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Comcast Corporation (NASDAQ:CMCSA)

Q1 2007 Earnings Call

April 26, 2007 8:30 am ET

Executives

John Alchin - CFO, Executive Vice President, Treasurer

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

Steve Burke - Chief Operating Officer, Executive Vice President; President, Comcast Cable

Analysts

Craig Moffett - Sanford Bernstein

Jessica Cohen - Merrill Lynch

Spencer Wang - Bear Stearns

Vijay Jayant - Lehman Brothers

Tuna Amobi – Standard & Poor’s

Anthony Noto - Goldman Sachs

Jason Bazinet - Citigroup

Doug Mitchelson - Deutsche Bank

Bryan Kraft - Credit Suisse

Rich Greenfield - Pali Capital

Kathy Styponias - Prudential

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Comcast's first quarter 2007 earnings conference call. (Operator Instructions) I will now turn the call over to Executive Vice President and CFO, Mr. John Alchin. Please go ahead, sir.

John Alchin

Thanks a lot, Operator and welcome to our first quarter 2007 call. First of all, I need to refer everybody to slide 2, which contains our Safe Harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, in this call we refer to certain non-GAAP financial measures. Please refer to our press release for a reconciliation of non-GAAP financial measures to GAAP.

Now for opening remarks, let me pass the phone to Brian Roberts for his comments.

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Brian Roberts

Thanks, John. We are thrilled with the beginning of the year. The first quarter, as you can see, had the biggest RGU growth in the company's history with nearly 1.8 million net adds, up some 63% over the same period last year. Double-digit revenue growth, 12% in cable, over 14% cash flow growth and this was the third consecutive quarter of record RGU net adds. So as you break it down, I think we have strength across all fronts.

Triple play really is changing the company and it's the gift that keeps on giving, if you will. We basically have basic net adds of 75,000. John and Steve will take you through it, but high-speed data, Comcast Digital Voice and digital, we are seeing an acceleration in America's transition to digital. So you put it together, every one of the business lines is performing at or better than we had thought, the momentum is growing, they're driving revenues which are therefore driving to increasing margins and 14% plus cash flow growth.

We're very bullish on the full year. It's only 90 days, so we're not changing any guidance, consistent with our policy in past years not to do that 90 days into the year. But I have to tell you, I think the momentum is fantastic. You'll hear lots of details and I look forward to your questions. I think we're off to a great start.

John Alchin

Thanks a lot, Brian. On a consolidated basis our consolidated numbers are driven by really strong results in the cable division and reflecting the impact of the Adelphia, Time Warner and Houston transactions. Revenues up 32% to $7.4 billion and operating cash flow also up 32% to $2.8 billion. Operating income increased 26% to 1.3 driven by growth in operating cash flow and offset in part by increased depreciation and amortization.

We reported $1.5 billion in depreciation and amortization in the first quarter, a 37% increase from the prior year. That increase reflects our recent cable acquisitions and higher CapEx. This level of depreciation and amortization is expected to recur throughout the remainder of 2007.

Net income increased $837 million in the first quarter, up from 466 or $0.15 a share in the first quarter of 2006. In addition to strong operating results at Comcast Cable, the quarter includes a one-time gain included in other income of $500 million or $300 million net of tax, related to the dissolution of our Texas-Kansas City cable partnership. Excluding the gain associated with the partnership dissolution and reconciled in table 7(b) of our press release, adjusted net income for the first quarter would be $537 million or $0.17 a share.

First quarter programming revenue increased 27% to $302 million reflecting higher network ratings, advertising revenue and distribution revenue. Programming operating cash flow increased 30% to $65 million, primarily due to the increase in revenue offset by rights and programming increases.

Corporate and other revenue is essentially unchanged at $88 million. Corporate and other operating cash flow loss for the quarter was $95 million compared to a $55 million loss a year ago, and reflects the lower operating cash flow contribution from our Philadelphia Sports partnership and from increased expenses at Comcast Interactive Media to support the growth in that new business.

Moving on to the next slide where we break down the cable revenue highlights, record-setting RGU net additions in the first quarter led to strong revenue increases across all product categories. You'll hear much more about our RGU growth that Brian has already alluded to and the success of our product offerings from Steve.

As always, we're presenting the cable results on a pro forma basis. Pro forma cable results include the results of the Adelphia Time Warner transactions, the Susquehanna acquisition and the Houston systems acquired with the dissolution of the Texas-Kansas City partnership as if those transactions were all made effective January 1, 2006. Again, I'd ask you to refer to the press release and specifically to note 1 in table 7(a) for the details of those pro forma entries.

Pro forma cable revenue for the first quarter increased 12% to $7 billion with pro forma operating cash flow for cable increasing 14% to $2.8 billion. Total video revenue increased 8% to $4.4 billion. The increase reflects increasing customer demand for digital features including on demand, digital video recorders and high definition television as well as higher basic cable pricing.

During the first quarter of 2007, Comcast Cable added 75,000 basic customers, up 49% from a year ago, and added a record 644,000 Digital Cable customers, an increase of 82% from 355,000 a year ago. We now have 13.3 million digital customers or 55% digital penetration of our video customer base. During the quarter, 535,000 Digital Cable customers added advanced services like high definition and DVRs to their digital service, either by upgrading or as new customers. This is a 70% increase over the same quarter a year ago.

