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Executives

Marlene S. Dooner - Senior Vice President, Investor Relations

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

Michael J. Angelakis - Chief Financial Officer, Executive Vice President

Stephen B. Burke - Chief Operating Officer, Executive Vice President

Analysts

Jason Bazinet – Citigroup

John Hodulik – UBS

Vijay Jayant - Barclays Capital

Spencer Wang - Credit Suisse

Douglas Mitchelson - Deutsche Bank Securities

Frank Louthan - Raymond James

Craig Moffett - Sanford Bernstein

Benjamin Swinburne - Morgan Stanley

Marci Ryvicker - Wells Fargo Securities

Jason Armstrong - Goldman Sachs

Comcast Corporation (CMCSA) Q4 2009 Earnings Call February 3, 2010 8:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to Comcast's fourth quarter and full year 2009 earnings conference call. At this time all participants are in a listen-only mode. Please note that this conference call is being recorded. I will now turn the call over to Senior Vice President of Investor Relations Ms. Marlene Dooner. Please go ahead, Miss Dooner.

Marlene S. Dooner

Thank you, operator, and welcome everyone to our fourth quarter and year end 2009 earnings call. Joining me on the call are Brian Roberts, Steve Burke, and Michael Angelakis. As always, let me first refer you to Slide #2 which contains our safe harbor disclaimer and remind you that this conference call may include 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 8-K for the reconciliation of non-GAAP financial measures to GAAP. With that let me now turn the call to Brian Roberts for his comments. Brian?

Brian L. Roberts

Thanks, Marlene, and good morning, everyone. Today we are pleased to report healthy operating and financial results that demonstrate the underlying strength of our subscription businesses and our ability to continue to manage effectively in a challenging environment. In 2009, consolidated revenue grew 4% and cash flow increased by 4.4%. We generated $4.4 billion in free cash flow and showed a very strong increase of 21% in that category. This reflects our focus on expense and capital management. We continue to be able to reduce the capital intensity of our cable business even as we invest in key strategic initiatives to strengthen our competitive position now and in the future.

From an operating standpoint, despite the combination of a weak economy and increasing competition in video. We added 1.5 million net new customers between video, high speed data, and voice. Business services, a new high-growth area for us was as significant driver in 2009 and the advertising market which went backwards for most of the year seemed to solidify towards the end of the year. So as we review 2009 I think you will see that we executed well, fine-tuning our operating strategy during the year to balance revenue, cash flow, and customer growth to deliver solid results.

As you all know just two months we announced the NBC Universal transaction with GE and last week we made our public interest filing at the FCC. Beyond that, we are beginning the planning process and remain very excited about the prospects of this transaction and the opportunity to accelerate value creation for our shareholders. Steve Burke is leading this effort for Comcast to maximize the opportunities available from the combination of cable and content assets. Given Steve's new focus, I'm delighted that Neil Smit will be joining Comcast in March as President of Comcast Cable. Neil is an incredibly talented executive with significant cable, Internet, and consumer products experience, and is a terrific addition to our already strong cable management team.

Like Steve and me and Dave Watson and Dave Scott, Neil strongly believes in our goal to deliver the best customer experience in the marketplace, driving meaningful innovation and dramatically expanding products and features we offer our customers. To do that we have been aggressively rolling out all digital and wideband. These are initiatives that are essential to our strategy and so we're investing about $1 billion in these two projects between 2009 and 2010 and we've made rapid progress deploying these technologies and new products that follow the rollout.

So for instance, we are actively deploying all digital in about 60% of our markets, recapturing and more efficiently using our bandwidth. As we go all digital we offer consumers in those markets 100 or more high def channels. We doubled the amount of foreign language programming available to between 50 and 70 channels per market. We also significantly increased the amount of content available on demand to nearly 20,000 choices with 3,000 HD options available to our digital customers each month.

In December we launched On Demand online nationally with over 19,000 TV and movie choices, adding a valuable benefit to our customers cable subscription. We also finished 2009 with wideband capability in 75% of our footprint, reinforcing our leadership position in broadband. Deploying wideband gives us significant capacity to deliver higher Internet speeds that continue to differentiate our broadband product. It provides us an additional speed advantage, particularly in the 85% of the country without fiber based competition.

Each of these initiatives helps to strengthen our competitive position now and in the future and helps us make progress toward our vision of Project Infinity, giving consumers more content anytime anywhere.

So as we complete the rollout of wideband and all digital and launch new services we are not only repositioning the company technically, we are beginning to reposition the company with the consumer demonstrating how the technical and product investments we have made can redefine how customers experience video, voice, and the Internet.

Beginning next week in 11 markets, we will introduce Xfinity, a new brand that encompasses our robust technology platform, expanded services we are offering today, and the future innovations we are planning to deliver. In the next few months we will launch Xfinity to almost half of our footprint and we will reach the majority of our markets by the end of this year.

Xfinity services will continue to evolve, but the important message to our customers is that Comcast is innovating in all our products across many platforms, giving these customers even more choice and control over the entertainment, communications, and information they want.

If you'll turn with me to the next slide, as we begin 2010, our goal is to continue to deliver and drive profitable growth. We have increasingly diverse revenue streams with strong subscription businesses and increasing opportunities to leverage the robust network to make our products even more distinct and to build new businesses and new growth opportunities. As Steve and Michael will discuss, we're focused on balancing revenue, OCF, and customer growth, while managing expenses and capital so that we can generate significant free cash flow.

At the same time, we are not sacrificing investment in areas that significantly strengthen our competitive position or that offer future growth potential. So we expect to substantially complete our wideband initiative early in 2010 and to substantially complete all digital by the end of this year. We plan to significantly expand wireless High-Speed 2go to many new markets in the new year. And we are now building on our strong momentum and business services to expand the customers we target and our offerings in that space.

