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Here’s the entire text of the prepared remarks from Comcast’s (ticker: CMCSA) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

John Alchin, EVP, Co-CFO

Brian Roberts, Chairman and CEO

Steve Burke, CVP, COO

Analysts:

Richard Greenfield, Fulcrum Global Partners, Analyst

Aryeh Bourkoff, UBS, Analyst

Jessica Reif Cohen, Merrill Lynch, Analyst

Craig Moffett, Sanford Bernstein, Analyst

Ray Katz, Bear Stearns, Analyst

Kathy Styponias, Prudential Equity, Analyst

Douglas Shapiro, Banc of America Securities, Analyst

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen-only mode. Operator Instructions Please note that this conference is being recorded.

I would now like to turn the call over to Executive Vice President and Co-CFO, Mr. John Alchin. Please go ahead, sir.

John Alchin, Executive Vice President and Co-CFO

Thank you, operator, and welcome everybody to our third quarter conference call. First of all, I'd like 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. Additionally in this call we will refer to certain non-GAAP financial measures. Please refer to our Investor Relations website for reconciliation of non-GAAP financial measures to GAAP.

And now for opening remarks please let me pass to Brian Roberts, our Chairman and CEO.

Brian Roberts, Chairman and CEO

Good morning. We are pleased to report another strong quarter in the third quarter. We had 9.8% revenue growth in cable and operating cash flow growth of 13.9%, approximately 14%, consistent with the first two quarters of the year. We are once again having strong results across the board. This quarter allowed us to invest more than $1 billion in our common stock. We had no major other investment activity, and we were able to significantly increase our share buyback purchasing more than 25 million shares for $750 million. In effect, we invested all of the free cash flow, $723 million that we generated in the third quarter, into buying back our stock. In addition, we settled another $250 million of Comcast exchangeable debt.

So since December 2003 when the Board first authorized post-AT&T our stock repurchase program, we have repurchased 2.7 billion, or 93 million shares, plus we have redeemed for cash 1.4 billion of debt, that was exchangeable into Comcast common stock, effectively removing another 47 million shares of float, bringing the total amount of recent repurchases to 4.1 billion. With more than 1.2 billion of remaining authorization we expect to review all possible uses of capital with our Board early next year as we continue to balance reinvestment opportunities with return of capital to shareholders while maintaining a strong investment grade balance sheet.

The acquisition of 70% of Susquehanna cable that we didn't previously own is another clear example of finding compelling investment opportunities in cable. With identifiable tax benefits and synergies primarily in programming and overhead, we will effectively be gaining control of 225,000 subscribers for less than 6.4 times operating cash flow.

On the business side, everything we are working on, whether in cable or content, is about improving and differentiating our products, extending our competitive advantage and increasing the value of our assets. We are really focused on innovation and differentiation as I have said before. And yesterday's transaction that was announced with Sprint, Time Warner-Cox, and Advance/Newhouse is another example of a transaction that helps to drive innovation, this time, of course, in the wireless space to deliver to all of our customers unprecedented opportunities of real-time high-speed mobility and access to content all in a single package.

So let me quickly review the Sprint transaction, not to be repetitive but to point out certain key attributes. We have for a long time said that wireless is a potentially important fourth product line that we would like to explore. The agreement with Sprint is not just a wholesale or reseller arrangement. The initial phase will allow us to offer wireless phones as part of our bundle, and that's nice, but in my opinion, the power of this news is the coming together of both -- the many, many U.S. cable companies in America, and hopefully room for others, so that we have the makings of a national platform, unlike the set-top box business where we have differing standards from the beginning of going into wireless, if we could have a national platform we think that that could drive innovation. Coupled with partnering with a company with the technical capability of Sprint Nextel, six weeks after their merger, is a great statement of their focus on innovation with the cable industry and with Comcast for new products that will work on a wireless network. And yesterday we demonstrated some of the initial ideas of the products that might be available starting in 2006, and they range from communications products to entertainment products.

And so on the communications front you can imagine integrated voice mail between your CDV, your Comcast digital voice, and your wireless phone. You can imagine bringing a smartphone home and having it use your Wi-Fi network in the house so you have great cellular coverage in your house but you don't actually go over the cellular network, giving great benefits to both the consumer and the cellular minutes that you wouldn't use and to the cellular company for reception, and at the same time, the beginning of application of entertainment products such as being able to look at programs from your digital video recorder, as we secure the digital rights, to programming your DVR potentially to actually having television right on a third screen. And I think it's the ability to innovate to this platform that will be a 20-year arrangement, a long-term journey, but a complete focus for our innovation plans to have a bundle and to have a partner that knows wireless, doesn't force us to go into a new business line, and at the same time, they're looking for us to be the entertainment and in-home communications piece, and I think it's a wonderful, natural alliance.

