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Comcast Corporation (NASDAQ:CMCSA)

Q3 2008 Earnings Call

October 29, 2008 8:30 am ET

Executives

Marlene S. Dooner - Investor Relations

Brian L. Roberts - Chairman of the Board, President, Chief Executive Officer

Michael J. Angelakis - Chief Financial Officer

Stephen B. Burke - Chief Operating Officer, Executive Vice President; President of Comcast Cable

Analysts

Ingrid Chung - Goldman Sachs

Craig Moffett - Sanford C. Bernstein

Jessica Reif-Cohen - Merrill Lynch

John Hodulik - UBS

Benjamin Swinburne - Morgan Stanley

Doug Mitchelson - Deutsche Bank

Thomas Eagan - Collins Stewart

Bryan Goldberg - J.P. Morgan

Vijay Jivant - Barclays Capital

Spencer Wang - Credit Suisse

Operator

Good morning, ladies and gentlemen, and welcome to Comcast's third quarter 2008 earnings conference call. (Operator Instructions) I will now turn the call over to Senior Vice President, Investor Relations, Ms. Marlene Dooner. Please go ahead, Ms. Dooner.

Marlene S. Dooner

Thank you, Operator, and welcome, everyone, to our third quarter 2008 earnings call. Joining me on the call are Brian Roberts, Steve Burke, and Michael Angelakis.

Before we start, let me refer everybody to slide number two, which contains our Safe Harbor disclaimer and remind you that this conference call includes forward-looking statements subject to certain risks and uncertainties.

In addition, in this call we will refer to certain non-GAAP financial measures. Please refer to our press release for the reconciliation of non-GAAP financial measures to GAAP.

And now for opening remarks, I will pass to Brian Roberts for his comments. Brian.

Brian L. Roberts

Thanks, Marlene. I think you will see we had solid financial and operating results this quarter but I want to begin the call by stepping back and just commenting on the obviously unique and challenging economic time that we are all living through in the United States. Is cable a good business? Is Comcast ready? I think absolutely yes.

With 9% cash flow growth, 8% revenue growth, and 109% free cash flow growth in the first nine months of 2008, we clearly have a very strong company.

About a year ago, we saw our world beginning to change -- a softer economy with slower growth rates and also more competition. So I look back over the last 12 months and see the moves that Steve and Mike and their teams have made to be ready for this type of environment and I am quite pleased with where Comcast is positioned. No one is going to see what is going to come next. All you can do is have the strongest balance sheet and have your operating team appropriately making adjustments in strategy as the world changes, and I think we are doing that quite well.

Let’s begin with the balance sheet. It probably goes back to my father’s, Ralph, life being truly changed by the depression and so he trained me always to be ready for even the most unexpected future, and I think that’s a big reason why Comcast is in such a strong position today.

We can comfortably make the statement that we do not need access to capital markets any time for the foreseeable future. We have significant free cash flow and liquidity to internally fund all of our obligations and that I believe is a very enviable position.

Operationally, we are beginning to invest in a technological enhancements that are enabled from going all digital, and continuing to improve the customer experience and I feel we’ve made real progress so far this year.

Now, we want to speed up the Internet even further as we recently announced with DOCSIS 3.0, have more high definition choices for our customers, with over 1,000 already and more coming, and build new businesses like Comcast business class. All of this will help position the company for future growth.

So when I think about the first nine months, both the financial side and the operational side, we expected for the full year to do at least $2.8 billion in free cash flow. I am very pleased and I think the most significant point for me is that in the first nine months of this year, we have now already achieved this full-year goal. So clearly we are on a path to exceed this target.

So our business model is solid. We’ve made adjustments to anticipate slower growth in the future. We’ve proactively managed expenses and capital so that we can generate even more significant free cash flow and at the same time position the company right where we want to be -- an industry leader, an innovator, and a provider of products that our customers really look forward to.

With that, let me turn it over to Mike Angelakis to take you through the financial details.

Michael J. Angelakis

Thank you, Brian. Please refer to slide four, which highlights our third quarter consolidated results. The third quarter reflects solid operational results in our cable, programming, and interactive businesses, as well as the integration of the Insight Cable systems which occurred this past January. On a consolidated basis, the company’s revenue increased 10% to $8.5 billion and operating cash flow grew 10% to $3.2 billion. On an apples-to-apples comparison, our third quarter consolidated pro forma revenue growth was 7% and our consolidated pro forma operating cash flow growth was 8%. Over the last 12 months, the company’s organic growth has generated $2.7 billion in additional revenue and $1.2 billion in additional operating cash flow. Our reported net income for the third quarter was $771 million, or $0.26 per share. Excluding $80 million in favorable tax adjustments, our adjusted EPS for the quarter was $0.24 per share, an increase of 33% versus last year.

Year-to-date reported net income was $2.1 billion, or $0.72 per share. Year-to-date net income for both this year and last year include games from the dissolution of the Insight and the Texas Kansas City Cable partnerships. Excluding these gains and this quarter’s tax adjustment, our adjusted EPS for the first nine months of this year increased 19% to $0.64 per share.

