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Comcast Corporation (CMCSA)

Q2 2006 Earnings Conference Call

July 27, 2006 8:30 am ET

Executives

John R. Alchin - Co CFO, EVP, Treasurer

Brian L. Roberts - Chairman, CEO, President

Stephen B. Burke - COO, EVP

Analysts

Jessica Rief-Cohen – Merrill Lynch

Craig Moffett – Sanford C. Bernstein & Co.

Aryeh Bourkoff – UBS

Douglas Shapiro – Banc of America Securities

Katherine Styponias - Prudential

Douglas Mitchelson – Deutsche Bank Securities

Spencer Wang – Bear Stearns

Thomas Russo – Gardner, Russo & Gardner

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Comcast’s second quarter 2006 earnings conference call. (Operator Instructions) I will now turn the call over to Executive Vice President and Co CFO, Mr. John Alchin. Please go ahead, sir.

John R. Alchin

Thank you, operator, and welcome to our second quarter earnings call.

First of all, before we get started, I’d like to refer everybody to Slide No. 2 which contains our safe-harbor disclaimer and remind everyone this conference call may include forward-looking statements subject to certain risks and uncertainties.

In addition, in this call we’ll refer to certain non GAAP financial measures. Please refer to our press release and to our Investor Relations web site for reconciliation of non GAAP financial measure to GAAP.

For comparison purposes, we’ll refer to pro forma as adjusted amounts throughout this presentation that reflect the impact of new accounting for stock options on the 2005 results and the acquisition of Susquehanna Communications in the second quarter of 2006. Please refer to our press release and especially Tables 7A and 7B for details of these adjustments.

And so for opening remarks, let me pass over Brian Roberts for his commentary.

Thanks, Brian.

Brian L. Roberts

Good morning. We are obviously quite pleased with the second quarter. As you look at almost all the key operating metrics that drive our company, we are reporting an increase in our expectations both from the results of the second quarter and our expectation for the second half of the year. As you look at the overall cash flow growth, it really is a different Comcast than anytime in the last five years. We are accelerating and it is, you know, you don’t want to use overhyped words like an inflexion point, but we really feel the phone business is now coming into its own and is going to drive an era of growth that we haven’t seen for a very long time. So let’s look at some of the specifics.

In the second quarter, this is the second consecutive quarter where we had the highest RGU growth in that quarter’s history for the company and that’s true for the second quarter with 816,000 new RGUs.

Impressively, CDV is 45% up from the first quarter, which was over 300,000 net additions to CDV. We are pleased at the performance of the CDV business, again, the Comcast Digital Voice. The product is great. It’s a great value for the consumer. That’s something that, as we’ve introduced new products, it not only works and it’s high class, but by putting it in the triple play bundle, we now have created a great value for our consumers.

All that has driven a revenue growth which has now accelerated and you’ll hear some more statistics but to 11% revenue growth nearly in the quarter, driving a nearly 14% cable operating cash flow growth. This is the 24th consecutive quarter of double-digit OCF growth.

Now you’ve heard us talk about double-digit growth but the momentum with the RGUs allows, in our opinion, for this trend to now continue and perhaps be better than we obviously had expected when we laid out the guidance at the beginning of the year, which is why we are upping cable guidance across every category in 2006.

John will take you through and see the specifics of each of those, but the bullishness that I feel based on these kind of results and what happened in the first quarter and then an increasing rate of CDV performance leaves me very optimistic.

And then we get to Adelphia. Adelphia is finally looking like it’s going to close here in the next couple days. It is a great transaction because we are able to convert a passive investment in what originally was Time Warner Entertainment. It’s been a long road to convert that to Time Warner Cable and to now convert it into cash flow generating systems that fit us quite well. Steve will detail all the work we have to do with these systems, but they fit like a glove. The opportunity for growth as we ready those systems should slightly be positive in 2006 outlook than even that which we’re providing today. As those systems come online, we think they will add a slight positive to the overall business.

So again, I think it was a great quarter. I think Steve and Dave Watson and others in the cable management team had a super year. The Content Division has made investments that are going to position us for growth in years ahead. We’ve decided to make investment this year. We’ve been buying back the stock with our free cash flow and all in all, I look forward to your questions later, but it’s a very exciting quarter.

John?

