markets.

Have a very experienced management team in Philadelphia and in the field, and we -- we are going to be able to leverage this as we rollout our IP phone business.

We-- we are a registered CLEC in many, many states.

We've been doing interconnection and we have now spent the resources necessary to have single billing, a full back office that's going to allow us to do a lot of different things and the recently announced addition of a fiber backbone will help as well.

So we have this foundation and we now think it's time to start to accelerate our phone business.

First of all, the AT&T integration is done, and we think the video business is in very, very good shape, and that was really where our focus was over the last couple of years.

So it is -- it is now -- it is now time and we're able to focus on phone.

Our approach is going to be to lead with a very simple, all-you-can-eat $39.95 product that has local and long distance.

I want to make it clear that this is not what-- what others refer to when they refer to VoIP.

You know when you see the Vonages of the world and people who are not facilities-based providers, this is very different.

We're going to be providing quality of service, 911, whole-house wiring.

This is the kind of phone product that, if you have a family and you want to know the phone works, you're going to want to have.

This is not -- this is not a VoIP product.

We're actually trying to make sure that we never use VoIP in any of our advertising and communication to customers because we don't want to be confused with a product that may or may not work.

We are also not going to be competing solely on the basis of price or even primarily on the basis of price.

Although we do think our pricing will be attractive.

We really want to compete on new features, such as unified messaging and video phone and special ring tones that you currently can only get from cellular providers to make sure that our phone product is a better product.

And, in fact, if you think of VoIP being-- the worst product or the move unreliable phone product and circuit switch being better than VoIP, we want to be better than circuit switch and VoIP.

We want to take our phone product to the next level and believe that that's the best way for us to compete.

As we look at how we do that, I think one very important strategic decision we made is to not outsource the plumbing of our phone business.

And this was made easier by the fact that we had a big phone business, that we inherited from AT&T broadband.

But doing it inhouse means that we can do more converged product development, because when you do it out of house, it's very hard to get products which blend high-speed data or video with the phone business.

And also doing it inhouse should mean that we have better quality and a better cost structure on which to build this business over time.

The second sort of strategic decision we-- we made, as we were looking at the launch is that we wanted to launch methodically.

So you'll see us be very focused on -- in 2005 in expanding into new markets, but not very focused on units.

We're not telling our people we want to have x number of units.

What we're telling our people is we want to be launched, we want to be launched in a methodical way, we want to have very high quality service.

And we -- we will accelerate in terms of units in 2006 and 2007, but the key is to get launched in the right way and be strategic with how we get this business rolling.

Today we're in three markets, the Philadelphia suburbs, Indianapolis, and Springfield, Massachusetts, and we'll be adding 17 new markets in the next 6 to 12 months, including some very large ones, Boston, Chicago, the majority of Philadelphia.

So we are going to be very much active in terms of getting all of these major markets launched and we should be in over 15 million homes by the end of this year, out of our 40 million homes; and in, as we've said before, in virtually all of the homes that we pass by the end of next year.

In terms of units and, again, this is not a focus of ours but just because you have to rack up the numbers.

We think we'll add 200, 250,000 IP phone units during the year, and we should churn off around 100 or 150,000 circuit switch phone units.

So that the total net adds for phone will go up 100 or 150,000 units and, again, these are very rough because these rollouts are just starting.

We are really confident that IP phone is a growth opportunity and we're treating it as such and a growth opportunity that can be comparable to high-speed data.

If you look at the chart that has the -- the growth curves for high-speed data and phone, what you'll see is that phone achieves the same kind of penetration, 8 million subscribers or 20 percent penetration, but it does it faster than high-speed data has.

And the reason why we think that's going to happen is partly because we've rolled out high-speed data and have that as a platform, but also because for this rollout, our plant is fully rebuilt.

All 40 million homes that we pass, or virtually all, already have phones.

Not every home in America has a computer, and so there's a larger addressable universe.

As we roll out and go after these 8 million subscribers, we're targeting an ARPU of about $40 and we think the margins should be consistent with our margins, in other words around 40 percent.

So this will be a very substantial business for us and we look forward to it being the next big growth engine as we continue to experience good growth with high-speed data and continue to see our video business move along nicely.

