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Comcast Corporation (NASDAQ:CMCSA)

Q4 2007 Earnings Call

February 14, 2008 8:30 am ET

Executives

Brian Roberts - Chairman and CEO

Steve Burke - EVP, President and COO

Michael Angelakis - CFO and Treasurer

Marlene Dooner - SVP, Investor Relations

Analysts

Jessica Reif-Cohen - Merrill Lynch

Craig Moffett - Sanford Bernstein

Ben Swinburne - Morgan Stanley

Jeff Wlodarczak - Wachovia

Vijay Jayant - Lehman Brothers

Spencer Wang - Bear Stearns

Doug Mitchelson - Deutsche Bank

Bryan Kraft - Credit Suisse

Operator

Good morning, ladies and gentlemen, and welcome to Comcast's Fourth Quarter and Full Year 2007 Earnings Call. (Operator Instructions). At this time all participants are in a listen-only mode. Please note that this conference call is being recorded.

I will now turn the call over to Senior Vice President of Investor Relations, Ms. Marlene Dooner. Please go ahead, Ms. Dooner.

Marlene Dooner

Thank you operator, and welcome everyone to our fourth quarter and year-end 2007 earnings call. Joining me on the call are Brian Roberts, Steve Burke, and Michael Angelakis. Before we start, let me refer everybody to slide number two, which contains our Safe Harbor disclaimer and to also 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 press release for the reconciliation of non-GAAP financial measures to our GAAP.

And now for opening remarks I will pass you to Brian Roberts for his comments, Brian.

Brian Roberts

Thanks, Marlene, and good morning everyone. I'd like to begin with slide 3. Over the last few years we have successfully transformed Comcast from a cable company into a new products company that utilizes one infrastructure to deliver a growing number of products. As a result, 2007 was another year of strong growth in revenue, operating cash flow and earnings, and a record year for new subscriptions RGUs.

And while the year had its challenges in the second half, we are confident that we are taking the right steps to maximize the growth potential of our business. To that end, as we started 2008, we laid out an exciting new product road-map for Comcast's future.

This next generation strategy is based on leveraging our existing state-of-the-art fiber network to create new products that are differentiated in future innovations that will keep Comcast ahead. With the integration of our acquisitions now behind us, and our phone business scaling nicely, we are looking forward to delivering free cash flow growth in excess of 20%.

We are also sharpening our focus to deliver profitable growth, while continuing to make important investments which enhance our competitive position, and significantly increasing the pace at which we return capital to shareholders. We are confident that these steps and others, position us well to continue to grow our business and to generate attractive shareholder returns over the long-term.

Before we get into a deep dive on the 2007 results and 2008 guidance, let me take a moment and highlight two key areas for today's call.

First, as we review our performance in '07, Steve will discuss how we think the economy and the competitive landscape impacted our business in the later part of the year. He will also review a number of steps we've already taken to respond to these conditions. I think this will provide an important context for our 2008 outlook, which incorporates those plans, as well as the trends we are seeing in the market today.

In addition, I will review and Mike will detail our capital allocation priorities including our accelerating return of capital to shareholder with today's announcement of dividend and an accelerated stock buy-back.

Turning to slide 4, in 2007 we made significant progress in each of our differentiated best-in-class products. This helped us to continue to successfully diversify our revenue streams. In 2007, about 43% of our revenues came from services other than our traditional cable television service. That's up significantly from the 32% of revenue they contributed just 5 years ago.

New non-video services are also the drivers of growth, growing on average at twice the rate of video, and representing more than 65% of our revenue growth last year. These products are far from mature and should help our growth for many years to come.

Each of our services Video, Voice, and Data has an exciting product roadmap and is on a path to benefit from significant technology advances in the next few years.

Let me quickly describe what I mean. In digital, we continue to rollout advance digital video services like HD DVRs, and we are committed to delivering truly superior high-definition television and unmatched interactive TV. For High-Def that means nearly 300 choices today, growing to over 1000 HD choices for virtually every Comcast High-Def customer by the end of this year.

