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Executives

Marlene Dooner - SVP, IR

Brian Roberts - CEO

Michael Angelakis - CFO

Steve Burke - COO

Neil Smit - President

Analysts

Jason Bazinet - Citi

Jessica Reif-Cohen - Bank of America Merrill Lynch

John Hodulik - UBS

Jason Armstrong - Goldman Sachs

Spencer Wang - Credit Suisse

Craig Moffett - Sanford Bernstein

Ben Swinburne - Morgan Stanley

Doug Mitchelson - Deutsche Bank

James Ratcliffe - Barclays Capitals

Marci Ryvicker - Wells Fargo Securities

Mike McCormack - JPMorgan

Comcast Corporation (CMCSA) Q2 2010 Earnings Call July 28, 2010 8:30 AM ET

Operator

Good morning ladies and gentlemen and welcome to Comcast's Second Quarter 2010 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, Investor Relations, Ms. Marlene Dooner. Please go ahead, Ms. Dooner.

Marlene Dooner

Thank you, operator and welcome everyone to our second quarter 2010 earnings call. Joining me on the call are Brian Roberts, Steve Burk, Michael Angelakis and Neil Smit. As always let me first refer you to slide number 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 Roberts

Thanks Marlene and good morning everyone. Today we are pleased to report strong financial results for the second quarter and the first half as we continue to focus on profitable growth. In the second quarter, revenue and operating cash flow growth accelerated to 6%, and we generated $1.4 billion of free cash flow, an increase of 16%.

These results reflect improved video revenue, double-digit growth and high speed internet and voice revenues and strong momentum in our business services group. In addition, a stronger advertising market helped us achieve advertising revenue of 20% or more in both our cable and programming businesses. These healthy financial results also take into account the typical seasonality in our cable markets in the second quarter and other promotional activities last year including the country's digital transition.

I believe our strong results demonstrate that we are striking a good balance between revenue, cash flow and customer growth. And we remain disciplined in managing operating expenses and capital. It's still difficult to see perfectly the direction and strength of the economy. So, we remain cautious but optimistic about our ability to continue to execute in this environment.

Under the new leadership of Neil Smit, who is of to a fantastic start internally, we are continuing to make steady progress deploying all digital and DOCSIS 3.0 strategic initiatives that dramatically improve our product offerings to consumers and strengthen our competitive positive now and in the future.

We have now deployed all digital and about 60% of our markets, and we're currently active in 80% of our footprint allowing us to significantly increase our product offering in HD television, foreign language programming and on-demand. We're also building a leadership position in 3D with movies, events and sports.

We now reach more than 80% of our footprint with DOCSIS 3.0, which reinforces our product superiority as we double the speed to our existing customers, and introduce new higher speed services like 50 megabits to more than 40 million homes available. We're also delivering accelerating growth in revenues and operating cash and strong growth in free cash flow while we invest to improve the customers experience and to support new growth opportunities that position the company for future success.

Another opportunity for Comcast is NBC Universal, which Steve Burke has turned much of his focus to planning on a successful integration. We're eight months into the regulatory approval process, and we're on track to close this transaction we hope by year-end. As Steve will discuss, we are well underway in our planning, and we are more excited about the prospects of this combination now than we first announced the transaction last December.

It provides the real opportunities to deliver the best entertainment experience to consumers, and to drive value creation for our shareholders. Let me now pass to Michael Angelakis to cover the second quarter results in more detail. Mike?

Michael Angelakis

Thank you, Brian. Let me begin by briefly reviewing our consolidated results starting on slide four. Overall, we are pleased with our second quarter results reflecting our continued focus on profitable growth as we continue to balance revenue operating cash flow and customer growth and remain very focused on expense and capital management.

Second quarter consolidated revenue increased 6.1% to 9.5 billion, and operating cash flow grew 5.7% to 3.7 billion resulting in a consolidated operating cash flow margin of 39.2%. This quarters operating cash flow results include approximately 22 million of operating expense related to the NBC Universal transaction which is included in our corporate and other segments.

Excluding these costs consolidated operating cash flow grew 6.3% and our operating cash flow margin increased at 39.5% from 39.4% in 2009. We are also very focused on free cash flow and free cash flow per share and earnings per share as important metric in evaluating the strength of the enterprise.

In each of this key metric our performance during the second quarter and on a year-to-date basis were strong and reflected continued progress and growth. During the second quarter we generated consolidated free cash flow of 1.4 billion an increase of 15.8% versus the second quarter of last year. On a year-to-date basis, free cash flow has increased 27.8% to 3.2 billion from 2.5 billion in 2009.

In addition, free cash flow per share increased 20% in the quarter to $0.48 per share and year-to-date free cash flow per share has increased 31% to a $1.15 per share compared to the same period in 2009.

