康卡斯特 (CMCSA) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Comcast to host, second quarter 2005 earnings call. [OPERATOR INSTRUCTIONS] 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.

Thank you, operator and welcome, everybody, to our second quarter earnings call.

First of all, I would like to refer everybody to our investors slides on our website, slide number two, contains our Safe Harbor disclaimer and I would like to remind you that this conference call may include forward-looking statements, subject to certain risks and uncertainties.

On this call we will refer to certain non-GAAP financial measures.

Please refer to our investors relations website for reconciliation of non-GAAP financial measures to GAAP.

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

Thank you, John, and good morning.

We are hosting what we believe is a very solid second quarter with revenue growth of 10.5%, and operating cash flow of 13.2%.

This is the 20th consecutive quarter where we've reported double digit operating cash flow growth.

This kind of consistently strong performance has allowed us to have double digit revenue and cash flow growth, and year-to-date free cash flow growth above 20%.

Demonstrating the strength of our businesses in which we have, as we've said before, we believe these kind of results are sustainable where we can have double digit revenue, double digit cash flow, and 20% or more free cash flow growth for the next several years.

Obviously, even this year, we are doing better than that.

We are focused on new products, and that's how we are getting the results.

We are making each of our products better.

Our strategy of product innovation and differentiation is really working.

In the first half of the year, we added 1.1 million new revenue-generating units, more than we did in the first half of last year.

We are not standing still.

We enhanced our products continuously, in video, tremendous success with our digital and On Demand offerings.

On Demand now has some 3500 program choices, 112 million views in June, a 10 million increase in just three months.

Our goal of over 1 billion IPTV or VOD streams in 2005 is now quite certain.

We now are nearing 2 million HDTV and DVR boxes.

We have added 1.3 million of the 2 million in the last year alone.

And as you will hear a little bit later, we are beginning to roll out our enhanced basic 100% all digital service.

In high-speed Internet, we have the same strategy.

Differentiation and innovation.

We just recently increased our speed to what we believe is the market leading 6 megabits and with our higher speed service 8 megabits and we are continuously adding valuable enhancements and features.

Comcast digital voice and a lot of news on that happening around the country, and in today's "Wall Street Journal," are on track to really ramp up in the second half of the year.

I know Steve will talk some about that.

We are on track to meet all of the goals and guidances around the digital voice rollout that we previously stated.

We've already made the network investment.

Our networks are fiber rich, we are making new investments now in both content and technology to maintain the lead.

In the last six months, and in some cases, come into a new business with a competitive advantage.

In the last six months we announced or completed seven transactions, Motorola, Pace, TiVo, Liberate, MetaTV, MGM/Sony, and STARZ Encore.

All of these transactions have one thing in common.

They enhance the video data and integrated products for cross platform capabilities that we currently have.

Our products are the best in the market and it's our goal to extend that competitive advantage.

We are providing more digital services to more customers so we can provide more interactivity, are constantly improving consumer friendly experience with the guide, more programming choices with movies, most of any MSO or any competitive video offering in On Demand to more customers.

So we are quite pleased with the numbers and our positioning and with that, let me pass it on to John.

Thanks, Brian.

If you'd turn to the next slide on our website, slide number four, let's review, first of all, the consolidated numbers.

Consolidated revenue grew 10.5% to almost 5.6 billion, while consolidated operating cash flow grew 13.2% to 2.2billion.

This is our 20th consecutive quarter of operating cash flow growth above 11%.

Year-to-date revenue and operating cash flow growth of 9.9% and 15% respectively are in line with our guidance and so we're reaffirming our full year 2005 guidance.

Cable revenue for the quarter grew 10.1% to 5.3 billion, with cable operating cash flow increasing 13.2%, to 2.2 billion.

I will review the drivers of cable revenues and cash flows in the following slides.

Content revenue increased 18% to 234 million, and cash flow increased 25% to 97 million.

Results in the contents division, were driven by growth at The Golf Channel and E-Networks, by increases in advertising revenues across all channels, and by increased distribution across all of the networks as well.

The Company reported consolidated net income of 430 million or $0.19 a share, a 58% increase from $0.12 a share in the same quarter of 2004.

On the next slide, we break down the components of cable revenue.

Let's review the drivers of the 10.1% growth for the quarter.

Total video revenue increased 192 million or 5.9%, to 3.4 billion.

Growth was driven by higher monthly revenue per basic subscriber and a 13% increase in the number of digital customers.

As expected, basic customers or basic subscribers were essentially unchanged from a year ago at 21.4 million.

In a seasonally slow quarter, basic subscribers declined 77,000 or 0.2% from first quarter of this year.