Next, we are working on a new architecture that will let us offer every month over 6000 movies on-demand to our customers; more than 3000 of them in high-definition. In fact, this new architecture paced away for our ultimate vision of what ON DEMAND can be. We call it Project Infinity.

With Project Infinity, we planned to give our customers exponentially more content choices delivered instantaneously to the TV. That means we want to provide every piece of video content that a producer wants to put on television. We can have a movie, a television show, any conceivable kind of video, and we are going to expand our relationships with all kinds of content creators large and small. We can work with whatever business model makes sense for them, whether it's free, Ad supported, subscription-based, or pay-per-view.

Our goal with Project Infinity is to give Comcast's customers the best content and the most On-Demand content they will find anywhere.

In High-Speed Data, we have DOCSIS 3.0 which is wideband, and it will start being offered to millions of our 48 million homes later this year. Wideband represents a quantum-leap in what speed will mean to consumers; 100 megabits or more, and literally a whole new platform for innovation in the years ahead.

And in Comcast Digital Voice we have strong momentum and a brand new all IP network, which allows us to begin to offer new features in the second half of this year. And having set up the foundation for our commercial business in 2007, we are now ready to ramp it in 2008, just as we begin to invest to build the next opportunity, interactive and targeted advertising. So, there seems like lots of diversified growth opportunities in the years ahead.

And finally we are committed to continuing to improve our end-to-end service experience. In 2007 we undertook many technical initiatives to improve reliability and quality of service, and we are starting to see the fruits of these critical efforts.

Turning to slide 5, as I mentioned earlier, a changing environment in the second half of 2007, including an economic slowdown and intensifying competition, led us to revise our guidance. Obviously, I was not pleased that we had to do this.

For 2008, we have worked hard to factor in the current economic and business realities. We think that our refined and focused strategy, when paired with our outstanding assets and people, are going to generate a strong performance this year and beyond.

So for 2008, we expect consolidated revenue and operating cash flow to increase by 8% to 10%; consolidated capital expenditures to decline to 18% of revenues from 20%; and consolidated free cash flow growth of at least 20% from the $2.3 billion we generated in 2007.

On slide 6, Michael will go into some detail about our capital allocation strategy. But I also think it is important that you hear from me how I think about capital allocation. Our overarching priority is to invest in the business and execute against the many opportunities I have just described. This is absolutely critical to our customer value proposition, to our competitive advantage, and to the best way to create long-term shareholder value.

I also want to address our acquisition strategy head-on. We are committed to remain disciplined in our approach to acquisitions and we'll place every opportunity through rigorous financial and strategic [filters] to ensure that our investments yield attractive returns for our shareholders. To be clear, we are not spending any time on any of the large transformative acquisitions that have been speculating about, such as Yahoo or Sprint. Instead, we are very focused on running our business and executing our plans.

And finally, because of our confidence in the ability of our business to grow free cash flow I'm pleased to be announcing two important initiatives that will accelerate the already substantial rate of which we are returning capital to shareholders. I'd note that in the fourth quarter of 2007, we repurchased $1.25 billion of our stock, the largest stock repurchase, we have every completed in a single quarter.

In addition, we have approximately $7 billion remaining under our share repurchase authorization and today we are announcing our intention to fully utilize it by the end of 2009, with at least 50% used this year. I'm also pleased to announce that starting in April, we are initiating a new quarterly dividend the initial annual rate is $0.25 per year.

Based on our performance, it is our expectation that the dividend will increase over time. This will be $750 million annually, which is about one-third of 2007 free cash flow, and will complement our ongoing repurchase activities.

So all in all, I'm excited about our 2008 plan and the roadmap we are on to deliver the best cross-platform experiences to our customers. I believe we have set the stage for many years of growth. And in 2007, we were able to get Mike Angelakis to become Chief Financial Officer of the company and I'm very pleased to now turn the call over to Mike.

