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Comcast Corporation (NASDAQ:CMCSA)

Q3 2010 Earnings Call

October 27, 2010 8:30 a.m. ET

Executives

Marlene Dooner - SVP, IR

Brian Roberts - CEO

Michael Angelakis - CFO

Neil Smit - President

Steve Burke - COO

Analysts

John Hodulik - UBS

Doug Mitchelson - Deutsche Bank

Craig Moffett - Sanford C. Bernstein

Jessica Reif-Cohen - Bank of America Merrill Lynch

Jason Bazinet - Citi

Jason Armstrong - Goldman Sachs

Stefan Anninger - Credit Suisse

Spencer Wang - Credit Suisse

Ben Swinburne - Morgan Stanley

Vijay Jayant - Citadel Securities

Marci Ryvicker - Wells Fargo

Richard Greenfield - BTIG

Bryan Kraft - Evercore Partners

Operator

Good morning ladies and gentlemen and welcome to Comcast Third 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 Senior Vice President, Investors Relations Ms. Marlene Dooner. Please go ahead Ms. Dooner.

Marlene Dooner

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

Brian Roberts

Thanks Marlene and good morning everyone. Please join me on slide three; today we are pleased to report strong financial results. This marks the third consecutive quarter of accelerating growth in revenue which increased 7% operating cash flow which increased 8%.

We generated free cash flow of $1 billion this quarter and almost $4.3 billion year-to-date an increase of 17% compared to the first nine months of last year. These results reflect our continued focus on profitable growth a very resilient residential business, a robust advertising market and a continued focus and strength on business services.

We obviously still have a tough economy which combined with the anniversary of the broadcast digital transition continued to impact video units. However, as Michael will discuss in a few minutes. We started to see some real year-over-year improvement toward the end of the third quarter and for October.

Overall, we are executing well delivering strong financial results as we focus on high value video customers on growing our relationships and broadband and phone and expanding business services.

We are also continuing to invest a foster growth and to further strengthen our competitive position with all digital now about 65% of our markets and DOCSIS 3.0 deployed in more than 80% of our footprint. As we near completion of these important projects we are starting to see the fruits of those investments.

In video, we have tripled the number of high def channels and have doubled the amount of foreign language programming. In HSD we are reinforcing our product superiority as we double the speeds to our existing customers and introduce new higher speed services with 50 megabits currently available to more than 40 million homes and a 105 megabits to more than 25 million homes.

Our On-Demand service is also expanding. With our new library server infrastructure which takes advantage of our scale, we called the Comcast content delivering network or CCDN. We now have the capacity to offer $70,000 of content. As a result, Comcast customers in more than 20% of our footprint now have access to over 25,000 On Demand choices including 11,000 movies.

By the end of this year a majority of our markets will have this level of choice and with CCDN we have the ability to continue to expand the On Demand choices we offer our customers. As we do this, we are rolling out enhanced guides with better linier and On Demand search, improved DVR functionality and more interactivity include a unique new feature that automatically informs you if the content is available in high definition and just with the click of one extra button immediately takes you to the HD version which our customers really love.

Our new guide has already been rolled out to three quarters of our markets and will be in all our markets in the next six months. We are also deploying remove DVR and multi room DVR and they are available in a majority of our markets today.

Please turn to slide four. This week we re launched Xfinity TV, our authenticated On Demand online service with a new and I think great marketing campaign. Xfinity TV gives customers online access to 150,000 entertainment choices including movies, TV shows, premium and HD content with a compelling search and discovery platform.

All of our digital video customers will receive a customer ID to access Xfinity TV for no extra cost. It's a tremendous value added service. And before the end of this year we will launching the Xfinity TV remote app which will work on all the iPhones and iPads and eventually, right after they come out on the Android based tablets.

This is an entirely new form factor and device for consumers of these tablets which I think makes the search and discovery and the enjoyment of television that much greater because we've all been looking for how to navigate these 150,000 choices or whatever the consumer actually has. And this, with the touch of a finger allows you to change channels as well as do search and discovery. I think you'll like it when you get one.

So as you can see, we have an exiting roadmap for new product introductions and we're delivering more and faster innovation to our customers. All of these enhancements and new features really are starting to bring to life our XFINITY brand and your going to continue to see and hear many new products from Comcast in the months and years ahead.

In order to deliver the best customer experience, you have to marry great products with consistently good customer service. We've worked hard to improve our service but the leadership of Neil Smit, who has now been with Comcast for seven months. I have never seen the organization this focused on the customer experience and making it better all the time. Neil's commitment to take service and also this rapid product innovation and getting it completed and to the next level while at the same time keeping us focused on strong operating performance like you're seeing this quarter makes me really exited about where our cable business is going.

Finally, on NBC Universal, the regulatory reviews are continuing and we believe they are on track to enable us to close by the end of this year. The integration of NBC Universal is huge task and I'm delighted that Steve Burke will become the new CEO of NBC Universal upon closing.