The 20 percent penetration number, interestingly, when we merged with AT&T broadband, they had many markets that had achieved 20 percent penetration in just a couple of years.

And when you look at what Cox, and more recently Cablevision, and others have done in this business, we think the 20 percent penetration is very reasonable within a five-year time period.

I'd like to talk a little bit now about the kind of investments we've been making and you're going to see us make in 2005 and beyond in our business to continue the growth trend that we've been on.

Essentially we're trying to make each product line better and each product line different than our competition.

And some of the examples that I could list that you will-- you have seen us make and that are flowing through our business, would include: the TV Guide joint venture, more recently buying Liberate, which is going to help us with interactive television, the national IP backbone, the films that's we are getting from MGM and Sony that will be showing on video ON DEMAND.

And, combined with IP phone, these investments in 2005 will cost about 150 to $200 million; in other words, a couple points of cash flow.

So if we had wanted to, and all we were really looking at is 2005, we could have had-- or projected cash flow growth in excess of 14 percent as opposed to the 12 percent that John mentioned.

Our feeling is that these are investments that are going to pay off in the future and-- and we need to-- we need to keep making them.

And some of these, you'll see, will flip quite quickly.

IP phone is about a $50 million OCF investment in 2005 and, as John mentioned 200 to 250 million in terms of capital.

We would anticipate IP phone flipping from minus 50 to maybe plus 50 in '06.

So you'll see some of these investments come right back to us in the future.

And then others are just part of making our business more competitive and we'll continue to make those.

And finding that right balance is really more of an art than a science, but we're very pleased that we can make these kind of investments and still have the kind of 12 percent plus growth rate and still have the kind of, sort of, more of the same profile with high-speed data and digital and all of our new RGUs that we have.

So we feel like we're in a really good spot.

I think you're seeing in our results a cable company that -- that is in the right place and moving in the right direction and we look forward to 2005 and beyond as more of the same.

John?

Let's toss to Brian for closing comment.

Okay, before we get to questions, let me -- first of all that was a great presentation, I think, for both you guys in laying out the strategy.

It -- it summarizes, really, our bullishness on cable, which there's not much that I can say about Adelphia, other than that it, hopefully represents our desire to -- our belief in the cable business future.

Generally speaking, on acquisitions what we've said in cable is that -- that we hope the deals can be creative and accretive, that we don't feel compelled, but that they're opportunities, if they come along, we're always going look at them.

And I think this certainly may have those characteristics and, beyond that, there's nothing you can really specifically say that hasn't already been speculated about.

So one of our goals has been to continually get out of passive positions, and simplify the balance sheet.

We were continually getting the right movement-- the right direction movement from the rating agencies and from creditors and I think, again, in the last couple years, a lot of great work has been done by the treasury group and the acquisitions department in taking passive positions and turning them into operating assets.

And certainly this may be another opportunity to do that.

With that, operator, we'll go to your questions.

[Operator Instructions] Craig Moffett, Sanford Bernstein.

I know you're limited in what you can say on Adelphia, but I'm wondering if you could just give us a little bit of color on what the relationship is between Comcast and Time Warner, and what your objectives are at least?

Is this primarily aimed at unwinding your ownership stake in Time Warner Cable?

Is this aimed primarily at getting bigger?

And are you attributing cash or stock, or is that coming from Time Warner?

Any of that kind of color would be helpful.

I know but-- all-- that's why I wanted to preempt that question.

Our relationship with Time Warner continues to be excellent.

I'm sure that's not what you meant by your question.

But I -- I don't think we can go into any of the details of the proposal.

But, generally, we have -- as you know, we are under an agreement with the FCC to dispose of the 21 percent, approximate, ownership stake in Time Warner Cable that we have.

So it is, you know, not unreasonable to -- you know to try to find a series of transactions that would allow us to dispose of that transaction and rather than receive, you know, anything -- The primary thing we'd like to do is grow our operating businesses in a responsible way that, given our operating efficiencies and cost benefits, we'd actually make any acquisition accretive or fair for all of our shareholders.

But I think that -- you know, we're not necessarily out there just trying to get bigger for bigger's sake.