In the second quarter, excluding total NBCU related costs of 59 million and tax benefits in last years second quarter earnings per share grew 13.8% to $0.33 per share from $0.29 per share last year.

On a year-to-date basis again, excluding NBC related cost of 88 million in the first half of this year and tax benefits during the first half of 2009 EPS grew 18.5% over the comparable period in 2009.

Please refer to slide five to review the cable division's second quarter results. Second quarter cable revenue increased 5.1% to 8.9 billion reflecting accelerating organic growth in each of our businesses including video, high speed internet, voice and business services as well as a continued improvement in cable advertising.

Customer growth was relatively strong in the first five months of the year but in June customer additions were softer than expected and this is continued into July. We believe this reflects a continuing soft economy and competition as well as a natural roll off of single product video customers we had gained from the 12 month promotions related to the broadcast visual transition.

For the second quarter, total video, high speed internet and voice customers grew to 47.8 million an increase of 3.4% or 1.6 million new customer additions over the last 12 months. Despite the seasonally affected customer growth total revenue per video customer increased 8% to a $128 per month in the second quarter and reflects rate increases in video and high speed data, a higher contribution from Comcast business services and the increasing number of customers taking multiple products.

At the end of the second quarter, 31% of our video customers took all three services compared to 26% at the end of last year's second quarter. For the second quarter of 2010 total video revenue has started to accelerate and increased 0.7% reflecting rate adjustments and increasing number of our customers taking higher level of our digital services and improved pay-per-view performance driven by day-and-date movies and events.

We now have 23.2 million video customers. High speed internet revenue increased a healthy 10.3% during the quarter reflecting rate adjustments and more customers taking higher speed services. We now have 16.4 million high speed internet customers with penetration of 32.2%. Voice revenue also posted a strong growth by increasing 14.3% for the quarter as we continue to grow our customer base. We now have over 8 million voice customers with penetration of 16.5%.

We continue to have real success in the small end of the business market with business services revenue increasing 54.4% to 306 million for the second quarter. Excluding the contribution from our CIMCO and NGT acquisitions completed in the first quarter, revenue increased 45%. We expect the momentum in the small end of the business market to continue and we are enthusiastic about the opportunity to expand our sell backhaul business and our capabilities to serve mid sized businesses.

As I mentioned cable advertising continue to rebound as revenue in the second quarter increased 22.6%. This improvement was led by a continued strength in automotive as well as a solid recovery in almost every category. Please refer to slide 6 to review our cable division's operating cash flow results.

Second quarter operating cash flow increased 5.7% to 3.7 billion. Our cable operating cash flow margin remained relatively stable at 41.3%, a 20 basis point improvement compared to last year's second quarter. Total expenses in our cable segment increased 4.6%, reflecting higher programming and marketing expenses.

Programming expenses increased 6.4% this quarter reflecting the addition of new programming, contract resets and higher pay per view expenses. As I mentioned last quarter we do expect programming expenses to increase at a higher rate in the subsequent quarters.

Marketing expenses increased 12.3% this quarter reflecting a continued investment in direct sales, our retail channel as well as cost associated with the ongoing roll out of our new XFINITY branding campaign which will be in 80% of our markets by year end.

We are constantly evaluating our cost structure to gain more efficiencies. In the second quarter customer service expense declined 2.4% and technical labor expense declined 7.6% as we benefitted of efficiency initiatives which resulted in lower activity levels, higher coal automation and customer self service. Given the economic backdrop, we have also been very focused on delinquencies and our bad debt expense and now have seen bad debt expense decline for four consecutive quarters.

Please refer to slide 7 to review our capital expenditures for this quarter. In the second quarter of 2010 capital expenditures increased 1.5% to 1.1 billion representing 11.9% of total revenue. The modest uptick in the level of CapEx spend this quarter reflects an increased investment to support the growth and expansion in business services and product enhancement initiatives in the areas of converged products, IP technology and switch digital video. These items together with the timing of CPE purchases contributed to the sequential increase in CapEx from the first to the second quarter.

During the second quarter we deployed 4.6 billion digital set tops and adaptors including 4 million digital adaptors in support of the all digital roll out. We have now deployed almost 13 million digital adaptors since the exception of the all digital project.

This quarter we also deployed almost 500,000 advanced HD and or DVR Set-tops as we added 154,000 advanced service customers in the second quarter. We now have 9.7 million HiDef and or DRV customers equal to 50% of our digital customer base and 42% of all video customers. Year-to-date capital expenditure decreased 9.6% to 2.1 billion or 11% of revenue. However looking ahead, we do expect CapEx will modestly increase in the second half of 2010 as we continue to invest a sustained momentum in business services and expand our efforts for the mid-sized businesses and sell backhaul.