This seasonal decline is 20% less than the 96,000 loss we reported in the second quarter last year.

We added 284,000 new digital customers this quarter, a 38% increase over last year's digital net adds.

With more than 9.1 million digital customers, digital cable penetration now reaches 42.6% of our basic customers.

Digital net adds are also driven in part by continued strong demand for our High-Def and DVR products that Brian described.

Recently we also began rolling out our enhanced basic service of 100% digital offerings in several markets.

We also continued to see great results in our pay per view category, driven by Comcast On Demand.

Pay per view revenue increased 24%, this is the seventh consecutive quarter of pay per view revenue growth driven by our On Demand product.

High-speed data revenues increased almost 29% to 982 million, reflecting growth in subscribers and strong average revenue per subscriber of $43.34.

This is a $0.53 sequential increase and roughly consistent with our second quarter ARPU of 43.50 from last year.

We ended the second quarter with more than 7.7 million high-speed data customers, adding more than 297,000 in the quarter.

Year-to-date net adds for high-speed data are essentially the same as last year's at just north of 700,000.

We added nearly 15,000 Comcast digital voice customers in the second quarter, as we rolled out our service to several new markets late in the quarter.

We are on track with CDV rollouts and expect CDV net adds to accelerate in the second half and you'll hear much more about this from Steve in his comments that follow.

Advertising revenue grew 9.9% in the quarter to 362 million, reflecting a 6.5% growth in local and 16.7% growth in regional national advertising.

This is as a result of our continued success of our regional Internet -- sorry, interconnect strategy.

Advertising revenue growth was slightly offset by a decline in political advertising when compared to the prior year.

Growth in the second half of 2005 will reflect a significant decline in political advertising compared with last year.

Moving on to the next slide, we have already covered revenue in -- but in slide number six, we put operating cash flow and the margin stories together.

Cable operating cash flow grew 13.2% to 2.2 billion in the quarter, an increase from 1.9 billion last year.

We achieved a notable benchmark in the second quarter of this year with cable operating cash flow margin above 40%.

Cable OCF margin increased 110 basis points year-over-year to 40.8%, we are pleased to be reporting this margin, which is the highest in two and a half years and, in fact, full year-to-date cash flow margins for cable has also reached 40%.

Increased margins and operating cash flow result from higher top line growth, as well as continuing reductions in rate of growth and certain expenses.

One example of these lower expenses is in the category of high-speed data and phone network costs.

Monthly data network costs are down almost 30% which is one of the many contributors to our overall cable margin.

On the next slide, number 7, we highlight the capital expenditures year-over-year, and year-to-date.

Capital expenditures for the quarter were 936 million, up marginally from the second quarter in 2004.

We expect lower CapEx in the second half of this year, and are reaffirming our guidance for CapEx for the year at 3.2 to 3.3 billion.

The increase in capital expenditures for the second quarter, as for the first quarter of this year, reflects the purchase of digital set-top boxes to meet customer demand for High-Def, and DVR service, as well as our rollout of our new enhanced basic service.

In addition, and as outlined before, and as Steve will review again today, we're investing in a number of network projects.

Digital simulcast, integrated provisioning, and integrated service platform, where most of the capital spend occurred in the first half of this year, and will decline in the second half of this year.

We show this project-related capital of 163 million year-to-date that is a subset of scalable infrastructure category separately on the bar chart on slide number seven.

This slide also shows the dramatic reduction in upgrade capital which is down over $200 million or 77% to $67 million for the quarter.

Roughly 75% of our total CapEx is now variable; that is, an increase from the 50% level that we were at in the second quarter of last year.

On slide number eight, we review our free cash flow.

We generated $422 million of free cash flow in the second quarter.

As we discussed in our first quarter call, free cash flow for the second quarter was impacted by the timing of tax payments.

As you can see, we paid 97% of year-to-date taxes in the second quarter.

We expect to pay approximately $1 billion in cash taxes this year, and so our run rate tax payments for the remaining two quarters of this year will be approximately $250 million a quarter.

Year-to-date free cash flow of $1.1 billion is up almost 28% because of the anticipated slowdown in the second half, capital expenditures we are reaffirming our free cash flow guidance for the year with growth anticipated at 35 to 45%.

As shown in slide number 9, we continue to balance capital deployment between return of capital to shareholders, and investment for growth.

In the second quarter we purchased 10.5 million shares, at a cost of about $334 million.

Since inception 18 months ago of our stock repurchase program, we have repurchased almost 68 million shares for total repurchase investment of almost $2 billion.

We have approximately $2 billion of a remaining stock repurchase capacity under this program.

In addition to these repurchases, we have also settled for cash, debt securities that are otherwise exchangeable into Comcast stock.