We now have 5 million, or 38%, of our digital customers taking high-definition DVR services. These customers are among our best customers and pay on average $75 or more for video services a month, a $25 premium to the digital starter customer category. Our full digital customers pay $65 or more a month, as we indicate on this slide, and amount to 45% or 6 million of the digital customer base. The incremental revenue generated by our digital tiers is a key driver of video revenue and represents almost half of the increase in this revenue category.

All of our digital customers have access to on demand and we continue to see strong increases in movie purchases through this service. As a result, pay-per-view revenues increased 26% to $181 million in the period. This category has increased more than 20% on average over each of the last nine quarters.

Our high-speed data business continues to be a really strong performer. We added 563,000 high-speed data customers in the quarter, the highest level of quarterly net additions in the company's history and 10% more than a year ago. High-speed data revenue increased 21% to $1.5 billion, now a $6 billion a year run rate business. For the quarter, average revenue per high-speed data customer was stable at about $43.26, in line with prior periods.

We ended the quarter with over 12 million high-speed data customers. High-speed data penetration now stands at nearly 26% compared to 22% a year ago. We continue to believe there is significant growth potential in high-speed data as our sell-in rate continues to be at a very strong mid 50% range.

Phone, we had another great quarter with our phone business and you'll hear more about this from Steve, but revenue increased 88% to over $350 million. Comcast Digital Voice alone, revenues passed $250 million in the quarter for the first time, making this a run rate $1 billion business with a lot of growth ahead of it. Steve will say more about this in his commentary. The phone revenues were partially offset by a $50 million decline in the circuit switch business as we continue to transition to the digital voice category.

Advertising revenue decreased 3% to $313 million, reflecting primarily the impact of the 12 broadcast weeks in the current quarter compared to 13 weeks in the first quarter of 2006. When you adjust for the effect of political advertising and the extra week last year, we think our core advertising business is continuing to grow at about a 5% rate.

On the next slide, where we show the operating margin, we're reporting further growth in the operating cash flow in the first quarter and an increase of about 70 basis points in the operating cash flow margin over a year ago. The margin improvement reflects strong double-digit revenue growth and our continued success in controlling the growth of operating costs even as we incurred higher service and installation activity from record RGU additions, and increased expenses as we begin to add additional resources to new businesses to like Commercial Services. Even as we delivered the record-setting RGU additions we continue to tap into the benefits of scale and we expect this improving margin condition to continue with some seasonality throughout the year.

Moving on then to the capital slide, capital expenditures for the quarter were $1.4 billion compared to $967 million in the first quarter of 2006. CapEx continues to be predominantly variable and revenue-driven with the increase in CapEx driven by the record-setting RGU net adds. For the first quarter 2007, as it has been in the past, capital spent on new service offerings represents approximately three-quarters of our capital expenditures and is directly associated with new product deployment and consumer demand for our new services.

As you can see from the chart, 86% of the increase in residential cable CapEx in the first quarter was related to new service offerings, with 66% of the increase alone in the form of customer premise equipment and the rest relating to scalable infrastructure to support the growth in RGUs.

During the quarter we spent approximately $70 million in capital related to network improvements and the integration of the new systems. We expect to spend a similar amount to complete all the necessary integration in this category in the second quarter. On the other hand, the capital spending on Commercial Services in the first quarter was nominal at about $24 million, but it's expected to scale up in the latter part of the year to the total that we mentioned when we gave guidance for this category at the beginning of the year of about $250 million.

We will continue to invest to drive growth. As we sell more new products throughout the year, expect capital expenditures to follow our RGU growth. We're clearly off to a very strong start with RGU growth and we expect this momentum to continue. We generate a great return on this investment. When we look at the return on variable capital associated with RGU, the result is a return of more than 30% as we generate on average approximately $220 in annualized operating cash flow per RGU.

Moving on then to the free cash flow slide, in the first quarter we generated $442 million of consolidated free cash flow. This is a decrease driven primarily by the increase in capital expenditures and was attributable to two key drivers. First of all, the $680,000 increase in RGU net additions and secondly, the increase in the deployment of high definition DVR boxes. Consistent with the last three years, we used all of our free cash flow to buy back stock this quarter, investing $500 million to buy back 19 million shares. The remaining availability under our stock repurchase program is $2.5 billion.

So when you put these factors together, you can see that we're making significant investments in our business that generate strong returns. At the same time, we've returned almost $8 billion to shareholders over the past three years, an amount that's well in excess of the free cash flow that we generated and we've reduced our shares outstanding by almost 12%. We'll continue to make these investments to support this incredibly strong business plan while also returning capital to shareholders. In his comments, Steve will give you more insight into the operational strength of our business.

Steve Burke

Thanks, John. We're very pleased with the first quarter results and feel like we're off to a strong start for 2007. The real story continues to be the triple play which keeps making almost every single metric that we track better. If you look at revenue versus a year ago, operating cash flow versus a year ago, basic subs, digital, high speed data and of course phone, every single metric looks better than it was 12 months ago.