Mike Angelakis

Thank you, Brian. I'll begin by briefly reviewing our consolidated results on both the reported and pro forma basis then I'll discuss in more detail our key financial priorities. So, please start on slide7.

Regarding consolidated results for fiscal year 2007 reflects solid performance at our cable and programming divisions as well as the impact of acquisitions.

For the full year, consolidated revenue increased 24% to $30.9 billion. Consolidated operating cash flow grew 25% to $11.8 billion. Adjusted EPS increased 23% to $0.74. Remember, net income for 2006 and 2007 is adjusted for one-time gains recorded, and as a result of cable transactions. Please refer to table 7b in our earnings press release for reconciliation to adjusted net income for the quarter and the full year.

Free cash flow declined 11% to $2.3 billion, reflecting a higher level of CapEx in 2007, due to RGU growth, a 63% increase in the number of set top boxes deployed, and including $2 million additional HD DVR boxes.

In addition, we also spent capital on network improvements in the integration of the acquired systems. These two metrics, free cash flow and adjusted EPS, are becoming more important critical elements of measuring our financial and operating performance. Going forward, I think you will see us emphasize this more.

On a pro forma basis which shows more clear comparisons, consolidated full year revenue growth was 12% to $31 billion, or slightly above our expectations of at least 11%. Pro forma consolidated operating cash flow growth was 13% to $11.8 billion and in line with our expectations.

I think it is important to recognize that in 2007, on a pro forma basis, we generated over $3.2 billion of organic revenue growth and nearly $1.4 billion of organic OCF growth. As we entered 2008, it is our intention to convert more of this organic growth to un-levered free cash flow.

Slide 8 shows our fourth quarter reported results. These were driven primarily by solid operational performance, and to a lesser extent cable acquisitions in the fourth quarter. Consolidated revenue increased 14% to $8 billion and consolidated operating cash flow grew 19% to $3.1 billion. Consolidated free cash flow increased 195% to $1 billion while adjusted EPS increased 33% to $0.20 per share.

On a pro forma basis, consolidated fourth quarter '07 revenue growth was 10% to $8 billion, and our pro forma consolidated operating cash flow growth was 14% to $3.1 billion.

Before I hand the call to Steve who will cover our cable results, let me summarize our programming division’s results. The programming division continues to show great momentum, as revenue increased 23% to $348 million in the fourth quarter, and 25% to $1.3 billion for the full year. This was due to solid increases in ad revenue, which was reflected by strong ratings growth at each of our networks and the strong ad market, in the second half of 2007.

We also had continued growth in affiliate and international revenue. Programming operating cash flow increased 17% to $49 million in the fourth quarter, and 20% to $286 million for the full year. These results were achieved, even as we continue to invest in production programming and marketing, which are related to new and live event programming for our networks, which includes the PGA Tour on the Golf Channel. This investment has had positive effects on our cable network ratings, particularly with our key demographic audiences. As you can see from the results, we are very pleased with this divisions continued growth.

Now let me pass the call to Steve.

Steve Burke

Thanks Mike. Before getting into the details of each specific area of our business during the quarter, I would like to give you some perspective on our performance in 2007, and how things look for 2008. If you would, please refer to slide 9.

In absolute terms, we had a pretty good year with 13% OCF growth and the addition of 6 million RGUs, and things slowed down in the second half, relative to our expectations. Our business changed as the economy and increased competition made it tougher to grow, but we still grew at a rate that prior to 2007 would have been considered very strong. For perspective, we added 6 million RGUs in 48 million homes in the last year, 20% more than 2006.

The company is growing in revenue, OCF and million of revenue generating units, and we will continue to do so in the future. We now better understand the effects of slower housing trends in a weaker economy. The good news is that is the market has changed. We are entering 2008 with new initiatives that will stimulate growth and enable us to attract and retain customers. Many of these are already in the marketplace and are starting to show solid results.