As reported in our fourth quarter call last year, we had settled as of December 31, 2004, 609 million of Comcast exchangeables for cash.

By the end of this month, we will settle our last remaining Comcast exchangeable security for approximately $250 million.

Combined with our repurchase program, this brings our total investment in our stock over the past 18 months to approximately $2.85 billion.

We are balancing this repurchase program with attractive high return investments in the content and technology areas as described by Brian.

As shown on slide number 7 -- I'm sorry, slide number 9, these investments have totaled $740 million year-to-date.

These investments enhance our products and position us for the future.

With that, let me pass to Steve for operational review.

Thanks, John.

The second quarter was another solid one in what is shaping up to be a very good year.

We had strong operating cash flow growth and our margin is now comfortably over 40% and I think to stay.

The second quarter is a seasonally weak one and we usually have units that are lower than the first quarter and this year was no exception as students and people who live in the south leave us.

But our units were really on par with last year, basic was a little higher, high-speed data net adds were a little lower.

We also made very good progress with a number of key initiatives and these are listed on slide 10.

These projects required investments of capital and time in the first half, which will have -- which will bear fruit in the future.

Let me highlight five of these key initiatives.

The first one is a project that we call Bedrock which is a new common provisioning platform.

We had two software platforms at the close of the AT&T deal, and have now converted 100% of the Company as of about 10 days ago to this new platform called Bedrock.

Bedrock allows to us provision voice, video, and data as well as converge services with the same software with a monumental effort taking over 7 million high-speed data customers and changing the way that we provision IP, phone, and video and making this shift and fortunately it is now behind us.

The second key project is simulcast.

Simulcast allows us to offer all digital service by simulcasting our analog signals.

This is something that we had never done, and it's really a key part of our video strategy, because it allows us to offer all digital quality, lower cost set-top boxes, reduced theft, and eventually open the door for VOD to almost all or all of our customers.

There were a lot of hurdles such as digital add insertion and just making sure that the digital picture quality was up to snuff.

But we're now well on our way to converting major markets.

In fact, we have converted all of Philadelphia to all digital and in the next two or three months, you are going to see a lot of additional markets roll on stream.

Our plan is to have three quarters of the markets converted to all digital by the end of this year.

Once a market has simulcast in place, we then start rolling out inexpensive set-top boxes, which allows to us raise our digital penetration and give more people VOD.

Based on all of our experience so far, we think this will fundamentally change the competitive dynamic with satellite, because digital customers with VOD have a superior product and a much lower propensity to churn.

The third project I would like to highlight is the STARZ Encore deal that we did on June 28.

We think this is one of our most creative and important programming deals ever.

Those of you who follow us closely know that we built our free Video On Demand model on content from cable channels and premium channels.

To date we've had some free movies but relatively few.

The STARZ Encore deal allow us to offer 250 constantly refreshed movies each month at no charge to all of our digital customers.

And these are great movies.

We launch in October so let me give you a sense of some of the titles for that month so you can get a feel for the kind of quality we are going to be able to offer our customers. "Lord of the Rings." , "The Mighty Ducks," Good Morning Vietnam," "Ghostbusters," "Kindergarten Cops" plus a Woody Allen month with "Annie Hall," "Bananas," "Hannah and Her Sisters," and seven other titles and a Halloween theme month with a dozen top horror channels and on and on and on.

So this is really going to give our customers who use Video On Demand literally hundreds of dollars worth of value as they get these movies at no additional charge.

We keep adding to free Video On Demand.

The usage keeps climbing as Brian mentioned, but I think with these movies we're going to go to an entirely new level come this fall.

The fourth project is our increase in download speeds for our high-speed data business to 6 meg.

Our high-speed data business continues to motor along with very solid net adds and consistently good ARPU as you can see in the detailed numbers.

As we've said before, our strategy is to compete on value, not price, and to do that, we have increased download speeds to 6 meg.

We think this business is in great shape despite very dramatic promotional pricing from the RBOCs and look forward to a strong second half.

The fifth key project, which I would like to spend a little bit more time on is Comcast digital voice.

For the last couple of years, those of you who have listened to these calls have heard us really downplay the telephone business and we have done this for a variety of reasons.

When we took over AT&T Broadband, we decided the most important thing we could do was to concentrate on video and really fix the AT&T Broadband phone business financially, in effect putting a fence around it.

We also thought that we needed to get our plan and technology ready for IP phone.

And finally we didn't see much benefit in informing the RBOCs about our phone plans.

We are now in full deployment mode and you will hear from us increasingly in the months ahead talk about our telephone business.

The technology is ready to scale.