John R. Alchin

Thanks a lot, Brian.

You’re probably aware that we have slides that we’ll be referring to throughout this presentation on our web site and I’m starting off with Slide No. 4, the second quarter 2006 consolidated results.

So the great start we experienced in the first quarter continued into the second, driven by the momentum that Brian referred to in his opening commentary.

Consolidated revenue for the quarter increased 11% to $6.2 billion while operating cash flow grew 12% to $2.4 billion.

Cable revenue increased 11% to 5.9 and cable operating cash flow increased an outstanding 14%. I’ll review the drivers of the cable business in the following slides.

The content revenue for the quarter increased 17%, reflecting increases in network ratings, advertising revenue and distribution revenue.

As we outlined previously, we’re continuing to invest in programming and production in our networks and, as a result, second quarter content operating cash flow declined 35%. This decline was primarily related to expenses incurred for OLN’s coverage of NHL along with other programming initiatives.

Consolidated net income for the quarter increased to $460 million or $0.22 a share compared to $0.19 a share in the same period last year. The 16% increase in EPS reflects the strong performance driven by cable in addition to other income of $85 million from sales of certain investments.

Moving on to the next slide, which is headed up Record RGU Net Additions, this shows the strong quarter over quarter RGU net additions that Brian also referred to, clearly illustrating that RGU net add momentum is accelerating. For the quarter, we added 816,000 RGUs, a 61% increase driven by strong net adds in digital, high-speed data and phone.

As always, seasonality impacts the business in the second quarter. Total second quarter RGU net adds represent approximately 84% of the first quarter net adds [label] and the number of basic subscribers declined 66,000 due to seasonal disconnects associated with a number of markets we serve in vacation and university communities.

We’ve added nearly 1.8 million RGUs year-to-date. That’s fully 63% above last year’s pace of 1.1 million. As a result of the confidence in the growth prospects of our business, we are increasing RGU net addition guidance for the year by 20% above our previous guidance of at least 3.5 million. Our revised guidance represents a full 60% increase over the 2005 levels of 2.6 million net adds.

With our phone service, we expect growth to continue to accelerate for the rest of the year. Phone for the year should add approximately 1.3 to 1.4 million CDV subscribers offset by up to about a 350,000 circuit switch customer loss which is reflected in the increased RGU guidance.

On the next slide, we show how RGUs fuel double-digit revenue growth. We expect this momentum to continue throughout the second half of the year and accordingly we’re increasing our guidance for both cable and consolidated revenue growth to 10% to 11% from 9% to 10%.

Total video revenue increased 8%. The quarter over quarter increase was driven by a 15% increase in the number of digital customers and consumer adoption of digital features. During the second quarter we added 350,000 digital customers to end the quarter with 10.5 million digital subscribers and penetration of almost 49%.

Included in the 350,000 digital additions are 238,000 enhanced cable customers as we saw rapid increases in enhanced cable net adds with the ramp up in the second quarter of our triple play offer. At the same time, we continued to see increased customer demand for high definition DVR products with approximately 30% of the customers, digital customers, now subscribing to HDDVR products. That compares to 28% in the first quarter and 20% a year ago and on average, these customers generate revenue in the $65 to $70 a month range. And remember that existing digital customers who upgrade to HD or DVR services are not counted as new RGUs.

Pay per view revenue also increased in the quarter by 30% year over year as purchases through out on demand service continued to power growth in the pay per view category. Pay per view revenues in the second quarter are double what we reported in the second quarter of 2003 when our on demand service was launched.

We’re also pleased with the strength of our high-speed data business. High-speed data revenues grew 22%, reflecting the addition of 305,000 high-speed data subscribers and, at the same time, stable average revenue per unit of $43.78. The significant ramp in CDV, Comcast Digital Voice, is also reflected in these results. Steve’s going to talk about this in much greater detail during his commentary, but it’s worth noting that the revenue increased 23% net of the $27 million decline in our circuit switch phone business. We added 306,000 customers in the quarter. That’s a 45% sequential increase over the first quarter.

Advertising revenue increased 8%, reflecting strong growth in political advertising driven by Florida and California primaries. Excluding political advertising, our core advertising business increased 6% from the prior year.