The triple play remains in our core message, but we have expanded the range of our product offerings to better meet customer expectations. We have launched a lower-speed data tier for 2495, so we can attract people who don't want to pay $45 for our flagship product.

We also use this tier for people, who are coming off our $99 annual promotions, but can't afford the price increase. We are now bundling two products, so we can offer more flexible promotions that start at $49 and go all the way up to $99, depending on the marketplace. Importantly, we can offer these one and two product bundles to the 24 million homes that don't presently take our video services.

Another change for 2008 is that we are planning on spending more money in marketing to make sure we get our message out more effectively. While there will be natural ebbs and flows in the business, that's what happens in a competitive marketplace. We will keep adjusting our strategies and feel confident our business will continue to do well.

Now let me walk you through 2007 numbers. Pro Forma Cable revenue for the fourth quarter increased 9% to $7.6 billion, and slightly over 11% to $29.4 million for the full year. Growth in the quarter compared to the year was impacted by lower than expected subscriber additions and a decline in advertising revenue.

Cable revenue would have been over 10%, and cable revenue growth would have been over 10% in the fourth quarter, if you excluded this advertising shortfall. One of the most important metrics in our business is our ability to drive ARPU growth, and not just units. In 2007, we delivered monthly revenue per subscriber of $102, compared to $91 per month in 2006.

Moving on to operating cash flow, Pro Forma Cable OCF for the fourth quarter increased more than 13% to $3.1 billion, with a similar increase for the full year. Total cable OCF for 2007 was $12 billion. Our OCF margin expanded this year by 80 basis points, as we continue to leverage our scale and grow revenues. The margin improvement trend will be difficult to sustain as we increase our spending on marketing and customer service in the future.

As a final point to 2008 operating cash flow, we expect our first quarter or two to have slower growth, due to difficult comparisons, the usual phenomenon of programming, other cost increases kicking in January 1st, and revenue growing throughout the year.

Now if you will turn to slide 10. On slide 10, we show that our total video revenue increased 6% in the fourth quarter and 7% for the full year. Video revenue is much more than basic subscribers, which we lost during the year, and much more about new digital services. The incremental revenue generated by these new digital services represents 60% of the increase in total video revenue for 2007. The total number of video customers taking our digital services is now over 15 million customers, which was 63% of total video subscribers. While we lost 180,000 basic subscribers during the year, we added 2.5 million new digital subscribers in 2007.

As the largest incumbent video provider, we will inevitably lose some additional basis video customers to new entrants. And our 2008 plan includes an increase in basis sub-losses. The good news is, with all of our new businesses, we will gain much more than we lose, as high speed internet, digital voice, digital video and commercial services power our business in the future.

We continue to see a growing number of customers taking our High-Def and DVR services. At the end of 2007, 42% or over $6 million of our digital customers take High-Def into our DVR service, up from $4.5 million or 36% in 2006.

Today, we think we are the leading provider of High-Def programming in the world. We have expanded our High-Def offerings and we'll continue to do so in 2008. We believe that customers really care about choice; HD choices and not necessarily channels. People watch choices, not linear channels. So, we have been adding ON DEMAND options as well as channels.

In 2008, we are going to nearly double the number of channels available and nearly quadruple the number of ON DEMAND choices. A year ago, in a typical Comcast System, we offered 15 to 20 High-Def channels. Today, through channel reclamation and other strategies, we have been able to increase our High-Def offerings to 25 to 30 channels. That will grow to up to 50 to 60 channels in a typical system by year end. In parallel, we have increased High-Def ON DEMAND choices from a 130 to nearly 300 today, and we expect to offer over 1000 High-Def choices ON DEMAND by the end of this year.

Given these new High-Def offerings, we think we are more than holding our own. We have three times the High-Def content at satellites. To better communicate this, we have been launching a new advertising campaign with the tagline, More, More, More. That's off to a very good start, emphasizing the fact that we offer more of the High-Def programming that people really want.