So we also pick up the retail marketing between both parties and Radio Shack said yesterday that they are supportive of this, and we believe all of Sprint's retail locations will be demonstrating in Comcast areas, Comcast high-speed Internet, Comcast cable, digital cable, high definition, and Comcast voice. We will do the billing for our customers in the first year customer service, Sprint will own the wireless customers, and the cable company will own the cable and video and high-speed data and telephone part of the relationship. Why is that important? Well, I think it's very clear up-front, as we've done many, many partnerships, to try to come up -- and I think we -- I'm very, very pleased with the innovation in this deal structure and our deal department did a super job -- in allowing for a structure that there's not a new co-created that will create tension with its two partners. Instead, the new co here is really about driving the product roadmap, the innovation, and the marketing ideas, both one on one with each local cable company, and potentially national marketing as you develop national products. So we believe this is going to offer great growth in the future and we can talk about it over the months and years to come.

Let me now kick over to John and Steve to take you through in detail the quarter. John?

John Alchin, EVP, Co-CFO

Thanks a lot, Brian. I would remind our listeners that we do have slides on our IR website, and would refer you to those if you're not already there.

And I'm just about to speak to the consolidated results, which is slide number 5 of the presentation for the quarter. Consolidated revenue for the quarter grew 9.4% to $5.6 billion, while consolidated operating cash flow grew 12.9% to $2.1 billion. Cable had a great quarter with revenue up 9.8% to $5.3 billion, while cash flow increased 13.9%. I'll review the drivers of cable results in just a moment.

Looking at content, revenue increased 14.8% while content cash flow increased 19.3% to $74 million. These results were driven by growth at E! Networks, Golf Channel, and OLN, with increases in distribution and advertising revenue across all networks. Third quarter was the highest rated quarter ever for both OLN and style. OLN's ratings were led by a strong Tour de France showing and also with the addition of Survivor.

We're revising guidance for consolidated operating cash flow for the year for approximately 13% from previous guidance of 14 to 15%. This revision is driven by increased investments in our content brands. Our recently announced deal with the NHL along with certain other initiatives will result in approximately a 50% decline in the fourth quarter content operating cash flow. But I would remind and emphasize to our listeners that 2005 cable operating cash flow is still expected to be approximately 14% for the year excluding whatever hurricane-related costs we incur in the fourth quarter, which it's still too early to estimate what they may be.

In the third quarter we reported corporate and other revenue of $22 million, and operating cash flow loss of $91 million, compared to revenue of 47 million and cash flow of 60 million in the third quarter of last year. The increased operating cash flow loss includes one-time charges related to termination of player contracts at Comcast-Spectacor.

Consolidated operating income was up 28.6%, up from $686 million last year, driven by an increase in the cable operating cash flow of 258 million. The Company reported consolidated net income of $222 million, or $0.10 cents a share, basically unchanged from the third quarter of last year. Net income and EPS were negatively affected this quarter by an investment loss of $104 million, or $0.05 a share on a pretax basis. The investment loss primarily reflects the change in value of the derivative component of our ZONE set as a result of the Sprint/Nextel merger. Excluding the investment loss EPS would have been $0.13 a share.

Moving on to the next slide, number 6, where we detail cable revenue, cable had as I said before a strong quarter with unit growth and near double-digit revenue growth of 9.8%. We added a total of 710,000 RGUs in the quarter, and so far year to date we've added 1.8 million RGUs. We're on track to achieve full-year 2005 guidance of adding about 2.5 million RGUs for the year. Total video revenue increased $184 million, or 5.7%. Growth was driven by higher monthly revenue per basic subscriber and a 12.4% increase in the number of digital customers. We're having tremendous success in moving customers to our digital services. We added 307,000 new digital customers in the quarter to end with 9.4 million digital subscribers, or 44% digital penetration up from 39% a year ago. And our digital sell-in rate continues to increase. It was 62% in the quarter, up from 60% in the second quarter and 59% a year ago.

Digital customers are taking as many as 1.75 digital boxes per customer on average reflecting strong demand for both the hi-definition and DVR services that we're rolling out. And that number is up from 1.63 a year ago. In the quarter we deployed 326,000 advanced set-top boxes with hi-def and/or DVR capability. This is the equivalent of 60% of the boxes that we deployed having those advanced capabilities, up from 40% a year ago. We ended the quarter with 2.3 million advanced set-top boxes in service. This is the equivalent of 22% of our digital customers having advanced set-top boxes up from 10% a year ago when we had a million fewer digital customers. High-speed data business delivered more than $1 billion of revenue this quarter as we continued to add units while maintaining strong average revenue per subscriber.