We will also continue to invest in our network, extending our technical capabilities even further, more widely deploying EBIF technology, for instance, to support interactive TV and advertising. And through our newly formed Comcast Labs, we will focus on extending and integrating IP technology in order to improve the customer experience, accelerate the pace at which we introduce new products, and expand our cross-platform experiences.

So therefore, I believe we are well positioned to continue to build a company that provides great products to consumers and creates long-term value for our shareholders. Let me now pass to Michael to review our results in more detail.

Michael J. Angelakis

Thank you, Brian. Good morning. As Brian mentioned, 2009 was a year of strong financial and operational progress. We reported solid results and executed well as we aggressively navigated the changing economic and competitive landscape and remained focused on profitable growth as well as gained more efficiencies in our expense base and capital program. We established our plans on an annual basis so let's begin by reviewing Slide 5 which shows the company's consolidated results for the full year of 2009.

For the full year, consolidated revenue increased 3.9% to $35.8 billion and operating cash flow increased 4.4% to $13.7 billion, resulting in a consolidated operating cash flow margin of 38.4%, a modest increase when compared to 38.1% during 2008. In addition to growing our revenue and operating cash flow, we are also very focused on free cash flow per share, free cash flow, and earnings per share, as critical metrics in evaluating our earnings growth and the strength of our company. In each of these key metrics, our performance during the full year reflects meaningful progress and growth. On a full year basis, free cash flow increased 21% to $4.4 billion compared to $3.7 billion in 2008. And free cash flow per share increased 23% to $1.53 per share.

Over the past year, we have converted 32% of our operating cash flow into free cash flow compared to a conversion rate of 28% in 2008 and 20% in 2007. We generated earnings per share of $1.26, an increase of 46.5% over 2008. 2009's EPS reflects growth in consolidated operating cash flow, lower interest expense due to lower net debt, and a reduced effective tax rate resulting from the recognition of income tax benefits during the year.

For 2010, we expect our effective tax rate to be approximately 40%. Broadly speaking, our results for the full year represent a balanced strategy and solid performance. As we remain focused on executing our strategic, operational and financial plans, there are several areas that should be highlighted. We continue to manage the business for long-term profitable growth and endeavor to find the right balance between revenue, cash flow, and customer growth. This year we made adjustments during the year and delivered solid customer metrics across all products, despite an incredibly difficult consumer environment and a substantially larger competitive overlap with the RBOCs.

Cable advertising was also challenged in 2009, down $265 million for the year due to the poor economic environment and the lack of political advertising. However, we are experiencing some signs of improvement in advertising. In the fourth quarter, advertising revenue declined 7% versus the prior year; however, if we exclude political, advertising revenue actually increased 10%, a notable improvement from the 20% to 25% declines we experienced in the first half of 2009.

Business services has experienced real momentum over the past year with revenue increasing 48% to $828 million for 2009. In 2010, we are again enthusiastic about business services prospects and expect this momentum to continue as we begin to expand our services to medium-sized business and sell backhaul.

As we begin to execute our 2010 strategies, we are focused on delivering further growth in revenue, operating cash flow, and free cash flow, as well as continued improvement in our capital efficiency.

Let's review our consolidated fourth quarter results, so please refer to Slide 6. For the fourth quarter, consolidated revenue increased 2.9% to $9.1 billion and consolidated operating cash flow grew 1.1% to $3.4 billion resulting in consolidated operating cash flow margin of 37.6% compared to 38.3% in the fourth quarter of 2008. Capital expenditures were $1.6 billion for the quarter, a 6% decrease compared to 2008. As expected, fourth quarter capital expenditures were higher than the previous three quarters as we accelerated capital to take advantage of favorable tax treatment related to the economic stimulus and attractive vendor discounts.

We generated consolidated free cash flow of $768 million, a decline of 11.1% over the fourth quarter of 2008, reflecting lower net cash provided by operating activities as a result of changes in working capital and higher cash taxes, partially offset by lower CapEx. Earnings per share for the quarter increased 136% to $0.33 per share reflecting lower interest expense and the recognition of income tax benefits.

While I would like to spend the majority of this call discussing our full year results and our views for 2010, there are a few notable items I would like to highlight regarding the fourth quarter. Total video revenue declined slightly by 0.6% reflecting a 199,000 decline in basic video customers and video ARPU growth was 2%. This slowdown in video ARPU growth is a result of more moderate rate increase in the fourth quarter of 2009 compared to the increases in the fourth quarter of 2008 and additional bundling and promotion.

As we mentioned previously, midway through the year we decided to proactively pursue market share by aggressively refocusing our marketing efforts on the triple play offer. As a result we lost fewer video subs compared to the last year's second half and reaccelerated growth in high speed Internet in CDV in the second half of 2009. In addition we have improved our performance competitively by taking share even as the RBOC has meaningfully increased their footprint.

From a segment standpoint cable operating cash flow increased 2% to $3.5 billion, programming expense growth slowed slightly to 8%, and non-program expense has increased modestly as we continue to aggressively manage our costs.

In addition, we remain very focused on controlling expenses and gaining efficiencies to continue to adjust our cost structure. As a result we are taking and absorbing an $81 million severance charge in the fourth quarter compared to a $63 million severance charge we incurred in the fourth quarter of 2008. Just to note, this charge is included in our OCF.

Our programming division, which has been performing well, reported a 5% increase in revenue, but a 17% decline in operating cash flow reflecting an expected increase in marketing costs to launch new shows and the recognition of higher program expenses in the fourth quarter. Corporate and other revenue increased 14% to $138 million reflecting strong results at CIM, or Comcast Interactive Media and Comcast Spectacor, but operating cash flow decreased 10% as it includes $20 million of expenses related to the NBC Universal transaction.

Now let's review our cable division's full year results in more detail so please refer to Slide 7. For the full year of 2009, cable revenue increased 3.8% to $33.9 billion reflecting continued growth in high speed Internet, voice, and business services, partially offset by slower growth in video revenue and a decline in advertising revenue. As I mentioned, we had solid customer additions during the year, total video, high-speed Internet, and voice customers, increasing by 1.5 million and 2009 with 47 million video, Internet, and voice customers.