I think this is an opportunity with clusters to look at properties that are attractive, that are underperforming, and that's what we just did with AT&T and we had tremendous success.

But this is also, you know complicated and complex, because of bankruptcy and, really at that point, I think I -- that's all we can say.

We'll just have to stay tuned.

Okay.

I wonder if I could just ask a follow-up question, then, that's on an operating topic.

Steve, with the rollout of voice over IP, I know you're trying to keep your initiatives to a strategic minimum but, is there a specific effort to target the small and medium business opportunity in your footprint?

And I wonder if you could talk about that a little bit?

Well, we-- we do a good business in terms of high-speed data to small and medium-sized businesses.

But if your question is, are we -- are we going after the commercial market for phone and high-speed data in a very aggressive way, the answer is no, not yet.

And that may be the next big initiative after IP phone, but sort of in an effort to try to prioritize, we've been going after that market aggressively for high-speed data, but not high-speed data plus phone.

Jessica Reif Cohen, Merrill Lynch.

I'm going to go back to a topic that you brought up, John, and, well, Brian also, the uses of free cash flow.

We'll leave Adelphia aside, whether you're going to put cash in or not, but how much -- or how intent are you on investing in cable networks, whether they are start-up networks, you have access to the MGM/Sony product, the Rainbow networks may or may not become available.

And then could you contrast that or prioritize versus share buyback and possibly a dividend?

Well, I think that it's been a stated goal now that you've got to create the free cash flow.

So last year we did sell and we were able to return most of it, Jessica, one way or the other, to -- in the form of equity purchases and, as John talked about.

The highest priority is to make the business more competitive and what Steve was talking about, the end of his talk and my examples, I -- I think, you know, we're in this for many, many years and we're long term investors.

So that's the premier focus.

I believe there's going to be a lot of free cash left over, and you know in prudence, we're waiting to see how the whole Adelphia thing turns out, make sure we get off to a good start and I think we'll have more to talk about throughout the year on how we plan to use that free cash flow.

But conceptually, you know, we -- we have paid dividends in the past, We have done stock buybacks in the past, we have redeemed debt.

We want to continually have a strong balance sheet, which keeps us in an enviable position.

I don't know how to answer that, other than to say that our track record, I think, is spoken pretty volumed.

Its only been at times when we weren't returning money to shareholders like that is when we were in a massive rebuild mode, which we just don't anticipate happening again.

Let me just underscore the point that one of the beauties of some of the things that we're now doing is -- and I know you remember this, Jessica.

I think the step chart we used to put up that after you make that first step, the foundation investment and the rebuild, that all the future steps are going to basically be success-based capital.

And we're more confident with that model now than really any time in the last several years.

And the digital simulcast project over a number of years is going to allow us to reclaim a lot of analog bandwidth.

It won't happen overnight.

It won't happen, you know, tomorrow; but there is a path to reclaiming a majority of our bandwidth which is kind of amazing, without another rebuild.

So I think this conversation of uses of free cash is one that's a high-class conversation that's going to be going on for a long time.

Would you just comment on the cable network strategy?

Yes.

Cable networks continue to be an area that we have had great success with.

We are enhancing our management in the next coming weeks and months to really have -- take advantage of some of the great deal making that Amy Vance and her team have done in the last couple years.

We now have Golf Channel and E! and Style and OLN and G4 and TV 1 and then we have the Sony channels and with the kids channel, international channel, as well as several Comcast SportsNet channels.

So we -- we, you know, don't see anything for sale, hasn't been for a while.

So therefore building, which has been our preferred methodology; so, you know, I think there's going to be an opportunity, whether in partnership with others, or in concert with entrepreneurs, or with people who -- like Sony that have-- and MGM that have content rights.

People, I think, want to work with Comcast, whether it's technology or content companies.

I think there's been a -- you know, a kind of settling in, post the AT&T deal, where we now have our focus on how to expand and incubate value for shareholders.

And I think that's what Steve's talking about operationally and I think on the content side the same would be true.

Niraj Gupta, Citigroup Smith Barney.

I guess a question for Steve and Brian, just on the topic of differentiation and leveraging the technological superior platform of cable.