Over the past 11 months Steve has been spending a lot of time planning so we can hit the ground running when the year closes. I believe we are in a strong position to deliver a great entertainment experience to consumers and to really drive new value creation for our shareholders.

Before I pass the call over to Michael I want to mention that we are following a new format for today's call shortening the prepared remarks for Michael and me and allowing more time for your questions for not only Mike and myself but also for Steve and Neil.

So, Michael with that please cover the results of the third quarter in more detail.

Michael Angelakis

Thank you Brian, let me begin by briefly reviewing our consolidated results starting on slide five, we are pleased with our third quarter results which reflect a consistent focus on profitable growth. We are executing well and continue to balance revenue, operating cash flow and customer growth as well as remain very focused on expense and capital management.

For the third quarter consolidated revenue increased 7.3% to 9.5 billion and operating cash flow grew 7.6% to 3.6 billion resulting in a consolidated operating cash flow margin of 37.7%.

Cable was the largest driver of these results but our programming businesses also performed well with revenue growth of 9% and operating cash flow growth of 26%. These results reflect the impact of a strong advertising market across all of our networks and rating strength E! which had record viewer ship in the third quarter.

These quarters consolidated operating cash flow results also include approximately $21 million of expenses related to the NBC Universal transaction which is included in corporate and other. Excluding these transaction related costs consolidated operating cash flow grew 8.2% and our operating cash flow margin increased to 37.9% from 37.6% in 2009.

We also remain very focused on free cash flow, free cash flow per share and earnings per share as important metric in evaluating the strength of the company.

And each of these key metrics our performance here on the third quarter and on the year-to-date basis was strong and reflect solid progress and growth. During the third quarter we generated consolidated free cash flow of a $1 billion and modest decline compared to last year primarily the result of higher cash income taxes and a slight increase in capital expenditures.

However, we prefer to evaluate free cash flow on an LTM or year-to-date basis and year-to-date free cash flow has increased 17% to 4.3 billion from 3.6 billion in 2009. Year-to-date free cash flow per share increased 19.8% to a $1.51 per share.

Earnings per share in the third quarter grew 14.3% to $0.32 per share from $0.28 per share last year when you exclude NBC Universal related costs of $66 million and tax benefits and a one time financing expense in 2009.

On a year-to-date basis EPS grew 17.1% over the comparable period in 2009 again excluding NBC Universal costs of a 154 million and last years tax benefits and one time finance expense.

Please refer to table four in the press release for more detail on these items. Please refer to slide six, to review our cable division's third quarter results. Third quarter cable revenue increased 6.9% to $9 billion reflecting accelerating growth in our residential business and continued strength in business services and cable advertising.

Total video, high speed internet and voice customers grew 202,000 for the third quarter and on a year-to-date basis we have added 875,000 customers compared to 1.2 million in the first three quarters of last year.

As discussed on the second quarter earnings call, in our recent investor conferences, customer addition trends were soft in July and August reflecting a continuing weak continuing weak economy; the impact of last years broadcast digital transition, the roll off of customers on discounted promotions and continued competitive pressures. However year-over-year customer trends improved in September and now that the impact from the broadcast digital transition is substantially behind us, we have experienced steady improvement in October.

This quarter's loss of 275,000 video customers was impacted by the factors I just mentioned and we are very focused on improving our retention efforts. Year-to-date we have lost 622,000 video customers, compared to 424,000 in 2009 where we benefited from the broadcast digital transition.

Over 40% of this year's video losses are in our lower end basic video package and the impact from these customer losses is more muted on the financial side as the average ARPU is less than half of our normalized video ARPU.

With regards to the economy, we remain cautiously optimistic about its overall direction and strength. However the housing market is still weak and unemployment remains high, which we believe continues to impact many consumers.

Even with these macro economic challenges, we are optimistic about our ability to continue to execute. We continue to manage the business for profitable growth and we've been effective in driving organic revenue.

Total revenue per video customer increased 10% to almost $130 per month in the third quarter reflecting strong ARPU management and increasing number of customers taking multiple products. At the end of the third quarter, 32% of our video customers took all three services compared to 27% at the end of last year's third quarter.

For the third quarter, total video revenue continued to accelerate and increased 2.2% reflecting rate adjustments and an increasing number of our customers taking higher levels of our digital and advanced services.

This quarter we deployed over 500,000 advanced Hi Def and/or DVR set tops and we added 228,000 advanced service customers. We now have 9.9 million advanced service customers, equal to 51% of our digital customer base and 43% of all video customers.

High speed internet revenue increased a health 12.2% during the quarter, reflecting rate adjustments and continued growth in our customer base. We added 249,000 high speed internet customers in the third quarter and year-to-date we have added 766,000 high speed internet customers, slightly above the 755,000 we added in the first three quarters of last year.