For the quarter, we're reporting average revenue per subscriber of $42.88, essentially unchanged from a year ago. We ended the quarter with more than 8.1 million high-speed data customers adding 437 in the quarter. Record adds of 549,000 in the third quarter last year were driven by the successful launch of our video e-mail and photo show features. We've added many, many products and enhancements during the past year, including increasing the speed to 6 meg and 8 meg, adding free McAfee Internet Security Solutions, adding NHL on line, photo show deluxe, and lots more, but there was no special feature launch in the third quarter this year, but still we report strong additions of 437,000 for the quarter.

High-speed data penetration is now 20% of available homes, up from 17% a year ago, and the sell-in rate continues to increase up to 43% from 38.5% a year ago. Our Comcast digital voice rollout is progressing on plan. We added 46,000 digital voice customers in the quarter, digital voice additions are offset by the roll-off of circuit switch phone customers as we transition to our CDV product that Steve will have a lot more to say about in his commentary.

Advertising revenue for the quarter grew 4.5% to 333 million with 2.9% growth in local advertising and 11.8% growth in regional and national advertising. Advertising revenue growth was impacted by a decline in political advertising when compared to the 2004 election year. The increase in other revenue of 36% reflects the growth in our regional sports channels because of a launch of Chicago Sports Net, which occurred on October 1, of last year.

Moving on to the next cash flow slide, as I mentioned, cash flow grew 13.9%. Third quarter margins increased 140 basis points to just shy of 40%. Increased year-over-year margins and operating cash flow result from higher top-line growth of 9.8% as well as continued reductions in the rate of growth of expenses offset by the impact of two hurricanes in the third quarter, which impacted cash flow to the extent of about $12 million, or 0.5 point of cash flow growth. We expect that hurricane Wilma will have an impact on fourth quarter results, but it's too early to estimate what that impact will be at this time.

Moving on to the next slide, where we highlight capital expenditures, slide 8, capital expenditures for the quarter were 899 million compared to 871 last year, reflecting the strong demand for our digital services and continued rapid deployment of high-speed data and DVRs. In addition, the increase in CapEx also reflects higher cost of phone readiness and CDV deployment. The composition of capital is now predominantly about 75% variable and revenue-driven. While we're increasing CapEx guidance for the year to approximately 3.5 billion to reflect this increased advanced set-top box deployment and CDV readiness for our phone rollout, you can see on the slide that CapEx per revenue generating unit has declined 26% over the last three years from 115 to $85 per RGU. CapEx per sub is also declining and is now at $164 per sub.

Table 5 in the press release also reflects this trend as you look at year-over-year capital investment, the increase year to date in variable capital of $615 (Indiscernible) million more than offset the decline in upgrade capital of $518 million. We really believe that we have a winning strategy and are committed to continued product differentiation and innovation. Our industry leading VOD platform in conjunction with our advanced set-top boxes with hi-def and DVR functions and our recently introduced enhanced cable, all-digital service, offers our customers more choice, convenience, and value. So to maximize this competitive advantage we're aggressively deploying digital boxes and rapidly rolling out Comcast digital voice. This strategy will result in slightly higher capital expenditures than we'd previously anticipated, as we now project guidance of 3.5 billion. And the specific factors contributing to that are greater deployment of the higher priced advanced set-top boxes, higher phone launch costs than originally budgeted, and more certified but not marketed CDV footprint.

Moving on to free cash flow, we generated 723 million for the quarter of consolidated free cash flow, up 34% from the $540 million that we reported a year ago. The increase is driven by increased operating cash flow and offset by higher capital expenditures and taxes. Year to date free cash flow of 1.9 billion is nearly 30% above the 1.4 billion that we reported a year ago. We now expect consolidated free cash flow growth of 30% for the year, reflecting both the increased, or the new consolidated operating cash flow guidance and higher cash flow, or higher CapEx.

Moving on to the next slide, number 10, talking about our focused capital deployment, as Brian mentioned, we significantly accelerated the pace of our share buyback in the third quarter where we invested more than the free cash flow that we generated for the quarter and repurchased over 25 million shares. So when you include the stock that we have bought back since inception, plus the debt instruments that are exchangeable into Comcast common shares, we have repurchased, or effectively removed from the number of shares outstanding, 140 million shares, for a total buyback for the program of $4.1 billion. And we'll continue to balance share repurchases with investments in the business that are key to our growth while maintaining a strong investment grade rating.