I know we're in the early stages of VOD advertising and your plain old vanilla advertising business is going quite nicely the last couple of years.

But just on VOD ads, can you talk about where you see that opportunity evolving over time given the obvious ability to track performance-based metrics?

Well, I think broadly speaking it is a -- it is a big opportunity and something that we are uniquely able to do.

If you think about it, a broadcast television station or a radio station has no way of targeting individual homes and has no way of inserting ads in specific ON DEMAND programming.

And we do.

Every single VOD session and next year, as Brian mentioned, we'll have more than a billion VOD sessions.

Every single one of those sessions is an opportunity to insert an ad.

And the same thing is true with DVR.

So as the world goes to more time shifting, I think Comcast has more ability to participate in that than anyone.

That having been said, right now VOD advertising is a very small part of our business.

We don't have the software engines to dynamically insert ads in DVRs or VOD right now.

All we can do is go and sell long form ads and we do that, I think we do about 40-- $40 million a year of that type of advertising.

But if you go out to '06, '07, '08, as the world moves towards time-shifted television consumption, I think we're going to have a very nice business there.

I just want to add, I think that if you look how long it took for the Internet to -- with all the, you know, rage of the Internet, to where we are today, where maybe the fastest growing company with revenue is Google, because there is a one-to-one relationship business.

What we are building is a platform that, over time, is going to be in the one-to-one relationship business with our customers.

And, you know, it takes a while until that change occurs but we're putting in place all the platform and all the technology to try to be able to offer content companies a one-to-one relationship with the consumer.

And eventually we'll be able to take that to an advertiser but I agre with Steve, that's years away.

Vijay Jayant, Lehman Brothers.

Can you just talk about the trend in churn over the last couple of quarters, especially, you know, you've given enhanced products which should be a key differentiator.

Has that improved, John, especially on the video product?

We've seen a 20 to 30 percent reduction in those homes that have VOD, there's a reduction in churn rates that were otherwise there.

And in virtually every category, across the board, we're seeing slight improvements in churn.

So it seems to be very positive.

And the exciting thing for us is the notion of taking VOD and giving it to more than just the 40 percent of our customers that currently have digital.

And if we can get the low-cost digital settop boxes, which I think are going to start arriving this year, into more homes and get this VOD product into more homes; we think it's going to have a very dramatic impact on the attractiveness of our product and our competitive stature.

Tuna Amobi, Standard & Poor's Equities.

As I look at the guidance for 2.5 million RGUs, I'm trying to dissect that, given the comments about basic subscribers being flat and -- I know you didn't give guidance on digital, but you also said that phone would probably be up 100,000, if I heard Steve correctly.

So that leaves me, you know, trying to figure out, you know, high-speed data and digital.

If we assume that digital, would be -- would come in at 1.2 to 1.3 million, which I think would be somewhat aggressive, that leaves me with about 1.3 to 1.4 million in high-speed data which, I think, would be a slowdown from where you came in, in 2004.

So I guess the logical question, and that might be to Steve, would be how does that reconcile to your expectation that high-speed data would continue to grow in 2005, given the fact that you did 1.7 million in '04?

John won't let me answer that question.

He's going to answer it for you.

I think what you're essentially asking us to do is to break the whole thing down into individual components, but let me emphasize a couple of things here.

First of all we say on the slide and in the press release, that we will generate at least 2.5 million units for 2005.

So I think in almost every respect, you're going to see more of the same in 2005, as you saw in 2004.

In my commentary, I suggested that basic subscribers will be flat at around the 21.5 million and Steve gave you more color on the phone unit numbers for the year.

So as we go throughout 2005, on a quarterly basis we'll break down each one of these for you.

But I think take a look-- or, you know, the thing to really focus on is the at least prefix that we've got there and the more of the same characterization that we've put around the RGU guidance.

I think that's all we can say for now.

Raymond Katz, Bear Stearns.

I think, Brian, you mentioned that, over the next three to five years, you're going to be looking for near double-digit revenue growth.

In 2004 you did about 11.5 percent, I think you said, John, without phone growth -- without the phone business in there.

