康卡斯特 (CMCSA) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2005 earnings conference 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.

Welcome everybody to our third quarter conference call.

First of all, I'd like to refer everybody to slide 2 which contains our Safe Harbor disclaimer and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties.

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

Please refer to our Investor Relations website for reconciliation of non-GAAP financial measures to GAAP.

And now for opening remarks please let me pass to Brian Roberts, our Chairman and CEO.

Good morning.

We are pleased to report another strong quarter in the third quarter.

We had 9.8% revenue growth in cable and operating cash flow growth of 13.9%, approximately 14%, consistent with the first two quarters of the year.

We are once again having strong results across the board.

This quarter allowed us to invest more than $1 billion in our common stock.

We had no major other investment activity, and we were able to significantly increase our share buyback purchasing more than 25 million shares for $750 million.

In effect, we invested all of the free cash flow, $723 million that we generated in the third quarter, into buying back our stock.

In addition, we settled another $250 million of Comcast exchangeable debt.

So since December 2003 when the Board first authorized post-AT&T our stock repurchase program, we have repurchased 2.7 billion, or 93 million shares, plus we have redeemed for cash 1.4 billion of debt, that was exchangeable into Comcast common stock, effectively removing another 47 million shares of float, bringing the total amount of recent repurchases to 4.1 billion.

With more than 1.2 billion of remaining authorization we expect to review all possible uses of capital with our Board early next year as we continue to balance reinvestment opportunities with return of capital to shareholders while maintaining a strong investment grade balance sheet.

The acquisition of 70% of Susquehanna cable that we didn't previously own is another clear example of finding compelling investment opportunities in cable.

With identifiable tax benefits and synergies primarily in programming and overhead, we will effectively be gaining control of 225,000 subscribers for less than 6.4 times operating cash flow.

On the business side, everything we are working on, whether in cable or content, is about improving and differentiating our products, extending our competitive advantage and increasing the value of our assets.

We are really focused on innovation and differentiation as I have said before.

And yesterday's transaction that was announced with Sprint, Time Warner-Cox, and Advance/Newhouse is another example of a transaction that helps to drive innovation, this time, of course, in the wireless space to deliver to all of our customers unprecedented opportunities of real-time high-speed mobility and access to content all in a single package.

So let me quickly review the Sprint transaction, not to be repetitive but to point out certain key attributes.

We have for a long time said that wireless is a potentially important fourth product line that we would like to explore.

The agreement with Sprint is not just a wholesale or reseller arrangement.

The initial phase will allow us to offer wireless phones as part of our bundle, and that's nice, but in my opinion, the power of this news is the coming together of both -- the many, many U.S. cable companies in America, and hopefully room for others, so that we have the makings of a national platform, unlike the set-top box business where we have differing standards from the beginning of going into wireless, if we could have a national platform we think that that could drive innovation.

Coupled with partnering with a company with the technical capability of Sprint Nextel, six weeks after their merger, is a great statement of their focus on innovation with the cable industry and with Comcast for new products that will work on a wireless network.

And yesterday we demonstrated some of the initial ideas of the products that might be available starting in 2006, and they range from communications products to entertainment products.

And so on the communications front you can imagine integrated voice mail between your CDV, your Comcast digital voice, and your wireless phone.

You can imagine bringing a smartphone home and having it use your Wi-Fi network in the house so you have great cellular coverage in your house but you don't actually go over the cellular network, giving great benefits to both the consumer and the cellular minutes that you wouldn't use and to the cellular company for reception, and at the same time, the beginning of application of entertainment products such as being able to look at programs from your digital video recorder, as we secure the digital rights, to programming your DVR potentially to actually having television right on a third screen.

And I think it's the ability to innovate to this platform that will be a 20-year arrangement, a long-term journey, but a complete focus for our innovation plans to have a bundle and to have a partner that knows wireless, doesn't force us to go into a new business line, and at the same time, they're looking for us to be the entertainment and in-home communications piece, and I think it's a wonderful, natural alliance.

So we also pick up the retail marketing between both parties and Radio Shack said yesterday that they are supportive of this, and we believe all of Sprint's retail locations will be demonstrating in Comcast areas, Comcast high-speed Internet, Comcast cable, digital cable, high definition, and Comcast voice.

We will do the billing for our customers in the first year customer service, Sprint will own the wireless customers, and the cable company will own the cable and video and high-speed data and telephone part of the relationship.

Why is that important?

Well, I think it's very clear up-front, as we've done many, many partnerships, to try to come up -- and I think we -- I'm very, very pleased with the innovation in this deal structure and our deal department did a super job -- in allowing for a structure that there's not a new co-created that will create tension with its two partners.

Instead, the new co here is really about driving the product roadmap, the innovation, and the marketing ideas, both one on one with each local cable company, and potentially national marketing as you develop national products.