With over 80% of our footprint now wideband enabled, we have substantially completed our wideband project, but we will continue our rollout of all digital and expect to be substantially complete with this project by year-end. Even with all the product and business oriented growth investments, we expect our 2010 capital expenditures will be lower and both absolute dollars and as a percentage of revenue when compared with last year.

Please refer to slide eight. Our priority for allocating capital has been consistent, to be return oriented and to profitably invest in the operating and strategic needs of our business. We will continue to deploy capital to our businesses that provide attractive incremental returns, enhanced our competitive position and delivers sustainable organic growth.

Our discipline and return focus approach to CapEx has help drive significant growth in free cash flow generation and as I mentioned previously, this quarter's free cash flow increased 15.8% to 1.4 billion and free cash flow per share increased to 20% to $0.48 per share.

Year-to-date, free cash flow increased 27.8% to 3.2 billion and free cash flow per share increased 30.7% with $1.15 per share. Reflecting our strong commitment to return capital directly to shareholders, in the second quarter, we repurchased 17.3 million of our common shares with 300 million and year-to-date we have repurchased 36.4 million shares for $600 million.

As of June 30th, we have approximately 2.7 billion availability remaining under our share repurchase authorization, as we have previously indicated we intend to complete this repurchase subject to market conditions by the end of 2012.

Also during the quarter, we paid a cash dividend totaling 267 million. Today, we paid our third quarterly dividend totaling 265 million for total of 800 million year-to-date. The combination of dividends and stock buyback resulted in a total payout ratio approximately 44% of our last 12 months free cash flow. Based on our current stock price, this combined return of capital now represent in excess of a 4% yield. Now, let me turn it over to Steve.

Steve Burke

Thanks Mike. As you just heard, we're pleased with our second quarter results as we are effectively balancing financial and customer growth. Financially, we saw a good acceleration in both revenue and operating cash flow and believe our product and efficiency initiatives like all digital, DOCSIS 3.0 and challenged 2010, a beginning to have a real positive impact on our results.

On the unit side, the second quarter is seasonally slow for us in both video and high-speed data due to the numbers of customers and college-in-vacation towns. In fact, for high-speed data, the more successfully we are at adding these customers in the third quarter, the more pronounced this second quarter seasonality becomes the following year. However, I think it's important to note that in the first half of 2010, we've added 517,000 new high-speed data customers, that's an increase of 31%over the first half of 2009. In addition to seasonality, last years second quarter included a significant amount of promotional activity related to the National Digital Transition. As these deeply discounted promotions are rolling off we are being disciplined in the offers we are providing these customers. However, these are price sensitive, high churn customers and we elected not to chase them.

When you look at the quarter overall, we effectively manage the business for profitable growth. In the second quarter, we reported improved video revenue, double digit growth in high speed internet and voice revenue. Also the momentum in business service continues, we are firing in all cylinders in this business and as Mike mentioned, we are maintaining our 40% to 50% growth rate even as our base gets bigger.

In addition, advertising continued to really turn around. Also our financials show that we've been very effective in driving average revenue per unit or ARPU growth. Over the last three quarters video ARPU has increased 5% and high speed data ARPU has increased over 4%, as a result both revenue and operating cash flow growth in the second quarter accelerated. We expect the momentum to continue in the second half of this year as we continue to focus on targeted retention and acquisition offers in an effort to get the right balance and the right products to the right customer.

Moving on to advertising, in the first half of 2010, cable advertising increased 23%, the turn around in the advertising business has been dramatic. Particularly compared to the first half of 2009, when advertising declined 21%. As Mike mentioned earlier this growth was lead by the auto sector, but we are seeing real improvements across many categories, including retail, food and beverage, healthcare and education, which all posted double digit increases.

Importantly political advertising is starting to ramp from November 2010. We should see this gain momentum in the second half of 2010 as political campaigns heat up around the country. This rebound in advertising is occurring across all areas including local, regional and national. We're also seeing advertising strength in our programming business; ad revenue is up 21% in the second quarter for the programming group compared to a 7% decline in the second quarter of last year. Driven by a strong advertising performance across all our networks and real rating strength at E!, VERSUS and G4.

Both E! And G4 had there most watched and highest rated second quarters in there history and VERSUS had its most watched second quarter prime driven by the NHL playoffs. The scatter market continues to be very strong and we are optimistic about the momentum in advertising in our programming business.

When you look at advertising for Comcast, combining the programming business and cable, advertising is about $2.5 billion a year, a large number but not all the significant compared to 35 billion in total revenues. With a combined NBC Universal and Comcast, advertising revenue will approach a very meaningful $10 billion. Having the advertising market rebound is a very good thing for the combined company.

Moving on the NBC Universal, we as all of you know have done a number of successful acquisitions over the years, but in every deal it's seems like from the time you announce to the time you close, a number of things inevitably go wrong. What's been really exiting about NBC Universal is that since we announced the deal in December, there had been mainly positive turnarounds. Most notably the advertising business which is very important, but also our ability to put in place some financing given market conditions that is very attractive and a number of creative improvements. At NBC, at the strong cable channels and also at Universal Studios with the recent hit at the box office of the new movie "Despicable Me" which could turn into a real successful franchise.