Our penetration continues to trend upward and is now at 33%. In addition we continue to see more customers take our high speed services compared to our economy service. Today 22% of our residential high speed internet customers take our Blast! Or above levels of service.

Voice revenue also posted strong growth increasing 12.6% for the quarter reflecting continued growth in our residential customer base as well as a growing contribution from business services. We added 228,000 voice customers in the third quarter and year-to-date we have added 731,000 voice customers compared to 906,000 in the first three quarters of last year.

Compared to the third quarter of last year, our penetration has increased 150 basis points and is now at 17%. We also had a strong quarter for business services with revenue increasing 54.5% to $333 million.

Excluding the contribution from Cimco and NGT which were acquisitions that were completed in the first quarter. Revenue increase 44%, we expect a momentum in the small end of the business market to continue. We remain very enthusiastic about our opportunity to serve mid-sized businesses and to expand our sell backhaul efforts.

Our cable advertising business continues to perform well as third quarter revenue increased 27.2%. This improvement was again led by strength in automotive as well as higher political revenue. Excluding the impact of political core cable advertising revenue increased 19% this quarter. We expect advertising growth to remain strong in the fourth quarter particularly given all the political activity.

Please refer to slide seven to review our cable divisions operating cash flow results. Third quarter cable operating cash flow increased 7.1% to 3.5 billion. Our cable operating cash flow margin remained relatively stable at the 39.5% a 10 basis point improvement compared to last years third quarter.

Total expenses in our cable segment increased 6.8% primarily reflecting higher programming and marketing expenses as well as continued investment to expand our capabilities and business services.

Programming expenses increase increased 4.9% this quarter reflecting a real focus on controlling costs offset by an increasing number of our customers taking higher levels of a digital services the additional new programming and contract resets.

In addition, we are receiving more value in our programming contracts particularly with more on-demand programming and increasing availability of content across multiple platforms.

Marketing expenses increased 17.3% this quarter as a result of higher overall advertising and media spend including XFINITY branding as well as continued investment and direct sales in our retail channels.

Customer service expense declined 2.7% in the third quarter as we benefit from a number of efficiencies initiatives such as higher call automation and better call center optimization.

Please refer to slide eight to review our capital expenditures for the quarter. In the third quarter capital expenditures increased a 139 million to 1.4 billion representing 14.4% of total revenue.

The level of CapEx spend this quarter principally reflects the timing of CTE purchases primarily advanced set top and DTAs offset by more favorable equipment pricing. We have now deployed over 15 million digital adapters since the inception of the all digital project including 2.2 million during the third quarter.

We have also continued to increase our investment to support growth and expansion in business services. We view our capital expenditure program on an LTM or a year-to-date basis and year-to-date capital expenditures have decreased 2.2% to 3.4 billion equal to 12.2% of revenue.

In addition, consistent with prior years our growth oriented capital expenditures represents approximately 72% of our year-to-date total spend. With regards to the fourth quarter we expect CapEx increase sequentially as we continue to invest and sustain our moment in business services, expand our efforts for the mid-sized businesses and sell backhaul and complete our roll out of all digital.

However, we still expect our full year capital expenditures to be below in both absolute dollars and as a percentage of revenue when we compare it to 2009.

Please refer to slide nine, our priorities allocating capital has been consistent to profitably investment in the operating and strategic needs of our businesses, deploy capital to areas that provide attractive incremental returns and enhance our competitors position and deliver sustainable organic growth.

This disciplined and returns focused approach to CapEx has helped drive significant growth in free cash flow generation and as I mentioned previously, year-to-date free cash flow increased 17% to $4.3 billion and free cash flow per share increased 19.8% to $1.51 per share.

With the recent extend of bonus appreciation for 2010; we anticipate the company will realize a benefit by paying lower income taxes in the fourth quarter. As we've done in the past we'll continue to report comparable results that both include and exclude cash impact on free cash flow from the economic stimulus packages.

Year-to-date, we have returned approximately 40% of our free cash flow to shareholders or $1.7 billion, including three dividend payments totaling 800,000 million and 300 million per quarter of share repurchases totaling 900 million.

The remainder of our free cash flow, which is currently reflected in our cash balance, will be used to fund a portion of the NBC Universal transaction which will be approximately $6.5 billion. We are pleased that over the past six months NBC Universal has successfully raised $9.1 million in the public debt markets.

This permanent financing for NBCU is now complete and was accomplished with a weighted average cost of debt of approximately 4.5% and an average duration of 13.3 years. When we close the NBC Universal transaction, we expect our consolidated leverage will be approximately 2.5 times and as we have said in the past, we remain comfortable with the debt to OCF leverage target of between two and 2.5 times.

Last December we articulated a three year capital allocation strategy for 2010 and we've executed well on that plan. Once the NBC Universal transaction is completed we will revaluate and communicate a new financial strategy for 2011.

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

Marlene Dooner

Thanks Michael. Operator, lets open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of John Hodulik with UBS.