So we believe this is going to offer great growth in the future and we can talk about it over the months and years to come.

Let me now kick over to John and Steve to take you through in detail the quarter.

John.

Thanks a lot, Brian.

I would remind our listeners that we do have slides on our IR website, and would refer you to those if you're not already there.

And I'm just about to speak to the consolidated results, which is slide number 5 of the presentation for the quarter.

Consolidated revenue for the quarter grew 9.4% to $5.6 billion, while consolidated operating cash flow grew 12.9% to $2.1 billion.

Cable had a great quarter with revenue up 9.8% to $5.3 billion, while cash flow increased 13.9%.

I'll review the drivers of cable results in just a moment.

Looking at content, revenue increased 14.8% while content cash flow increased 19.3% to $74 million.

These results were driven by growth at E!

Networks, Golf Channel, and OLN, with increases in distribution and advertising revenue across all networks.

Third quarter was the highest rated quarter ever for both OLN and style.

OLN's ratings were led by a strong Tour de France showing and also with the addition of Survivor.

We're revising guidance for consolidated operating cash flow for the year for approximately 13% from previous guidance of 14 to 15%.

This revision is driven by increased investments in our content brands.

Our recently announced deal with the NHL along with certain other initiatives will result in approximately a 50% decline in the fourth quarter content operating cash flow.

But I would remind and emphasize to our listeners that 2005 cable operating cash flow is still expected to be approximately 14% for the year excluding whatever hurricane-related costs we incur in the fourth quarter, which it's still too early to estimate what they may be.

In the third quarter we reported corporate and other revenue of $22 million, and operating cash flow loss of $91 million, compared to revenue of 47 million and cash flow of 60 million in the third quarter of last year.

The increased operating cash flow loss includes one-time charges related to termination of player contracts at Comcast-Spectacor.

Consolidated operating income was up 28.6%, up from $686 million last year, driven by an increase in the cable operating cash flow of 258 million.

The Company reported consolidated net income of $222 million, or $0.10 cents a share, basically unchanged from the third quarter of last year.

Net income and EPS were negatively affected this quarter by an investment loss of $104 million, or $0.05 a share on a pretax basis.

The investment loss primarily reflects the change in value of the derivative component of our ZONE set as a result of the Sprint/Nextel merger.

Excluding the investment loss EPS would have been $0.13 a share.

Moving on to the next slide, number 6, where we detail cable revenue, cable had as I said before a strong quarter with unit growth and near double-digit revenue growth of 9.8%.

We added a total of 710,000 RGUs in the quarter, and so far year to date we've added 1.8 million RGUs.

We're on track to achieve full-year 2005 guidance of adding about 2.5 million RGUs for the year.

Total video revenue increased $184 million, or 5.7%.

Growth was driven by higher monthly revenue per basic subscriber and a 12.4% increase in the number of digital customers.

We're having tremendous success in moving customers to our digital services.

We added 307,000 new digital customers in the quarter to end with 9.4 million digital subscribers, or 44% digital penetration up from 39% a year ago.

And our digital sell-in rate continues to increase.

It was 62% in the quarter, up from 60% in the second quarter and 59% a year ago.

Digital customers are taking as many as 1.75 digital boxes per customer on average reflecting strong demand for both the hi-definition and DVR services that we're rolling out.

And that number is up from 1.63 a year ago.

In the quarter we deployed 326,000 advanced set-top boxes with hi-def and/or DVR capability.

This is the equivalent of 60% of the boxes that we deployed having those advanced capabilities, up from 40% a year ago.

We ended the quarter with 2.3 million advanced set-top boxes in service.

This is the equivalent of 22% of our digital customers having advanced set-top boxes up from 10% a year ago when we had had a million fewer digital customers.

High-speed data business delivered more than $1 billion of revenue this quarter as we continued to add units while maintaining strong average revenue per subscriber.

For the quarter, we're reporting average revenue per subscriber of $42.88, essentially unchanged from a year ago.

We ended the quarter with more than 8.1 million high-speed data customers adding 437 in the quarter.

Record adds of 549,000 in the third quarter last year were driven by the successful launch of our video e-mail and photo show features.

We've added many, many products and enhancements during the past year, including increasing the speed to 6 meg and 8 meg, adding free McAfee Internet Security Solutions, adding NHL on line, photo show deluxe, and lots more, but there was no special feature launch in the third quarter this year, but still we report strong additions of 437,000 for the quarter.

High-peed data penetration is now 20% of available homes, up from 17% a year ago, and the sell-in rate continues to increase up to 43% from 38.5% a year ago.

Our Comcast digital voice rollout is progressing on plan.

We added 46,000 digital voice customers in the quarter, digital voice additions are offset by the roll-off of circuit switch phone customers as we transition to our CDV product that Steve will have a lot more to say about in his commentary.