On our end, currently we're highly focused on the planning as to how we will execute once we close this transition. We are careful about the rules and regulations regarding this, or planning both administratively and strategically for the business post close. We're meeting weekly to identify growth opportunities in order to hit the ground running when the deal closes. At this point, we remain even more excited than we were -- when we announced the transaction in December, and look forward to close by the end of this year.

Now let me turn it back to Marlene for Q&A.

Marlene Dooner

Thanks Steve. Operator, let's open up the call for the Q&A please.

Question-and-Answer-Session

Operator

Thank you. We will now begin the question-and-answer-session. (Operator Instructions). Our first question comes from the line of Jason Bazinet with Citi. Please go ahead.

Jason Bazinet - Citi

Thanks so much. I just have a question for Mr. Smith. I was just wondering if you could give us sort of comparing contrast between your experience in chartering what you sort of experience so far Comcast sort of way in on sort of where you see the greatest opportunity either on the cost side or on the revenue side based on what you learned so far? Thank you.

Neil Smit

Hi, Jason. I think that the number one is I've been really surprised by the enthusiasm and the motivation of folks here. There is really pride in being part of Comcast. I think the scale of the business is impressive, and that as we do things as one entity and we are well aligned, we can really move the needle. I think I'm really focused on aligning the business around some big themes and getting focused as well as customer service. I think we've made a lot of progress part of my arrival here in customer service, and we are now leveraging some of that we are sharing calls more between the various entities. We are doing in self service area. We are doing more in self service area. We are doing more intra day monitoring of calls, and really we're focusing on sharing the best practices between the regions that been went out to the regions and divisions. There is a lot of good things happening and we're trying to leverage that across the business. So, they are also there is where we are really focused on here.

Jason Bazinet - Citi

Okay, thank you very much.

Marlene Dooner

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

Operator

Our next question comes from the line of Jessica Reif-Cohen with Bank of America Merrill Lynch.

Jessica Reif-Cohen - Bank of America Merrill Lynch

Thank you. What Brian and Steve mentioned that you were more excited now than even before regarding NBC Universal, so I was just wondering with what different is just the advertising turnaround or the other things that you can do that you want, didn't think before, and could you give us just an update on the regulatory side you still expect the year-end close, or it's just too optimistic?

Brain Roberts

Well, Jessica I think advertising is got be sort of that the biggest headline if you look we signed a deal last December most companies that we were advertising base were going backwards. Today eight months later, to be going pick up 15, 20, 25% is a big deal for the company that's going to have $10 billion of advertising.

Secondly, a lot of the financing that we are putting in place because the market is favorable than we assumed it would be is coming in, has come in at very attractive rates. Third, I think really in a number of the businesses, they had a number of wins, and that stretches from NBC to the cable channels to Universal Studios. The entry to the animation business with "Despicable Me" is a big deal in our opinion.

And then finally, we spent a lot of time doing post-merger planning and has been through a lot of the businesses, the NBC executives have looked at our cable businesses and we keep identifying more and more opportunities to do things together that can enhance value.

So, if you look at some of our deals when we do the AT&T broadband deal it was right before Enron, right before the world fell up on the stock market went down, interest rates started to gyrate. So, we have been there before when it feels like everything is going against you in this instance it certainly feels like everything that we can see that's major is going our way.

Brian Roberts

I think on the regulatory front Jessica, there is really no new news. The process is well underway and we are still hopeful for a year end, before year end close.

Marlene Dooner

Thanks Jessica, operator let's go to the next question please.

Operator

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

John Hodulik - UBS

Okay, thanks. Good morning. Could you just comment on the level of competition you are seeing in the residential market? Looks like the broadband weakness that you guys saw was also prevalent throughout the industry.

Maybe a sense for what's happening there, it's just sort of seasonal and maybe cyclical issues and then following up on Jessica's question about the regulatory side. Is it possible there is a point to handicap the possibility of a negotiated settlement on as it comes to Title II? Thanks.

Neil Smit

Hi, John its Neil. I think clearly we saw a sequential slowdown in HSD but year-over-year in the quarter we were up 80% and year-to-date we put on 517 case up and are up about 31%. Revenue this quarter was up 10%. So -- and over the past four quarters we have put on more HSD sales in AT&T and Verizon combined.

So, we are very pleased with our financial performance, we are very pleased with the way our product is positioned and we see great opportunities going forward. I will pass it over to Brian.

