October 25, 2007

Comcast 3Q: Revenue Up, Earnings Down, Basic Sub Loss Continues

Third quarter results indicate softening lure of triple play offers in the face of increased competition.

By Shirley Brady

Comcast's third quarter earnings this morning the proverbial good news, bad news.

The good: revenue increased 21% to $7.78 billion in the three months ending Sept. 30, from $6.43 billion a year ago.

The bad: its earnings fell sharply, dropping 54% to $560 million, or 18 cents a share, compared with $1.22 billion, or 38 cents a share, net income in 3Q06, when it posted a $669 million one-time gain related to its Adelphia transaction with Time Warner Cable.

Comcast cut its consolidated free cash flow target for 2007, which it now expects to decline 10% from a year ago. Its previous 2007 free cash flow projection was flat.

Basic Video Takes a Hit

The company also lost 65,000 basic cable customers in the third quarter, prompting Dow Jones to comment that its "growth engine" in past quarters, the bundled triple play offering of services, is "slowing."

Comcast customers added 1.4 million revenue generating units or individual service subscriptions in the quarter, a slight decrease in its RGU performance a year ago.

In a note to clients this morning, Bear Stearns commented that Comcast's 3rd quarter "underlying RGU metrics were disappointing, albeit somewhat expected. Total RGU net adds of 1.398 million was below our 1.654 million net adds estimate [while] basic sub losses, data and VoIP net adds were shy of expectations."

As of Sept. 30 the company had 24.2 million basic video subscribers, with 61% digital penetration (up from 50% a year ago). The company added 489,000 new digital video subscribers in the quarter, down 12% from last year, to 14.7 million digital video subs.

Comcast Digital Voice phone service added 662,000 consumers, up 36% from last year, to 3.8 million. As it phases out circuit-switched phone service, it lost 138,000 subscribers for a balance of 304,000.

Average customer video revenue was $102.24 a month, up 11% from last year, while digital voice revenue was $41.35 a month compared with $37.49 in 3Q06.

High-speed Internet revenue fell to $42.86 a month, from $43.29 a year ago, reflecting DSL competition.

Operating income increased 14% to $1.4 billion, while free cash flow was cut in half to $524 million.

Capital spending, meanwhile, increased 19%, to $1.5 billion.

The company also announced a $7 billion Class A stock repurchase program, bringing the total to $8.2 billion.

4th Quarter Outlook

Looking ahead to the fourth quarter, Comcast expects continued softness in the economy to impact its year-end results, along with increasd competition and an accelerated exit from circuit-switched telephony.

Comcast chairman and CEO Brian Roberts commented on the quarterly results, "Our business continues to perform well both operationally and financially. We once again posted double-digit growth in revenue and operating cash flow, our two most important metrics. In addition, continued strong demand for our products powered our ability to reach 56 million RGUs at the end of the third quarter."

Roberts continued, "We have transformed our company from a one-product provider of video to become the only company in the world able to offer video, high-speed Internet and phone services to over 40 million households. This provides us with a competitive advantage and will fuel our growth well into the future."

* More info: Comcast 3Q07 press release | Comcast 3Q07 Slides (pdf) | Earnings Call Transcript (Seeking Alpha)

* Additional coverage: AP | Dow Jones/Wall Street Journal | TheStreet.com