John Hodulik - UBS

Okay. Thanks guys. Good morning. The video losses are a little higher than we expected. Can you comment on what do you think is driving that? Is that -- you said some hangover from the digital transition but is there evidence in the numbers that you're seeing more cord cuttings from over the top or even competition from AT&T and Verizon and you had also commented on just the competitive environment. I think the carriers were a little bit more competitive or aggressive on the DSO side, at least on the lower end. If you could just comment on what kind of competitive activity you are seeing these days. That would be great.

Neil Smit

Hi John, it's Neil. I think there are a few factors. Let me break them down. The first was the economic situation that Mike referred to. We're seeing fewer occupied housing units and the unemployment is still a factor. The second is the digital transition and the promotional roll off. 42% of the customers we lost were basic customers.

The digital transitions, the peers could be mostly behind us. And the third reason is the rate increases we took. So this year we took rate increases over the last six months. So Q2 and Q3 and about our 75% of our footprint versus about 3% last year. From a over the top impact we've -- now all our active surveys have seen almost no impact.

We have seen the customers who are disconnecting and not going to a competitor that small number of customers appear to be going over the air much more than any over the top impact. The competitive situation really hasn't changed much.

We have seen year-over-year a build out of the our box so AT&T about 2.2 million home build out. We haven't seen a significant increase in that competitive factor. The DSL players appear to be playing more on rate but we are very pleased with our HSD numbers. We once again gain shares as we put on more HSD subs and Verizon and AT&T combined.

We are pleased with that number; our HSD ARPU is up 4.9% we are pleased with that number. I think there is some real positive news in the quarter. If you look at year-over-year customer trending so net adds per month, every month of the quarter improved.

So August was better and July, September was better and August and we are seeing that positive trend continue into October. The other piece of positive news is we are really pleased with our advance services.

So we sold about 228 more advance service customers about 500k more HD and HD DVR, cut the boxes. Our revenue for advance services was up 11%, so we are seeing some positive trends. I think net, we are to keep focusing on the quality of our customers as I said on last call we are not going to chase volume. We're going to keep looking at customer service and focusing on the customer experience and improving the value of our service.

Marlene Dooner

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

Operator

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

Doug Mitchelson - Deutsche Bank

Thanks so much just one quick follow up on that video side. Neil, any sense of how much of 3Q was due to growth adds versus churns just so we could try to parse out some of those drivers that you were talking about and then I got a question for Brian.

Brian Roberts

I think that both in versus Q1 and Q2 where our churn was really generally trended very good, we saw a slight uptick ensure in Q3. However, I think the good news is we identified some of the cause of that which was the step up off of our promotional role off. So, there was a pretty significant step in pricing and now we are handling that in a much more effective manner. I think the very good news was as we increased our marketing spend throughout the quarter. We saw a positive connect trend, so the customer base was responding to our offers and we were pleased with that.

Doug Mitchelson - Deutsche Bank

So it was improving at a marketing spend, not a greater promotional or discounting or retention effort then is what you are saying.

Neil Smit

No I think it was just marketing spend, we were more active in the market place, we weren't overly discounting as I said before. I don't believe in overly discounting the product but more looking at the value of the services we are offering. So as Brian mentioned we launched Xfinity TV, we have launched in the affiliate market to see how that breaks out. We have increased our XFINITY products to more VOD so I am a big believer in not overly discounting but increasing the value of our service.

Doug Mitchelson - Deutsche Bank

Thanks Neil. So, Brian when you announced NBCU a year so ago, you emphasis the risk of worse nature of the JV structure, cable network advertising has to be better than anyone budgeted and that bodes well for NBC's results and value and the financing markets have been remarkable.

So, the question is it time to move up the risk curve consider accelerating the purchase of the remaining 50% of NBCU from GE. I understand the mechanisms of the deal but GE might be completing the full transaction faster and if there was ever environment where leveling up might have made sense in this environment.

So any thoughts on that would be helpful.

Brian Roberts

Well I'm glad you like the advertising, the financing underscore on that because I totally agree with you. Things have appeared to go quite well since we announced the transaction. We're still awaiting the regulatory approval. So no, we haven't even thought about that question. I like the structure that we have.

Its I think exactly right for both corporations. So I don't anticipate any change. I just want to talk to one of the things that Neil said to just make sure everybody understood some of the step up lingo. 12 months ago, during the digital transition, we gave a lot of customers a 12 month offer.

Many of those customers were for the first time coming on the multi-channel television. At the end of the 12 months, they went to normalized rates and that step up -- and that happened sometimes in promotions but there was an awful lot of that happening in the second and the beginning of the third quarter. Marlene?

Marlene Dooner

Thanks Doug. Operator lets go to the next question please.

Operator

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

Craig Moffett - Sanford C. Bernstein

Hi, good morning guys. There was a -- there have been some reports recently that Netflix amounts to as much as 20% of all the traffic carried on the net these days and I know you guys have been working on beefing up core facilities to sort of create a VPN if you will.