Total revenue per video customer remained healthy during 2009 increasing 6% over $118 per month. Total subscription revenue per customer which excludes advertising grew 7.5% to $113, reflecting the following components. Total video revenue increased 1% reflecting a 4% increase in video ARPU and a decline in basic video customers. During 2009 we lost 623,000 video customers compared to 575,000 in 2008. The growth in video ARPU reflects rate increases and continued growth in advanced services as we added or upgraded over 1.4 million customers to HD and/or HD-DVR services. These benefits were partially offset by additional bundling and promotions, a decrease in pay revenue, as well as a shift in our video mix as customers subscribed to lower price levels of our digital service.

High speed Internet revenue increased 7% during the year. ARPU remained stable at $42 and we had solid unit additions of over 1 million this year with our HSI penetration now exceeding 31%. Voice revenue increased 23% for the year, reflecting continued growth in our customer base and a modest decline in ARPU to $39 per month. We added over 1.1 million voice customers this year, now have over 7.6 million customers with penetration for our voice service now approximately 16%.

We have made terrific progress in bundling and at the end of 2009, almost 28% of our video customers took all three services compared to 23% at the end of 2008. Overall, we remained focused on profitable and sustainable growth, and while we expect additional video customer losses as the RBOC expand their overlap, we believe we will see penetration gains in our digital, HD, and DVR services, high-speed Internet, voice, and business services during 2010.

Please refer to Slide 8 to review our cable division's operating cash flow results. In 2009 cable operating cash flow increased 4% to $13.7 billion which was in line with top line growth and contributed to a stable operating cash flow margin of 40.4%. Over the past 12 months, total expenses in our cable segment increased 3.7% including a 9% increase in program expenses. The increase in our program expenses reflect higher rates, additional digital programming costs as we have increased our digital customer base, and new programming that has been added to our services. As we look to 2010, we expect programming expenses to grow, but at a slightly lower rate than in 2009.

Excluding programming, our expense base increased only 1% in 2009 even as we incurred incremental operating expenses to support the digital transition in the first half of the year to deploy all digital, wideband, and wireless, and to improve the customer experience. Investment in these key strategic initiatives contributed to a 6% increase in customer service expense and a 5% increase in technical labor expense during the year.

To offset these higher expenses we continued to extract scale benefits and efficiencies in our high-speed Internet and voice businesses. Compared to the full year of 2008, our direct costs for high-speed Internet declined 1% and our voice direct costs have decreased 17%. At the same time we have managed a reduction in both our marketing and administrative expenses compared to 2008.

As part of our focus on cost management and considering the difficult economic environment, we have been very focused on delinquencies and bad debt expense. In 2009 we were successful with this effort, particularly in the second half where we reduced our net bad debt expense versus 2008. As I mentioned earlier, we are taking an $81 million severance charge in the fourth quarter to account for further efficiencies and a reduction in staffing levels.

As we begin 2010 we are also undergoing a companywide initiative which should result in improved efficiencies and increase our speed to market for new products and features. We call this program Challenge 2010 and as Steve will cover this in more detail later in the call, efficiency gains through this program will help support additional investments we're making in cross platforms or convergent services, business services, and wireless.

Please refer to Slide 9 to review our capital expenditures. For the full year of 2009 our capital expenditures decreased 11% from $5.7 billion in 2008 to $5.1 billion reflecting slower growth and meaningful reductions in equipment pricing. As you can see on the slide this represents a meaningful decrease in the business's capital intensity to 14.3% of revenue from 16.7% in 2008 and 19.7% in 2007. This progress was achieved even as we invested in all digital and wideband strategic initiatives supported growth in advanced video services, high speed Internet, and voice penetrations, and increased our capital investment in business services by over 51% to over $350 million.

Consistent with historical trends, capital expenditures for 2009 continued to be predominantly growth oriented with gross CapEx accounting for over 70% of total cable CapEx. To recap how our CapEx was deployed in 2009, we added over 1.5 million video, voice, and data customers. We deployed 8.8 million digital set top boxes and adapters bringing our total deployed to over 36 million. We deployed over 6.2 million digital adapters in 2009 to support the all digital rollout. Also included in this number are almost 2.2 million advanced HD and/or DVR set tops as we added over 1.4 million advanced service customers in 2009 which is actually an increase over 2008. We now have almost 9.2 million HD and/or DVR customers and our advanced service penetration is approximately 50% of our total digital video customers. We also purchased equipment as we accelerated DOCSIS 3.0 or our wideband initiative, and as Brian mentioned we have already deployed this technology to 75% of our footprint.

In 2010 we anticipate our capital intensity to decrease further as capital expenditures are expected to be lower both in absolute dollars and as a percentage of revenue. We expect improved CPE pricing and further capital efficiencies to be realized in 2010. This further reduction in CapEx will occur even as we invest in areas of future growth. In 2010 we will invest aggressively to sustain our momentum in business services and expand its reach to midsized business and to sell backhaul. We will complete our deployment of wideband in early 2010 and the all digital effort by year end. We'll expand our wireless efforts including the launch of Wireless High-Speed 2go in a number of new markets. We will also fund several new initiatives through our newly formed Comcast Labs that focuses in the areas of converged products, IP technology, and switch digital video. Investments in these new initiatives will be included in discretionary CapEx and will represent less than 5% of our total capital.

Please refer to Slide 10. We are executing on a disciplined and returns focus approach to allocating capital both internally and externally with the intention of further growing free cash flow and free cash flow per share. In 2009 as I previously mentioned, we increased free cash flow to $4.4 billion and this increase represents a 21% increase versus 2008 and an 89% increase over the past 24 months. As previously indicated by our initiatives, our first priority remains to profitably invest in the operating and strategic needs of our business. We will continue to deploy capital to our businesses as it provides attractive incremental returns, enhances our competitive position, and delivers sustainable organic growth.