Since we'll be talking to a lot of you on May 1st, let me briefly touch on four areas: phone, data, digital and the integration of new systems. First, turning to phone, we added a record 571,000 new phone subscribers and ended the quarter with over 2.4 million CDV or IP-enabled phone subscribers in total. Our footprint grew to 35 million homes, up from 19 million homes a year ago and 32.5 million homes in the previous quarter.

What's interesting is if you look at our growth, about 60% of the growth in the first quarter versus the first quarter of '06 came from having more marketable homes; the other 40% came from selling more to existing homes which we've been trying to communicate on these calls. What happens is as we launch the phone business the initial penetration gain per week is much less than it is after you've been at the business six or nine or 12 months. So as we go through 2007 our phone net adds should increase quarter after quarter as we continue to ramp up and add more marketable homes, but also as we continue to increase the velocity of our sales to existing homes. As a result, we think our quarterly net adds will increase significantly by the end of 2007.

Earlier this week I was in Boston which was one of our first phone markets that we launched about 18 months ago, and their CDV penetration for the entire Boston region, which is a big region, has hit 12% with some areas over 14% already. Boston shows no sign of slowing down and we think Boston is really a leader and a telling indicator of where the entire business is going to be in the next nine or so months. Companywide right now, our penetration is right around 7% and you're going to see that 7% number increase significantly over the next three quarters.

Moving on to data, we had another really strong quarter with 562,000 net adds, up 10% in terms of net adds versus the same period in 2006. What's interesting is our high-speed data business was plateauing and showed signs of slightly declining two or three years ago. As we had hoped, the triple play is really like a booster rocket to our high-speed business. We're in a different trajectory than we were on just a couple years ago.

Interestingly, we really got going with the triple play about five quarters ago and for each of the last five quarters we've added more high-speed data customers than we did in the previous year and we're doing it without sacrificing average revenue per subscriber. ARPU actually climbed $0.73 to $43.26 this quarter versus the same quarter in '06.

Moving on to digital, we had an all-time record digital quarter with 643,000 digital net adds which is up over 80% versus the 354,000 digital net adds we added in the first quarter of 2006. I think this increase is so significant, I want to take a minute to explain where it's coming from. There are really three causes for the acceleration of our digital rollout. First, we're seeing a lot of demand for high-def and DVR boxes. As John mentioned, 38% of our digital customers or 5 million customers now take either a high-def box or a DVR box or some combination of both. What that means is 20% of all of our 25 million or so customers now have high-def or DVR or combined functionality which is amazing, since we've only been at it a few years.

We added 535,000 of these advanced set-top boxes during the quarter. Here the math is a little bit hard to explain because some of those customers were upgrades. So when you add up the number of high-def boxes we added, plus the number of enhanced cable, plus the number of regular digital tier, it adds up to more than the 643,000 digital subs that we added. But this is a key driver of our digital growth.

The second trend is an increase in what we call enhanced cable which is our low end set-top box deployment. We added 307,000 enhanced cable customers during the quarter and the strategy here is we don't charge that much and in some instances we don't charge at all for enhanced cable. What we're really trying to do is get our digital penetration deeper into our footprint because we know that when a digital customer switches from analog their propensity to churn is much lower. Digital customers have better picture quality, they get VoD, et cetera. So at the end of the quarter we were up to 55% of our video customers in total having digital, up from 46% a year ago and on its way to over 60% by year end.

The third trend, which is really a temporary trend which will end at the end of the second quarter, is our goal of getting more digital boxes out in advance of the July 1st date when we're required to have a new type of set-top box with separable security. So as a result you're seeing in the first quarter us being more aggressive than we normally would be to get more boxes out before July 1st. And in the second quarter you're going to see that spike even more. We're going to have a very, very high digital number in the second quarter which we actually think is going to drop in the third quarter after we've made the transition to the new boxes. The good news is we're rolling out more boxes. Again, our ARPU actually grew to from $17.08 a year ago to $18.45 this year in the first quarter as more people took advanced set-top boxes.

Finally, I'd like to touch on the integration of the new systems. We closed the Adelphia-Time Warner deal -- it's hard to believe -- but we closed the Adelphia-Time Warner deal about nine months ago and we had internally set a standard of getting the integration done in 18 months. We're now halfway through the time period so I thought I'd give you a status report.

The good news, even though we're halfway through in terms of time, we're about 80% of the way there in terms of progress integrating these systems. We've now finished with 14 of 16 waves of system conversions and as our business has gotten more complicated, these system conversions are more complicated than they were when we were just in the analog cable business. System conversion could be a billing platform, is always going to be a high-speed data platform as we shift from Adelphia's high-speed data service, Time Warner's Road Runner to our own Comcast data network; and also obviously, getting ready for the phone business.

So during the quarter, as John mentioned, we spent about $70 million on capital enabling these systems to make these conversions and only two of the 16 waves are left to go. We have a big wave left ago in Houston and one smaller wave, but 80% of the waves are now behind us.

Interestingly, we have gained basic subscribers in these systems during the first quarter and actually gained significantly more subscribers than we did for the quarter a year ago. So from the basic sub front, we're making very good progress. We are not making as much progress in terms of high-speed data and telephone where we actually added less units during the quarter in these newly acquired systems than we did a year ago. This is explained by the fact that during the conversions we actually slowed down the marketing for high-speed data and telephone., but now that most of those conversions are behind us we think high-speed data and CDV in the acquired systems will increase significantly.

