Comcast Beats Targets, Boosts Buyback

Cable operating margins rise, but the company hints at greater spending on basic cable ahead.
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Updated from 7:55 a.m.

Comcast

(CMCSA) - Get Report

posted strong second-quarter numbers Wednesday, saying its profit margins were better than expected.

And, as Wall Streeters had speculated, the Philadelphia-based cableoperator doubled the size of a $1 billion stock-repurchase program it initiated last December. Comcast said it has already bought $750 million worth of stock under the earlier billion-dollar buyback plan.

Still, Comcast shares slipped 2% early Wednesday as the company trimmed its expectations for the scope of its basic cable operations. Cable exec Steve Burke said he thought the low end of the cable industry had reached "equilibrium," as measured by Comcast's latest-quarter loss of basic subscribers and reduced year-end target. Later, an executive at rival cable giant

Time Warner

(TWX)

made similar comments.

The remarks suggest that the companies may redouble their efforts in coming months to market basic cable service, a business they'd largely ignored in recent years amid a push to cash in on more lucrative advanced digital services.

On Wednesday, Comcast dropped 51 cents to $28.23.

For the second quarter ended June 30, the nation's largest operator of cable TV systems reported earnings of $262 million, or 12 cents a share. That reverses the year-ago loss from continuing operations of $93 million, or 4 cents a share. Latest-quarter earnings eased past the Thomson First Call estimate of 10 cents.

Revenue rose 10% to $5.07 billion, beating the $5 billion Wall Street consensus estimate. Operating income before depreciation and amortization -- among cable stocks, a more closely watched figure also known as ebitda or operating cash flow -- jumped 21% from a year ago to $1.95 billion, compared to analysts' expectations of $1.86 billion.

"Cable's strong second quarter results and improved outlook for the remainder of the year reflect robust growth in new video and high-speed Internet services as we deliver compelling video services like Comcast ON DEMAND and HDTV and as we continue to expand the features offered to our high-speed Internet customers," CEO Brian Roberts said. "We are also generating significant operating improvements and scale efficiencies that are driving Operating Cash Flow growth and improving operating margins. We are reporting cable operating margins of nearly 40% for the second quarter -- well ahead of our expectations. This strong performance demonstrates our continued operational success in the acquired cable systems and the ability to leverage our scale.

Cable-only revenue rose 10% to $4.84 billion; analysts had been expecting it to come in just below $4.8 billion. Cable operating cash flow came in at $1.92 billion, up 20%.

One important factor in the improved cable OCF was a lower-than-expected increase in the cost of programming. Comcast has always said that lower programming costs would be a payoff of Comcast's 2002 acquisition of AT&T Broadband, and Roberts said Wednesday that the company has been cutting programming cost increases in a "meaningful, sustainable way."

UBS analyst Aryeh Bourkoff, for one, noted Wednesday that programming cost increases amounted to 5%-6% for the quarter, lower than his own forecast of an 11% increase.

Comcast Wednesday raised cable OCF guidance from the prior range of 15%to 17% growth to approximately $7.5 billion, or 18% growth. The companycited increased revenues, a reduction in the growth rate of videoprogramming costs, and lower expenses related to customer service, phoneofferings and high-speed Internet service.

Comcast, which is the nation's largest provider of residential high-speed Internet connections, added 327,000 cable modem subscribers in thesecond quarter, compared to 351,000 additions in the second quarter of 2003and down 17% from 394,000 additions in the first quarter. Traditionally,the second quarter is the weakest time of the year in the cable industryfor subscriber additions.

Average monthly revenue per subscriber, abbreviated as ARPU, rose 2.5%in the Internet business from the first quarter and 0.4% from year-agofigures. Overall ARPU grew 4.2% from the first quarter and 10.1% from thesecond quarter of 2003.

As noted by Fulcrum Global Partners analyst Richard Greenfield Tuesday,three of the nation's biggest regional telcos reported second quarter nethigh speed data additions that were down 24% from first quarter figures.

Comcast lost 96,000 basic cable subscribers in the quarter, leaving itwith a subscriber count of 21.5 million. The company lowered basicsubscriber guidance for the year, saying it would end the year with anunchanged subscriber count instead of the previously forecast growth of0.5%, or 100,000 subs. The company says the revised outlook won't have ameaningful effect on revenue, OCF or its OCF margin.

On a conference call with analysts, Comcast chief operating officer Steve Burke indicated that the company didn't believe basic video penetration would significantly grow in the coming years, but had reached an "equilibrium point." Roberts and Burke suggested that the company had to be more aggressive about the company's basic business while continuing to develop high-margin advanced services such as high-speed data and telephony. "No, we don't want to sacrifice the bottom end of the market and surrender it," Roberts said.

Echoing Comcast execs' comments about the need to pay greater attention to the basic business, Don Logan -- chairman of Time Warner's Media & Communications group -- commented on disappointing results at Time Warner's basic cable business by saying that the company hadn't done a good job of marketing basic cable over the past few years. "We're going to get much more aggressive about that going forward," he said.

Comcast also lowered guidance for its phone business, replacing aforecast of a 50,000-household gain with one of a 100,000-subscriber loss.The company said it was focusing on profitability, not unit growth, at thebusiness it inherited from

AT&T

(T) - Get Report

while it makes the transition to voice overInternet protocol technology.