Brian Roberts

On Title II or reclassification of broadband or whatever you want to refer to it, we feel pretty pleased that there is a constructive dialogue around this area and with the FCC and with number of stakeholders. We have on the one hand the national broadband plan needs reasonable rules to allow them to implement plan that we think many elements they were very supportive of and so as the chairman has talked about a third way proposal and that's one possibility, it seems like the extreme scenarios are off the table from our perspective but there is -- we are hopeful that there is a constructive process underway to try to find regulatory solutions that can allow the businesses to go forward with some certainty to be pro-investment and pro-innovation and at the same time establish some ground rules that everyone can find constructive.

So, we are working on that and when there is something definitive we will be able to report it, I am still hopeful.

John Hodulik - UBS

Okay. Thanks.

Marlene Dooner

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

Operator

Our next question comes from the line of Jason Armstrong with Goldman Sachs. Please go ahead.

Jason Armstrong - Goldman Sachs

Thanks. Good morning, couple of questions maybe first just on video competition if you can talk about what you saw during the quarter in particular relative to some of the satellite promotions including free HD and then on the margin trajectory surprising upside on couple of key ARPU metric video and HIS. Should we be thinking about this translating into further margin expansion over the balance of the year? Thanks.

Neil Smit

Hi, Jason its Neil. On the video side I think there were a few factors that Steve referred to. The first was seasonality and I think the impact has been more pronounced as we have executed better on some of the back-to-school campaigns. The second was DTV and a promo roll off.

We estimate about 100 K gain, or more than a 100-K gain for the DTV campaign last year and we had some promo roll off that occurred within the quarter. And I think on the competitive side, I think it's no surprise that it's a more competitive environment. We've got three plus competitors in any, in most of our markets and I think with the economy you're going to see more promotional activity. I think if you go to the destination price that the customer ultimately pays at the end of all the promotional activities rolling off. We feel very good about our products and our pricing. I'll turn it over to Michael on the margin side.

Michael Angelakis

Yeah, morning Jason. So on the margin side we've been very pleased with the stability of the margin. We've actually seen it grow a little bit, both on a cable side and on the consolidated side and that includes absorbing a lot of initiatives that we've been pursuing as well as the NBCU costs. So I think the team has done a terrific job of really managing a margin over several years. If you look at one of the slides that I had, you can see that the margins are remarkably stable over a long period of time and that again involves absorbing meaningful costs.

With regards to ARPU you're seeing a couple of things. One, we have done rate adjustments which I mentioned on both video and high speed. And also we are selling more three product and double product bundles. It's really now about, almost one out of three of our customers take three services. So that has helped a lot as well and I think it's just a testament to the execution of the cable team.

Jason Armstrong - Goldman Sachs

Great, thanks.

Marlene Dooner

Thanks Jason. Operator, lets go to the next question please.

Operator

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

Spencer Wang - Credit Suisse

Thanks, good morning. Two quick questions. The first I guess is for Neil. Some of the housing data points over the last couple of months have been fairly troublesome. So I was wondering if you could just speak to how you think this will affect the RGU outlook for the second half.

And then the second question is for Brian. It seems like IP Video was a big topic at the cable show this year. So I was interested in your thoughts or interested in going out of market or out of footprint with IP delivered video, thanks.

Neil Smit

Hi Spencer. I think your point is fair that -- I think consumer confidence hasn't recovered yet and there are fewer occupied living units to buy our services. That being said, as Michael mentioned, our ARPU is strong. We're selling more advanced services.

We're selling more triple play and we've got a great value proposition in our phone product. So I think we've able to offset a lot of that, the foreclosure issue with the economy and we'll continue to be competitive in our product set and continue to adjust our product bundling and our offers to meet the market conditions.

Brian Roberts

On our technological plans, our principal focus really is in market. We continue to believe that's a business that we understand, that we understand the business model. We've not seen other business models that make sense to us at this time; so, out of market. In market we've tired with Fancast national websites. But in market our focus is trying to really give our customers the benefit of the IP technology. That can be in the form of the iPad app that we showed at the cable show where you're able to get on the web and see what's available and control your TV better to more on-demand online features on devices if you, one of our customers and this cross platform acceleration of capabilities using IP technology is going to continue to happen it's an exciting time, but we continue to believe that this is part of what's powering our broadband business. Our Wi-Fi really helps enable the last foot if you will to let the consumer device be almost whatever they wanted to be for that last foot, but that last mile is best with our cable and pretty bullish on consumption and usage, and how that's going to power our business and the investments we're making in capital to have the best, the best facilities to a broadband video-on-demand, HiDef and the like.

Spencer Wang - Credit Suisse

Great, thank you.

Marlene Dooner

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

Operator

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

Craig Moffett - Sanford Bernstein

Hi good morning. Question for Neil and I guess for Brian, a strategic question. As you get to the end of Project Cavalry, or at least you've now got a all digital rolled out in enough markets, what is your capacity utilization look like in those markets and how as you're thinking evolved about, what do you actually do with all of that extra capacity and how do you take advantage of a strategically and competitively once it's there?

