Back to the basics

Sub slump hits Comcast despite rev growth

It was back to cable business as usual for Comcast on Wednesday, as the leading U.S. operator reported a reasonably healthy boost in 2004 second-quarter earnings and revenues thanks to steady high-speed Internet gains that balanced out more modest growth in video revs.

But the company’s decision to focus on profitability at the expense of subscriber growth still left investors jittery.

Without the background noise of its abortive hostile bid for Disney earlier this year, CEO Brian Roberts and chief operating officer Steve Burke focused on trying to renew enthusiasm for the company’s main cable biz while tempting some indifferent investors by increasing its planned stock repurchase program.

Comcast shares have dropped 15% since it first approached Disney back in February. And even beating the Street’s “whisper numbers” and upping the buyback didn’t stop company’s shares from losing 4.11% to close at $27.56 on Wednesday.

Cable revenues, which account for the vast majority of company sales, rose a healthy 10.4% over the same three-month period in 2003 to $4.8 billion. Digital subscriber gains of 1.1 million over the year-ago period drove a 20.5% jump in digital revs and an overall 7% increase in video revenue.

Basic sub count of 21.5 million was nevertheless flat from a year ago, with 96,000 basic video subs lost in the first quarter due to “seasonality and modestly lower gross additions,” company said. Some 30,000-40,000 of those lost likely migrated to satellite, estimated Oppenheimer analyst Thomas Eagan.

During the quarter, Comcast did help its cause by picking up more than 206,000 digital subs to bring its total to 8.1 million nationwide. Investors were nevertheless dismayed by company’s slightly more conservative basic cable expectations, which chief operating officer and cable prexy Burke said had reached “equilibrium.” For the full year, Comcast cut its basic subscriber growth forecast to 0.5% or 100,000 subs.

The content division, which comprises E! Entertainment, the Golf Channel, Outdoor Life Network and G4TechTV, saw a second-quarter sales gain of 25.3% thanks to increases in distribution fees and ad sales on all its networks.

Total consolidated revenues gained 10% to $5.06 billion. A second-quarter net profit of $262 million reversed last year’s loss of $93 million. Operating income before depreciation and amortization rose 21% from a year ago to $1.95 billion, beating Wall Street’s forecast.

Speaking to analysts on the Wednesday morning conference call, Burke warned that basic video penetration would not grow much more in the coming years but indicated that Comcast would more aggressively market some basic services while pumping up higher-margin digital offerings such as high-speed data and IP-telephony.

Total average revenue per subscriber grew 4.2% from the first quarter and 10.1% from the second quarter of 2003.

As expected, Comcast upped its planned stock buyback program to $2 billion and said it has already purchased some $750 million of its own class A special common stock.

Company said it finished the quarter with some 600,000 high-definition set-top boxes. Pay-per-view/video-on-demand revenue was up 26% thanks to higher movie buy rates in homes with the VOD service.

Roberts noted that the company has managed to cut its programming costs (currently $4 billion a year) even more than expected. Burke said program costs grew only 5% in the first half of this year, down from 13%-14% per year when Comcast purchased AT&T Broadband.

For 2004 the company upped its forecast for operating cash flow to around $7.5 billion (up 18%) over its previous forecast range of 15%-17% growth, thanks to less cost growth and increased sales.

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