Our plant is ready to scale.

Our organization is ready to scale.

And we're about to start very dramatic growth in our footprint and units will obviously follow.

As of June 30, we had 1.6 million homes that were marketable for Comcast digital voice.

Today, we have roughly 3.5 million homes that are marketable for Comcast digital voice.

Market launches are going very smoothly, all according to the schedule we laid out which gets us to 15 million homes by the end of this year.

Some of the markets we have announced in -- already announced launches in include Boston, Hartford, Philadelphia, Portland, Chicago, Indianapolis, and Springfield, Massachusetts.

We do surveys after 60 and 90 days, and what we found is that over 90% of our customers are satisfied or very satisfied and intend to stay with us for the long term. 75 to 80% of our customers take all three services, which we think is very good news.

We're on target to hit 250,000 Comcast digital voice customers by the end of this year and should add at least 1 million customers in 2006.

In summary we had a very strong quarter financially, and thanks to investments in our platform and programming, are in great fighting shape for the future.

John.

Let me toss to Brian before we open for Q&A.

Steve, excellent summary of all the projects and how well we're doing.

Let me switch gears then and offer a few final observations on the Company's stock performance and its capitalization and expanding a bit on what John said.

Notwithstanding the continued strong performance of the business, cash flow is up 27% since the first quarter of 2004.

Our stock is down 6.3% over the same time period as compared to a 14% increase in the overall S&P 500.

While this is disappointing, it has given us the opportunity to repurchase about $2 billion of our shares over the past year and a half, at what we believe are attractive prices.

Plus more than 600 million in exchangeables that we settled for cash.

In fact, we have decided, as John said, to settle the last 250 million in exchangeables in effect buying back the stock for cash or not issuing the stock.

As John reported, we are reaffirming all of our previously issued guidance for 2005 including our guidance for consolidated free cash flow growth.

As we enjoy the benefits of continued free cash flow generation and growth, management and the Board will be reviewing all of our options for the most appropriate uses for those funds, including an ongoing program to return capital to our shareholders.

We continue to be excited about our growth and bullish about the business in general.

And with that why don't we go to Q&A.

Operator, if you could open up the Q&A please.

Thank you, sir. [OPERATOR INSTRUCTIONS] The first question is from Craig Moffett from Sanford Bernstein, please go ahead.

Yes, good morning.

I'm wondering if you could just talk a little bit about the seasonality pattern that you saw in high-speed data and whether, in fact, the -- what happened at the gross addition level.

Was this largely an issue of increased seasonal churn but growth additions were still strong?

And did you perceive any share shifts at the growth addition level relative to DSL?

And then a second question, could you just talk about what you expect to do in terms of your marketing timetable for Voice over IP in the second half in the markets where you've already deployed the service?

Let me start with Comcast digital voice.

Typically what we do is deploy and then for the first three months take commercial accounts but don't really push units and make sure that the operating processes and the quality is what it ought to be.

And then in the second three months we go -- using an automotive analogy, we go 30 or 40 miles an hours.

It really takes us six months when we launch a new market to really get to what I would call the normal ramp speed.

And as we go through those three phases, the marketing changes.

The marketing doesn't get fully aggressive until the third of those three trimesters.

In terms of the high-speed data business, what we are trying to do is stay in a sweet spot, and manage ARPU, multiplied by units and when we look at the second quarter, we are slightly below last year, but if you look at our ARPU, it was up versus the first quarter, and the easiest thing in the world for us to do is get more promotional and add more units and it's a constant fine tuning thing.

There's no question the RBOCs are more aggressive and when you see SBC go down to 14.95, that's an example of it.

But I think Verizon has been more aggressive as well.

But I don't think our feeling is there was a major share shift in the second quarter, nor does the fact that our business in the second quarter was slightly lower than it was last year, portend anything for the growth prospects of the business.

And any time we want to we can increase the promotional intensity.

Next question, please, operator.

The next question is from Raymond Katz from Bear Stearns.

Please go ahead.

Yes, I wonder if you could shed a little bit more light on your digital simulcast program.

You had mentioned that you are going to be fully digital in a number of markets by the end of the year.

I presume you mean the capability to digitally simulcast, and you did talk about low-cost box rollout?

Could you give us an idea as to the cost of these boxes, the functionality in these boxes and when you think you will have a market, any market that basically will be 100% digital for all of your customers?

Well, Ray, what we are doing, there's really two or three phases in the simulcast project.

The first is technically enabling the market to offer all digital customers all digital service.

And that's sort of the first phase and that's the phase that is complete in the Philadelphia area.

Right now, about 300,000 or so of our Philadelphia digital customers, when they turn on what used to be analog channels get digital picture quality.