So if you're rolling out VoIP over the next three to five years, could you try and deconstruct that revenue growth and tell us why it looks like it's slowing from '04 with the new product?

Well, I -- listen, we're not in the -- you know, I think around 10 percent is what I -- if I didn't say it , that's what I said-- I think it -- publicly before so you maybe were attacking the words exactly.

But I mean basically we think cash flow will grow faster and is clearly, you know, the kind of a double digits which drives free cash flow.

I think it's more to be indicative of a very healthy business, not dependent on any one product for success.

As Steve said, at some point, Ray, high-speed data has got to slow down.

That was the last question as well.

We don't know.

We're not in the prediction business.

But we're already planning the next wave of products.

And exactly how that gets timed and scaled, you know, some folks live quarter-to-quarter.

If you're-- planning a multi-year strategy, which is your question.

We're talking about a very healthy business that I think would be the envy of many to be able to say, I've got, you know, a video product that's robust.

I've got a data product that's robust, and now I'm going to have a new phone product, and I'm working on, you know, more things beyond that.

That you don't have a huge burden of capital, growing but, in fact, reducing and that it's success-based.

And that's going to drive a 20 to 30 percent growth in free cash flow which is a sustainable, we think, growth rate for several years.

So I didn't mean to send any negative signals whatsoever on revenue.

It's just the pie keeps getting bigger, so just the pure math of it catches up to you.

Steve, you want to add anything there?

Well just that, Ray, when we do our long-range planning and there's a side of this, that I'm sure is boring; but it really looks like the next five years are going to look a lot like the last five.

And if you take out all the AT&T sort of improving their margins from 20 to 40 percent, and just look at the Comcast systems; obviously it's going to come from different places.

IP phone is going to replace high-speed data as the real growth engine.

But I think the revenue and the operating cash flow growth characteristics of the business in the next five years, our best guess, are going to be very similar to what they've been in the last five.

Douglas Shapiro, Bank of America Securities.

Arguably the DBS have a big advantage because they control their settop design and you guys have systematically moved to take control of a lot of things that were formerly outsourced -- Gemstar, Level 3, those kinds of things--

Can you speak up a little bit please?

What I was saying is, you know, you systematically moved to take control of a lot of things that have formally been outsourced and the DBS guys arguably have an advantage in controlling their settop design.

I was just wondering if you could talk about the prognosis for taking over greater control of the settop?

And I can't resist a follow-on.

If you could just quickly tell us what the incremental cost of a DVR box is right now and where you see that going?

Sorry, can't do that.

Let me-- let me say that in an all digital world, it is a lot easier for us to-- to help design and be in control of their design, much like a satellite system is, as you referenced.

So I think that's the direction we're headed.

We are expanding the expertise in the Company.

In addition to Dave Fellows and Mark Covich, in the last year and a half or so we've added Steve Silva and he's been growing his group.

And so, I think you'll see real advancement in the year ahead, where we have a much more involvement in -- in the design, so that we can begin to attack the features that we think our customers want.

In terms of DVR boxes, you know you've got some that have -- most right now have high def, we're doing DVR boxes without high def that are becoming -- I don't know what we've said in terms of an incremental, but I think the industry's basically said, what, a couple hundred dollars?

Yes, a little bit more than a couple hundred dollars and that's going to change because, as we go to an all digital delivery, means we're not going to have to have two analog turners-- tuners in DVR boxes.

So that number will shrink over time.

But just to sort of zero in, we sent out an RFP months ago for what we call the next generation network architecture.

And that process will -- will allow us to have very advanced, very low-cost settop boxes, and in the interim, this year, we're going have a new generation of very low-cost settop boxes; and we're going to start rolling those out mid-year to allow us to give a VOD all-digital, great guide experience to more people.

So, I think your premise is right.

We're getting much more involved in designing boxes, designing the architecture of the next five or ten years and, you know, that's very consistent with our strategy regarding the guide, regarding VOD and everything else.

And just to be clear, that is a bad name-- I think for any technology, just because it has architecture in there, that does not mean changing any of the network.

No.

This is the settop box.

Yes, just the settop box.

So I would just end with saying I'm very pleased, actually how far and how fast we've come.