Free cash flow for the quarter increased 77% to $928 million, reflecting growth in operating cash flow and a reduction in CapEx from $1.5 billion in the third quarter of ’07 to $1.3 billion in the third quarter of ’08. Free cash flow per share increased 88% during the quarter, from $0.17 in the third quarter of ’07 to $0.32 this quarter.

On a year-to-date basis, free cash flow per share has increased 124% to $0.94 per share from $0.42 per share. I think it is important to note that these results also include the incurrence of $59 million in hurricane and severance related costs during the quarter. With year-to-date pro forma revenue growth of 8% and pro forma operating cash flow growth of 9%, our results are consistent with the full-year revenue and operating cash flow targets we provided at the beginning of the year. Although our visibility is difficult as the economic environment is clearly more challenging today than it was at the beginning of the year, we continue to expect to achieve our full-year revenue and operating cash flow guidance, albeit with revenue at the low-end of the range.

Please refer to slide five and let’s review our revenue results in more detail. Pro forma cable revenue for the third quarter increased 7% to $8.1 billion. As you can see in both the third quarter and year-to-date numbers, video revenue growth was relatively stable at 4%, reflecting growth in advanced services and rate adjustments and offset by continued promotional activity, lower basic subscriber, and the effect of a larger proportion of our subscriber base in multiple product plans. At the end of the third quarter of ’08, 22% of our customers took all three of our products, compared to 17% in the beginning of ’08 and 15% at the end of the third quarter in 2007.

Our high-speed Internet revenue grew 9% in the quarter, reflecting continued unit growth and relatively stable ARPU. In the third quarter, we added 382,000 high-speed Internet subscribers as we continued to gain market share in broadband. Also, our trends continue to look favorable for our broadband customer mix.

Our economy service, which allows us to address an important segment of the market, continues to represent less than 5% of our total high-speed Internet gross additions. At the same time, we continue to see many more customers taking our blast service versus the economy service, demonstrating that customers are willing to pay more for higher speed service.

Our phone revenue increased 44% in the third quarter, reflecting continued growth in our CDV customer base, offset by slightly lower ARPU. While the pace of net additions has slowed, we continue to add approximately one percentage point of CDV penetration in the third quarter, which now stands at 13.3% of homes passed.

Although we are now essentially out of the legacy circuit switched phone business, it continues to negatively impact revenue growth. Phone revenue would have increased 61% year over year if we excluded the decline from our circuit switch business.

Our business services group continues to experience healthy growth, with third quarter revenue of $145 million, an increase of 42% versus last year.

Now moving on to our advertising business, this is an area where we are experiencing real softness, particularly on the local side, which continues to feel the impact of a weakening economy, even in this political year. Additionally, this quarter had one less broadcasting week than in 2007, which negatively affected both the cable advertising and the programming division’s comparable results.

On a reported basis, cable advertising revenue decreased 10% in the third quarter and if you adjust for the one less week and exclude the benefit of $30 million of political advertising in the quarter, our core revenue did decrease about 10%, which is worse than the 4% to 5% decline in the core advertising revenue experienced in the first half of this year.

On the national advertising side, which is more reflective of our programming division’s operations, it’s a bit of a different story as the softness there was mostly ratings driven resulting from the Olympics. While the market has weakened, pricing and demand for our networks are holding up quite well. Overall, programming revenue grew 5% for the quarter and 11% year-to-date, benefiting from continued affiliate fee growth and strong international revenue growth.

The corporate and other category also saw strong revenue growth this quarter as we benefited from increased Internet advertising and search revenue at Comcast Interactive.

Please refer to slide six -- as revenue growth has slowed, we are continuing our focus on improvements in efficiencies and expense reductions. We continue to extract operating efficiencies in our phone business, which now stands at 6.1 million customers. Total direct costs related to our high-speed Internet business also continued to decline. Each of these services had expense declines of approximately 9% on an absolute basis this quarter.

Expense reductions in these two areas helped to offset increases in our programming expense, in our technical operations, in marketing, and in our business services operation.

This quarter, our results were also negatively impacted by two major hurricanes -- hurricanes Ike and Gustav, that reduced operating cash flow by $20 million in the third quarter. We expect these hurricanes will also impact operating cash flow to a similar degree in the fourth quarter.

Finally, we incurred $39 million of severance expense related to a recent divisional restructuring and ongoing staff reductions. Year-to-date, we have incurred $63 million in severance expenses as we remain very focused on managing our expenses and as the level of activity slows. As such, we may have a similar level of expense in the fourth quarter as in the third quarter.

All in, for the third quarter pro forma operating cash flow for the cable division increased approximately 7% to $3.25 billion and cable’s operating cash flow margin for the quarter decreased 20 basis points to 40%. Excluding the impact of the hurricane and severance charges I just mentioned, cable operating cash flow grew 9% in the third quarter with a margin of 40.7%.

In the programming division, operating cash flow increased 9% from $97 million in the third quarter of ’07 to $105 million in the third quarter of ’08. Year-to-date, programming operating cash flow has increased 30% from $237 million to $307 million. As we mentioned previously, year-to-date results reflect the timing of marketing and programming costs, which were not incurred during the first nine months of the year but we expect to spend in the fourth quarter.