Financially, these newly acquired systems are off to a very strong start. When we acquired these systems, and we're talking about, about 15% of the company is an acquired system when you do the math, these systems had a blended margin a year ago in the mid-30s and in the first quarter we got these margins up to slightly over 40% or roughly where we are with the rest of the company. Doing that in nine months is a real testament to our team and getting off to a very strong start. So I think the integration efforts are ahead of plan, the basic subs are healthy, the financial side looks good and high-speed data and CDV will pick up now that we've made these conversions.

So in summary, we think we had a very strong first quarter. The triple play continues to drive our financials and unit growth and the new systems are performing well. As importantly as the first quarter, we're taking a lot of momentum into the second quarter and a lot of the things that we've done in terms of infrastructure in the first quarter will pay off in the second, third and fourth quarters. So in total 2007 looks like it's going to be a very strong year.

John Alchin

Thanks, Steve. Let’s open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Craig Moffett - Sanford Bernstein.

Craig Moffett - Sanford Bernstein

First, and I'm sure you're going to say a lot about this next week, so I don't want you to have to front run it, but as you start to ramp up your online business with Fancast and now with the Fandango acquisition, can you talk about what advertising is doing in that business today and whether the softness in advertising includes presumably some gains in online and what does that mean for the advertising business on television?

Second, your capital structure is an area that constantly raises questions. I wonder if you could just talk about your thinking now about the amount of leverage you've got on the balance sheet and whether your thinking has changed at all, given the strength of the business and what level of debt it might support?

Brian Roberts

Let me start with the advertising. We are very excited about the potential to grow our advertising business through interactivity of all sorts; I would say the Internet is but one piece. You've got video on demand, the ability to do direct response interactivity on the television set. I think we're going to have a very positive series of quarters and years on the interactive Internet advertising front and we're very, very happy with the progress that Tim has made.

I think the entire advertising business is going through a transition as people do are more interested in having two-way capability in their advertising and more eyeballs shift to the Internet. What's great about our position is, because we're so big and strong on the broadband side, we are really in great shape to take advantage of that shift.

As John mentioned, we were hurt on the traditional ad sales side by the lack of a week this quarter that comped against an extra week last year and I think because it's an odd-numbered year and there's less election and political impact and obviously no Olympics, that business will be a single-digit business this year. But if you look at it in total, I think we're as excited as we've ever been about advertising.

Steve Burke

I just want to add that we will detail at the conference more about interactive, but I definitely echo Steve's sentiments. I think it is a very profitable segment and growing and as we all read in the newspaper every day, it's where a lot of attention is being spent.

Second question, I think we'll also go into a deep dive on the balance sheet and we'll talk a lot about the leverage and the free cash flow then. So if I might, why don't we just push that question to the conference? I don't think anything has changed. I think we're very pleased with the start to the year and we're continuing to buy the stock.

John Alchin

The only thing I'd add to that, Craig, and it's stealing a little bit of our thunder from next week, but you'll see debt continue to tick up a little bit through the year because we've announced a couple of transactions: the wrap-up of Insight, the acquisition of Fancast. So don't expect that to go down, expect it to sort of tick up from the 25 in accordance with the numbers that were published around those deals.

Craig Moffett - Sanford Bernstein

Understood, thanks.

Operator

Your next question comes from Jessica Cohen - Merrill Lynch.

Jessica Cohen - Merrill Lynch

Could you update us on what's going on in these video-on-demand trials and when you might roll out across the board?

On the data, which was obviously a phenomenal number with the strong ARPU, what are you doing from a competitive standpoint in regard to speed and what is your average home per node at this point?

Steve Burke

VOD trials, we have confidentiality agreements with the studios so we can't be as precise as I wish we could. The increase in purchasing of movies is very substantial and that increase would translate to a substantial increase in studio revenue from pay-per-view, and obviously our business would increase substantially as well. We're currently trialing in two markets. We're actively talking to the studios about adding a third market. We've done some research that shows that this business is incremental, not cannibalistic, which we shared with the studios. We're optimistic that in the not too distant future we're going to be able to expand beyond two or three markets to the rest of the country.

In terms of our high-speed data business, currently we're at 6 mb down. We have something called PowerBoost that allows a customer that gets 6 mb down all of the time to go to a higher speed, 12 mb or 15 mb. We believe that for the vast majority of our customers, our high speed data product is delivering much better speed than they can get from DSL. If you look at the last quarter, over half of our net adds came from DSL customers that switched to cable, which is amazing. There was a time when that number was less than 10%; it's now over half.

You asked how many homes per node, I think we're about 450 homes per node. We're in the process of surgically splitting some nodes in areas where we have very high high-speed data penetration, we have a lot of places where high-speed data is now over 30% or 40% of homes within a node so we're doing some splitting.

The reason why we've been able to maintain ARPU, which is incredible to me when DSL goes down to $19.95 and our ARPU stays at $43, it's a better product. For most people they get better speed, it's a better product, we're managing our network well and at the end of the day that's one of the reasons why our business is growing. Another reason is the triple play. I think that's a way to deliver tremendous value without overly discounting our high-speed data business.