Advertising revenue for the quarter grew 4.5% to 333 million with 2.9% growth in local advertising and 11.8% growth in regional and national advertising.

Advertising revenue growth was impacted by a decline in political advertising when compared to the 2004 election year.

The increase in other revenue of 36% reflects the growth in our regional sports channels because of a launch of Chicago Sports Net, which occurred on October 1, of last year.

Moving on to the next cash flow slide, as I mentioned, cash flow grew 13.9%.

Third quarter margins increased 140 basis points to just shy of 40%.

Increased year-over-year margins and operating cash flow result from higher top-line growth of 9.8% as well as continued reductions in the rate of growth of expenses offset by the impact of two hurricanes in the third quarter, which impacted cash flow to the extent of about $12 million, or 0.5 point of cash flow growth.

We expect that hurricane Wilma will have an impact on fourth quarter results, but it's too early to estimate what that impact will be at this time.

Moving on to the next slide, where we highlight capital expenditures, slide 8, capital expenditures for the quarter were 899 million compared to 871 last year, reflecting the strong demand for our digital services and continued rapid deployment of high-speed data and DVRs.

In addition, the increase in CapEx also reflects higher cost of phone readiness and CDV deployment.

The composition of capital is now predominantly about 75% variable and revenue-driven.

While we're increasing CapEx guidance for the year to approximately 3.5 billion to reflect this increased advanced set-top box deployment and CDV readiness for our phone rollout, you can see on the slide that CapEx per revenue generating unit has declined 26% over the last three years from 115 to $85 per RGU.

CapEx per sub is also declining and is now at $164 per sub.

Table 5 in the press release also reflects this trend as you look at year-over-year capital investment, the increase year to date in variable capital of $615 (ph) million more than offset the decline in upgrade capital of $518 million.

We really believe that we have a winning strategy and are committed to continued product differentiation and innovation.

Our industry leading VOD platform in conjunction with our advanced set-top boxes with hi-def and DVR functions and our recently introduced enhanced cable, all-digital service, offers our customers more choice, convenience, and value.

So to maximize this competitive advantage we're aggressively deploying digital boxes and rapidly rolling out Comcast digital voice.

This strategy will result in slightly higher capital expenditures than we'd previously anticipated, as we now project guidance of 3.5 billion.

And the specific factors contributing to that are greater deployment of the higher priced advanced set-top boxes, higher phone launch costs than originally budgeted, and more certified but not marketed CDV footprint.

Moving on to free cash flow, we generated 723 million for the quarter of consolidated free cash flow, up 34% from the $540 million that we reported a year ago.

The increase is driven by increased operating cash flow and offset by higher capital expenditures and taxes.

Year to date free cash flow of 1.9 billion is nearly 30% above the 1.4 billion that we reported a year ago.

We now expect consolidated free cash flow growth of 30% for the year, reflecting both the increased -- or the new consolidated operating cash flow guidance and higher cash flow -- or higher CapEx.

Moving on to the next slide, number 10, talking about our focused capital deployment, as Brian mentioned, we significantly accelerated the pace of our share buyback in the third quarter where we invested more than the free cash flow that we generated for the quarter and repurchased over 25 million shares.

So when you include the stock that we have bought back since inception, plus the debt instruments that are exchangeable into Comcast common shares, we have repurchased, or effectively removed from the number of shares outstanding, 140 million shares, for a total buyback for the program of $4.1 billion.

And we'll continue to balance share repurchases with investments in the business that are key to our growth while maintaining a strong investment grade rating.

Moving on to the last slide that I want to review, the Susquehanna acquisition, on October 31, we announced a definitive agreement to acquire cable assets of Susquehanna communications for total consideration of approximately 2800 per sub, or 6.4 times 2006 operating cash flow.

This is effectively converting a passive investment into an operating cash flow generating asset.

We're adding 225,000 subscribers primarily in the central Pennsylvania area, and after we've done the Adelphia acquisition, 80% of these acquired subscribers will be adjacent to current Comcast systems.

These are great systems to be acquiring, fully upgraded with solid basic penetration of 63% with upside opportunity, with digital penetration in the acquired properties only 27% versus 44% in Comcast, with upside in average revenue per subscriber which is only 69% in Susquehanna, while it's almost $83 in Comcast.

So we have a real opportunity here to build on an already strong business by accelerating the deployment of our advanced services such as Comcast ON DEMAND and digital voice.

So with that, let me pass to Steve for his commentary.

Thanks, John.

It's been almost three years to the day since we closed the AT&T Broadband deal.

And it seems like a good time to take stock of where we are and where we're headed.

Financially, we've made a lot of progress with 40% margins and OCF per subscriber, per year, which we think is probably the best index of how we're doing on an operational basis, of $395 for 2005, which is almost double the $208 in OCF per sub we had in 2002 when the deal closed.

