Cable Operators

Broadband Boom

10/31/2004 7:00 PM Eastern

Comcast Corp. and Cox Communications Inc. reported strong new-services growth in the second quarter, silencing — at least for the next three months — critics who’d predicted the days of robust broadband growth were over.

Both Comcast Corp. and Cox Communications Inc. blew away analysts’ predictions for third-quarter growth in high-speed Internet and digital-cable services.

Comcast’s high-speed data rolls rose by 549,000 customers — above the expected 400,000 to 450,000 additions — and digital-cable subscribers increased by 341,000, above predictions of 230,000 to 300,000 additions.

Cox was no slouch either. It added 184,000 high-speed data customers in the period for its single highest-growth quarter ever.

Those new-services additions helped fuel revenue and cash flow growth at both companies. Comcast reported an operating cash-flow increase of 14.6% to $1.858 billion on revenue of $4.84 billion (up 10.6%). At Cox, pro forma operating cash flow rose 12.5% to $611 million, on revenue of $1.62 billion (up 11%).

Some analysts expected high-speed data growth would tail off as penetration neared 30% of basic customers and as pricing competition from digital subscriber line service heated up. Comcast’s high-speed data penetration currently stands at 17.2% of available homes and 30% of total subscribers.

Adding to the concerns: DSL outpaced cable in HSI market share over the past two quarters.

In a research report last week, UBS Warburg cable debt and equity analyst Aryeh Bourkoff said Comcast’s and Cox’s strong data growth indicate that the balance in high-speed data has shifted.

He said DSL captured 51% of new additions in the first quarter (versus cable at 49%) and 53.2% of new additions in the second quarter (compared to cable’s 46.8%).

Prior to the Comcast and Cox third-quarter results, Bourkoff estimated DSL would take 51% of net adds in the period versus cable’s 49%.

But based on Comcast’s and Cox’s reported results, Bourkoff changed his tune, estimating that cable would capture 52.1% of high-speed data adds and DSL 47.9%.

The other large MSOs — Time Warner Inc, Charter Communications Inc. and Cablevision Systems Corp. — are expected to release third-quarter results in the next two weeks.

In a conference call with analysts, Comcast chief operating officer Steve Burke said the data numbers were helped by a $30 million promotion targeted at the back-to-school market.

That promotion led to an additional 100,000 high-speed subscribers, which Burke said would bring in $50 million in additional annual revenue.

“That’s a pretty good trade-off,” Burke said on the call.

Most encouraging: Comcast maintained its average revenue per unit for the period, meaning the additional customers were not brought in through deep discounting.

Data ARPU for the period was $42.91, down slightly from $43.52 in the second quarter.

Comcast also upped year-end guidance for high-speed data growth to between 1.6 million and 1.7 million, from earlier estimates of 1.6 million to 1.6 million.

Signs are pointing to continued strong growth, Comcast chairman and CEO Brian Roberts said on an analyst call.

“I just can’t imagine the youth of America wanting narrowband when they become the purchasers as they grow older,” Roberts said. “It reminds all of us of cable TV in the beginning days — once you have it, you don’t go back.”

Burke talked of getting to 10 million HSI customers, from Comcast’s current 6.5 million.

He wouldn’t say when Comcast would reach that milestone, but added: “I don’t think it will take too long. The original business plan for high-speed data had us way below where we are today, in terms of penetration.

“I think we keep raising it over time, and my feeling is 10 million is not going to be the ending point, that we will go beyond 10 million. There are a variety of things that can be sort of afterburners in the high-speed data business as people develop new applications to take us beyond 10 million.”

Basic subscribers were up by 8,500 in the period, including the loss of 10,000 customers due to hurricanes in Florida, exceeding analysts’ expectations of between 1,000 and 7,000 basic additions.

On the call, Burke said that although Comcast expects its analog-only base to shrink by about 1.5 million people in the next few years, Comcast is working hard to switch those customers to digital service.

Burke said that digital customers tend to be more loyal.

“The trend of a shrinking analog-only base will help us with basic subscribers,” Burke said.

Burke said digital is getting a “second wind” because of video-on-demand, digital video recorders and HDTV.

Comcast said it added about 15,000 HDTV customers per week in the third quarter, and DVRs, now available throughout the MSO’s entire footprint, are adding roughly 10,000 customers per week.

“The fact that digital numbers are going back up is an important thing, because it suggests that the digital value proposition for consumers is getting better,” Sanford Bernstein & Co. cable analyst Craig Moffett said.

“A couple of years ago, digital was code for a bunch of additional channels. Today digital is DVRs, HDTV and VOD. There’s a much more compelling value proposition for consumers.”

Backing up that argument: Cox’s digital numbers weren’t as strong as Comcast’s. Cox has rolled out VOD in several markets, but it has not been as aggressive as Comcast.

“That [VOD] is one of the key places Comcast has sought to differentiate itself,” Moffett said.

Despite the strong results, cable stocks rose only slightly.

The three biggest gainers between Oct. 26 and Oct. 28 were Comcast (up 75 cents, or 2.7%, to $28.91 each), Time Warner Inc. (up 25 cents, or 1.5%, to $16.48 each) and Mediacom Communications Corp. (up 22 cents, or 3.5%, to $6.50)

Moffett said the market perception is cable is a risk-intensive business, so a big price bump was not expected. But he added that given the performance of the sector in the past, it was encouraging.

“If investor reaction wasn’t a standing ovation, at least it was polite applause,” Moffett said.

On the Advance
Comcast and Cox’s strong Q3 new-services adds:
Source: Individual companies.
HSI ADDS DIGITAL ADDS
3Q03 3Q04 3Q03 3Q04
Comcast 473,000 549,000 319,000 341,000
Cox 169,290 184,446 121,744 72,868

September