On the next slide, we show how operating cash flow grew 14% and this is the result of continuing increases in our cash flow margins. The combination of strong top line growth, cost controls, operating efficiencies delivered this increase to 41.4% in cable operating margins. That’s fully 110 basis points above second quarter last year and over 400 basis points above first quarter 2004 levels as we show on Slide No. 7.

Even as we delivered impressive RGU additions and as CDV growth is accelerating, we continue to tap into the benefits of scale and we’re effectively managing our overall expense growth. Margins have historically peaked in the second quarter and then dropped and flattened out in the second half of the year. We expect this trend to continue this year, particularly as we accelerated RGU additions.

So, year-to-date operating cash flow margin of about 40.5% is fairly indicative of what we expect for the full year.

The combination of continued strong demand for our product and disciplined cost controls have enabled us to increase operating cash flow guidance for the year to at least 13%.

On the next slide we show how capital has remained relatively flat for the year at $1.8 billion. Capex continues to be variable in nature. For the first half, 74% of cable capital expenditures were variable and directly associated with new product deployment and customer demand for new advanced services.

When we look at the returns on variable capital associated with RGUs, the result is incremental returns of more than 30% on a leveraged, after-tax basis of what we’re generating.

So, we’re investing to drive growth and as we accelerate and sell more new products, Capex is increasing only modestly at 10% above last year’s level to support what is a full 60% growth this year in RGUs.

One way you can see the returns that we’re generating out of this is to look at Slide No. 9 where you see that in the first half of the year we generated over $1.3 billion of consolidated free cash flow, including $553 million in the second quarter. On a year-to-date basis, free cash flow increased $572 million from last year, due primarily to a 29% increase in cash from operations driven by strong operating cash flow growth at Comcast Cable as well as changes in working capital reflecting the reduction in the broadband-related payments in 2006.

As in prior years, the second quarter includes tax payments that we make in April and June, while no tax payments are made in the first quarter.

So we’re able to reaffirm our 2006 free cash flow guidance as our free cash flow conversion rate is still expected to be in the range of 25% to 30%.

On Slide No. 10, we show that we’re maintaining a focused and balanced approach to capital deployment as we utilize the free cash flow generated by our business and sustain the flexibility to make investments and continue to grow, while all the time returning capital to shareholders.

For the first half of the year, our stock repurchases slightly exceeded the free cash flow that we generated. We bought back more than 22 million shares, for a total investment of $685 million, which is more than double the level of repurchases that we made in the second quarter of 2005. Year-to-date we have repurchased almost 50 million shares for a $1.4 billion investment and since the inception of the program, we’ve bought back nearly $6.4 billion worth of stock, effectively reducing shares outstanding by almost 10% and we still have stock repurchase availability under our program of $3.9 billion.

At the same time, our liquidity position remains strong and we’re ready to close the Adelphia transaction.

With that, let me hand over to Steve for the review of our operations.

Stephen B. Burke

Thank you, John. As a general comment, six months into 2006, we’re delighted with our performance and particularly the progress we’ve made rolling out CDV. As happy as we are with the results to date, we’re equally pleased with how we are now positioned for the second half of 2006 and beyond.

When we put our budget together for 2006, we set a target of a million new phone customers and 10% to 11% operating cash flow growth. Those targets seemed reasonable and realistic at the time given the challenge of rolling out CDV across the majority of our footprint.

During the first half of 2006, we’ve exceeded our internal targets for revenue-generating units as a whole, basic subscribers, high-speed data, digital, telephone and operating cash flow. As a result, we’re increasing our guidance and looking forward to building on our momentum in the second half of the year.

Our accelerating phone rollout was really the highlight of the quarter. By the end of the quarter, we reached 25.6 million marketable homes for CDV and 95% of those homes get triple play marketing offers today. We’ll take the 25 million homes to over 30 million homes by the end of the year.

We’re seeing a consistent ramp up in weekly net adds, from an average of 10,000 net adds per week in the fourth quarter of 05, to 16,000 in the first quarter and 23,000 in the second quarter of 06. After adding 211,000 CDV net adds in the first quarter, we added 306,000 in the second. We see no reason why this momentum won’t continue and we see no reason why we can’t add over 400,000 CDV net adds in the third and fourth quarters, hence the increase in guidance.

Net adds will grow in the future as we add to our footprint but, as importantly, will increase as the maturity of our triple play marketing offers mature in market by market.