Can you talk about what you are seeing in terms of network traffic and how think about addressing the simultaneous needs of on the one hand making sure the network is robust enough to deliver a good service and then on the other hand, as you think about TV everywhere and that sort of thing, maintaining neutrality and the like in the way that you deliver broadband services.

Neil Smit

Hi Craig, it's Neil. I think right now we feel comfortable A, with our caps. We got 250 gig caps. The average consumption, the median usage is about two to four gigabytes. So we feel very comfortable with where we are.

That being said we rolled out DOCSIS 3.0 -- its about 83% of our footprint -- to increase our ability to offer higher speeds and the -- I think with Netflix I did read the same report that about 20% of prime time usage appears to be streaming.

We'll continue to monitor that. We feel good about where we are and that all digital initiative we have frees up more bandwidth. We're looking at -- I should say recapturing even more bandwidth as we go to D1 or basic digitization in some of our markets. So we're very -- we feel very good about our bandwidth situation. We'll continue to monitor it. We do have meters in place. So consumers can see how much they are consuming.

We feel that's a useful consumer service and we'll continue to monitor it as things progress. But it's a very small percentage of the population consuming that was large percentages of bandwidth. We are supporters of TV everywhere and we will continue to work on that as we said in our Xfinity TV launch.

Marlene Dooner

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

Operator

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

Jessica Reif-Cohen - Bank of America Merrill Lynch

Hi, thanks. Two questions. You mentioned that fourth quarter subs are improving or you said that each month was actually sequentially improving. I was wondering if you could give us some color on kind of all the -- not just video but advanced services within video and then there would be data and voice as well. And then secondly Steve, as you went you're through the integration process with NBC Universal. Can you highlight where you see the biggest pockets of growth or opportunity and maybe like a step nobody mentioned, can you give us an update on that?

Neil Smit

Why don't I actually take the first question, Jessica I don't think we are going to provide anymore data related to where we are seeing trends. I think we feel pretty good about how we are performing. So I think we will just leave at that, we really wanted to address I know some of the concern related to primarily basic video. So, let me just push it over to Steve.

Steve Burke

In terms of the opportunities for NBC Universal I think since we signed the deal last December almost all of the news has been positive. Obviously the NBC network still has it challenges but if you look at advertising, the business is significantly better than we thought. Universal Studios invested in an animation company its first release a film called Despicable Me that was a tremendous success and obviously the animation business is one of the best part if not the best part of the film business.

Universal Studios opened Harry Potter down in Florida which has been a sort of standing from only success and then really the cable channels that we will have when we get this company put together offered. I think real opportunity is to sort of cross promote, provide new programming. Just bring everything to a different level. So I think we have done a lot of deals over the last number of years and I think sometimes everything happens to the negative between signing and closing and this time it seems like that's the majority things are very positive.

In terms of Canoe we now have Canoe now has 10 million homes right now today where you can buy interactive advertising on style network and AMC has also launched a number of other networks. So, Canoe is now live it's outselling and sort of starting to do what we have wanted the interactives, advertising business to do for a long-long time and that 10 million number is going to grow very dramatically because it's based on the roll out of EBIS which does who follow the industry knows now sort of the industry standard for interactive television. So, we are very pleased with the progress of Canoe and optimist that finally after years of putting together the infrastructure and the partnership and everything else. Interactive advertising is going to deliver real results.

Jessica Reif-Cohen - Bank of America Merrill Lynch

Thank you.

Marlene Dooner

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

Operator

Your next question comes from the line of Jason Bazinet with Citi. Please go ahead.

Jason Bazinet - Citi

Thanks. I just have a question regarding Netflix and players like that. I think if you went back a few years people would have thought that was maybe a potential impact to your VOD business or maybe premium channels and I think the hope of the Netflix investors and maybe the fear of cable investors as it becomes real a viable substitute several years from now. Do you think that's a cogent concern as the market evolves and if not why not?

Brian Roberts

Well this is Brian, I think even Netflix on their own call felt that they were more complimentary than anything else to the existing market place. Also we think we are seeing an expansion on usage as you can use more devices. So, our on-demand usage continues to be quite large and growing and we are adding content agreed and are a great user interface. That is now something as you could use in articles today in paper something a lot of people are working on.

As new devises come out we're very exited about for instance the -- as I mentioned earlier the iPad gives us a chance to now start from scratch with the user interface that is using web technology, not cable box technology.

We also have better and newer boxes coming out and we have new guides to replace old guides. So there is an awful lot happening but I think with a new series of devices that allow people to consume more.

You are seeing actual usage go up and you are seeing more people in this space and that's just the reality and part of that is great for our broadband business, part of it increases our innovation speed and part of it establishes relationships that are new for the consumer like in Netflix and all that is in the market but net, net I think there is -- we're in a wonderful position to grow and that's what I think we're focused on and hopefully we'll integrate well with others as they enter the marketplace because that's something our consumers want. That's what Neil's talking about with the end to end consumer experience.