When it comes to considering potential acquisitions or external investments, we will remain extremely disciplined and execution oriented, focusing on opportunities that extend our services or add features that allow us to build new complimentary revenue streams. However, in 2010 we expect our energies in this area will be spent on planning for the NBC Universal transition. A key principle in our capital allocation strategy has been to return capital directly to shareholders in the form of both dividends and share repurchases.

Even during the difficult economic environment of 2009 we returned over $1.5 billion to shareholders through a combination of dividends totaling $761 million for the year and share repurchases. During the fourth quarter of 2009 we repurchased 18.1 million of our common shares for $300 million. So on a full year 2009 basis we purchased 49.8 million of our common shares for $765 million. Combined, this represents a total return of capital to shareholders of 35% of free cash flow.

As I believe most of you are aware, in December we announced a 40% increase in our dividend, our second increase in a year which was effective last month and increases our annual dividend payments to $0.378 per share. As of December 31st we had approximately $3.3 billion of availability remaining under our share repurchase authorization, and as we have previously announced we intend to complete this repurchase subject to market conditions by the end of 2010.

The combination of dividends and stock buybacks results in a total payout ratio in excess of 50% of our last 12 months' free cash flow and places our payout ratio on a total return of capital basis at the top of our peers. In addition, based on our current stock price this combined return of capital allocation represents in excess of a 5% yield. Now let me pass the call to Steve.

Stephen B. Burke

Thanks, Mike. As you look at 2009 we delivered solid financial results and made progress operationally in the face of a challenging economy, increased competition with over 5 million more homes built by the RBOCs, a decline in advertising revenue of 15%, and continuing to invest in important initiatives like the country's digital transition, our own all digital efforts, DOCSIS 3.0 and business services.

On previous calls we've talked about the balance between financial and unit growth. We made a number of neat course corrections in the middle of 2009 to concentrate more on units in the second half. The good news is this midcourse correction worked. We increased our promotions and refocused our marketing efforts on the triple play. In the fourth quarter we also decided to take fewer rate increases. In the fourth quarter of 2009, 6.8 million customers had video rate increases versus the fourth quarter of 2008 with 16.2 million customers getting rate increases. The good news is that we got the units which proves that we can go after market share by getting more aggressive. We're really pleased with our unit results. In the second half we did better on basic subs compared to the second half of 2008 despite more competition.

In the second half of 2009 we added 895,000 combination video, voice, and data customers versus in the first half of '09 adding 633,000. This was driven by very strong high-speed Internet ads. In the second half of 2009 we added 608,000 versus 393,000 in the first half of '09. The fourth quarter is also the second consecutive quarter where we added almost as many residential high-speed data customers in the quarter as AT&T and Verizon combined. The RBOC number is all in for fiber and DSL. We also had stronger voice ads in the second half than in the first half.

Overall, these efforts resulted in total revenue per customer remaining healthy during 2009 increasing 6% during the year to over $118 per customer per month. During the year we also remained very focused on managing expenses. With Challenge 2010 we adopted a companywide program to standardize and simplify processes which not only results in improved efficiencies, but also increase our speed to market for new products and features.

Moving toward a more standardized operating model will help us be more efficient. We're consolidating call centers, introducing more robust IVRs to handle more customer inquiries, reducing the number of truck rolls, increasing self installation from our Hot Drop program, consolidating warehouses and improving our inventory management. The bottom line is we're cutting costs and becoming more efficient while at the same time investing in new businesses and marketing.

We're continuing to enhance our product superiority and drive long-term growth in our business. Our all digital efforts continue to go very well. We've now deployed over 6 million digital adapters. We've completed the all digital conversion efforts in 35% of our footprint and are currently active in about 60% of our footprint and by the end of 2010 we expect 80% of our systems to have made the conversion to all digital.

Once you go through this conversion it creates network and operating efficiencies which compliment previously mentioned cost reduction initiatives. For example, 80% of our customers have been using self install kits for their digital adapters and once the home goes all digital we're able to do a number of things that we couldn't do before.

The first market that went all digital was Portland, our first major all digital market and there we're seeing a number of encouraging trends. Our high def penetration is growing faster in Portland than most of the other markets in the country now that we have 100 high def channels. Truck rolls are down significantly in the Portland market and OCF is growing faster in this market than most others. Importantly, customer service scores have also improved markedly. Portland is really leading the pack.

Moving onto DOCSIS 3.0 or wideband, we've deployed this technology to over 75% of our footprint and plan to complete our DOCSIS 3.0 deployment in early 2010. DOCSIS 3.0 means we have a much faster high-speed data product particularly in the 85% of the country that doesn't have fiber based competition. About 35 million homes in our footprint can purchase 50 meg with the ability for even higher speeds using wideband technology. In fact, Comcast now has more homes capable of providing 50 meg service than all the other cable and telephone companies combined. We believe speed will continue to power the next generation of applications and growth in high speed Internet and we're delighted to have made such good progress with DOCSIS 3.0.

In 2009 we believe we laid the foundation for our technology platform to stay ahead of competition. As Brian mentioned, now that we're almost complete with repositioning ourselves technically we're repositioning ourselves to the consumer. Therefore, we're launching Xfinity on February 12th in 11 markets. This is a major rebranding effort for Comcast Cable. Xfinity gives the customer more choices, more convenience, more control over their entertainment, information, and communication choices, in more innovative ways and we're really excited to introduce the Xfinity brand to our customers.

Meanwhile, we're continuing to invest in future growth. In business services we continue to have real success in the small end of the business market with a lot of room for growth. In fact, we've been growing this business which is now quite sizable. Revenues have been growing 40%-50% very consistently. Now we feel we're ready to expand our offering further, targeting companies with 20-250 employees, in other words, a larger company size than previously we'd been targeting. This segment of the business market spends $10-$15 billion per year on the services we offer which represents another opportunity roughly equal in size to the small end of the market where we've been concentrating so far.