On a consolidated basis, pro forma operating cash flow increased to $3.24 billion, an increase of approximately 8% for the third quarter, with a margin of 37.9%, up 20 basis points. Year-to-date, pro forma operating cash flow has increased 9% to $9.8 billion, with a margin of 38.3%, also up 20 basis points.

Please refer to slide seven to review the quarter’s capital expenditures. Reflecting slower unit growth and an increased discipline around capital allocation, total capital expenditures for the quarter were $1.3 billion, down approximately 16% compared to pro forma CapEx of $1.6 billion for the third quarter of ’07. On a year-to-date basis, consolidated CapEx has decreased 14% from $4.7 billion to $4 billion. Consolidated CapEx as a percentage of revenue has decreased this quarter to 15.3% from 19.6% in the third quarter of ’07 and year-to-date consolidated CapEx has decreased to 15.8% of revenue versus 19.9% last year.

Consistent with historical trends, cable CapEx continues to be predominantly growth oriented, with growth CapEx accounting for 73% of the total cable CapEx for the first nine months of this year. The most significant driver in this quarter’s CapEx decline was CPE, which was down 15% compared to last year’s third quarter, reflecting the lower unit activity.

Additionally, capital spent on new construction is also down approximately 45% this year, which directly reflects the slow down in the housing market. These declines were somewhat offset by our continued investment in business services, which has increased $100 million on a year-to-date basis versus last year.

While year-to-date CapEx has been trending at a lower level than last year, we do expect an increase in the CapEx during the fourth quarter as we aggressively commence our all digital and DOCSIS 3.0 rollouts. Specifically, we will be purchasing millions of D-to-A converters in the fourth quarter as we begin the all-digital transition in up to 20% of our systems. In terms of DOCSIS 3.0, as we just announced last week, we are launching our extreme 50-megabit service in 10 major markets by the end of this year. Even with this expected increase in our fourth quarter capital investment plan, we are very comfortable with our full-year guidance for capital expenditures.

Please refer to slide eight. Our financial priorities have not changed. Our first priority continues to be to secure sustainable and profitable growth by investing in our businesses and by executing on our strategic plans in a very disciplined manner. Another priority is return capital to shareholders and we have been aggressively executing on this priority through a combination of our share buy-back program and our dividend.

Our financial strategy is supported by our increased focus on free cash flow and free cash flow per share, and given the continued growth in operating cash flow and lower capital expenditures, we generated free cash flow of $928 million this quarter. On a per share basis, we generated $0.32 of free cash flow in the quarter, an increase of 88% over last year. Year-to-date, we generated $2.8 billion of free cash flow versus $1.3 billion last year, an increase of 109%. Year-to-date, we have converted almost 29% of our operating cash flow into free cash flow, compared to a 15% conversion rate for the first nine months of 2007.

As I mentioned, free cash flow generation remains a priority for the company and given that CapEx continues to trend lower than we initially forecast, we will exceed our full-year target of at least 20% growth in free cash flow this year.

At the same time, we have been committed to returning capital to shareholders. In the third quarter, we repurchased $800 million of our stock, reducing our shares outstanding by 1.4%. This buy-back, combined with the payment of our quarterly dividend, equates to the company once again returning in excess of 100% of its free cash flow to shareholders.

Over the last 12 months, we have repurchased approximately $4.1 billion of our stock, reducing our shares by approximately 7%. We have a continuing commitment to our buy-back program and believe our stock remains under-valued. However, we have entered into unprecedented times with regard to the economic disruption and the crisis in the equity and credit markets. As such, we may not complete our buy-backs for the fourth quarter and for next year as originally planned.

We believe it is critical to maintain the strength and stability and financial independence of the company. Therefore, we will continue to monitor the economy and the capital markets, remain disciplined, and make appropriate adjustments as we go along.

Now let’s move on to our balance sheet data on slide nine, as I know many investors are appropriately spending time in this area. This slide outlines our current balance sheet metrics and our upcoming debt maturities for the next three years. As Brian has mentioned, we have taken a very responsible and prudent approach to managing our financial operations and believe our balance sheet is a tremendous asset to our shareholders in this environment. Our focus on free cash flow generation has provided us with improved liquidity and financial independence and as you know, we are an investment grade credit and we have ample liquidity to meet our financial obligations while simultaneously being able to invest in our business to meet our strategic return on incremental capital and our competitive goals.

Therefore, we remain confident about our business model and our financial and strategic position. Importantly, we continue to be very disciplined around resource and capital allocation and we will continue to make the necessary investments to ensure that we sustain our competitive advantages for the long-term, which we believe will generate attractive shareholder returns.

Now let me pass the call to Steve.

Stephen B. Burke

Thanks, Mike. I am going to quickly walk through some of the unit activity for our cable business this quarter and then I will spend some time discussing why our operational strategy is working in this environment.

First on video, we continue to manage well in an increasingly competitive marketplace. Basic subscriber losses are consistent with our expectations, digital penetration continues to grow and is now approach 70%. Growth in higher end services like high-def and DVR remain strong as we added over 300,000 advanced service customers during the quarter. Advanced service penetration now stands at 43.5% of our digital customer base.