Jason Bazinet - Citi

Okay. Thank you very much.

Marlene Dooner

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

Operator

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

Jason Armstrong - Goldman Sachs

Hey, thanks good morning. A couple of questions. First on programming costs. The largest sequential decline we've seen in several years -- I'm just wondering what's driving this. And then margins pricing upside on most of the ARPU metrics, it looks like; it would seem to point opportunities for margin expansion. So how should we be thinking through this? Thanks.

Neil Smit

Hi Jason. It's Neil. I think programming costs will fluctuate quarter-to-quarter -- year-to-year based on the terms of the deal and deals that are renewing at that time. So I don't think I'd read too much into that. They were up about 5% in the third and year-to-date. I think we're getting more value out of our programming relationships in terms of BOD and online availability of contents and I think from a margin perspective -- I think there were -- the programming costs were not able to increase our video rates at the rate that the programming costs are going up and I think that's a trend that will probably continue. On the margin side we're focusing on both effectiveness and efficiency. So you saw customer service -- improvement in costs year-over-year and I think that's due to efficiency. We're managing our operations from a call center prospective a little bit more efficiently while improving service levels and I think we're going to try and manage the business so that we can try and hold margins but I think that will fluctuate and time will tell.

Jason Armstrong - Goldman Sachs

Okay, thank you.

Marlene Dooner

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

Operator

Your next question comes from the line of Stefan Anninger with Credit Suisse. Please go ahead.

Stefan Anninger - Credit Suisse

Hi, thanks for taking my question. My question is for Neil. I'm here with Spencer who has a question for Steve. Neil, can you discuss your HSD pricing strategy over the longer term and more specifically, do you believe that you can increase the price differential between bundled and unbundled HSE and perhaps helping to offset any future basic losses?

Neil Smit

I think the pricing strategy will fluctuate based on market conditions. I don't think there -- I believe that we have a fixed strategy. We respond to market conditions from a bundling perspective. As we've seen the triple play continues to offer more value to customers and we continue to increase the percentage of triple play customers. We do see an HSD only package to customers who want that and we'll -- if that continues so well we will continue to respond to market conditions in that regard.

Spencer Wang - Credit Suisse

I just have a quick question, Brian or Steve. Just given the number of programmer and MSO disputes over the last 12 months. Can you just update us on your thoughts on the –re-trends regime and your thoughts? Do you think that the re-trends must carry regime, it should be modified or what would you advocate for. Thanks.

Brian Roberts

I think we have consistently said that we witnessed new transaction. We can hopefully play a constructive role and any new thinking that has to take place around this space and so this doesn't really change anything because I think the anticipation of these disputes we are having same one in the market place today but at this point by being a cable operator and a broadcaster perhaps we can foster ideas that will not have the consumer to be taught in the middle there. So, we will just have to take one step at a time but we think there is an opportunity to play a constructive role.

Spencer Wang - Credit Suisse

Great. Thank you.

Marlene Dooner

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

Operator

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

Ben Swinburne - Morgan Stanley

Thank you. Good morning, just a follow up on the cost side for Neil and then I have a question for Brian. Two of the expense buckets you guys break out technical labor and administrative and other which were both down in the first half of the year or were up quite a bit in Q3 which surprised me a little bit just because you are moving through I think towards the end of the our digital roll out where I think you are going to see some pretty nice savings in terms of truck rolls and sort of overall activity level. So, I don't, Neil if there is any comment you want to make there to help us think about going forward or what the drivers where and then for Brian, everyone is starting focused on Xfinity TV or TV everywhere how you want to describe, or let me one of the most focused on initiatives in the industry in many years.

Now that it's launched can you sort of talk about your vision for the product. Particularly given that you have done deal now with CBS ten year deal which I think contemplates a lot of what you are trying to do here. How do we think about the number of screens you can push this product to devices, mobile broadband, internet connected TVs, how do you think about windowing. Are you going to get, so you are looking to have in-season access to all these shows on multiple windows or prior seasons.

No one is really in the position that Comcast is into sort of drive this product and I am curious what your vision is for this service?

Brian Roberts

Mike do you want to talk about the first part?

Michael Angelakis

Yeah I will talk about expense. Those two categories, technical labor was higher due to a couple of factors. One is our capitalization and there was less capitalization and more expense our OpEx as we discussed for that. The second reason in tech flavor was that we have launched a program that really focuses on the quality of our CPE's.

We are doing much more testing of the CPE across various facets and it provides a temporary OpEx hit but we think it's the right thing to do for the customer in the long term and long term it will take the boxes out of the system that are prone to problems and we think it's the right thing to do for the customer.