So backhaul is another nice complimentary business that can further leverage our network and one we're actively pursuing. We size this business at roughly $1 billion for Comcast over time.

Moving onto wireless, we're now in the execution phase with our High-Speed 2go product. In 2009 we launched in five major markets. In July we launched Portland, Atlanta launched in July as well, in November we launched Philadelphia, Chicago launched in December, and Seattle launched in December as well. As of yearend we're offering the product in more than 9 million of our homes passed and we look to significantly expand that by the end of 2010.

High-Speed 2go is sold in conjunction with our high speed data products, sold in a bundle which makes a lot of sense for the consumer and is a straightforward transaction for us to process. We've proven in Portland, that Comcast High-Speed 2go bundled with our high-speed data product is a way to increase our high-speed data business. In Portland roughly 40% of the High-Speed 2go customers are new high-speed internet customers for Comcast.

Moving on to advertising during 2009 as Mike mentioned our advertising business went backwards $265 million. The good news is this core business is starting to turn around and could be possible upside in 2010. In addition, we continue to work on expanding the advertising opportunity within our activity. And in the last 18 months, in conjunction with Canoe we've made real progress on the ITV front.

We've enabled about 12 million households in 30 markets to use the EBIS platform to deliver reliable interactive applications to our customers. These applications include caller I.D. to the T.V now available in 3.5 million homes, RFI, request for information, piloting in three markets Chicago, San Francisco and Detroit. We're testing remind-record and we're also testing shop-by-remote with home shopping network.

In 2010 you'll see us continue to grow our footprint while launching new ITV applications. At the same time we're working hand in hand with our MSOs in Canoe to establish standards and provide a national footprint. We think that is really important to making ITV really breakthrough. We're excited about Canoe and think it represents a big opportunity for the industry as we ramp up interactive advertising products on a national basis.

The upside for advertising for 2010, however will really be lead by the turn in the market which we're seeing in the fourth quarter as Mike mentioned with our core business net of political growing 10%, but also strong trends as we enter 2010. Due to weakness in ad sales in the first half and lack of political our advertising business declined and was a real drag on revenue and OCF, it really cost us about 200 basis points of OCF growth in 2009. If current trends continue this drag could turn into a real lift as we enter 2010. To summarize in the worst economy in decades despite greater competition and investing in more new initiatives in 2009 than any year I can remember, we achieved solid unit and financial growth, and as importantly, are really positioned well for the future. Marlene.

Marlene S. Dooner

Thanks, Steve. Let's open up the call for Q and A please.

Question-and-Answer Session

Operator

Thank you we will now begin the Question and Answer Session, (Operator's Instructions). Our first question comes from the line of Jason Bazinet with Citigroup.

Jason Bazinet – Citigroup

Thanks so much, I just had a question regarding Mr. Smit, could you just chat a little bit about what attracted you to Mr. Smit based on what you saw at Charter? And what if any sort of change philosophically or otherwise, we might anticipate based on your conversations with him and his sort of philosophy regarding how to run a cable business? Thank you.

Brian L. Roberts

This is Brian and let me begin and also I think it's an important question to ask Steve's perspective, because they all report to Steve. The first thing is we wanted to stay very focused on all the execution of Comcast cable and while we're going to have a busy year here in preparing for NBC universal and all the transition and post-merger planning and getting ready to have hopefully an integration. It's important that we get that right and Steve is able to now focus a lot of his attention on that and as well begin to think about how we get some of the great benefits that we believe lie in our future.

Neil's track record both with AOL before Charter and at Charter through CableLabs and NCTA, I've known him for a long time and I'm personally incredibly impressed with his leadership skills and how well I think he will fit into the culture at Comcast, he's just a terrific executive. Charter, obviously when he got there had lots of problems that preceded him and I think he did more than a great job, an yeomen’s job of dealing with the realities of a company that had too much debt and needed to go through reorganization.

As it came out of that reorganization, it created an opportunity for him to rethink where he wanted to work for the future and the timing was amazingly perfect for us. And I think it's going to allow us to continue what we started, not have a big strategic shift, he's working for Steve, but I think he will add an external perspective to help us accelerate and lead and make decisions and he's a decisive guy and very fair and decent guy, so I think he will fit in perfectly. Steve?

Stephen B. Burke

Just to add to that, I don’t think there'll be any philosophy change. Obviously, Neil's going to be an important part of the business and he'll have things that he does differently than maybe I have done things but I think in terms of philosophy and the need to keep working on things we've been working on, Neil is in the exact same place we are.

He also joined a really strong team, I've been with the company for 11 years and I think our team right now is stronger than it's been at any point in those 11 years. We have very strong management really across the board and Neil will only keep that and enhance that. Of course, Brian and I will still be around and all the strategies and philosophies that we put in place and the cultural side of the business, I look forward to continuing.

Jason Bazinet – Citigroup

Thank you.

Marlene S. Dooner

Thanks, Jason, Operator, let's have the next question please.

Operator

Our next question comes from the line of John Hodulik with UBS, please go ahead.

John Hodulik - UBS

Thanks, Good morning. Two quick ones for you, first have you noticed any change in the competitive pressures in the residential market, say in the last month or the last quarter? Given some of the statements coming out of Verizon, assume it will be a little bit less market share oriented. And then secondly, you're not sure you're going to spend a billion in terms of the wideband and the all-digital initiatives, 75% down on the wideband, 60% percent of the market is being worked on in the all-digital, could we assume that a proportionate amount of that billion has been spent in 2009 and we should see a tailing off number in 2010 or maybe just give us an idea of the split between 2009 and 2010 with that capital. That would be great, thanks.

Michael J. Angelakis

Hey, John, it's Michael. With regards to the second question in terms of capex, that's dedicated to all-digital and wideband. I think you're assumption is pretty much correct, it's about a 50/50 split in terms of what's been spent in 2009 and what we expect to spend in 2010, so wide band will be done in the early part of this year in terms of our project. That was a smaller ultimate amount than obviously the DTA in all-digital effort, but in terms of absolute dollars you can go by the assumption that it's half and half.