It was another strong quarter for our high-speed Internet business, indexing at close to 80% of last year’s net adds. It’s pretty clear we are taking share in this business.

Demand for our phone service from new customers remained strong, with sell-in rates at 40%. Lower activity due to the slow down in the housing market does impact this business, as there are simply not as many new opportunities for people to take phone service when they move. Nevertheless, we continue to grow penetration and are now over 13%. We have some markets with penetration in excess of 20% and others that are quickly approaching. We are confident that there is plenty of room for growth left in this business and we are on pace to add over 2 million new phone customers this year.

Looking ahead, we see a real opportunity to target and attract new customers to all of our cable services with the upcoming digital transition in February. At the same time, we continue to invest in new growth opportunities like business services. This business is starting to ramp nicely now with revenue up 42% for the quarter. This business is now a real cash contributor to the company.

I think slide 10 reflects our approach to diversified growth, which is predicated on slower growth in our more mature business of basic video, complemented by new digital features such as DVRs, high-def, high-speed Internet, phone, and business services, all combining to result in strong ARPU growth, which is now $111 a month, up 9% versus last year.

As the economy and competitive dynamics change, our job is to adjust our strategy accordingly. Cable is more recession resistant than most businesses but as the environment changes, we need to change too. The first area where we are adjusting our approach is our product offering. Examples of this were introduced -- we have introduced two product bundles, we’ve instituted economy tiers, we’re changing how we speak about high-def, particularly as we go into the holiday season and more people are buying high-def sets. We’ve recently put a lot more emphasis on retention due to the economic climate. While we are adjusting our promotions, we are continuing to focus on investing in product superiority. For example, we are expanding our VOD offerings, we’re adding more high-def channels, and we now have over 1,000 high-def choices on video-on-demand, which we think is helping us do well competitively as the world transitions to high-definition. Our research shows that we are doing quite well and holding share in terms of high-definition television.

We are rolling out TiVo beyond the Boston market test, where things are going quite well and we are going to be introducing other cities, probably starting with Chicago in the first quarter next year. We are starting to introduce wide-band with the DOCSIS 3.0 rollout, which is our very high-speed Internet service, which I think will be very competitive with DSL, and we are beginning the conversion, as Mike mentioned, to digital delivery to get more bandwidth in a very cost efficient way.

While we are investing to be more competitive, we are also making good progress reducing our expenses and becoming more efficient, and this has been a key focus area for us during the last year. As activity levels have slowed with the business, we are doing a good job adjusting our staffing accordingly. We are also improving reliability and that’s resulting in 2 million less truck rolls during the third quarter and over 6% less trouble calls. And when these activity levels go down, that means we save money because people don’t have to go out and do those truck rolls or answer the phones or respond to trouble calls.

Unit costs for CDV and high-speed data have declined significantly as these businesses scale and that decline is actually greater than we thought would happen. And finally, capital spending is down for the quarter about $260 million versus the same quarter last year. Some of this capital reduction is due to slower growth in units but much of it is due to better procurement as costs for set-top boxes, cable cards, CMTSs, high-definition equipment, EMTAs, are all down on a per unit basis.

Finally, capital expenditures are a key focus area for our entire management team and free cash flow growth is very much on people’s minds and I think that is proven out in the results and will be in the future.

So to sum up, even in a challenging environment, our business is fundamentally resilient and continues to grow. With some adjustments to reflect changes in the economy, we are confident that we can continue to keep operating cash flow and free cash flow on a growth curve in the future.

Now, Marlene, I guess we’ll open it up for questions.

Marlene S. Dooner

Thanks, Steve. Operator, please give us the instructions to start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs

So my first question is about how operating conditions trended monthly, so I was wondering if you could talk about how operating conditions in September ’08 compared to September ’07, and then how did October 2008 look versus September 2008?

And then my second question is about the geographic distribution of basic losses. I was wondering if they were isolated to certain areas.

Brian L. Roberts

Let me start by saying broadly, the economy and the slow down in the economy affects certainly parts of our business and doesn’t affect other parts. For example, when housing starts come down, that obviously means there’s less opportunities to gain new subscribers. But when existing home sales go down, that’s actually good for our business in certain areas because there is less activity -- less connects and less disconnects.

What we have seen, and this has been going on for a while and accelerating recently, is that our connects are lower than they were last year. Interestingly, our disconnects are not rising so it’s not that people who have our service are leaving, it’s that there’s less propensity to upgrade, less propensity to move and take our services when someone moves into town.

A lot of our other metrics are very stable -- bad debt is very stable, pay-per-view is growing 9% or so a year. Ad sales is a very negative picture. Ad sales is going backwards but a lot of the trends that we are talking about, we’ve been seeing for the last year. All the housing related things have been in the business the last year and obviously over the last few weeks, the economy has gotten worse. We are watching some of these metrics very, very carefully, like bad debt, and we’re surprised all three of our product lines have lower churn for the third quarter and the month of October, we think, than last year. So it’s an interesting thing -- the base core subscription side of the business is very resilient we think and very strong but on the margin, people’s propensity to do something new and step out and increase their spending with us appears to be affected more than our existing customers potentially leaving.