And even before we step on the gas with phone, the Company is growing RGUs at over 2.5 million units this year, or about 7% unit growth for the Company as a whole.

Our video business is getting stronger.

Today only 8.9 million of our customers are analog-only cable customers, which is down from 9.7 million a year ago, and we think headed down even further in 2006 as we continue to roll out high-speed data, phone, and digital products.

These analog-only customers have the highest churn, so it's important to reduce this base over time, which is happening exactly according to plan.

During the quarter, the third quarter this year, we lost about 46,000 basic subscribers.

About half of these subscribers were life line customers who pay us about $15 a month.

This loss of subscribers doesn't concern us too much because during the quarter we added over 700,000 high-speed data and digital customers who, on average, pay us well over $40 per month.

So when you net those two out financially, it's a very, very good trade.

We also continue to make our VOD product better during the quarter, and in October hit 1 billion streams for the year.

We said we'd do that by the end of the year and we actually did it half-way -- or nine or ten months into the year.

We've also recently added over 250 new free movies, so we think VOD will continue to increase in the future.

Our high-speed data business continues to grow nicely.

We think there are three key metrics that you should keep your eye on in this business.

Unit growth, average revenue per user, and share of new broadband customers.

Adjusted for our footprint, our net adds are comparable to the big bell's, so we think our share of net-adds is okay.

In terms of units, we think whenever someone tells you what their high-speed units are, the next question you should have is what's your ARPU?

And in that category we're doing very well.

Our ARPU is essentially flat versus last year despite a lot of discounting in the industry.

So when you're seeing unit growth of 24%, it's actually converting to revenue growth of 26%.

With all of this as a foundation, we've now turned our focus this year to starting to accelerate our phone deployment.

I think we made significant progress on the digital phone front in the last quarter.

Today we're launched in 21 markets ahead of our goal of having 20 markets launched by year end.

Comcast digital voice is being marketed today to over 12 million homes, and we will be marketing to over 15 million homes by year end.

By year end, our plant will be certified to over 20 million homes, or roughly half our footprint.

Now, what we try to do is be very clear about where we're actually marketing.

So when we say we're certified to 20 million homes, what that means is our footprint in 20 million homes is capable of launching phone and has capital deployed, and we're ready to go.

The difference between certified and marketable largely stems from apartment complexes where we do not have the permission to go in and market.

So by the end of the year we anticipate having 15 million homes that we can actually market to but the capital and the readiness will be there for about 20 million homes, which is about half of our plan.

Our marketing approach has been to introduce phone on a node by node basis.

And so far the results have been very encouraging.

It's clear to us demand will not be an issue any time in the near future.

Some of our initial market are coming up on one year since launch, Indianapolis and Springfield, and we're approaching 5% penetration.

We're currently experimenting with three product bundles, and we're seeing the same kind of results as Time Warner cable and Cablevision and getting more and more excited about what CDV can do as a growth engine but as importantly what CDV can do for our high-speed data and basic subscriber businesses.

We think we're in good shape, as we told you before, to hit 200,000 to 250,000 CDV unit net adds in 2005, and in addition, we think we're very well positioned to meet or exceed 1 million units of CDV net adds in 2006.

I think in summary there's been a lot of hard work over the last six months getting the company ready for phone, literally thousands of people have been trained.

We spent a lot of capital to where we are today, and we really look forward to starting to reap the benefits in the months ahead.

John.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] The first question is from Richard Greenfield from Fulcrum Global Partners.

Please go ahead.

Hi, a couple of questions.

When you think about your video programming deals, do they currently allow you to stream television to wireless phones, or do you have to go back and negotiate that?

And then just in terms of your digital sub adds, you had 307,000 in the quarter, how many of those were the enhanced basic, and what's the related ARPU on those enhanced basic subscribers versus your existing digital subs?

Thanks.

Okay.

Good question, John will hit number two.

Let me take number one.

On the video programming deals, being that we're not, we never were, in the wireless business, for the most part I don't believe our contracts would cover them.

But that raises the broader question, and one of the reasons I think Sprint sought us out is our relationship with the content community and the opportunity to add value.

And I think one of the things we talked about yesterday, for those that weren't at the Sprint announcement, is really the creation of a third screen, as a possibility.

And you heard Dick Parsons talk about it on the Time Warner call, and you saw it with the iPod announcement with Desperate Housewives.

Our view is, and really I think a lot of it can certainly also be attributed to our great success with 1 billion streams, as Steve mentioned, in ON DEMAND.

The television business is changing, and just as the music business before it has changed and is changing.

And we, all of us, see the opportunity to be very protective of digital rights management, to have the content community feel good and secure in what is happening to the content at all times, but to create new opportunities that will allow all the distributors and the rights holders to create new revenue and new business models for customers.

And you see this, and I believe the dam is open.

We're very excited by the iPod announcement, and I think you will see announcements following on.