In fact, the consumer response has been terrific.

The next phase is to take low-cost set top boxes, and we haven't precisely identified with the prices but it's well below $100 a box, and take the digital penetration from 40 or 45%, wherever it happens to be in that market up.

And we don't intend on doing this in an abrupt way but I think it's fair to say over the next two or three years, you are going to see digital penetration in these simulcast markets grow quite significantly.

That having been said, it could be a long time before we turn off analog channels and the beauty of this simulcast strategy is it allows us to get all the benefits of going digital and then over time determine when it's appropriate to take back the analog channels and gain the bandwidth.

Let me just add a point or two.

First of all, it's not yet been tested or clear how much consumer -- every consumer, let's say 40% are digital so 60% are not in today's numbers, want a digital box.

Satellite requires you to have a digital box on every customer.

So there are some homes where it may prove for a while to be a competitive advantage to not have a box.

But what Steve described earlier and I want to underscore, of how spectacular this STARZ Encore lineup is, the Encore lineup, if you get this box, you in theory may get "Lord of the Rings" for free.

If you get this box, you may get all the Woody Allen movies or whatever the lineup is that month plus, whatever other digital programming we would have in that customer's household.

So for the first time box may mean something more than just a channel changer.

It may mean additional goodies, the value that we are talking about not just price cuts.

And I think we think we have -- the real question you should be focused on, I think, is was your network flexible enough to have 15 High-Definition channels and what was once a two megabit high speed data service now doing 6 or 8 megabits and getting faster every year.

Can it do simulcast and not affect your channel lineup and not have to spend a lot of capital to do all that and still have room to grow and then you can dial up or dial down the digital box deployment at your discretion and at the customers' take rate.

And I think the answer is yes, we have done all of that and in some of the markets we will be deploying the low-end box in the second half of the year.

That has now begun.

Next question, please, operator.

Thank you.

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

Please go ahead.

Thanks.

I wanted to ask you about advertising.

You've clearly grown well above the broadcast industry and I'm wondering, it looks like you have taken share from broadcasting.

Do you think you are taking it from other areas, maybe cable networks.

And it sounded like you are warning a little bit about the second half.

How much was political in the second half of '04?

Well, I think it's -- it's hard to precisely determine where our growth is coming from.

We think 10% growth, 9.9% growth in this environment is great.

I think it comes from a lot of different places.

I think it comes from broadcast TV.

A little bit comes from radio and newspapers.

We have always said the beauty of our platform for an advertiser, and this will only get better once we go all digital and allow addressable advertising is that we've combined the effectiveness of television, and television spots always going to be better than radio or newspaper, with the targetability of direct mail or other targeted mediums.

So we really get the best of both worlds.

In terms of political, last year, for the year as a whole, I think it was a few percentage points around that number.

Yes.

Probably around 45 to 50, Jessica with the bulk of it into the second half of the year.

45 to 50 million on a base of a billion and change.

Yes.

And it's hard to tell what's going to happen in the second half of the year.

We have been moving along at 10%.

It may drop to 8% or thereabouts.

We are not sure.

But it's still, I think, going to be significantly higher than you are going to find in the broader television market.

Let me just say that we have been talking with advertisers.

We had a big meeting here yesterday on this subject.

Our strategy of bringing Internet-type functionality to your television, which is what On Demand is all about, and having the kind of features and viewer control is completely applicable to the advertising market and that is what I think we believe is going to continue this trend for a while, and if you look at the success of a company like Google which is able to take and give an advertiser exactly the customer they want, the goal here, to see if we can do it, is to see if we can't deliver that same experience but with a better end product which is a TV commercial, not just a link.

Thanks.

Next question, please, operator.

Thank you.

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

Two things, John, you guys continue to run a working capital deficit.

I was just wondering if you could talk about how long we should continue to expect that going forward.

And then secondly, Brian, just regarding your final comments, maybe it's wishful thinking on my part but it sounded like you were alluding to doing something more dramatic than the recent share repurchase activity.

I was just wondering if you would ever consider something like a self-tender of a larger size.

Thanks.

With respect to the working capital, Doug, if you look at footnote 3 of table 4, you see that the AT&T-related cash outflows year-to-date are $383 million.

Of that 383 million, 220 of it relates to AT&T litigation settlements.

All of which were paid in the second quarter.

Other, AT&T related costs through 6/30 amount to about $163 million and we fully expect full-year acquisition-related costs to be about half of what they were last year, and last year's level was about 515.

So I think -- once we get through this AT&T period, that that's when we come back to a more normalized working capital neutral position.