On the competitive front, I think we've seen a lot of our competitors increase their rates, and we've seen slightly less pressure but overall I think our team is just executing a heck of a lot better in terms of gaining more market share.

Stephen B. Burke

One of things you have got to be careful of, we have three competitors in almost every market if you include both of the satellite guys and RBOC, and everybody's being aggressive, everybody's being competitive and things go up and down during quarters. We have different programs, marketing promotions, advertising efforts, plus you throw in the economy, so I think the notion that there's a major sea change I would reject. Quarter to quarter, we're going to see ups and downs, and times when we're gaining share in high-speed data and times when we're not. The only thing you can do from an operating point of view is determine a strategy and continue to execute that strategy and that's what we're doing..

Marlene S. Dooner

Thanks, John. Operator, let's go to the next question please.

Operator

You're next question comes from the line of Vijay Jayant - Barclays Capital. Please go ahead.

Vijay Jayant - Barclays Capital

Thank you. A question for Steve and a clarification for Mike, Steve, in Europe we're seeing some operators use DOCSIS 3.0 to not really price it at a massive premium, but use it as a strategy to gain more share in broadband which is also sort of having a halo effect in reducing video losses. Can you talk about how you see your philosophy in the pricing of DOCSIS 3.0 between the balance between pricing and market share? And for Mike, you mentioned that programming costs were going to moderate, the costs increases are going to moderate in 2010, is that on a per sub basis or on a total number basis? Thank you.

Stephen B. Burke

So DOCSIS 3.0 for us is still fairly new and even though we've rolled it out in the majority of the country, I think our initial roll-out has been focused on making sure that it works technically, making sure that it's available everywhere, making sure that we start to buy DOCSIS 3.0 modems, and get pricing down the cost curve. And we have not used heretofore DOCSIS 3.0 as a way to radically change the pricing structure. I think things will evolve in the future in terms of the product that we're actually offering and the packaging, but right now I think our approach has been to get the technology out, to make sure that people understand that if they want 50 or 100 megs that we're the place to get it and 85% of our footprint the only place to get it. And I think the pricing strategy will evolve over time. I would not – if you're following our company and trying to figure out what we are doing financially I would not anticipate a major move in terms of collapsing prices or anything like that. I think it's more getting the product out there, trying to figure out what the customer acceptance is and sort of tweaking on the edges.

Michael J. Angelakis

Vijay, I'll take the second question on programming. If you look at the trending schedule – actually the year has been – we get a high point in the first quarter which is you know consistent and then slightly trending down. And we ended the year about I think 8.5% of increase in total programming costs. For 2010 we expect total programming costs, not on a per subscriber basis to be slightly lower than that.

Vijay Jayant - Barclays Capital

Thank you.

Marlene S. Dooner

Thanks, Vijay. Operator let's have the next question please.

Operator

The next question comes from the line of Spencer Wang with Credit Suisse. Please go ahead.

Spencer Wang - Credit Suisse

Thanks and good morning. Just a question on the expense outlook for 2010, I guess for Mike. Just in terms of some of the other expense categories, should we expect marketing G&A to continue to trend pretty flat in 2010 given some of the efficiencies? And secondarily, on the voice gross margins, Mike, that had a nice lift in 2009. Should we expect a similar increase in the gross profit margin for voice in 2010? Thank you.

Stephen B. Burke

Let me touch on expenses and then pass it to Mike. I think if you look at non-programming expenses, we're pretty close to flat. What's going on, and it's really a major, major effort throughout the company, this challenge 2010 effort is a way for us to take literally hundreds of millions of dollars worth of cost out of our business. We started this in mid 2009 and I'm really pleased with the results so far. It's really a way to make the company more efficient, to standardize things, to – you actually improve customer service while taking a lot of costs out of the business. So really the goal here is programming costs we do the best we can but they're obviously increasing at a rate that is higher than inflation. But then take all of your other costs and try to get those – get costs out of the business. And I actually think we're going to show real progress all the way through 2010 and into 2011. On the non-programming cost side of the business, I think what you see in 2009 should continue in the future.

Michael J. Angelakis

Yeah, I agree with everything Steve said and I think on the voice gross margin, as your particular question, I don't think we're going to have the same kind of benefits we had in 2009. Frankly the team just did a terrific job of taking efficiencies out. I'm not sure the magnitude of those efficiencies in 2010 are still there but we're working really hard. I'll go just one more step in terms of where I think you're going in terms of what do our margins look like. I think our margins have been very steady over the last few years and we're anticipating a pretty stable margin as we go forward.

Spencer Wang - Credit Suisse

Thank you very much.

Marlene S. Dooner

Thanks, Spencer. Operator, can we have the next question please?

Operator

Your next question come from the line of Doug Mitchelson with Deutsche Bank. Please go ahead.

Douglas Mitchelson - Deutsche Bank Securities

Thank you very much. So cable revenue growth decelerated every quarter for the past three years until you just reaccelerated a bit in the fourth quarter. Given your comments on the call regarding having the right technical platform in place soon having plenty of plant capacity across your footprint with the all-digital coming to completion and your ability to offer better and new services to your customers as a result, and then combine that with the economy getting better right, so at least versus last year, especially for advertising, it seems the company could be at an important inflection point where revenue growth continues to accelerate. So I guess first, do you agree with that philosophy? And then just separately, briefly, I'm sure any change is minor at this point but I was hoping you could comment on NBCU's results and were they as expected and have their budgets improved or deteriorated at all from what you thought pre-deal? Thanks.

Michael J. Angelakis

I'll take the NBCU. We're really not commentating on their results. It's just not really appropriate Doug, and we do spend time with them and we're planning our transition right now, but certainly I don't think it's appropriate for us to comment on their results.