Right now we’re adding people and cross-training our existing workforce at a rapid pace. This will allow us to increase capacity for installation and net adds will grow as a result.

We are still supply constrained and in the early innings in terms of our marketing aggressiveness. Our phone metrics are right where we want them to be, with about 35% of all new customers calling our call centers taking phone and triple play RPU over $120 per month.

The physics of getting a big organization with 70,000 employees moving in one direction are not simple, but we’re very pleased with how our people have embraced the triple play and know that, like the integration of AT&T Broadband, once we set our sights on something, we tend to do it very well.

Basic subscribers, as expected, were down 66,000 subscribers due to seasonality. We’re the largest cable operator in Florida with about 1.8 million subscribers there, and every year we lose about 50,000 or 60,000 subscribers who go north. We also think we have over 40% of all the college students in the United States in our footprint, and they also contribute to our second quarter seasonality.

During the second quarter we were 13,000 basic subscribers ahead of the same period last year and for the first half, we’re 92,000 basic subscribers ahead of last year and we fully expect to gain basic subscribers for the year as a whole.

Our high-speed data business continues to power along. We added 305,000 subscribers during the quarter, slightly more than during the same period last year. Year-to-date, we’re 29,000 high-speed data subscribers ahead of last year’s net add pace.

Our RPU was $43.78 for high-speed data, slightly higher than the previous quarter and last year. After the Adelphia transaction closes in a few days, we’ll have over 10 million high-speed data subscribers and the business shows no signs of slowing down.

Our digital rollout is also going well as we push to eventually go all digital. Year-to-date we’ve added roughly 700,000 new digital subscribers compared to under 500,000 for the same period last year. Our digital penetration now stands at about 49%.

VOD usage continues to grow and we had a record 150,000 VOD sessions in June, a 33% increase versus the same period last year. We’re constantly adding new VOD content and we think this makes our digital service superior to our competition.

Advertising sales were up 8.4% for the quarter and we’re optimistic about the second half of the year due to political spending.

Now that we’ve covered each line of business, let me add some perspective on our financial results.

Revenues are starting to grow more rapidly due to the triple play. As a subscription business, this revenue growth should accelerate with our triple play net subscriber additions accelerating as well.

In the second quarter, revenues grew 10.5% while expenses grew just 8.4%, which meant operating cash flow grew 13.7%. A year ago, we thought our phone rollout would be a drag to our 2006 operating cash flow growth rate of about 100 basis points. The idea was we would add CDV customers in 2006 who would benefit us in 2007, but during the initial rollout period they would actually be a drag on operating cash flow growth. In reality, due to the triple play we’re seeing the benefit of less discounting on our video and high-speed data business. We’re also seeing the benefits of scale and running three products over the same infrastructure. As a result, operating cash flow growth has accelerated from 10% to 13% and that acceleration should continue as we add more triple play customers in the future.

As a final note, we’re now looking forward to closing the Adelphia transaction finally in a few days. Most of the properties we’re getting fit very well with ours. We’ve had business plans in place for months and management teams assigned and ready to hit the ground running, just as we did with AT&T Broadband several years ago. Based on our business plans, we think these new systems will generate just over $600 million in operating cash flow and have capital expenditure requirements of $300 to $350 million in 2006. Given programming savings and operational improvements, we think the Adelphia systems will actually be accretive to our OCF growth rate and free cash flow in 2006. Longer term, as we add CDV and our version of VOD to these systems, we would expect them to increasingly look just like ours. These are great properties and we see no reason why we can’t integrate them very smoothly into our operations.

John?

John R. Alchin

Thanks a lot, Steve. Operator, could we open up for Q&A please?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions) Our first question is coming from Jessica Rief-Cohen with Merrill Lynch.

Jessica Rief-Cohen – Merrill Lynch

Thanks. Just two questions. The first one is on data [auto] on – it was a great surprise in the quarter and I think, Steve, you just said there was less discounting. Could you just talk about RPU outlooks, particularly for high-speed data for the second half of the year?

The second question, I guess this would just be for Brian, but given the significant speculation regarding a merger between DirecTV and EchoStar which would result in a multi-channel operator of over 27 million subscribers, could you discuss what your primary competitive concern would be in dealing with such an entity?