Brian Roberts

Let me add a couple points. I just came back with a Cable Labs visit as we've done every few years to Asia, and make one observation that America's competitiveness in broadband is absolutely on par despite what various political agendas may be at work to try to suggest that this country is not up to snuff on broadband deployment. We actually look at speeds and services and business plans for the future whether we went to Hong Kong, to Japan and to Korea. I was amazed at how similar because a lot of us are buying some of the same equipment.

What's happening in the U.S., and I think maybe at a faster pace now, is the market is clearly expanding as more and more great applications are available in broadband. So when something like a YouTube takes off, more and more people now want broadband. What Steve just said, the last point, I think is the key: when they want the best experience we're finding we're getting the high quality customers, the revenue is fantastic per customer and we are constantly improving that experience with features like PowerBoost.

Finally, I'll give you a commercial for the NCTA convention. We are planning to demonstrate on stage the next wave of where we're going as an industry in Cable Labs technology of DOCSIS 3.0, which is going to be a significant speed enhancement for not a lot of additional incremental cost, which is this channel bonding technique to really be able to turbo charge today's experience into a super broadband experience.

I think I'm very, very comfortable with not just one quarter, but the whole strategy and how we stack up around the world.

Operator

Your next question comes from Spencer Wang - Bear Stearns.

Spencer Wang - Bear Stearns

First, I know it's very early in terms of commercial, but I was wondering if you could just talk to us about what you're seeing there and how big the revenue impact was in the quarter? Did you include any commercial accounts in the subscriber figures or ARPU figures that you've provided in the presentation?

Then just one clarification on Steve's commentary about the margins of the acquired systems going from mid-30s to over 40%. Does that mean that for the historical or legacy Comcast systems that margins were flat to down? If that's right, can you just tell us why? Thanks.

Brian Roberts

In terms of margins in the historical Comcast systems, because the acquired systems are only 15% historical Comcast did not go down. We're making progress on margin improvement in historical as well.

Regarding commercial, commercial really was not a material impact during the quarter. It was actually a drag financially in terms of OCF because we're spending a lot of time and energy hiring; I think our plan calls for us to hire about 600 people and we've done a lot of that. In most of the markets right now commercial is confined to just high-speed data, we don't have a high-speed data and phone combination and that's not a real business. You really want to be able to offer a small or medium-size business both. We're going to be rolling out phone pretty aggressively over the next two quarters, so you're going to see commercial really start to move.

In terms of commercial's percentage in the total high-speed data business, I think it's below 5% or right around 5%. It's a fairly small percentage of our overall high-speed data business.

Operator

Your next question comes from Vijay Jayant - Lehman Brothers.

Vijay Jayant - Lehman Brothers

Given the Verizon recent victory on patent litigation with Vonage, is there any risk to cable VoIP technology and specifically Comcast CVD?

Following that, on switch digital video roll out, any color on how the roll out has been in Denver and when can it be fully rolled out across the footprint? Thank you.

Steve Burke

Let me start with switch digital. We're doing very early stage trials in a couple markets, Denver and New Jersey, and when I say very early I'm talking in the lab and with employees. The trials are going fine. We're committed to switch digital playing a role in our capacity enhancements, but I think it's too early to declare victory or say that the trials are doing well or poorly.

In terms of Vonage, who wants to --?

John Alchin

Comcast Digital Voice is really technically and fundamentally different than Vonage. Our product is implemented based on packet cable standards that were developed by Cable Labs. Based on everything that we’ve seen from the Verizon suit, all the public information that is available, the patents that are at issue in the Vonage case seem to be very different, and appears to apply to over-the-top VoIP providers like Vonage, who route their customers calls over the Internet. Our service and systems do not use the public Internet. The major thrust of the Verizon case involves a different technology than ours, and where our service is over a privately managed network. So that is what we know at this stage.

Operator

Your next question comes from Tuna Amobi – Standard & Poor’s.

Tuna Amobi – Standard & Poor’s

Thank you very much for taking the question. I can’t remember the last time I had a chance to ask Brian a question. I wanted to zero in on CIM, if Brian or Steve can comment on that.

A housekeeping question. The advertising revenue that you alluded to earlier, is that going to be accounted for under the other line, or is that going to be included in the cable segment?

Brian Roberts

I think the answer is it's in CIM which is part of other, not cable.

John Alchin

It's a very, very small number at this stage; it would be a rounding by the time you get it up onto the P&L.

Tuna Amobi – Standard & Poor’s

Still on CIM, just to get a sense of the financial, how it's looking right now. I know there are probably a bunch of things in there, the video and the platform, all of that. I'm just trying to get a sense for that entity as a whole. When do you expect to breakeven in terms of profitability and what kind of longer-term margins would you expect that segment to generate over a longer period of time?

Brian Roberts

First of all I love coming to Standard & Poor’s, so we'll have to let you ask more questions when we're at the debt side of Standard & Poor’s. But you're going to hear a lot about CIM at our investor conference, not a lot, but you'll hear more. We're pretty comfortable that what's happening in online advertising and search advertising is going to put CIM in a very good position quickly. We'll see exactly how much detail we can share at that point. We have some discussions under way as have been rumored in the media right now. It's a very aggressive time and we believe we have a great advertising platform with Comcast.net and the reach that it has and then some of the new services that we're securing content rights for.