Neil Smit

Hi Craig. Well, as Brian mentioned our All-Digitals rolled out about 60% of our footprint and we're active in about 80%. We've been successful on those rollouts, and we've -- we're seeing great opportunity as you mentioned in freeing, and upping our bandwidth capacity. I think a few examples of that as we've rolled out XFINITY in markets, we're offering over 100 HiDef channels, we've doubled the amount of foreign language programming to between 50 or 70 channels.

We've launched on-demand with more than 20,000 TV and movie choices. We've eliminated in some of our more mature markets about 25% of the truck rolls, so it comes in the form of being able to offer more content in the video side, higher speeds on the HSD side, and more operational efficiencies and I think those are some of the tangible benefits of that.

I think as we move forward in that, our capacity has increased, it will really depend on consumer needs and demands how we utilized that capacity going forward.

Craig Moffett - Sanford Bernstein

I guess a good answer.

Neil Smit

I would add 3D interactive advertising, ethnic programming, business services, one of the great things about what happened to Comcast and the cable industry in general the last five to 10 years, Steve used to refer to us we're going to be a new products company. For longtime, I never quite understood what that would mean, and if you really think about that's what we become, and we have a number of products and as the competitive nature of each of those areas and the demand that's put on them to have a network it's finding a way to get more capacity is a really important and strategic assets for the company.

Craig Moffett - Sanford Bernstein

Is there anything you say Brian about the differences in operating or financial results in post-Cavalry markets and pre-Cavalry markets?

Brian Roberts

I can say operationally, generally, we have what we called power rankings, between our different regions and it's stacked up financial results, customer service type results, operational results. And generally speaking, the markets that are more matured and their Cavalry rollout that have had it for a longer time period and to be higher in our overall power rankings which is a very comprehensive way of looking at the business, so that's probably the most tangible evidence we have of the benefits of Cavalry.

Brian Roberts

And then just to add to that Greg, it's been a very good -- let's say ROI effort for us as well, we've spent time analyzing those mature markets and certainly as Neil mentioned from a cost stand point, there is real savings and we've been very pleased. We will look to possibly share some of that later this year, early next year as the more data matures.

Craig Moffett - Sanford Bernstein

Yes that's helpful, thank you.

Marlene Dooner

Thanks, Craig. Operator lets go to the next question please.

Operator

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

Ben Swinburne - Morgan Stanley

Thank you, good morning. Just a couple of questions I guess to anybody who wants to take them, but I think Mike maybe you mentioned video on demands premiums earlier in your prepared remarks and video ARPU showed a very nice acceleration this quarter. Just curious or maybe if Steve if you could talk about how much the shifting window on VOD is helping that business and obviously with Universal coming down the pipe, you're going to have more opportunities to look at how you maximize the VOD platform.

I think this is a business that probably has a lot of up sides, I'm curious if you could talk about that and then second maybe for Neil, I don't think anybody mentioned the Clearwire High-Speed 2go product, just curious how that roll out is going and if your putting a lot of marketing muscle behind that, how do you think the customer reception and price points are working so far?

Mike Angelakis

Why don't I take the VOD, I mean VOD is performing well, we are having more and more titles with day-and-date which actually has driven some VOD pay-per-view revenue, so that's a real positive effort and, Universal, we think will be an interracial part of how that strategy develops, so we've seen real progress in the day-and-date aspect and that has converted into revenue growth which we are pretty happy about.

Neil Smit

I still think there is a lot more potential there about half the films right now we're getting day-and-date with DVD and as that 50% gets closer to a 100% and consumers can pretty much count it, the films being there day-and-date, I think there is a chance for a big jump as part of Project XFINITY we now have 70,000 hours of VOD capacity in many of our big markets and you look at the ability to deliver lots and lots of movies and increasingly lots and lots of movies day-and-date with DVD, to me it feels like there is a lot of upside. I think we are just starting to see that reflected in the financials.

Ben Swinburne - Morgan Stanley

And Steve I don't know if you can answer at this point, but it sounds like you probably don't feel there's and real DVD cannibalization from that day-and-date shift.

Steve Burke

No, we've done a lot of testing and a lot of the studios have done a lot of testing and all the test results suggest that it's incremental.

Ben Swinburne - Morgan Stanley

Got you.

Steve Burke

And that's why studios like Warner Brothers have basically as matter of policy and Universal and others, as a matter of policy we have said, this makes sense, we're going to do it, it's just -- it takes time to chip away at old habits, but I haven't seen any data that suggests it's not incremental for everybody.

Ben Swinburne - Morgan Stanley

Thank you.