I think to your second question, the Company is open to thinking about adjusting our outlook on share repurchases or other techniques, but as we have discussed -- and I want to stress, we have already made a significant investment in returning capital shareholders through the share repurchase program that John described.

So far, just to summarize we have had 2 billion in share repurchases, by the end of this month, we will have settled 850 of securities that were exchangeable into stocks so that's 2.85 plus an additional 2 billion of announced intention to repurchase so that adds up to almost $5 billion of return of capital to shareholders.

As we continue to generate and grow key free cash flow, I think management and the Board are going to review all of our options for the best uses of those funds, and a decision with respect to additional repurchases or any other techniques to return capital to shareholders will flow out of that analysis but today we are not ready to go with any specific timetable.

Thanks.

Operator, next question, please.

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

Please go ahead.

My question is one, when, you talk about the deal you signed with STARZ, why would a consumer then pay for STARZ if they are getting so much of what STARZ offers for free and could that impact your premium video revenue that you normally would get from selling STARZ.

And then second, just to touch on something that Brian mentioned you have like 15 HD networks today.

That number is clearly going to go up.

How much bandwidth is simulcast actually using up?

And as the number of HD networks goes from 15 to 30 or 45, what are you doing or what can you do to free up bandwidth as simulcast is eating into some of that bandwidth?

Thanks.

Let me start with the question on STARZ Encore.

We get 75 movies a month from STARZ and you need to be a STARZ customer to get those movies, which not everyone is.

Not all of our digital customers are STARZ customers; although we would anticipate more STARZ customers in the future than we currently have.

But the bulk of the movies, 250 per month, come from being an Encore customer, and all of our $14.95 digital customers are Encore customers currently.

So the real -- all of the movies I listed are Encore movies and that's really the difference there.

I think I may have confused things by mentioning the word "STARZ".

I think there are three different groups of customers and not all movies will go to all, as Steve just said.

In addition you have got Sony/MGM movies that are also available.

So we are going to have hundreds and hundreds, some customers will have up to 500 movies a month On Demand and different customers may have 250 and some may have even less.

But it's pretty exciting breakthrough.

Second question was--?

Bandwidth.

Was on bandwidth for HD and we believe we have a long-term plan right now in place that will allow us to significantly increase High-Definition channels, as the market warrants to the kind of numbers you just referenced, 30 to 45 channels without any need to rebuild the network, without major disruption to our customers, while we are able to ramp up phone penetration, ramp up high-speed data functionality, the simulcast to answer your question, I think around eight analog channels of capacity, at about 10 to 1 compression so that's 80 to do the simulcast.

We have got a number of our markets fully simulcasted and we are not really seeing any pushback.

Again it does create some consumer disruption in the beginning, as we have the little technical glitches but as Steve said, we believe we are beyond that and in good shape.

Thanks.

Thanks, Rich.

Next question, operator.

The next question is from Aryeh Bourkoff from UBS.

Please go ahead.

First question is for Steve.

You mentioned the 1 million plus net adds for telephone in '06.

Is that number the Voice over IP number or does it have to be offset by any circuit losses or does all the circuit switch losses occur this year and then next year it is all just a net number, positive.

That's the Voice over IP number.

It's very, very early.

We wanted to give people an indication of what our run rates are going to be in the fourth quarter going into next year and that's the Voice over IP number.

The circuit switch fall off is fairly de minimus at this point and we would anticipate that happening.

Okay.

Thanks and then for Brian, just what happens next on broadband?

The growth has been so strong on the unit metrics.

You are giving, obviously a lot of the traditional content companies or the new media companies sort of better, fatter pipe now.

How do you think Comcast is positioning itself for the next round of how they leverage that broadband pipe into content, we have seen CBS News now and other content vehicles on the Internet.

How do you guys prepare for that?

I think that's a great question.

Looking down the road, I think there is a new energy and excitement.

It's kind of the old chicken and egg and I think we have reached yet another milestone between cable and DSL of what broadband can do and where broadband is at and I think this company, we are spending much more of our time focused on relationships with, very broadly described what I'll call content, not content necessarily in the traditional media companies, but features and functions and there are more business plans being presented to us, and I'm sure to others, every day, that it almost feels like, a throwback to a few years ago, where there is an an energy, of venture capital firms, entrepreneurs, who see the capabilities of somebody yesterday called it Internet 2, that we are at a level of -- it's just way different than what you could do four, five years ago and to create business models and so I think all of that, yes, there are implications, what does it mean to your traditional businesses, what might happen and all of those questions are still there and are always going to be there, but I don't think we feel that it's faux.

We think it is all friendly to drive broadband to yet deeper penetration.

Some of these services are going to want our help in marketing and there's a potential for new revenues and there's a potential for additional services that we can start ourselves.