What's really amazing in the grand picture of Comcast, the cost of creating a new division like this and several new websites is relatively minor and the opportunity could be relatively major. Time will tell how much consumers want to consume over the Internet. We saw with our on demand platform that it was really transforming. We had 2 billion orders of on demand shows last year and we've only been at it a few years. And we're hoping to be able to have some of that same content, long form and short form, available on PCs but then be able to transact and also do it on cross-platform devices.

So at the same time we can be in discussions with the people who do search and advertising and I think when you put it all together you might be surprised that it's actually not a drag.

Steve Burke

Just to clarify what's in CIM because it's a relatively recent phenomenon. We have the Comcast.net portal which is the portal that any of our 12 million high-speed data customers can access. We also have a company that we purchase called The Platform which is a company dedicated to the physical delivery of video for ourselves and other third-party clients. We will have Fandango, which is the company that we just bought that's in the movie ticketing and entertainment business; and then a series of web businesses that we've been in the process of putting together over the last 15 months since we created CIM. Fancast was mentioned in the Wall Street Journal today. There's a site called Ziddio, a site dedicated to gaming, etc. And when you add all of that up, because we make a fair amount of money from search advertising and some money from display advertising, the business is a very modest negative in terms of operating cash flow this year, but I think that business is going to turn fairly rapidly. As we build out these sites it could be a major new area for us.

Brian Roberts

We hope to have specific news on that, a little more clarity on that at the investor conference.

Operator

Your next question comes from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

I was wondering if there's anything about seasonality this year compared to years past that your 1.76 million net adds doesn't accelerate in the following three quarters? I know second quarter goes down, but then third is greater than one and the fourth is greater than third. Because if that's true, RGU net adds could be closer to 7 million than your prior guidance of 6.5. So is there anything different?

A second question around Internet advertising. Could you give us a sense of the total number of page views that you've generated through the PC and the total amount of revenue just so we think about how much more monetization opportunity there is against that inventory? Thank you.

Steve Burke

Let me try to hit the first. I don't think we're seeing anything different in terms of seasonality. The phone business is clearly going to ramp very substantially in the second, third and fourth quarter. One anomaly that is clearly going to cool down in the second half of the year is what we're doing with digital. Obviously the high-def move is here to stay for more than the first half of the year, but the separable security date is going to change.

Obviously it's too early in the year to sort of say that we think we're going to do better than what we have guided the world in terms of RGUs, but we're off to a very strong start and if that continues there's no reason why we can't do better than we thought we would do when we gave guidance three months ago.

John Alchin

And then on Internet ad sales?

Steve Burke

I think it's too early to be that specific, the numbers are staggering. We're something like the fourth most popular destination in our homes. The page views are in the billions and billions. We can give more color on that on May 1st, I think.

Anthony Noto - Goldman Sachs

Great, thank you.

Operator

Your next question comes from Jason Bazinet - Citigroup.

Jason Bazinet - Citigroup

I just have a quick question regarding your strategic decision to push digital set-top boxes ahead of this FCC mandate; if you could just give a bit more color on that. Thanks.

Brian Roberts

Part of it, the suppliers are ending a product line because they're going to have to now put in cable cards. So they had made a lot of units and the date got hard with actions at the FCC and so we were able to buy a lot of inventory and it has to get deployed right away. There's also an increase around the end of the year a lot of people bought these new sets, as Steve alluded to, and in the first quarter and the second quarter they all want to get hooked up.

It is amazing when you actually look at statistics of customers who bought high-def sets who think they're getting high-def actually are not yet getting high-def. Then they finally get the real high-def and they're really in love with the product. So new televisions just improve television, period, when they're hooked to digital and of course eventually people realize to hook it up to the real HDTV it then becomes incredibly compelling.

We're just seeing a great lot of growth and at the end of a product line and the opportunity to get it deployed in the early part of the year.

Jason Bazinet - Citigroup

If you had your druthers then, given all the advantages and disadvantages of being in the box business, you prefer to remain in the box business as opposed to push that capital on the consumers' balance sheet?

Brian Roberts

No, not necessarily. Part of the Cable Labs trip to Asia was to visit with the consumer electronics companies, and we had an excellent series of meetings across the board with every major CE company in Japan and Korea to talk about precisely that question. Rather than take up a whole lot of time today, it's something that we can delve further into either at the cable convention or at investor day.

The short version is OCAP is being deployed by this industry right now and through the fullness of next year and pretty much every major operator is focused on having an interoperable software platform that every cable company has deployed so that every set-top company and every television company can operate on. Whether you see OCAP TVs or whether you see OCAP boxes made by these companies where consumers buy the box or whether you see it integrated, I think we're going to see a variety of all those.

You're going to see PCs and some progress with the PC industry running OCAP. So I think this industry is on the verge of a breakthrough on having better interoperability with the consumer electronics industry and being able to give the consumer that option. We do like the existing business model; it may improve, we're not factoring that into any of the future plans, but it's something we're working on.

Operator

Your next question comes from Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Good morning, gentlemen. Two questions as well. Based on all the comments on HD and the strong demand you're seeing, based on the average excess capacity you expect in your systems, how many HD channels do you think your systems can accommodate by year end?

Secondly, you talked about the items holding back margins, John, but what's the source of the current margin expansion? Steve of course gave the acquired properties change, but can you give us what the margin change was at the core properties and what was driving any change? Thanks.