The movies that Steve talked about for ON DEMAND, and so we will go back very quickly now, and begin a conversation on how can we take snipets, maybe full-time channels, maybe custom-made content.

And I'd give one last point on this, because I think it's a very interesting area, if you were to ask yourself, for $0.99 you can buy a song and download it, and for $1.99 you can download 30 seconds of a song, which would people like more?

And it's kind of amazing, when you step back and think that ring tones account for $5 billion of revenue, and iTunes is 1/10th or less of that.

So the consumer behavior is sometimes hard to foreguess, or predict.

Secondly, the wonderful new business that that represents to the music industry, rather than just a straight cannibalization of an existing revenue, but the creation of something that a generation is in love with, such as ring tones, creates, to me, in my mind, the real promise of a video ring tone.

Not the actual ring tone, obviously, but the idea of is there another set of applications that you people would pay a small premium for, or an incremental charge, or have a new advertising model, or a new business relationship that can occur on wireless devices as they evolve over the next 20 years that will enhance the relationship that we today enjoy, and if you look at what happened with ON DEMAND, when we started out, we didn't have any content, we now have 4,000 shows, lots of movies, and wonderful -- every single category and every relationship with the content company we have, they all talk about ON DEMAND.

So we think this is the beginning of creating a technical platform which will quickly follow it on with a relationship with the content and distribution community.

And, Rich, with respect to the enhanced basic what we're now calling the enhanced cable product, we mentioned that included in the 284,000 digital adds in the second quarter this year, that there are about 40,000 enhanced cable adds.

This quarter, however, there was essentially no change in the number of enhanced cable subscribers, as we were really focused on the network side of the digital simulcast rollout as opposed to adding any more enhanced cable customers.

You will see that number increase as we get into the latter part of this year going into next year.

Next question, please, operator.

The next question is from Aryeh Bourkoff from UBS.

Please go ahead.

Just a few questions.

First, on the financial side, could you just talk about the working capital swing, I think there may be some one-time items we can go through.

I think this year in the circle it was negative 2.11 last year it was plus $3.84, so a pretty big swing year-over-year.

If you could talk about that.

Then a bigger picture question for Brian, can you talk about cable valuations in a historical context.

Obviously we haven't seen a market like this, but could you talk about this time around, given your balance sheet strength, the Company has the ability to sort of capture some of that value, you've materially increased the buy-back in the third quarter, obviously, but what kind of things could you do to sort of unlock value in the future, especially given your flexibility, and just putting where investors are looking at cable today versus your experience historically?

Thanks.

Okay.

Aryeh, with respect to working capital we add one-time event in the third quarter last year, and that was the Liberty share exchange, which resulted in a cash in flow of about $547 million.

So if you net that out, we would otherwise have been negative about 160, this quarter last year, as opposed to the 211 this year.

And literally 50% of the negative number, about $100 million, relates to timing of interest payments.

We tend to make those payments in the first and third quarter, and that has the impact on working capital.

Well, look, valuation is an art, not a science, and different people can disagree at any one moment in time.

The Company's actions in the last several months and really last period of time here is, as our business continues to generate free cash flow and continues to grow, our first priority is to put the money back into the business, be that of advanced digital boxes or phone readiness or software relationships and innovation, and secondly, we've chosen to buy back the stock in great quantity, I think more than any other company in our sector in the last year or so, certainly in the cable and some of the media companies.

But the market obviously sees forms of competition in the future because they're discounting your current cash flow at what is probably a historical low on the multiple of our cash flow to our market value.

That's the pure math.

And it is -- I believe that the Company's responsibility is obviously to try to take advantage of that opportunity if it's there and finding financial plays and buying stocks and buying the Susquehanna and being able to take advantage of our synergy and find opportunities to create value if we're right about our future, and secondly, I think to continue to just remain differentiated, not be commoditized, point out that the sky is not falling, the grass is not greener, we are not going to allow any, if we can avoid it, any innovation to pass this company by.

We're not just sitting there going to stand static.

And yesterday's announcement I think is great proof of that.

The ON DEMAND creation is proof of that.

I think the success of phone around the industry is proof of that.

And I think it will continue that way.

This is an entrepreneurial industry.

Can't reflect what will be a catalyst event, but I think -- it's amazing to me that we continue to hear about new technologies that are going to change everything and not really there, and yet this industry continues to march ahead.

Steve do you want to add to that?

It's a tough question to answer.

To sort of build on that point, today we are marketing to 12 million -- our phone product to 12 million homes.

And I don't think any of the RBOCs are actively marketing any video anywhere in our footprint.

The effect of RBOC FIOS type services has been really de minimus and so if you want look out a year or two, almost no matter how you paint a picture of the world, we're going to be marketing phone to many, many more people and actively expanding that business, and, it remains to be seen what kind of impact the RBOCs are going have on our video business at all.