Stephen B. Burke

I think the other point, however, is on the geographic diversity, we do see that AT&T and Verizon are both now in a competitive position in many of the markets, so there’s -- you know, it’s not just one versus the other. I think we have more competition as more homes have become available with an over-build from a wireline over-builder. And I do think that we -- you know, we are reading the paper like everybody else. We see that October of course is just an unprecedented month in so many ways, that as we said a lot of our planning is to assume that the fourth quarter and that the period that we are in is worse than the period that we were just three, four months ago. But as Steve said, this business has certain characteristics that can retard that but it’s not a great environment. It’s not getting better, that’s for sure.

Ingrid Chung - Goldman Sachs

Thank you.

Marlene S. Dooner

Thanks. Operator, next question, please.

Operator

Your next question comes from the line of Craig Moffett with Sanford Bernstein.

Craig Moffett - Sanford C. Bernstein

Good morning. Brian, you talked about preparing for slower growth, so let me just drill down on that a little bit, if I could, and then one additional question on technology. But first on the overview, 30,000 foot question -- when you say you are preparing for slower growth, what are the things that you anticipate customers doing? Is it reducing the richness of their packages? Is it a slow-down in the uptake of HDTV? Is it that they are going to downgrade their HD or their HSD tiers? What are the sort of things that you specifically expect and that you are preparing for?

And then if I could follow-up with a specific technology question, just to make sure I understand, Steve, you talked a lot about your D-to-A converter strategy. As I understand, those don’t have conditional access. If they did, they would need to have cable cards. So am I to understand that you are going to be sending digital signals to television sets unscrambled and if so, is that compliant with all your programming agreements with your content partners?

Brian L. Roberts

Let me start and Steve can answer a little bit of both of those. Let me just put in context what I meant by slower growth -- if you go back to ’07, we have seen -- and we stated in our ’08 guidance -- that we thought we would sell less RGUs and we would have slower revenue growth than we did in ’07 in ’08, and so what I think you do when you see that period of time coming as some of the products mature, you begin to reduce your expenses, you reduce your capital, all the things that I think make this a very healthy quarter from a financial standpoint and I think bode well as we look to the rest of the year in terms of how we will perform on free cash flow in particular.

Customers, and Steve can be even more granular, are looking for packages, customers are I think showing that they still want our cable and our broadband product. I think clearly in wireline phone, some people are not getting wireline phone who are just getting wireless phone, so you are seeing some of that perhaps affect the growth rate. But when you are coming from a 10% penetration that went up a few points this year, you have so much upside versus down side that it nips you a few hundred thousand units perhaps over time in a year or whatever than you would have liked to have had at the beginning of the year but big picture, we are way -- still the fastest growing part of the company and we think -- and the same goes in broadband. I am sure there are some people who would have liked to have switched already or some other reason but as long as we have the right package and the right pricing and the best products, we are in a terrific business that in times, when times are tough, people want to watch television and now even as much, they want to be on the Internet and be connected. And our phone product represents the best value of all of our three products because it is clearly cheaper than any alternative and as part of a package, it’s even a better deal.

So I think the other macroeconomic conditions are something that we all are just anticipating and doing what you have to do to run your business appropriately. Steve.

Stephen B. Burke

Just to put a point on it, I think what we are talking about is marginally less net adds, so instead of 550,000 phone ads, it’s 450. Instead of 400,000 high-def sets during a quarter, it’s 300,000. It’s those type of things. It’s not existing customers leaving or no growth. It’s just slower growth in terms of the elections that consumers make.

In terms of the D-to-A and the conversion, the way this will work is you will need to have a D-to-A to receive the expanded basic digital signal, so it will be secured initially by the fact that you need to have a D-to-A. Right now, you don’t. Obviously you can just get an analog signal so in many senses, it will be more secure than the analog distribution. We will not be using encryption initially and that is fine in terms of our programming contracts.

Craig Moffett - Sanford C. Bernstein

Okay. Thank you.

Marlene S. Dooner

Thanks, Craig. Operator, next question, please.

Operator

Your next question comes from the line of Jessica Reif-Cohen with Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

-- three questions. First is given the volatility in the market, I was just wondering if you would consider increasing the dividend, you know, helping investors wait for a more normalized market.

The second question is on wireless -- given what’s happened to Clearwire shares and everybody’s shares but given what’s happened, is there any way that you can revise the terms, either in terms of money, control, or structure?

And then finally, I was hoping that you could give us some color on your initial experience with DOCSIS 3.0. Thanks.

Michael J. Angelakis

Why don’t I take the first one? With regard to dividends, we are not making any change to dividends. We think it’s appropriate. We’ve only had two dividend payments and I think you are indirectly getting at the buy-back in terms of how we’ve mentioned we’re just reevaluting it. You know, there’s a lot going on in the marketplace. I think everyone is very aware of that and we’re just taking a step back on the buy-back and just reevaluating all aspects of the credit markets, of the capital markets, and those kinds of items. So I don’t think we are going to make any -- we don’t anticipate any changes to the dividend.