Steve Burke

Well, I think as we continue to roll out the triple play and high-speed data, margins should go up modestly for the core business. We obviously have a drag when we launched triple play the first quarter or two, we have a drag from commercial, we have other drags, but the high-speed data business and the phone business, because they don't have the programming costs, when you efficiently roll those out over time I think your margins should go up.

John Alchin

Yes, I think that says that.

Steve Burke

And then in terms of high-def channels, right now we have all the high-def channels that anybody cares about. It's interesting because DirecTV runs a lot of advertising saying how they're going to have all these great high-def channels, but the fact of the matter is most of our systems have 20 to 25 high-def channels. Right now we're offering high-def video-on-demand. Dave Juliano on May 1st will take you through our plans for making sure that we keep the high ground in terms of high-def. We intend to do so, I believe we will and for the last couple years I think we have a higher high-def proportion of our digital subscribers than I think almost anyone and we intend to keep that.

Brian Roberts

Something that people also have noticed and we see affecting retail is the quality of our high-def as well, and we'll be talking about that. But it's a very complicated thing when you buy these new sets and I alluded to it but there's some very interesting data around that as well. So we're very comfortable that we have a good strategy around that, we'll lay that out in greater detail.

Steve Burke

We think we win in terms of quantity, in terms of quality and in terms of price value for high-def and our goal is to make sure that we keep that.

Doug Mitchelson - Deutsche Bank

If I can go back to something, Steve, that you said, if the implication is there's not a lot of margin expansion in the base video business, is it possible over the next couple years we're going to have another round of difficult discussions with the programmers regarding rates?

Steve Burke

No, I think that the video business is what it is. The programming cost increases have come down very significantly since we bought AT&T Broadband. I think there's always squabbles, but I think that business is kind of in a groove and I don't think the margin there is going up or down too much. It's such a big part of our company that it sort of weights you a little bit. What we're seeing is the business gets more efficient. I think as we scale the telephone business there's tremendous opportunity to start taking cost out of that business the way we have with high-speed data. But knowing us, there will be more new products that we'll be launching which will be a drag down. So I think it would be inappropriate for anybody to assume our margin is going to go up very dramatically, but I think there should be a steady rise, not including other activities, over the next few years.

Brian Roberts

To that point, we are fortunate and I've made this point before, at some point here we reach the crossover where half of the company is not in the cable television business; we are in the high-speed data business and we're in the telephone business. With the RGU growth being what it is, it will not take very long until that tipping point occurs. Of course, those businesses don't have programming costs.

So the diversification on the risk around that question is extraordinary. Over a ten-year period we will be, from where we started to some point in the ten years, we'll be 50% no longer a television company and that's hard for us to change and I think it's hard for investors to look at that change in terms of the revenue diversification that this company now has.

John Alchin

We'll go into a little bit more of a deep dive next week, Doug, as we talk about some of those cost efficiencies in the operations, so more to follow.

Operator

Your next question comes from Bryan Kraft - Credit Suisse.

Bryan Kraft - Credit Suisse

I just have a question actually on the full year guidance. Why is the guidance for revenue growth 100 basis points lower at the consolidated level than it is for cable, particularly when you look at this quarter's results where cable revenue growth was 12% versus corporate and other growing 20%?

John Alchin

All that is, is that the growth out of programming and the corporate and other category just isn't at the same level because while we're doing higher growth in programming it's just not enough to move off of that larger number, Bryan. So nothing more complicated than that.

Operator

Your next question comes from Rich Greenfield - Pali Capital.

Rich Greenfield - Pali Capital

Good morning. A couple questions related to your digital rollout. Steve, I think you mentioned that in some markets you're actually giving away digital boxes at no cost. Could you discuss your thought process in terms of moving all digital faster, and whether it might make sense to give away these low-cost digital set-tops and really drive either a high end digital tier which is kind of the HD or DVR group or than a free kind of low-cost digital box? And have that be the plan moving forward versus the existing kind of standard digital product that you actually charge a rate for in between?

Relate that to the second part of the question of what you're doing in Chicago. I know you're not planning to go all digital rapidly nationwide, but what are you learning so far in the early days of the digital conversion in the rest of downtown Chicago and how does that apply to this discussion? Thanks.

Steve Burke

What we're doing in Chicago is really confined to just downtown and we're doing it on a node by node basis and we're literally going all digital. The numbers there are fairly small. What we're finding is it's easier than we thought which is good for the rest of the company and we have some other markets, parts of Augusta, where we've done this before.

I think our general approach to the eventual conversion which we think is inevitable to all digital is that there is no great rush and there is no need to put too much stress – financially or otherwise – on the system.

If we get up over 60% by the end of this year, which we should do fairly easily, and we keep at this pace, what you are going to find is that we have many, many systems that are in the 70% and 80% digital and we will be able to make the transition. We want to do it gradually, we have a lot of other things going on with the triple play; we don’t need the bandwidth just yet. We will need the bandwidth for high-def and other services, but we don’t need it just yet. I think our strategy of just chipping away at it and getting penetration from 46%to 55% over 60% up to 70%, up to 80%, makes sense.