Stephen B. Burke

Let me take the first one and Brian, you can talk, if you choose to, about the second one.

I would not expect our high-speed data RPU to go up substantially in the future. It’s quite high as it stands as a percentage of our retail price. But what’s going on as we increasingly rollout the triple play, we are less reliant on high-speed data only promotions. Our high-speed data only promotions might be $19.95 for three or six months and once you rollout the triple play, triple play customers, by definition, are taking high-speed data.

So I think both on the unit side, where we’re seeing high-speed data net adds bigger than last year despite the fact that the business is in its eighth or ninth year and you would normally assume it would be mature at this point, on the unit side triple play is helping and also on the RPU side we’re seeing less need to discount to keep the momentum going.

Brian L. Roberts

I would add one other point on that which is the commercial side of the business is perking up as we begin to now get comfortable with rolling out phone and I imagine that you’re going to see us begin to talk more about, over the rest of the year and well into next year and beyond, how we’re going to have a high-speed data business that’s going to be able to also include voice so really a two play. If people want video, they can get it but a much better small business, medium business initiative and so RPU will have that tug to the north. So you’ve got a lot of good things going on, Jessica.

No way am I going to speculate on speculation. So if there was some announcement, we probably would comment then but we’re focused on our results.

John R. Alchin

Thanks, Jessica. Next question please, operator?

Operator

Our next question is from Craig Moffett with Sanford Bernstein.

Craig Moffett – Sanford C. Bernstein & Co.

Hi. Good morning. I wonder, Steve, going back to your comments about the availability of the triple play if you could provide any additional detail on how the triple play market looked different than the rest of the footprint during the second quarter in markets like Boston and Philadelphia? Did you see different basic subscriber patterns? Did you see different high-speed data subscriber patterns?

Then secondly, I think there’s been some discussion about addressable advertising trials in the second half. I was wondering if you could add some commentary about those as well.

Thanks.

Stephen B. Burke

Let me do addressable advertising first. We are doing some small-scale trials. I wouldn’t assume that they would have any material impact on the business in the next six months or so, but you’re going to start to see us put our toe in the water in terms of interactive advertising and, as you know, we’re very bullish on that medium and long-term.

In terms of how the triple play effects markets, there really is a maturity factor and the maturity factor, we think, takes fully four or five quarters. The market that is most advanced, the big market that’s most advanced for us, is Boston and in Boston I think it’s fair to say that we’re seeing a greater uplift in high-speed data and basic subs than other markets. As a whole, we don’t think the triple play is materially effecting our basic subs now, but we’re clearly seeing trends that would suggest it will once you get out a couple of quarters and those trends are most evident in Boston. Boston, just for reference, went from losing 16,000 subscribers during the quarter to gaining about 1,000 subscribers so a pretty big shift there and we would anticipate that would roll through the rest of the company although I do want to caution people. It takes times. When a market first launches triple play, the executive and sort of fulfilment side of the house are really just concentrating on getting the orders fulfilled, not on sort ramping and getting the high-speed data and basic subscriber business up. That happens over time and we’ve seen that pattern at other cable operators as well so I think it’s fair to say right now we don’t see much impact but in the future we look forward to seeing it ripple through the company as triple play gets more mature.

John R. Alchin

Thanks, Craig. Next question, please, operator?

Operator

The next question is from Aryeh Bourkoff with UBS.

John R. Alchin

Go ahead, Aryeh.

Aryeh Bourkoff - UBS

Thanks. Thanks, sorry, good morning. I just wanted to ask if the RPU, I mean obviously it was asked already about the data RPU but I think, different from some of the other cable operators that were at the triple play offering, you’re RPUs are looking a lot better which is obviously helping the operating leverage of the model financially, not just on the metrics.

So, aside from just the data RPU and obviously having the bundle, what do you see when you go out with a $99 triple play bundled offer? Are you upselling to a number higher than that, that’s really spread around on different products? That’s the first question.

The second question is, maybe you could give us a little bit of the statistics of Adelphia and the systems you’re acquiring versus the Comcast core properties so we can get a sense of the room for improvement.

Thanks.