So if you look at satellite a few years, their platform may have had more features.

I don't think there's any question in most people's mind that cable has a superior technical platform.

Now we're talking about theoreticals with phone, perhaps we're -- that is happening slower and with less initial impact than some might have thought, and next thing people say is, okay, what about the Internet?

Again, just for a point of view, I believe video over the Internet is a great opportunity for this company.

And we are going to -- again, we have our -- our FAN had 30 million video downloads last month.

We do like a million a day.

We think that the faster your broadband, the more video works well, and that, frankly, again, I don't see the content companies wanting to just completely unbundle all of the cable experience to change the business model that is going to benefit so quickly and put their content into an unlicensed model.

So there is a theft unlicensed world that we all should worry about, which is why we're so strongly supportive of content protection, and digital rights management, but I actually think it goes back to, and I won't do it again, the video ring tone.

I think you will be looking for new models through video on the net.

Some would call it the lean forward experience, versus television, lean back.

Everybody we talk to is pursuing ways to, when you're sitting at a computer and you have different search capabilities, and I think television is going to continue to be different than PCs, and that broadband growth in this country can grow and continue to grow from here because of video, Comcast is going to be a big winner and we're going to try to make that happen.

So again, some see the glass as half full.

We continue to be quite optimistic.

Next question, operator.

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

Please go ahead.

Thank you.

Two questions.

One, John, could you address the increasing CapEx for this year, how much of that is voice related and how much it relates to the set-top boxes since you did not change your RGU outlook, and as part of that if you could just comment on the '06 outlook for CapEx.

Second, maybe for Brian, could you comment on your interest, or reported interest, in AOL, along with Google, particularly in light of what looks to us to be an incredibly underleveraged balance sheet?

Jessica, it's too early to sort of be too specific about next year in terms of CapEx.

We'll do that when we put out our fourth quarter numbers.

But order of magnitude, you're probably looking at well over half of the increase related to the number of advanced set-top boxes that are going out there, and with the remainder just having to do with getting readiness of the digital voice product, and as Steve said, we really have a plant that's now ready in front of about 20 million homes, that's more than we expected to be, even though we're not marketing in front of those homes, at year end we expect to be marketing in front of about 15 million of those homes.

Yes, I mean, to move the new RGU model, Jessica, when you're talking about millions of units, at some of these advanced boxes, at over $400 a box, just a slight shift in the take rate, again, I believe this is a high-class, welcomed situation which is to be able to have customers want our services, and we're kind of -- we're at the moment in time, a lot of the deals the last six months have been about trying to get multiple set-top box manufacturers to drive down the cost of these advanced boxes, and we have agreements in place that will kick in hopefully in the second part of next year that will begin to significantly bring down the cost of these boxes so that we can continue to sell even more and more units.

But the more customers take these products, as Steve said, and take a bundle of products, the more successful we think we'll be in the years ahead, because these are recurring revenue, and you're putting the up-front capital in today, obviously we'd like that capital to be lower, and we're trying to find that balance.

To the question, we're not going to speculate here on any potential AOL or any other situation such as that.

We'd generally comment that the Internet is a growing area, advertising on the Internet appears to be a great value, if you get the right mix in customers and directed search, and we have more broadband connections than anybody in America.

And broadband searches account for well north of, I think, 80% of Google's searches.

So it's not inconceivable that companies seek us out to say, are there ways that we could work with Comcast.

I think we're in a great position.

We don't feel compelled to add anything, as you know, we talk and listen to every idea out there.

And then to your comment about a significantly underleveraged balance sheet, everybody has different views of those words, but we still do have something like 22 or $23 billion of debt.

These are large numbers.

We are conservative, but we did take most of the -- as John said, or all the free cash flow and buy back our stock.

So we, again, did not have to spend a lot of money on wireless.

That was another element of the transaction that I think, we did say yesterday that among all the things we looked at was whether you want to build your own network or buy a network or partner with somebody, and for the right reasons, we had the flexibility, if we wanted to go and build or buy, but we chose willingly and happily to partner with someone who is expert at a business who is equally motivated to differentiate their product using our assets, and we're equally motivated to differentiate our products using their assets.

And so again I think we're going to look for creative ways to successfully deploy our capital, but first and foremost is to give our customers value as we did this quarter.

Thanks, Jessica.

Next question, please, operator.

The next question is from Craig Moffett from Sanford Bernstein.

Two questions if I could.

The first is, just to expand on the last discussion, can you talk about what the advertising potential might be for your broadband portal, and in the absence of any M&A type of transactions to monetize that advertising potential, what you might do just as a normal course of business to ensure that you're getting sufficient advertising, and then a follow-up if I could.

The portal right now gets what I would call a very insignificant amount of advertising revenue, and we did that by design when we first launched the portal.

We said, let's try to keep this an environment that had almost no advertising.