And we are viewing ourselves, that's a job we want.

We've talked to our incumbent vendors, they're very comfortable with that and they know their customer is getting what they want.

And we're speaking as an industry, at least for our part of the industry, with a more of a collective voice.

As compared to a couple years ago, where AT&T may have wanted one thing, MediaOne wanted something else, and Comcast wanted yet again something else.

All of that is now speaking with one voice.

So I think everyone's happy with that part of it, and I think, as Steve said, you're going to see some real tangible results.

Kathy Styponias, Prudential.

I was wondering if any of you can comment on the IP-based-- video IP-based strategy that SBC is deploying?

It sounds like from-- at least from the regulator's perspective-- at FCC, in particular, the rhetoric out of them suggests that this is something that they'd be in favor of.

And, I guess the question is: One, what do you think the chances of success are with their deploying that at least on a local level, what kind of fight are they going to get from local authorities?

And, two, if-- given the fact that box costs could really drop dramatically, at least according to what Microsoft and SBC are saying an IP-based platform, is that something that the cable industry or Comcast, in particular, might look to do as well?

And if so, what kind of costs or challenges would that create?

Well, look, it's a new area, and I think we'll be all watching it and having more to say as it goes from laboratory to somewhere.

But we, I think, and the industry has pretty clearly said that if we have to get a local franchise, that video is video, and we should have to comply with the -- they should have to get local franchises and have all the, you know, franchise fees, MPEG and access requirements and build out requirements that a cable company does.

But beyond that, as a technology matter, you know, technologies are going to keep advancing and one of the things that I think the digital simulcast shows is that you can evolve your technology.

It's not all or none.

And that, you know, I anticipate us -- we do some IP video transport now.

But it's not, today, a technology that we're massively deploying because it's not stable and working yet and it's something we're certainly going to, you know, look at and if the technology evolves that way, there will be advances in features.

Our customers are going to have the best products.

We have the relationship with the consumer.

And we've got to make sure the consumer continues to enjoy all the possible benefits of new technology.

That said, there's a stability and a 50-year history of the MPEG world that, you know, we shouldn't be so quick to abandon because people don't want to reboot the TV all the time.

So, you know, we're going to find that fine line as the new technology comes in and I think the same thing has been true with IP phones.

It's very different to do voice as compared to video and it's taken a long time.

We like the technology, as a new provider but it's taken us years to get to the point that we were ready to scale it up.

So what we're not doing is stopping the innovation, but I don't think there's much we're doing that wouldn't -- wouldn't, you know, allow us to evolve if there's a new technology.

Chris Hussey, Goldman Sachs.

A quick question, if I could, just to sum up on the operating leverage inherent in the business model.

When you think about your 2004, you grew a little bit better than 10 percent, you had a little bit better than 17 percent EBITDA growth.

And then looking out to 2005, you're looking for 10 percent revenue.

But it's down to 12 percent EBITDA growth.

You explained a little bit of it on investments; although I imagine there were some investments being made in '04 as well.

What are the other drivers that are bringing the operating leverage down a little bit?

Well, I think first of all, we -- we had the --the kind of the windfall of improving AT&T's operating margins that may be makes 10 to 17 look greater than it would in a steady state be.

If you look back a year before, you'll see a 10 or 11 that was a 25, 27;

I don't remember off the top of my head.

So there's an improving margin and we've said that we were able to do most of that in two years.

We originally thought it would take at least three years to just get two-thirds of it.

So we're a victim of our success in that regard.

And then there's the question, as Steve said, how much do you want to grow this year, versus grow for a sustainable long term and how -- how-- you know what are you investing?

So if we didn't go into the digital phone business we'd grow a little faster, if we were not making investments in long-term payout products like video-on-demand and DVR, we could make a little more.

We could just-- you know, and so that's the balance that I think he was trying to say.

But in our minds, taking a 10 percent revenue and turning it into 12 or so or month of EBITDA, and then converting that to 20 to 30 percent free cash flow is a great thing, and we're -- we're very bullish that that's a -- that's the right way to drive this car now, and that's something you revisit all the time.

Thanks, Chris and thank you, everyone.

We have no time for further questions.

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