Neil Smit

And with regard to the High-Speed 2go, as you know we're positioning our HSI and home product together with our 4G wireless products, so your getting basically the fastest home internet product with the fastest mobility product. To ensure that there is broad access to the 4G network we're also offering High-Speed 2go that includes 4G-3G as well as the 3G stand alone option right now. We're actively deploying High-Speed 2go in seven different markets and as of the second quarter we'll have the product available to about 17 million of our homes and we are looking to expand that by the end of 2010.

Ben Swinburne - Morgan Stanley

And Neil is this mainly through business traveler type customers? What kind of folks are taking the product?

Neil Smit

I think it's a mix of business travelers as well as people who just want to have access to the products outside of the home. So, the mobility related customer, so it's both.

Ben Swinburne - Morgan Stanley

Thank you.

Marlene Dooner

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

Operator

Our next question comes from the line of Doug Mitchelson with Deutsche Bank. Please go ahead.

Doug Mitchelson - Deutsche Bank

Thank you so much. Good morning. A couple of questions. The big picture, one for Brian and Steve, given how rapidly you've been improving the quality of our VOD offering, are you scratching your heads a little bit on how successful Netflix has been ramping subscribers and do you see a point in the future with the lines crossed so to speak, where customers starting dropping Netflix because the Comcast service became so robust, and separately on high-speed data, you mentioned seasonality. I know you don't like to stock monthly, but just conceptually in June, July post ecology or ending have you seen the seasonality impact and I guess sort of I guess third question, you talked a lot about going All-Digital on the DOCSIS markets and the early markets. Are you seeing improved results for your high-speed data market share? Thanks.

Brian Roberts

Lot of stuff in there, so we will try our best to all of that if we don't you are free to follow-up, but on Netflix, they've done a great job. They have offered a nice product and I think what we can do is try to make our products better. A number of the on-demand offerings have improved. Dramatically, we've something we call project infinity that has a significant leap forward in the amount of on-demand content from library servers. We're very excited about the potential of our technology, but one of the things Netflix does beautifully and others is give you a great way to search what's available and give you recommendation, and that's not so easily on our electronic program guide today. So we are improving, I think we will improve and let me kick it over to Neil for some of your other questions.

Neil Smit

With regards to the high speed seasonality, I think it was very evident in our Q2 to Q3 numbers last year. So, you saw that become reality there. So, in Q2 of last year we added about 65K customers and in Q3, we added about 361K customers, so pretty significant difference and I think a lot of that attributed, attributable to be back to school and some of the seasonal movement. With regards to DOCSIS 3.0, we do generally see when we launch that in the market, we're able to offer high speeds. We do see the umbrella affect, people buy the higher speed, but they also tear up and there are other services. And the good news is our high speed tiers continue to outsell our economy service. So, there is real appetite for some half of the consumers for this higher speeds and all they bring to their capabilities in the house.

Doug Mitchelson - Deutsche Bank

Neil, I mean I get the crux of my seasonality question high speed data was should we expect a similar bump this year? Last year you did have some unique dynamics with RBOCs e-promotional in 2Q and they are less promotional in the second quarter. So I just trying to get a sense of should we expect a similar bump this year as we fell last year?

Neil Smit

I think it's way too early to comment on that.

Doug Mitchelson - Deutsche Bank

Great, thanks.

Marlene Dooner

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

Operator

Our next question comes from James Ratcliffe with Barclays Capital. Please go ahead.

James Ratcliffe - Barclays Capitals

Thanks for taking the question. Just one conceptually I guess only for Mike. How do you think looking at the future once you have the NBC deal one about leverage within the company and particularly between sort of 100% on Comcast and the joint venture, you look at an overall consolidate basis or proportional or do you really look at two business as separately. Just trying to get an idea of how you think through that process?

Brian Roberts

Yeah we are actually going through some of that right now but we will consolidate NBCU, so we will consolidate their debt. Obviously it's not recourse but when you really will peel back the onion. Some of it will be proportional but just to be clear once the deal closes and we issue our statements, we will be NBC will be consolidated with Comcast. We will control it and we will manage it. Obviously, we have a lot, we'll have a lot of say in terms of how that business performs, we are very pleased by the way with regards to the financing that they did earlier this year where they issued about $4 billion of financing and that's turned out to be a very smart move took out part of the bridge facilities.

But just to be clear it will be fully consolidated.

James Ratcliffe - Barclays Capitals

And when you think about target leverage for the company as a whole, do you think about it in terms of target leverage becoming as a whole or do you think it by it for cable specifically post that transaction?

Brian Roberts

No I think we are going to look at it as a whole, we will be one company. Obviously, we will have a minority invest with regards general electronics but we will look at it as a whole. I think where we are post closing, I think we have articulated as a consolidated basis we'll be somewhere around 2.5 times that's a reasonable number and for Comcast consolidated we are some have been and will be somewhere between 2 and 2.5 times depending on how the company performs.