Stephen B. Burke

Well Aryeh, on the triple play there are some customers who call and take the $99 product and nothing more. But the average customer who takes the triple play spends more than $120 per month with us, so we’re clearly upselling those customers into digital packages and HBO and sort of more advanced services. Our feeling is it’s very important that we continue to do that. We want to make sure our average RPU per basic customer is a little over $90. We want to make sure that the new customers you’re taking in on triple play are significantly higher than your average existing customer.

What the triple play does is it allows you to provide a very attractive price-value relationship without overly discounting individual products. So the sort of pressure on the basic subscriber on the high-speed data side would generate a lot of discounting by our field personnel that right now they don’t need to do because what they’re seeing is that, sort of in hotel terms, our yield is much higher. Our revenue yield is much higher than it otherwise would be because the triple play takes that pressure off in a way that financially is very advantageous because you’re actually getting more at a very high margin because you’re doing it all over the same plan and tend to do it with the same technician, etc.

Brian L. Roberts

Okay. John, do you want to give any color.

Aryeh Bourkoff - UBS

I’d like you –

John R. Alchin

Just as a general rule, I think the Adelphia systems have lower margins. There’s still a fair amount of work to be done in terms of not so much rebuilding them but making sure that the VOD infrastructure and the high-speed data infrastructure and telephone are all introduced the way we would introduce them.

You know, we have done this over and over and over. We’re a company that has basically grown through acquisition and we don’t see anything with Adelphia that is altogether different than things we’ve done before and there’s clearly opportunity, not only for 2006 but I believe for 2007 and 2008 to improve those systems.

One tempering point is it’s only about 8% of the company so that the advantage of taking their systems up to our margins and getting all these new services deployed will be minimized by the fact that it’s only 8% of the company as a whole.

Thanks, Aryeh. Next question please, operator?

Your next question is from Douglas Shapiro with Banc of America.

Douglas Shapiro – Banc of America Securities

Yeah, thanks. I also had two things. First, there’s a question on the RGU guidance, I guess maybe for John. But you increased the total RGU guidance by 700,000 and you increased the CDV guidance by 300,000 or 400,000 and I think you said you were increasing the service [with losses] by roughly 100,000. So when you add all that out it roughly, you know, is going to be somewhere between 400,000 to 500,000 non CDV, new RGUs that you’re looking for this year, at least relative to what you originally budgeted. I was just wondering if you could talk about what’s driving that.

The second thing, also just some quick math on the Capex increase, it looks like, just on the CPE numbers year-to-date, you incurred about $550 per new RGU and CPE and when you look at the Capex increase it’s about $500 per RGU in terms of the increase in the RGUs in the Capex. Just wondering, is it as simple as that or is that way too simplistic?

John R. Alchin

First of all, on the RGUs, Doug, we’re not slicing and dicing through the remainder. We’ve been very specific about the CDV category but the remainder of the increase will be spread across the other product lines.

I think the important thing on capital is that you look year over year. We’re increasing capital by 10% above the $3.5 billion level of last year to approximately $4 billion. Before that, we’re getting a 60% increase in RGUs. So I think that’s sort of the real productivity story that’s coming out of the capital deployment side.

Douglas Shapiro – Banc of America Securities

All right. Fair enough. Thanks.

John R. Alchin

Thanks a lot, Doug. Next question please, operator.

Operator

Our next question is from Kathy Styponias with Prudential.

Katherine Styponias - Prudential

Hi, thanks. I was wondering if you’d be willing to comment a little bit about the AWS spectrum that’s coming up for auction relatively soon, especially in light of the form that was filed and the ownership that Comcast has. Could you give us a sense of what you think you might use the spectrum for and/or given that Comcast has a 52% ownership stake, does that mean that you would be footing 52% of the bills should you win the auction? Thanks.

John R. Alchin

Kathy, I think the real commitment that we’ve made is to the partnership that we have with the other MSOs and Sprint. We’ll be rolling out two markets with wireless products by the end of this year. We’re keeping our options open in terms of registering. It’s like going to a Sotheby’s auction and buying the, you know, the baton to participate and if there is something opportunistic in the way of, you know, prices that we think are attractive for our shareholders, we’ll be in a position to participate. But the real commitment, first and foremost, is to rolling out with the Sprint JV that we have and those must be up and running by the end of the year.

Next question please, operator?

Operator

Our next question is from Doug Mitchelson with Deutsche Bank.