And whether that plays out or not, I'm pretty certain you are going to see broadband be the center piece for a lot of innovations.

Next question, please, operator.

Thank you.

The next question is from Kathy Styponias from Prudential.

Could someone please comment on your enhanced basic offering, with respect to how many of those subs were included in the digital number this year?

And are you thinking -- are those included in the guidance that you have given for digital and/or RG use for 2005 and then the second question is, I'm wondering if Brian or Steve would be willing to comment on OLN and potentially repositioning that channel, making it more sports oriented.

From a risk perspective, is there a risk that can given the AMC/Time Warner verdict that if you change it too much, it could result in dropped carriage?

Thanks.

Kathy, there's only about 40,000 out of all the digital net adds that are included in the second quarter numbers.

And they should be counted in the 2.5 million RGUs for the year, yes.

Let me comment on just the -- some of the reports on various OLN next steps.

First of all, we are very proud and excited with what happened with Tour de France and the kind of accolades that our management team and the on-air talent received.

And so it's raised the question where other events of marquee nature could find a new home.

I think I would just say, I think some of the speculation has frothed over too much.

We are not in any way trying to take on some other network directly.

I think that's not the goal.

The question is, can be we opportunistic and find a win/win model that does just the opposite of what your question is, which is will it enhance distribution?

Will it enhance the network's attractiveness and work hand in glove with our distribution partners to make the service more valuable and we are very mindful of those kind of issues as we go, and so I'm excited that people are calling us up and creating opportunities and see the opportunity not just to linear networks but I will give you an example.

Outside of OLN, early results of PBS Sprout.

While we're out marketing a new channel, in the first couple months, I believe, and Steve correct me if this is wrong, we had something like 6 million On Demand orders for PBS Sprout content, making it the number one category in children's in its debut.

That creates energy and excitement for operators to want to carry the channel, because ultimately you are going to want to have both the channel and On Demand.

So as we go and look and talk to sports events or other kinds of content, like movies, we have this ability to have a multi faceted conversation that includes not just linear channels, does include On Demand, and, of course, can also include broadband.

And the ability to do this on all cross platform services.

So hopefully that answers your question.

Let me just add to what Brian said maybe a little bit more bluntly.

The press had said -- is our strategy to take on ESPN with Outdoor Life and we look at it, ESPN is in such a league of its own and has established such a strong brand and such an amazing franchise with sports fans, it would be impossible for us to compete with ESPN, even if we wanted to.

What we are really trying to do is take Outdoor Life which has a fair amount of momentum now based on the Tour de France and add to it and make it a better channel.

Thank you.

Next question please, operator.

Our next question is from Jason Bazinet from CitiGroup.

Please go ahead.

Two quick questions.

One, I was wondering if you could just talk a little bit about how wireless fits into your overall strategy and in that context, if we should expect something that's more creative than a plain vanilla MB&O, so that's kind of still the preferred solution.

And then secondly, given the emphasis on providing more value on your video product, what metric do you think we should be looking at to see whether or not that strategy is paying off?

Thanks.

Well, I think we've said numerous times, in the past, that we are studying -- we and other MSOs are studying the wireless business and looking at a variety of alternatives.

I think we, however, are mostly focused on trying to bundle an enhanced wireless service that would have a seamless relationship between the -- when you are at home, the wired phone and the wireless phone so you can keep your voice mailbox and have some sort of simplicity in your life.

And whether you call that MB&O or whether you call that a marketing relationship, whatever, that's certainly one way that we are talking and looking at it.

We really have nothing to report.

We also don't believe today that it's had any kind of sizable effect at all on our business to not be in this business.

There are numerous wireless providers, many, many people have already bought their phones, it tends to be a decision driven by how good the coverage area is in your personal commute or your personal area of life and we don't think it relates directly to your video or high-speed data buying decisions.

We don't believe that our CDV rollout is impacted by not having wireless at all.

We are looking at results and, again, today's Journal, I think talks about Time Warner and Cablevision and others and the results are spectacular.

If you assume that we can do similar type results, there's a lot of pent-up demand, because there really is no competition in the voice business in homes and for many of us -- and I suspect almost everybody on this call, we're still going to have a home phone and a wireless phone, not just one or the other.

So we are working on it.

I think that we are -- long, long term, we want to make sure that as those phones become broadband communicators that we have some ability to get our content and our relationship with the consumers extended there.

There are still four carriers and I think there's a lot of -- a lot of interest in next generation working together and that's something that we're talking about and working on, but nothing to report.

Okay.

Thanks.

Can we take two more questions, please, operator.

Yes.

Lolly from Goldman Sachs is on now with a question.