When you talk about Clearwire, you know, we are very focused on closing the deal and we look at Clearwire as sort of new Clearwire, where there are a lot of assets from Sprint in the zone and spectrum that’s getting contributed to a new company called New Clearwire and we are very focused on getting that transaction closed. We are very focused on our 3G agreement, which we negotiated with Sprint, as well as our 4G agreement, which we negotiated with Clearwire, or New Clearwire, which we think are both strategically important to us, and we are also focused on sort of post closing what that looks like.

So I think DOCSIS 3.0, Steve, why don’t you take that one?

Stephen B. Burke

DOCSIS, it’s too early. We have customers now but measured in the hundreds. The good news is technically, it works beautifully and we are rolling it out to a very substantial part of our base as we speak but in terms of customer reaction, it’s just too early.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Marlene S. Dooner

Thanks, Jessica. Operator, next question, please.

Operator

Your next question comes from the line of John Hodulik with UBS.

John Hodulik - UBS

Thanks. Two quick questions -- it seems like you guys are well on your way to being under the 18% CapEx number. I think you would have to spend well under the 20% of revenues in the fourth quarter. I mean, is there any -- assuming that you are below the 18% this year, is the expectation that, and I think you guys have been talking about that if you look into ’09 versus ’08, or just in the future that the CapEx percentage of sales would continue to come down even from what may be a lower level this year.

And then second, just getting back to some comments Steve made, it sounds like you may be seeing a little bit of more competition from AT&T as they roll out U-verse. In the past, it has sort of been said that I think FIOS has been strong but you really haven’t see much AT&T. Do you see a bit of a change there as they roll out or are they being more aggressive in general or is it just a function of maybe more marketing on their front?

Stephen B. Burke

Why don’t I do the AT&T/Verizon one first -- we are actually seeing more competition from AT&T than Verizon right now and that was the exact opposite a year ago. We monitor it very, very carefully. AT&T has so much broader a footprint that we actually think they are having a greater effect on our business than Verizon.

In both AT&T and Verizon’s case, we obviously believe that we are taking more phone and data customers from them than they are taking video from us but clearly we’ve seen a shift of late where AT&T is proving to be a more formidable competitor than they were.

John Hodulik - UBS

Now, is that just a function of the rollout or have they gotten more aggressive from a pricing promotion standpoint?

Stephen B. Burke

I think it’s more footprint related. I think they have been very aggressive for a long time in certain markets. I think it’s more just footprint.

Brian L. Roberts

But just to comment, relatively speaking it’s fairly expected what we think is happening. I don’t think there is too much surprise. It’s clearly working and they have improved their high-def offering and other things but I want to echo the point that we have assumed that we were going to lose subscribers and that we were going to be able to get many more phone customers and high-speed data, and I think one of the points that hasn’t been brought up yet on this call is high-speed data came in, as Steve said in his opening remarks, around 80% of a year ago’s level and a lot of that is coming from DSL and we do think that the DOCSIS 3.0 question that was just asked, even though we don’t have data yet, we are going to be able to go on a proactive marketing campaign that we offer up to 50-megabits of speed in many of our markets as soon as by the end of this year and that’s a pretty I think reaffirming message to consumers that if you want high-speed data, the best way to get that is through Comcast.

Stephen B. Burke

In the third quarter, we gained more high-speed Internet customers than AT&T and Verizon combined.

Michael J. Angelakis

That’s a great note. I’ll take the CapEx question -- obviously we have been trending lower this year. Our guidance is approximately 18%, which we are very comfortable with. In the fourth quarter, we do expect to spend more capital than the third quarter related to the D-to-As, as well as DOCSIS 3.0, but again for year-end, we feel very good. And the second part of your question, John, related to next year -- budgets are not done but we are very hopeful that as a percentage of revenue, we’ll continue to see a trend downward, even in ’09.

John Hodulik - UBS

Great. Thanks, guys.

Marlene S. Dooner

Thanks, John. Operator, next question, please.

Operator

Your next question comes from the line of Benjamin Swinburne with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley

Thanks. Good morning. Two questions -- I wanted to go back to the converter all digital rollout and Steve, now that you are getting very close to accelerating this, is there any headcount impact? And any comment you can make on sort of the percentage of converter deployments that require truck rolls, just so we can sort of try to fine-tune the CapEx numbers around this project? And also, are you still thinking you will complete this sort of maybe the end of ’09 and 2010? Does the timing still make sense?

And then I wanted to ask on VOD, I think you said pay-per-view was up around 9%. I believe that’s a slow down from where it was running last year and maybe Brian, I don’t know if you can comment on this, but as you look out into ’09 and 2010, if the windows improve for the VOD movie releases, do you think that business can reaccelerate? I mean, that seems a business that would hold up fairly well in a downturn, home video watching.

Stephen B. Burke

Okay, on the digital conversion, it’s definitely going to spill into ‘010. We will not finish in ’09. In terms of the percentage of digital boxes that are going to go in with self-install, that’s really the $64,000 question. It’s a very -- it’s going to be a very material percentage but whether it’s 50% or 70%, we are going to need to sort of monitor the initial rollouts. Portland is getting ready to go as we speak with the new D-to-A boxes, which are now in-stock and in test homes and we’ll see what that percentage is.