In terms of enhanced cable, I think enhanced cable is a part of the eventual solution. There will be a subset of customers who just don’t want to pay for more television channels. The interesting thing about enhanced cable, once you get that into someone’s home, they tend to spend more on pay-per-view and so you are actually are getting a revenue stream when that customer gets a box in their home because they are more likely to use pay-per-view. Over time, once you get enhanced cable into the home you have the ability to upsell HBO, you have the ability to upsell the entire digital assortment and of course you have reduced churn and better picture quality.

So there has always been an internal debate, should we start to really put our foot on the pedal and go all digital? Some systems you will see doing that, but I think it will be the minority, certainly in 2007 in Chicago and Augusta and a few other systems will be test cases this year.

Brian Roberts

Let me make a couple of other points. I think there is some confusion in the world about the words “all digital”. Every device in the house, in order to completely reclaim the bandwidth, would have to have a box. There were some cable markets, mostly urban America, where depth of service and how closely packed the houses are, from the beginning had a box on every single device. Those markets are therefore a lot easier to go all digital, and that is what I think you are seeing. That can be a great learning ground, can be a great test area.

Most cable systems don’t have a box on every device, and therefore it is very much in our plan and a lot of what you will see in bandwidth management at the May 1 deeper dive on this subject. We will show you that we can be somewhere in the middle where we are a majority digital. There is somewhere between all and a complete analog where you can gradually, over time, reclaim some bandwidth. It is not an all or nothing proposition, and as Steve said, we are completely in control of that pacing, that timing, and how that works. Right now, you will see that we think we have a very, very sensible roadmap that can be flexible. I just wanted to make that point.

Rich Greenfield - Pali Capital

Just to follow up, can you discuss the strategic rationale for why in some markets you are charging for enhanced cable versus in others, it sounds like you are just pushing it out at no cost.

Brian Roberts

In all cases the lowest would be zero and the highest might be $2. From the beginning, enhanced cable has really been a bandwidth, maybe $3. Enhanced cable has been an analog version put with a low-end digital device. That device, not every operator was taking that strategy. We have rolled out lots of them.

I think they, on the one hand, allowed us to as Steve said, have a better pay-per-view platform, begin to reclaim some bandwidth, get more customers with the digital experience. The offset, you do see some growth from that, to the fact that many of our customers who are existing customers take the advanced digital – in somewhat equal numbers, actually – that aren’t considered new customers. So in the end, the total digital base, which is the total number of digital homes and the average per digital box or digital home went up. So when you add it all together, it is a terrific trend but nothing has changed in the marketing of that. Of course, that low-end box just got more expensive with the cable card having to be added to it, it actually changes the form factor and so that is something that probably slows back down a little bit as we adjust. I think that is what Steve was alluding to.

Operator

Your final question comes from Kathy Styponias - Prudential.

Kathy Styponias – Prudential

The first question is regarding retransmission consent, which has obviously been in the press quite a bit lately. The question I have is, I am wondering how much of the discussions that you are having with station owners talks about having a true affiliate relationship? That is to say if you are “paying” something you get something in return, specifically advertising time, whether it is on the television set or through the Internet? Is that something that Comcast is pushing for and/or getting, or something that is going to be part of future discussions?

You have fantastic high speed data adds this quarter. In Seattle, I believe Clear Wire has launched and I am just wondering if you had any data points that you can share about what kind of impact you are seeing, if any, from that wireless data service? Thanks.

Steve Burke

Let me start with the second question. Clear Wire launched in Sarasota, I think it might have been their first market or one of their first markets, and the pie is so big and expanding, as Brian mentioned, so quickly that Clear Wire has really had a de minimus impact, if any, on our business.

Brian Roberts

Let me take the retransmission consent. I don’t think there is any new news there. All quiet on the Western front. There is a lot of noise recently from the industry, and I think you are seeing the kind of deals that we make with all groups, we have been from the beginning trying to get value for value. It has to at least be reasonably comparable. Thus far I think we have remained consistent with that policy, we have long-term agreements with the largest broadcasters, we have long-term agreements with many of the independent broadcasters, we always have agreements that are expiring coming up, the world is constantly reassessing this question.

For the most part, the kinds of things you are talking about, whether it is advertising on the Internet or advertising on the TV, supporting each other’s businesses – if it is a true relationship – these conversations are very complex with the larger groups that own cable channels, they obviously involve distribution. But we have not gone out and just directly paid for free broadcast television. In fact, some of the set-top box folks I think are going to be demonstrating at the cable convention an interesting technology that I saw in Asia – and this is the last time I will refer to it – but it is a different point.

An interesting technology that I had never seen was a mobile device with an antenna in it, and the antenna picked up the new digital broadcaster’s video in all of those countries. So you got very clear digital picture on a small device, not the kind of video we are seeing here in the U.S. which is coming over the cellular airwaves, if you will. So it had nothing to do with the bit rate, but had to do with the fact that it is being broadcast.

A number of set-top companies that want to rebuild that same technology into the set-top boxes, and that is something Cable Labs has taken a look at. So I think television that is broadcast that you can get with antenna will get easier, not harder, in the digital age. I think that we continue to want to work with the broadcasters to build each other’s businesses. We are very comfortable with where we are at. We can go into deeper discussions at the NTTA convention of some of these newer technologies.

John Alchin

Thank you all. Appreciate your participating. Thank you.

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