On the admin side I don't think I would read much into that it's just fluctuation quarter-to-quarter and overall that expense. We feel good about on the…

Brian Roberts

I think for Xfinity TV and TV everywhere we are at the beginning of that in my opinion not anywhere near the end. Ultimately, when we lay down our initial vision, which we called project Infinity a couple of years ago at CES, as a technical matter where you would like to get to is have a architecture and a capability that any piece of content could be accessed by the consumer on any device at any time and then its up to the content rights holder to determine whether they want to sell it at all, at that moment, in different windows.

All the things you said -- they get advertising support and have an additional charge for it were any other model and that the technology that our industry can bring or Comcast can perhaps lead with is things like the CCDN and with the architecture of our VOD infrastructure coupled with the WiFi in the home initially focused very much in the home and now new devices like the tablets which I think we're just seeing the very beginning of, the number of people who are going to make tablets and the rapid nature by which the price is going to decline in my opinion will accelerate this architecture to be taken well and used by the consumer. We're just starting. Ultimately it would be wonderful if there was an expectation by the consumers, they would now where the shows are and in what windows.

Today you know when a movie comes out you to the theater and so many months later you can buy a DVD and you see it on paid television and etcetera and then On Demand. Its all over the place right now and people are experimenting with different windows and different models and old episodes, new episodes, future episodes and I think until there is enough content that there is an understanding by the consumer, it will be adopted by some but not by all and our job is try to make it simple, ubiquitous and have the technical platform handle the volumes that we hope will ultimately come.

Neil Smit

We feel very confident that we can secure a lot of content because we had this experience when we did free video on demand six or seven years ago. The concept didn't really even exist. We had to sit down with the content companies and talk about why we thought it was a good idea.

It started a little slow in the beginning but at a certain point it really took shape and then took off and we think the same thing will happen with TV everywhere and one of the nice things about the NBC Universal deal is it will allow us to sort of speed that process up a little bit. But ultimately, this will be good for our customers because they are paying for these products on one device and we'd like to give these products to them on more devices at more different times.

Ben Swinburne - Morgan Stanley

Thanks a lot.

Marlene Dooner

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

Operator

Your next question comes from the line of Vijay Jayant with Citadel Securities. Please go ahead.

Vijay Jayant - Citadel Securities

Thanks. Questions f or Neil. On the details on the high speed data ARPU growth which is nearly 5% year-over-year, can you sort of breakdown how much was high speed, plans being taken, price increase as well as the commercial and I really have a sort of an observation and want to get your reaction is. It is -- there has been a lot of talk about over the top impact t o multi channel video and but if you sort of look at the pricing that most operators have for the faster speed tiers of broadband, if there is over the top this kind of cost cutting, cable operators actually on the margin a little better or even neutral given the margin of the two businesses, thanks.

Neil Smit

Yeah, a few thoughts. One is our HSD ARPU we were pleased with but most of that was due to customers taking higher speeds. So ass Brian mentioned, we rolled out 50 Meg servers to about 40 million homes and 105 Meg to about 25 million homes.

So we are continuing to offer higher speed to customers and that is really what's driving the ARPU. So, over 20% of our customer subscribed to the higher speed tiers that are black level which is 8 Meg and above.

So that's what's driving the speeds. Rate adjustments were a factor, but I would say that will continue to monitor and the rate and volume and manage that as the economy evolves. I think you are right in terms of the potential opportunity as if over the top and there comes to into been and there is more consumption of online video, we feel very good about our capacity that's one of the reasons we have invested so heavily in DOCSIS 3.0.

We feel that big pipe into the house is important and we will continue to investment in speed increases like that, like DOCSIS 3.0. We think it's an important component and the consumers continue to consume more bandwidth.

Vijay Jayant - Citadel Securities

Thank you.

Marlene Dooner

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

Operator

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

Marci Ryvicker - Wells Fargo

Thanks I had two questions; one is a little bit longer term. At what point do you no longer need the set top box, soon as it becomes extinct and what impact do you think it has on your business and then secondly and more immediately the double digit ARPU growth that we saw in the quarter, is this a trend or is this just a one quarter event?

Michael Angelakis

I will take the ARPU growth; we are very focused on ARPU. I can't tell you whether the double digit is going to be a short, medium or long term trend but certainly we are focused on the selling bundled services which is triple play selling advanced services in terms of more HD DVR, selling more pay on the VOD. So, we are very focused on ARPU management as one of the really critical metric in terms of how we manage the business.

So I really don't want to forecast where that's going but if you look at trends over the last several years we have been able to grow that number consistently.

Brian Roberts

The set-top box thing Neil you want to comment to but basically I think there will be set top boxes for a long time but the world is beginning to see technologies that can in some cases do away with the set top boxes. Some of your services we have digital adapters for much Television as Neil said over 15 million the world is changing and evolving very rapidly and we want to serve all spaces.

That said the most exciting products we are working on that allow you to have tremendous functionality right on the TV to have set-top boxes involve with them and some customers will not want all that and will want a different model and so we are working on all -- all across the landscape. Also as more and more moves into the cloud and into a different architectures we have to handle that as well.