Douglas Mitchelson – Deutsche Bank Securities

Thank you very much. Two questions. One, for Brian or John, any update you can give us on bringing your two big remaining off-balance sheet assets on balance sheet, the Insight and the Time Warner Cable JVs?

Then on digital, just wondering, did you say 238,000 of the additional adds were enhanced basic and if that’s accurate, then just a question in terms of, does that imply that digital growth for the core product is slowing or any comments on that further business?

John R. Alchin

In terms of the Time Warner JV, we have triggered the unwind of that partnership and should be hearing from Time Warner, you know, in the very near term as to what decision they have made in terms of selection of property.

Nothing has really been done on the Insight property at this point in time.

The second part of the question?

Douglas Mitchelson – Deutsche Bank Securities

It was expanded basic –

Stephen B. Burke

The enhanced basic number was 238,000. What’s really happening here, a year ago, before we launched triple play, if an individual market wanted to have a video, a good video promotion, their tendency was to make that promotion DVR centric or HD-centric and now most of those markets have turned their attention to triple play. So I think what you’ll see in the future is the big ramp up in digital will be on the enhanced basic side and we’ll continue to move along nicely in terms of advanced [options.]

John R. Alchin

Thanks, Doug. Next question please, operator.

Operator

Our next question is from Spencer Wang with Bear Stearns.

Spencer Wang – Bear Stearns

Thanks. Good morning. Just to follow up on the last question on the expanded basic, can you just give us, our understanding, I guess, is that the RPU on the expanded digital is basically pretty comparable to analog, I guess. So what’s the benefit to you guys of driving growth in that bucket as opposed to the standard digital product? Thank you.

Stephen B. Burke

Well, the real benefit is those enhanced basic customers are coming on with a very low cost digital box and they’re getting a lot of VOD and our research shows that a digital customer, particularly a digital customer that uses VOD, is much more loyal, much happier, much less likely to churn. So what you’ll see, if the normal digital, [paid-for] digital penetration was X%, some number way less than 100% of our base, we intend to make up the difference between X% and 100% with enhanced basic. We’re just at the beginning, if you look at the enhanced basic numbers, we’re just at the beginning of that take off and I think you’ll see those numbers in the years to come go up as we drive that penetration as high as possible and get all the benefits as giving all of our customers VOD.

Brian L. Roberts

Then the second benefit is longer term, which is we’re migrating people away from analog onto digital. So not only do they get better picture quality and have the functionality that Steve just talked about, but we’re going to someday be closer to being able to be all digital over time gradually and when that day comes for all or part of the analog capacity, you get a “free” rebuild by taking back. Up to two-thirds of your entire network is devoted today to analog and it’s all being now shipped out in these low cost digital boxes. So it’s a very elegant bandwidth management strategy to give us the flexibility to have more bandwidth for future services.

John R. Alchin

I think we have time for one more question please, operator, if you would.

Operator

Our final question comes from Thomas Russo with Gardner, Russo & Gardner.

Thomas Russo – Gardner, Russo & Gardner

Congratulations on some great numbers. Thanks for taking the call. John, could you describe, or Steve, to what extent the rollout of the triple play has started to allow you to light up the dark homes you’ve long passed and not served?

Stephen B. Burke

Yeah, I think it’s too early to say that that is happening in any material way although that is part of our thinking. Due to the acquisition of AT&T Broadband, we have, of the large cable operators, one of the lowest penetration rates of video and traditionally we’ve looked at that as being a disadvantage, you know, we wish our video penetration was 65%, not in the low 50s. But the positive side of that is we have a disproportionately large amount of homes that we have not sold video to, and the good news is a lot of those homes, almost all of those homes, have a landline phone. A lot of those homes are going to be much easier for us to attract. Virtually 20 million plus customers who currently take no service from us, who almost all have a phone, are going to be customers that we can attract not only for phone but increasingly using phone as part of a triple play for video as well. But I think those kinds of benefits are clearly in our mind but things that we would look at happening in 2007 and beyond.

John R. Alchin

Thanks a lot, Tom. Thank you, operator. And thank you, everyone, for joining the call.

Operator

We have no further questions at this time. (Operator Instructions) This concludes today's teleconference. We thank you for your participation and you may now disconnect.

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Source: Comcast Q2 2006 Earnings Conference Call Transcript (CMCSA)
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