We have a very small strip down the side, and of course we have a relationship with Google, so we get some derivative search advertising but we've noticed that consumers, particularly as it relates to streaming video on the Internet, are very tolerant of having ads at the head of a video stream, whether it's the ESPN 360 product, or MTVs broadband product, people are used to seeing a 15 minute clip, and we think that's a huge opportunity given the fact that the Company has 30 million broadband clips a month, and each one of those could be an opportunity to put an ad, and with the billion-plus VOD streams, we think there's an opportunity there as well.

We're currently not doing either.

We have a plan that we're working on to be able to do both of those streams in the next, say, six months or so and go out and start to sell those.

Not on a dynamic basis.

In other words, not inserting ads dynamically based on the person at the other end.

That's going to take a little bit longer.

But just putting ads at the front of those streams and we think that's a big potential.

As to how that actually gets quantified and when that rolls through the P&L, we don't know, but it's a lot of eyeballs that currently we're not advertising to at ?

One of the lessons from Google's success has been the power of aggregation, not just with their own network, but with working with others.

And so consistent with the Sprint announcement, again, we're going to do that on a technology basis, the same thing can be said are there ways to aggregate this industry's broadband eyeballs and its future eyeballs, and as those eyeballs increasingly are exposed to video opportunities in sort of the next-generation of the Internet, there's a lot of discussion going on about how best to take advantage of that, and you're playing offense here, and it's a neat opportunity.

Thank you, Brian.

One follow-up question.

As you roll out your advanced set-top boxes, you presumably are getting a bunch of DCT 2500s, or standard definition digital set-top boxes back into inventory.

Can you just update us on where that inventory stands, and is that a strategic opportunity to accelerate the all-digital transition, if you will, to redeploy those boxes out into the field?

Well, you're exactly right, we are getting a lot of DCT 2500s back.

The first thing we try to do is keep them in the home as an additional outlet, so if a person has one or two boxes in their home you put a DVR box in, then you move the DCT 2500.

Second thing we do is take it out and then reuse it.

I think it's fair to say we haven't bought any or very few DCT 2500s for a long time.

We're essentially now buying DCT 700s, which are the all-digital box, and then the DVRs.

Just a point on the DVRs, what has happened to us this year, is that the demand for DVRs and hi-def boxes has far exceeded what we thought was going to be the case, and some of it is due to the fact that DirecTV is advertising DVRs, and that has a derivative impact on our business.

Some of it is due to the fact that hi-def adoption is higher than we thought.

We literally are being pulled by that demand to buying more boxes than we had planned.

Now, that's a good thing, because when we do an advanced set-top box, let's say it's $400, we get $10 a month in revenue.

So there's a nice return on that, and the customer is happy but it does have an impact on capital.

Thank you.

Thanks, Craig.

Next question, please, operator.

The next question is from Ray Katz from Bear Stearns.

Please go ahead.

Yes, good morning.

Question first for Brian, and then for Steve.

Brian, regarding the wireless JV, you stressed the innovations that will be coming out of that more than anything else.

We seem to have precious little detail though on the organization of that JV who will be making decisions on prioritization of research projects, on direction of budgeted funds to fund those research projects, any kind of Board, CEO, management, et cetera, almost the impression it's a virtual organization.

Could you put some meat on the bones for us, and for Steve, second question, basic subs, you said about half of the subs, basic subs that you lost this quarter were lifeline subs, so I'm just wondering, it strikes me as a little odd that lifeline subs are dropping.

Where are they going?

What are the dynamics behind the ones that are weren't lifeline that you lost in the lifeline as well?

Okay.

I'll take the wireless JV part.

There will be -- it's not a virtual organization at all.

We'll have more announcements as we organize and take shape on that.

There's been a lot of work done for a long time by Sprint.

They've been experimenting with the cell phone part of it.

I don't want to minimize the quadruple play.

Let's not allow that to happen.

The marketing element of this alone is very interesting.

There is a bilateral relationship between Sprint and each MSO, how aggressively you want to do that, it can be done MSO city by city, different offers.

Very elegant structure, it's 50/50, so you are going to have to agree on that.

We've agreed on how we would divide various discounts that if you take a four product bundle, a three product bundle, a two-product bundle, et cetera.

The product road map for the next couple of years has actually been discussed in great detail.

There's a number of products that Sprint has been working on, a couple that I've mentioned already on this call.

There will be full-time people devoted to this, and we're -- as with everything, first you do the deal, then you start announcing the next phase of it, but I think there's a -- I think we said yesterday there will be products out in '06 that will -- that will be available off of Sprint's platform.

The more important question I think is do you think it's governable and workable.

And I guess what I'm trying to say is, having been in many ventures, maybe everyone starts out with the same optimism, but sometimes you just look at the structure and say, gosh this is awfully complicated.