Moving on to the last slide that I want to review, the Susquehanna acquisition, on October 31, we announced a definitive agreement to acquire cable assets of Susquehanna communications for total consideration of approximately 2800 per sub, or 6.4 times 2006 operating cash flow. This is effectively converting a passive investment into an operating cash flow generating asset. We're adding 225,000 subscribers primarily in the central Pennsylvania area, and after we've done the Adelphia acquisition, 80% of these acquired subscribers will be adjacent to current Comcast systems. These are great systems to be acquiring, fully upgraded with solid basic penetration of 63% with upside opportunity, with digital penetration in the acquired properties only 27% versus 44% in Comcast, with upside in average revenue per subscriber which is only 69% in Susquehanna, while it's almost $83 in Comcast. So we have a real opportunity here to build on an already strong business by accelerating the deployment of our advanced services such as Comcast ON DEMAND and digital voice.

So with that, let me pass to Steve for his commentary.

Steve Burke, CVP and COO

Thanks, John. It's been almost three years to the day since we closed the AT&T Broadband deal. And it seems like a good time to take stock of where we are and where we're headed. Financially, we've made a lot of progress with 40% margins and OCF per subscriber, per year, which we think is probably the best index of how we're doing on an operational basis, of $395 for 2005, which is almost double the $208 in OCF per sub we had in 2002 when the deal closed. And even before we step on the gas with phone, the Company is growing RGUs at over 2.5 million units this year, or about 7% unit growth for the Company as a whole.

Our video business is getting stronger. Today only 8.9 million of our customers are analog-only cable customers, which is down from 9.7 million a year ago, and we think headed down even further in 2006 as we continue to roll out high-speed data, phone, and digital products. These analog-only customers have the highest churn, so it's important to reduce this base over time, which is happening exactly according to plan. During the quarter, the third quarter this year, we lost about 46,000 basic subscribers. About half of these subscribers were life line customers who pay us about $15 a month. This loss of subscribers doesn't concern us too much because during the quarter we added over 700,000 high-speed data and digital customers who, on average, pay us well over $40 per month. So when you net those two out financially, it's a very, very good trade.

We also continue to make our VOD product better during the quarter, and in October hit 1 billion streams for the year. We said we'd do that by the end of the year and we actually did it half-way -- or nine or ten months into the year. We've also recently added over 250 new free movies, so we think VOD will continue to increase in the future. Our high-speed data business continues to grow nicely. We think there are three key metrics that you should keep your eye on in this business. Unit growth, average revenue per user, and share of new broadband customers. Adjusted for our footprint, our net adds are comparable to the big bell's, so we think our share of net-adds is okay.

In terms of units, we think whenever someone tells you what their high-speed units are, the next question you should have is what's your ARPU? And in that category we're doing very well. Our ARPU is essentially flat versus last year despite a lot of discounting in the industry. So when you're seeing unit growth of 24%, it's actually converting to revenue growth of 26%.

With all of this as a foundation, we've now turned our focus this year to starting to accelerate our phone deployment. I think we made significant progress on the digital phone front in the last quarter. Today we're launched in 21 markets ahead of our goal of having 20 markets launched by year end. Comcast digital voice is being marketed today to over 12 million homes, and we will be marketing to over 15 million homes by year end. By year end, our plant will be certified to over 20 million homes, or roughly half our footprint.

Now, what we try to do is be very clear about where we're actually marketing. So when we say we're certified to 20 million homes, what that means is our footprint in 20 million homes is capable of launching phone and has capital deployed, and we're ready to go. The difference between certified and marketable largely stems from apartment complexes where we do not have the permission to go in and market. So by the end of the year we anticipate having 15 million homes that we can actually market to but the capital and the readiness will be there for about 20 million homes, which is about half of our plan.

Our marketing approach has been to introduce phone on a node by node basis. And so far the results have been very encouraging. It's clear to us demand will not be an issue any time in the near future. Some of our initial market are coming up on one year since launch, Indianapolis and Springfield, and we're approaching 5% penetration.

We're currently experimenting with three product bundles, and we're seeing the same kind of results as Time Warner cable and Cablevision and getting more and more excited about what CDV can do as a growth engine but as importantly what CDV can do for our high-speed data and basic subscriber businesses. We think we're in good shape, as we told you before, to hit 200,000 to 250,000 CDV unit net adds in 2005, and in addition, we think we're very well positioned to meet or exceed 1 million units of CDV net adds in 2006. I think in summary there's been a lot of hard work over the last six months getting the company ready for phone, literally thousands of people have been trained. We spent a lot of capital to where we are today, and we really look forward to starting to reap the benefits in the months ahead. John?

John Alchin, EVP, Co-CFO

Operator, if you could open the line for Q&A, please.

Question-and-Answer Session

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