With regards to accelerating revenue growth, you know we'll see. We absorbed – you know advertising was down $265 million last year. That is a meaningful amount and we're off to a relatively good start in advertising. But I think we're working hard to manage ARPU, and ARPU has grown. We hit $120 in the fourth quarter of total ARPU, so we're going to work through the best we can to certainly grow revenue but I also want to caution you, we're looking at profitable revenue, and profitable growth is really something we're probably more focused on.

Stephen B. Burke

We'd certainly like to see an acceleration but you know it's very difficult to predict what's going to happen with the economy, which really affects our business in a number of ways, housing, discretionary spending, ad sales. And with competition, again to my point earlier, it sort of ebbs and flows here. I do think we had sort of a three part hit between the economy's effect on housing and ad sales, plus increased competition during 2009. And to the degree that any of those three things changed, one would hope they would change to our benefit. And when they do change, two or three of those change, I think you can see a reacceleration.

Douglas Mitchelson - Deutsche Bank Securities

Do you feel comfortable giving us the local ad business [ph] for 1Q?

Stephen B. Burke

Well, what I would say is if you look back over the last year, it's gotten better and better and better, and we think that is a trend that is likely to continue. Who knows, but certainly coming out of December and into January, things still look good. What's interesting to me is how broad the change in ad sentiment is. You know when you talk to NBC or when you talk to the NBC cable channels or our cable programming group or our local ad sales, it seems like the world is getting better. The problem is obviously it's month to month and we'll see where it goes from here. But there's for me no reason not to be optimistic.

Douglas Mitchelson - Deutsche Bank Securities

Thank you.

Marlene S. Dooner

Thanks, Doug. Operator, let's have the next question please.

Operator

Your next question comes from the line of Frank Louthan from Raymond James. Please go ahead.

Frank Louthan - Raymond James

Great, thank you. With the SME business and saying that you're going to larger companies, the 20 to 250 lines, are you going to be more aggressive in moving into those locations that are out of your local cable region doing some interconnects and so forth, or are you still mostly going to be concentrating on customers that are within your existing service territory?

Stephen B. Burke

I think it's really concentrating on existing service area. You know we have this tremendous asset which is the fiber that we've put into the ground for our residential business, and leveraging that fiber in the commercial space is really what we've been all about. And so I think when you take that advantage away, then all of a sudden, you're in a very different business. So we're really concentrating in footprint.

Frank Louthan - Raymond James

Have you found any push back from customers that have locations in other places that want you to service that if you are not willing to go out of territory?

Stephen B. Burke

You know from time to time you'll find somebody who has fifteen locations inside your footprint and two outside and sometimes there's a hand-off to other cable companies who are in the commercial space, sometimes those companies go back to the RBOCs, so you know I think there are examples where it spills over. But the primary concentration is to concentrate on the places where we are.

Frank Louthan - Raymond James

Okay great, thank you.

Marlene S. Dooner

Thanks. Frank. Operator, let's have the next question please.

Operator

Your next question comes from the line of Craig Moffett of Sanford Bernstein. Please go ahead.

Craig Moffett - Sanford Bernstein

Yeah, hi. Mike, you talked about CapEx next year being lower on an intensity basis as well as on a real dollar basis. That puts you for the first time meaningfully below 15%. If you look out to 2011 and a little bit longer term where presumably after you're finished with the all-digital conversion, your need for standard desk set-top boxes drops pretty significantly and I would suspect probably your advanced set-top box demand has dropped pretty significantly as well. Do you feel comfortable sort of projecting out longer term CapEx? It would seem like it almost has to stay fairly significantly below 15% for the foreseeable future, wouldn't it?

Michael J. Angelakis

Well, Craig, I would say one thing. We did actually buy more advanced set-top boxes in terms of dollars in 2009 than we did actually in the prior year. But I think your theory is relatively right. We are continuing to focus on capital intensity. We don't foresee any major changes. We are investing as we've talked about I think quite a bit today in a number of different areas which we think positions ourselves for growth, like business services. We increased our business services investment by roughly 50% plus. So we feel relatively confident that particularly in 2010, we're going to continue to manage the efficiencies and get what I would consider great growth out of our CapEx. As we go forward, we'll see where that goes. But obviously it's a big focus of ours.

Craig Moffett - Sanford Bernstein

Okay, thank you.

Marlene S. Dooner

Thanks, Craig. Operator, let's have the next question please.

Operator

The next question comes from the line of Ben Swinburne with Morgan Stanley. Please go ahead.

Ben Swinburne – Morgan Stanley

Thank you. Good morning, everyone. Steve, I wanted to come back to the price increase information you gave us about the fourth quarter and just give me a little more color to what extent was that timing related around taking increases at a different point this year versus last year verses sort of a more philosophical change in how you are looking at rate increases and pricing power. I did not know if the rate increases came in places where you were not seeing RBOC video penetration growth or how we should think about that piece of the story as well?

And then maybe for Brian, how are you thinking about some of these emerging platforms, particularly the Apple Tablet and other new distributions platforms for content that could be friend or foe for the cable plan? Obviously, you have got a NBCU coming in so you have got interests all over the value chain. But I just was going to get your reaction from a Comcast perspective at what is being talked about and discussed on the Tablet and other distribution model front.

Stephen B. Burke

So, Ben, the price increase information you were talking about in the fourth quarter, just to level set everybody, last year about two-thirds of our systems took a price increase in the fourth quarter. This year was about a third. I would say, in general, we have been sort of the second half of the year in particular trying to be more unit focused, and then also, during the second half of the year we have a lot of places where we are converting to all digital, a lot of places where we are doing DOCSIS 3.0. We mentioned that we are launching Xfinity. We, I think, in many instances felt that from a timing point of view, you don’t want to go through a tough digital conversion and raise prices at the same time. So, it was a sort of combination of an overall philosophy that we wanted to go for units, but also some timing differential given what we are doing with the plant.