Just actually two questions.

One on the VoIP strategy.

I think a number of us believe that you have an advantage in terms of voice pricing.

Could you expand a little bit more on your thoughts regarding pricing and the bundling relationship?

Why wouldn't you not consider selling VoIP unbundled to a non-Comcast customer at $40 a month, and get your foot in the door as opposed to selling it at an incrementally $10 or $15 higher price?

Why wouldn't you want to maximize revenues per homes passed as opposed to revenue per customer?

And the second question, there have been a lot of articles in the trade magazines with the municipalities pursuing their own Wi-Fi strategies.

There's a big article regarding Philadelphia last week.

Can we get a little bit of your thoughts regarding municipalities taking on broadband strategies.

How much of a risk do you see that to your business?

Thank you.

Well, let me start with the second question on the municipalities.

That's interesting.

Okay.

Making sure we're still connected.

Yes.

The second question is whether -- look there is no question.

I think it's reflected in the market about what kind of competition if they are going to be different tomorrow than there are today, and on the scheme of things, we are not today, that focused on municipalities being the robust competitor.

We saw this in the cable business 25 years ago, where there were municipal overbuilds.

It's not typically the most likely thing.

A number of those municipalities, while they are talking one way, are also approaching us to say, well, would you like to service it?

I think it's focused on trying to create a perception for a city, that it's a attractive climate and that outside there are lots of hot spots.

I think the commercial market will find, if there there is a hole, will find the hole, and fill it, and want to service it directly.

So personally, I don't think that's a business for municipalities to be in, and I doubt it will have a meaningful impact but you never know.

And that is -- let me just comment broadly on that and then kick the first question to Steve.

There's nothing we can do about the what-ifs.

It's frustrating to all of us that people will put out press releases we are going to do this, we are going to do that.

I think what our company can do is stay focused and to try to innovate and bring our products to market.

And if working -- we today work with numerous wireless providers, for instance, on hot spots for Comcast.net.

We had virtually no feedback that I've gotten ever that gee, I'm not happy because my Comcast.net can't be -- you can get to it through a Blackberry.

You can get to it through your remote locations and so we have to make sure that we are there first, and on the cutting edge and at the same time that he with don't get so distracted by the next new thing that we lose sight of where most Americans are.

Most Americans are, right now wanting to enjoy the benefits of whether it's broadband or viewer-controlled television.

And I think that the fine tuning that Steve talked about even in our high-speed data, which, again, look at the first half of the year, we sold more than we did or the same as we did in the first half last year.

We are very pleased with how well we have been able to navigate wanting to do everything, and staying focused on the here and now.

So in terms of our Comcast digital voice pricing.

We price $39 all you can eat per month if you are a video customer, $69 for voice and high-speed data, and we think both of those prices are very attractive prices versus where the RBOCs are right now.

We do charge an extra $10 if you are not a video customer, and you could argue at some point, we will change that strategy, but a big part of our Comcast digital voice plan is to positively impact other parts of our business.

We really think that VoIP is going to be the sort of next afterburner for high-speed data and if you look at Cablevision's results, that's clearly true and the ability to offer both phone and high-speed data for $69 implies if our ARPU on high-speed data is 43, implies a very sharp price for phone.

We also think based on our work in places like Indianapolis that the CDV business is going to have a positive impact on basic subs and I think some of the other MSOs feel the same.

We can always change but our real goal is to try to get people to take two or three products whenever we can and this bundling strategy has worked well with high-speed data.

We think it will work well with CDV as well.

Thanks, Lolly.

Can we take one last question, please, operator?

Yes.

The last question is from Doug Mitchelson from Deutsche Bank.

Please go ahead.

Thanks.

You showed a little bit of a slowdown in the pace of EBITDA growth from 1Q to 2Q on the same revenue growth.

So I'm trying to figure out is the slowdown due to some some of the margin benefits from the AT&T deal finally starting to fade a little bit or are you just investing more in the second quarter in some of these new initiatives than you invested in the first quarter?

I know you reaffirmed guidance for the year.

I'm just trying to get the difference between the quarters.

It's more the latter there Doug.

Because there have been a number of initiatives in the second quarter that may or may not repeat to some degree in the second half of the year but that's why we feel very confident about reaffirming guidance for the full year.

Okay, so 3Q or 4Q might be a little bit stronger than 2Q obviously to make the guidance?

We're confident about making the guidance.

Great.

Thank you.

Thank you all very much.

Bye.

We have no further time for questions.

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Once again, the number for the replay is 630-652-3000 and the pass code is 12020969. a recording of the conference call will also be available on the Company's website beginning at 12:30 p.m. today.

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