It clearly increases headcount and marginally reduces operating cash flow when you take a market to D-to-A. There’s a certain amount of phone calls, there’s a certain amount of truck rolls, there’s a certain amount of marketing and activity level and that’s all baked into our plans, but it does have an effect on the profitability of that system when it is going through that conversion.

Brian L. Roberts

The VOD question, we are hoping that, and I think I saw some news in the last day that one of the studios is talking about taking some releases and going day-and-date across the nation, so you are beginning to see more people experimenting because of what is happening with the DVD market and the economy in general and just whether VOD can re-accelerate.

We had a lot of boxing matches and other things that weren’t the same as a year ago. There is clearly more ways to get that content, whether it’s over the net or some of the other places, so I don’t know what re-accelerates it. We are just as equally focused not so much on that line item growth rate as sort of the experience of what on-demand brings to our customers. And by having 10,000 choices on-demand and project infinity, trying to increase that, so this year we got to 1,000 -- over 1,000 HD choices and now to be able to go to multiples of 10,000 over the next year or two or so, and to be able to interlay the Internet content someday into the on-demand experience, I think you are going to see customers value that more and more vis-à-vis their pricing with satellite and other competitive offerings, and one way or the other, I think we are going to be able to recoup value to our shareholders by having on-demand.

So whether it’s pay-per-view or it’s part of your subscription or we create a special package some day where you can access a bucket of content, we’re looking at a bunch of models and talking to the content companies about that and I think we are making progress. Technically, we’re very much on track to be able to continue to increase beyond where we are today.

Benjamin Swinburne - Morgan Stanley

Thank you.

Marlene S. Dooner

Thanks, Ben. Operator, could we have the next question, please.

Operator

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Two questions, both for Steve -- I was hoping for more details on small, medium sized business, you know, along the lines of what percentage of your ultimate target market are you attacking right now in terms of what products you are offering versus where you might go over the next few years -- in other words, are you still on track with what was laid out early last year for the long-term outlook for that business?

And the second question was what is the character of the basic subs that you are losing? It seems to me that many of the video subs you are losing are single play, lower value subscribers and maybe basic subs isn't the right way to look at the business anymore. Thanks.

Stephen B. Burke

Okay, on the basic sub side, you are absolutely right -- the propensity or the vulnerability of single product video customers is significantly higher than double or triple-play product customers. Right now, I think 22% of our customers are double-play, or triple-play, 57% are double-play, so the 43% that are just video are more vulnerable and the good news is if they are disproportionately lost, it hurts us less financially but we don’t like to lose any subscribers that we don’t have to.

In terms of small and medium-sized business, I am getting very optimistic about this business. The revenues grew 42% year over year. We see that ramp continuing. We have phone and data, eight-line phone and our high-speed data product with a very interesting suite of additional services which we are enhancing all the time. And that product is scaling very well.

It’s interesting -- we are doing our budget sessions now, finalizing the 2009 budget and every single part of the company spends a significant amount of time talking about business services. And when you look at the financials, you see that as a percentage of their operating cash flow growth and free cash flow growth in ’09, it’s become a significant chunk.

So general managers who last year might have said well then, we’re hiring some people for business services now spend 20 minutes talking about how important it is and how it’s all working. So I feel very confident in all the projections that we are going to get 20% or 25% of the small and medium sized business market eventually. We are increasing our passings and don’t do a lot of if you build it, they will come capital investment. Typically we would be more conservative than that but just organically as the business expands, you increase your fiber footprint, increase your passings. We are starting to get some sell-back haul business and overall, I feel very positive about the job Bill Stemper and the business services team are doing.

Doug Mitchelson - Deutsche Bank

As a follow-up on the basic, are you willing to tell us sort of what the churn differential is between a triple-play sub and say just a basic only sub?

Stephen B. Burke

I don’t think we’ve ever done that.

Doug Mitchelson - Deutsche Bank

All right. Thank you.

Marlene S. Dooner

Thanks, Doug. Operator, next question, please.

Operator

Your next question comes from the line of Thomas Eagan with Collins Stewart.

Thomas Eagan - Collins Stewart

Thank you very much. I guess first question for Steve -- if you could give us a little more, little deeper thoughts on the wireless substitution. For example, is what you are seeing, is that a function of the economy, meaning that folks are being more economy minded and therefore substituting fixed line phone for wireless? Or is it just a trend amongst consumers? And then secondly on that, how did what you saw in Q3 differ from what you saw in Q2? And then I have a follow-up, thanks.

Stephen B. Burke

Well, there’s no question that wireless substitution is substantial and is increasing and it would stand to reason that it would increase as people look at all of their bills and try to respond to the changing economy.

One of the interesting things about our business and maybe it’s because we are -- the majority of our phone customers are in packages, is that we are seeing churn, phone churn decline fairly markedly year over year, so while there’s clearly some wireless substitution, my bet is that what’s happening is the majority of the wireless substitution in percentage terms is coming from [ARBOC] customers that are not bundled in, and I think if you look at their numbers, there’s some evidence that that’s increasing.