Brian L. Roberts

Regarding the other platform question, you know, I think like many people we are waiting to see some of these products first hand, so I don’t have a lot of specifics on the Apple Tablet. I saw the presentation, or parts of the presentation. You know, I think there is an incredible time for innovation going on right now, and I don’t think it has ever been happening faster or more broadly and there is going to be some hits and there is going to be some misses. What I think it is demonstrated, and what is driving us, is to have a company that is in a unique, we are a very special place where all of our focus is on getting to the consumer with some of the Comcast products, and sometimes that will be at the expense of other Comcast products and sometimes it's going to be added of experience.

Personally, I don’t think people are wanting more content on more devices, what they want is anything but a good thing for our company, whether we make that content, whether that encourages them to use the content more and therefore in and out of the home. But I went to CES, let me pick a slightly different, it relates to your question, at that time, and again since then is the Tablet, but at that time the two hot products that I liked at CES, one was Google’s new Nexus phone. It was smaller than the iPhone, so a smaller screen was the hot product, and the other hot product was 152 inch 3-D TV in high def that everybody wanted. So you had these two very different extremes, that the consumer wants something really small and portable, and something really big in the home. And I think we continue to find ways to service, and want to be servicing, those needs. So, you know, Broadband had a showing again in 2009 that faster speeds because folks want to consume more bits in their home, and our 4G platform that we are working with Clearwire to have the fastest speed outside of the home.

Ben Swinburne – Morgan Stanley

Thank you for the color.

Marlene S. Dooner

Thanks, Ben. Operator, let’s have the next question please.

Operator

The next question comes from the line of Marci Ryvicker with Wells Fargo Securities. Please go ahead.

Marci Ryvicker - Wells Fargo Securities

Thanks. I have two questions. The first, what is driving the slowdown in programming expense growth in 2010 versus 2009. And then, secondly, for the SME segment, would it be appropriate to infer that you could increase your $2.5 billion target for this segment now that you are focused on larger companies and (inaudible)?

Stephen B. Burke

Let me try the second and then do the first, and Mike can jump in if he wants to. You know, I think our feeling is the small to medium sized business opportunity is about the same size opportunity as this larger opportunity that we are going into. So really we look at those two businesses as separate. We really haven’t said exactly what our target is for the medium sector it's just too early, but I think it is reasonable to assume that that's incremental to the 2-2.5 that we've said.

In terms of the programming expense slowdown, these things are very lumpy and certain big deals will expire at certain times and that'll drive some of the acceleration and I think that lumpiness is probably a reason why '09 for us, and it's different for every cable company because their deals expire at different times, was a year that was higher than '10 is likely to be.

Marlene S. Dooner

Thanks, Marcy. Operator, let's have the last question please.

Operator

The last question comes from the lien of Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs

Hey, thanks for taking the question. Maybe just a couple of quick ones. On stronger RGUs in the first quarter, can you step us through sort of the growth add versus turn components across the key categories to really help us think about where the strength is coming from? And then maybe second question more broadly, RGU is sort of down 25% year over year, but more flattish if you look at the second half of '09. So the total suggests pressure, but the run rate implies a little bit more stability. What's the right framework to think about as we move into early 2010 forecasting? Thanks.

Stephen B. Burke

Well, let me concentrate on high-speed data although you could kind of make the same comments about everything. Churn is down year to year which is, to me, a very interesting thing when the RBOCs have added 5 million new homes and I think a good thing and there's a whole variety of theories as to why churn is down. I think some of it is we get more and more bundled customers. I think we've made some efforts and seeing some success with improved service, et cetera. So churn is down, but gross adds are up for high-speed data and the high-speed data business I think has made a very interesting pivot in the first and second quarters. Certainly in the second quarter we were down significantly versus the prior year and we've had a lot of weeks in the second half of the year where this business which is a maturing business where we have 16 million customers is doing better on a weekly basis than the prior year and I think a lot of that has to do with the fact that we've made the DOCSIS 3.0 investment, our speeds are better, but that has been surprising to us.

So I think it's progress both on gross adds and churn and who knows where that goes. It's very difficult to assess. The high-speed data business I think has been indexing at less than 100% of prior year almost every year for certainly three, four, five years, and then all of a sudden in the second half it's indexing higher and I think that could be due to a whole variety of things. We're certainly not assuming that as a lock to continue to happen through 2010. We certainly hope it does. But I think these things bounce around and you'll see quarters which are better and quarters which are worth, but we're certainly pleased with where you are.

Brian L. Roberts

Let me perhaps use this to finish the call by just saying that I think we've made real progress on operational execution and just to echo the service improvements we have been targeting, I think it's a whole customer experience that's critical and so we're starting to see, and Steve touched on it with our initiative for 2010, to continue to become better operators in how we answer the phones, how we roll the trucks, how we process all the transactions that we do. The volumes are quite large and we've made real progress and I think you're starting to see that also in some of the churn numbers and some of the performance in the second half.

There's a real focus on execution and that's one of the things we absolutely don't want to miss a beat as we kick off the new year, and at the same time with the launch of Xfinity and the emphasis on a lot has changed in our consumer proposition, this is again a way to begin the new year by putting a real emphasis, particularly in those markets that are completing some of these strategic initiatives that all of the rest of the markets or most of the rest of the markets will complete throughout the year or get close to completion, we think we have a real consumer message that is this is a different experience than you got just two years ago. The world has changed. A lot's changed for the positive, consumers in control, and I think we're giving a better and better service experience. Thank you.

Marlene S. Dooner

Thank you all for joining us this morning. Operator, please provide instructions for the replay.

Operator

There will be a replay available of today's call starting at 11:30 am Eastern Standard Time. It will run through Monday February 8th at midnight Eastern Time. The dial-in number is 800-642-1687 and the conference ID# is 47186371. This concludes today's teleconference. Thank you for participating. You may all disconnect.

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Source: Comcast Q4 2009 Earnings Call Transcript
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