So it's an interesting time technically and cable adaptors are looking at a lot of these different things. Neil?

Neil Smit

Yeah I think that I agree with Brian, the set-top box will be around for a while simply because we feel very focused – we feel it's very important to manage the rights of that content and the set-top box and something that enables that.

That being said as deploy technologies such as EBIF, it enables different thing. Such there are remote iPad that Brian showed at the NCTA National Show so we can work more on the user interface and excess access to that content and we can work more across platforms as Steve referred to, whether it's the television, the DVR, VOD; we can have a consisting user interface and I think that's a real important development in the overall customer experience.

Net, net we're probably more exited about our road map of innovation because of the trends its occurring and ultimately one could say there will be less and less boxes perhaps needed over time but I don't think it's a binary event that's going to happen anytime soon.

Marci Ryvicker - Wells Fargo

Okay. Thank you.

Marlene Dooner

Thanks Marci. Operator, lets have the next question please.

Operator

Your next question comes from the line of Richard Greenfield with BTIG. Please go ahead.

Richard Greenfield - BTIG

Hi, thanks for the question. When you look at these broadcaster websites, whether its ABC.com or whether it's the ABC iPad player, which are available free to the world with advertising, how do you think about the impact of what the broadcasters are trying to do vis-à-vis the re-trends demand that we see continue to escalate across the board and where do you think that all shakes out over time. Even before you get NBC, just what is the impact from all of that where do you think, whether it's Hulu or the ABC player, how does all this change over the next couple of years?

Brian Roberts

Well one of the points we've tried to make -- there is going to be a market and the market is going to have many other people and Comcast involved in that. So whether its cable vision and Fox or other companies and their negotiations, those negotiations are going to have a free market and a set of model. Clearly the broadcasters would like as many eyeballs as possible to their shows and since they're broadcasting into the air, it makes a lot of sense to put a lot of shows on the internet. The what exactly the show -- and exactly what window is up to each content company and again I do believe we can try to help the balance that is going on as the technology enables consumers to do more and content and distribution companies are trying to enable all that to happen in a way that is good for their stakeholders. I think we have an ability to be constructive force and ultimately give consumers more access and more windows on more devices and that's the strategy we're trying to pursue.

Marlene Dooner

Thanks Rich. Operator, lets have the last question please.

Operator

Your last question comes from the line Bryan Kraft with Evercore Partners. Please go ahead.

Bryan Kraft - Evercore Partners

Hi, thanks. Two short ones. I guess first, how do you see the myriad of rights issues that are today an impediment to a more comprehensive Xfinity TV online rollout being completed and how many years do you think that process reasonably takes to complete and then the second question was just if you could maybe give us an update on your wireless strategy and how you are thinking about approaching that market and how you're thinking has changed maybe over the last year. Thank you.

Brian Roberts

Well I think on the myriad of rights, I think Steve's answer was right on which is -- and its consistent where these platforms are getting enabled and we're just starting to look at each new device and new window and in the home and potentially out of the home and its -- your right, its complicated. But I think everybody is trying to pull in the same direction because of piracy. You got a looming issue that if you don't there are other ways consumers can get this content.

So it's in everyone's interest to come up with authenticated and authentic copies of the content to into the consumer so I think we are very pleased with the announcement this week Xfinity TV has I don't know something like a 150,000 different choices and you are now on devices that have wonderful navigation and search capabilities and these are all very important steps as we now have more devices allow users to play those contents not just at a fixed PC.

On wireless my sense is the steps we have taken are couple of different areas, the one that's most intriguing to me at the moment is sort of the last foot.

The last foot may want to have some display on a wireless device using WiFi in the home. As you get these tablets, that's what make some things and our ability combined with the EBIS that Neil was just talking about really it gives some unique capabilities to interact from the wireless device right to your set-top for those of you that have a Crestron type remote in your home. High-end consumers have wanted this. Now we are going to be able to bring this to everyone who has a few hundred dollars in a tablet.

So, otherwise we continue to monitor the wireless business but I think we are very pleased the way we deal all data businesses and that's really how we looked at wireless.

Bryan Kraft - Evercore Partners

Are you still continuing to roll out markets with the laptop connect cards with the same kind of resources and data behind it or is that maybe less emphasis on that now?

Brian Roberts

Yeah Brian we continue to roll out markets with the data cards, we have worked with the different pricing models and we found that combined 3G, 4G works well and using it as an add-on service to the triple play seems to improve take rate. So, we will continue to that as well as we are looking at the WiFi I mentioned in Philadelphia and we will monitor how that proceeds.

Bryan Kraft - Evercore Partners

Thanks very much.

Marlene Dooner

Thanks Brian and thank you all 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, November 1st at midnight Eastern Time. The dial in number is 800-642-1687 and the conference ID number is 10950140. This concludes today's teleconference. Thank you for participating and you may all disconnect.

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