Thomas Eagan - Collins Stewart

Okay, and then secondly on the February ’09 migration, how do you think the economy and the pressures may impact what consumers might do and how do you think that differs from what you were expecting about six months ago? Thanks.

Stephen B. Burke

Well, we are already starting to see some people call us and say I want to get a head of the migration and we ran a flight of advertising during the month of October to try to get the word out. Our theory now is that with everything else going on, people are going to be distracted and the people that may have acted earlier than waiting until the last minute in February, a greater percentage will wait until the last minute.

Our deal is if you get any of our other services, Internet or phone, we will give you basic video service for free. And if you want just basic video service, we will give it to you for $10 for a period of time. So we think we have a pretty attractive deal for someone who needs to do something during the transition and we think a lot of people are going to be outside of the digital footprint and they are going to have to do something if they want to keep watching those channels, and that will result in us picking up basic subscribers plus some high-speed data and phone subscribers, but I think to the degree that the economy changes things, our bet is that it just makes people distracted and they make their decisions later than they would have.

Thomas Eagan - Collins Stewart

Right. Okay, thank you.

Marlene S. Dooner

Thanks, Tom. Operator, next question, please.

Operator

Your next question comes from the line of Bryan Goldberg with J.P. Morgan.

Bryan Goldberg - J.P. Morgan

I was wondering, what percent of your digital net adds this quarter came from enhanced basic? And also, do you have an estimate of cable TV piracy in your footprint? And based upon your experiences in Chicago, is it reasonable to expect this rate to improve and if so, can you help us think about how to quantify that?

Brian L. Roberts

There is no question that when you go all digital, you reduce theft and we have had some markets where the percentage increase in expanded basic customers has been 5% or 6%. Again, it’s very, very early, very small sample size but it stands to reason, we’ve always known there’s a significant amount of theft. It’s not all that difficult to steal an analog signal -- much harder to steal a digital signal and go out and get a box and all those things, so I think we are anticipating some kind of a build-up due to theft reduction, and we are looking as we speak for the percentage that’s enhanced digital versus paying digital. We’ll get that for you in a minute.

Why don’t we take the next question and we can factor that in later?

Operator

Your next question comes from the line of [Vijay Jivant] with Barclays Capital.

Vijay Jivant - Barclays Capital

Thanks. Brian, given the current valuations across the board and in the past you’ve shown some interest in content assets and arguably some of those prized assets are very attractively valued. Do you think this is a time to play offense and take advantage of the strong balance sheet and do something? Or do you want to be more cautious for the foreseeable future?

Brian L. Roberts

Well, I think that we are staying focused on the business that we’ve got. We’ve got I think a very good plan and I am pleased with all the things we’ve been talking about this morning, so I want to stay focused. That’s job one.

We have said previously and Mike has said, and you can weigh in here if you want, that we do want to look at opportunities to grow the company in a disciplined way and in a focused way. Our content business did quite well this quarter and through the first nine months is the fastest-growing part of the company. But there’s nothing that we are working on in this environment. I don’t think there’s that much to really talk about, actually and we are pretty focused on the business we’ve got.

Mike.

Michael J. Angelakis

I think you said it well. I mean, we’ve been very clear that we have sort of seven meaningful revenue streams. We want to look at everything within those seven areas. We are very focused and disciplined and we have I think pretty meaningful financial and strategic filters related to acquisitions. I would argue that the criteria for those filters have increased a bit given the environment and I think Brian summed it up pretty well.

Brian L. Roberts

We gained 417,000 digital homes, starter was 210,000. It’s kind of confusing because people moved into different tiers with advance, but 210 out of 417 is the answer to your question, Bryan.

Marlene S. Dooner

Thank you. Thanks, Vijay. Next question, please. Operator, we’ll make this the last question, thanks.

Operator

Okay, the final question will come from the line of Spencer Wang with Credit Suisse.

Spencer Wang - Credit Suisse

Good morning. I just want to go back to CapEx for a quick second. It looks like Mike, you mentioned that CPE CapEx, it looks like it was down double-digits in the third quarter, down 7% I think year-to-date. Yet RGU net adds are actually growing both in the quarter and also year-to-date, so I guess that means unit costs are coming down even more. And I know Steve has talked about better unit, better procurement but is there anything else going on there in terms of how you are redeploying older equipment or the CPE you have in inventory? Thank you.

Michael J. Angelakis

No, I don’t think there’s any magic to that. I think that we have done an excellent job on procurement. I think the team has done really a very strong -- have very strong relationships with our suppliers and we work with them. I think that with regard to CPE, also you are looking at product mix. So we are down, as you said -- I don’t really look at the quarter per se because there’s a lot of volatility going around quarter to quarter but we are down 7% year-to-date and I think that’s a combination of both units as well as better procurement.

Spencer Wang - Credit Suisse

Okay. Thank you.

Marlene S. Dooner

Thanks, Spencer. Thank you all very much for joining us. Operator, you can go ahead and give all of the directions around repetition of this call. Thanks.

Operator

Thank you. There will be a replay available of today’s call starting at 11:30 a.m. Eastern Time. It will run through Friday, October 31, at midnight Central Time. The dial-in number is 800-642-1687, and the conference ID number is 65905828. 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.

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