That's not the case in this structure.

There is a quite unified cable industry of what we want.

We have very workable governance between the cable companies, I believe.

Then as to Sprint's agenda, again, it's to how best -- what do consumers want with this platform and whether it's communication services or television services or some of both, and I think that this is one of those, you build the platform, then there will be lots of people with applications.

Yesterday I happened to be on a panel with Ed Zander, the CEO of Motorola, and the timing was quite interesting, people were asking Motorola about this, and his answer to a couple questions was, they have a different vision of exactly what the television part of it would be, and, Ed was saying, you know, you could take some of the shows off your DVR, which wouldn't take the whole show, just take the last inning of an exciting game, or you would automatically take letterman's top ten.

Or different things that will be different ideas that people will have, but the wireless business, without a doubt, it was critical to offer our customers this possibility to migrate their experiences outside of the home.

And I think we've accomplished that.

In terms of the basic subs, we do, in a typical quarter, we do 1.5 or even 2 million connects and disconnects.

So when you think of a cable company, you really need to think of, because of moves and everything else, lots of people coming in and out of the business and so it's very difficult to precisely tie it down to, okay, here are 23,000 people out of 1.5 million coming in and 1.5 million going out and a total base of 21 million.

And the real driver, I think, is trying to manage your promotions so that you're not overpromoting, and overdiscounting, and so that you're trying to concentrate on moving people up to digital and growing your ARPU as opposed to deteriorating your ARPU, but I would guess that a lot of those people found a cheaper deal someplace else and left the fold.

Next question, please, operator.

The next question is from Kathy Styponias from Prudential Equity.

Please go ahead.

Hi.

Thanks very much.

Two questions as well.

With respect to the CapEx increase, it sounds like about 100 million of the increase in CapEx is due to further voice deployment.

I guess my question is, what is it that's coming in higher than you had anticipated, especially in light of the fact that the subs that you're adding seem to be somewhat slow, and the second question I have is regarding the Adelphia deal, there seem to be some rumblings out of Washington that there might be conditional approvals put upon this deal, specifically things like either a family tier or network neutrality conditions, and I was wondering if there were any deal breakers with respect to certain conditions.

Thanks.

In terms of the phone deployment, it's been a little bit more expensive, not in terms of the per-unit economics, but in terms of getting the plant ready.

And when I say more expensive, I think it's modestly more expensive.

We also have done more aggregate footprint, more certified homes when we talk about the gross number, than we had initially planned.

I don't think we can speculate on any conditions.

I think it's premature.

We certainly hope to get this deal through, and believe that we will.

Next question, please, operator.

I think we should make this the last question.

We're almost at an hour.

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

Please go ahead.

Thanks.

Sorry to beat a dead horse on this CapEx question, but just to drill down a little bit on the advanced converter spending, it looks like the deployments are only up a little bit modestly over the second quarter.

So is it that the surprise is that you thought the demand was going to moderate or that you thought the ASPs were going to come down, or is it just that you expect there to be substantial demand in the fourth quarter that you need to prepare for?

The second thing, for Steve, is that I think you briefly alluded to this idea that you're seeing some beneficial impact from VoIP, or CDV, I should say, on basic and data in some of your older CDV markets.

So just wondering if you could add a little bit of color and specificity to that.

Let me do them in reverse order.

I think the initial testing in terms of the three-product bundle, really confirms the kind of sort of broader full-market rollout evidence from Time Warner cable and Cablevision.

We've done this in very small sample sizes, but I think we're getting more and more convinced that a big part of our future is going to be managing the bundle in a very strategic way.

As it relates to the digital set -- the advanced set-top boxes, during the quarter, virtually 100% of our digital adds were advanced set-top box.

The demand started to take off in the beginning of the year, in the second quarter, and we kept saying was there a way that we can gate this demand, because it's just been so high, then at a certain point we said we shouldn't gate it.

If we're getting the kind of return on, 25, 30% return on these boxes, let's keep rolling them out, a person who has a DVR that's loaded up with their programs is more likely to be happy with our service and everything else and stay with us than if not.

So at a certain point during the year we said, okay, we're starting to run these overall variances, but it's the right business thing to do, and spending more capital that's going to get a return in the future is appropriate.

I just want to make sure that that point -- it's an excellent point, I'm not sure it came through that clearly on this call.

If you have an existing digital home and they then take a advanced box, it's not a net new add.

Either as a digital customer or as an RGU.

We just are changing the consumer experience and it's costing some money.

We think it's great.

People love it.

It changes their television, and we're going to make those boxes cheap in the future.

Long run, I think many, many percentage of Americans are going to have DVR capability in their homes.

Thank you all.

We have no further time for questions.

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

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Once again, the number for the replay is 630-652-3000, and the passcode is 12825827.

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

This concludes today's teleconference.

Thank you for participating.

You may all disconnect.