James Ratcliffe - Barclays Capitals

Great and just one I guess for Neil, at what degree the good ARPU performance in broadband in particular. Can you talk about the degree to which both DOCSIS 3.0 and business services drove that?

Neil Smit

Well I think the clearly in the ARPU side and HSD higher speed and their ability to offer higher speeds is a significant driver of ARPU within that product line and also as a whole as you know our overall ARPU was up about 8%. Some of that was due to rate increases, some of that was due to better bundling and so DOCSIS 3.0 contributes to that overall equation.

What was your second question?

James Ratcliffe - Barclays Capitals

Also in regards to business services essentially how much it was like for like better ARPU and how much of it was change in mix?

Neil Smit

No I think business services while, we had a great quarter there up 54% was a relatively minor contributor to the overall ARPU number.

James Ratcliffe - Barclays Capitals

Great. Thank you.

Marlene Dooner

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

Operator

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

Marci Ryvicker - Wells Fargo Securities

Thanks, my first question, as you track is subs that leave and I'm specifically referring to the 265,000 net video subdue loss. Can you tell us where they are going, are they going to the Telecos, to the satellite or they are cutting the cord. Then the next question would be why are they leaving, is it price or customer service or something else?

Brian Roberts

We do as customers are leaving, ask them why they are leaving and where they are going to. I think most of the customers who were leaving, clearly satellite are biggest competitor right now and that's a factor. I think in terms of why as Steve referred to in his comments, you had GTV and things are relatively low priced, single play video customers are seeking, they are very price sensitive and generally churned at a higher rate and I think as a whole as how we approach the business. We are not going to chase volume, we are going to remain very targeted and disciplined and how we approach the business. I think the manifestation of that is the fact that both churn and bad debt were equal to or better than last year in Q2.

Marci Ryvicker - Wells Fargo Securities

And then I have follow up on your wireless data strategy. The feedback we have heard is that clear wire experience has been kind of spotty. Have you thought about other options to go into that segment?

Stephen Burke

I think our wireless strategy is focused on extending our services. The first is the build out, the high speed next gen wireless network. The second is the wireless strategy is the Wi-Fi component where we're travelling on a targeted basis. And the final piece is wireless apps. So we've made very good progress on that and as I mentioned earlier with the clear trial, we're still rolling out new markets and I think we're seeing progress on those fronts.

Marci Ryvicker - Wells Fargo Securities

And then one last question with regards to NBC. We've heard there has been a slowdown in pricing lately. Is there any type of comment you can have on that?

Stephen Burke

I think you'd have to ask NBC but looking at our advertising business there is anything but a slowdown.

Marci Ryvicker - Wells Fargo Securities

Right, thank you.

Marlene Dooner

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

Operator

Our final question comes from the line of Mike McCormack with JPMorgan. Please go ahead.

Mike McCormack - JPMorgan

Hey guys, thanks. Just maybe a couple of comments; one on DOCSIS 3.0 strategy. It feels like you guys have been probably targeting more FiOS areas and potentially U-verse that on a going forward basis we're seeing pretty significant DSL losses at Telcos. Is there an opportunity to take much more significant market share going downstream against the Telcos? And then secondly, I heard some pretty good trends at the Telcos regarding small medium sized business. Just trying to get a sense for what you're seeing on the ground level on the commercial opportunity. Thanks.

Stephen Burke

Hi Mike. Concerning DOCSIS 3, clearly we feel our product competes very well versus DSL and I think we're seeing some of that in the marketplace. So I think you're observation is what we're seeing as well. With regards to business services I think there are a lot of opportunities that we're seeing great growth in both small and medium business. Now we're going after mid market as well as backhaul and Metro E. So we great growth opportunity going forward in that business and the team has been executing very well on that front.

Neil Smit

Hey, just would add I think, again the strategy of investing and having superior products puts your in a position to sort of see what the future holds really to those questions in terms of how much market opportunity is there. But I think we're really enjoying the fruits of those investments and I think in the business service market, that's particularly in broadband and in the business service market I think we're just, really just getting going and the market keeps, our market opportunities keep expanding. The same is true on broadband. As you project four or five years, 10 years you know there is going to be more and more connected devices all over this country that the consumer uses. I saw some study that said that - that wouldn't tend to connected devices in a home. So our strategy, its not just any one product. It's having the best platform. And I think that's really critical as we go forward.

Mike McCormack - JPMorgan

Great, guys. Thanks.

Marlene Dooner

Thank you. And again thanks all of you for joining us this morning.

Operator

There will be a replay available of today's call starting at 12:30 PM Eastern Time. It will run through Monday, August 2nd at midnight Eastern Time. The dial in number is 800-642-1687 and the conference ID number is 82686142. This concludes today's teleconference. Thank you for participating. You may all disconnect.

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Source: Comcast Corporation Q2 2010 Earnings Call Transcript
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