For a number of years, we have said that eventually we'll go all digital with our digital penetration in the mid 60s. We now believe it's time to start taking all digital systems and plan to do just that in about 20% of our markets in the back-half of 2008.

You will see us follow a similar strategy to what we did in Chicago last year. We'll send all our content digitally, while maintaining an analog tier of 20 channels to 30 channels. Converting to all digital will mean recapturing 40 or more analog channels that we can then use for up to a 150 high depth channels, DOCSIS 3.0 for wideband, or other ideas that we can [remount]. The capital for taking up to 20% of the company all digital is baked into our 2008 capital plans.

Next slide please. Our high speed data business has continued to be a significant contributor to our cable revenue growth. High speed data revenues grew 14% in the fourth quarter and 18% for the year, reaching a total of $6.4 billion. This revenue growth reflects high speed data additions of $1.7 million in 2007, which compares to $1.9 million in net additions in 2006.

We ended the year with $13.2 million high speed data customers; over 27% penetration against our total homes and with relatively stable ARPU, when compared to the prior year. Today the majority of our net new subscriber gains are coming from DSL migrations, not dial-up conversions. In fact, in the fourth quarter, 64% of our net ads came from DSL in comparison to 53% for the fourth quarter of 2006.

There is still plenty growth of left in the high speed data market. If we maintain around a 50% share and broadband penetration reaches 80%, as many have suggested, we'll eventually reach 40% penetration or nearly 50% more subscribers than we have today. We expect to add -- continue to add millions of high speed data customers in the next few years, although, as you have seen from us and others in the industry, the business is maturing, and we'll probably add fewer customers in 2008 than in 2007.

We have a number of initiatives that we believe will continue to allow us to grow our penetration. As mentioned, we've launched an economy tier of service for those who want slower speeds at a lower price point. This service is differentiated enough to limit cannibalization of our base businesses and will help us in the retention effort and in attracting more price-sensitive customers.

We'll promote our high-end service, which we call Comcast’s Blast, which today includes speeds of up to 16 Meg for an extra $10 a month to customers who want that extra speed. Our 2008 capital plan includes DOCSIS 3.0, which we call white band, to be deployed to up to about 28% of our footprint in 2008.

As many of you know, this technology will allow us to offer speeds of up to 100 Meg or more. It is still very early, but our January results suggest we have the right customer mix. The number of customers taking our Blast tier is outpacing the number of customers coming in on the economy tier, and the overall strategy is helping our business.

We see broadband speeds as a real differentiator in the market, and in areas where DSLs simply can’t compete. We just launched our 16 Meg service in the San Francisco market. Now everyone in Silicon Valley who wants the speed can get it. Imagine what will happen after we roll out the new white band service, and they can get 50 Meg or even 100 Meg of speed.

On slide 12, you'll see that over the past three years we've able to grow our CDV business very significantly. Today, we are the fourth largest residential phone company in the country with 4.4 million customers or about 10% of the available homes.

Almost 28% of our video customers currently take a phone from Comcast. We added 2.5 million Comcast digital voice customers in 2007, which is 61% more than we added in 2006.

We hit our stride, and we’ve been adding approximately 600,000 new customers for each of the last four quarters. We expect to be able to add as many CDV customers in 2008, as we did in 2007.

We grew total phone revenue to $1.8 billion, an $815 million increase in 2007, as we expanded the ability of our service by nine million homes to 42 million homes or 86% of our footprint. We're seeing the benefits of our scale in the cost side of this business as well. We spend the time initially to build our own CDV infrastructure, so we were able to handle the service offering from end-to-end. As a result of these efforts, we are seeing real operating efficiencies and it will only get better.

Our direct cost-per-subscriber declined 40% in 2007, due to lower per unit rates for long distance in internet connection cost and improved network reliability, which resulted in lower customer contact rates.

2007 revenue growth would have been greater if not for the impact upon winding our old circuit-switched phone service. Planned circuit-switched phone customers decreased 476,000 in 2007, and we prepared to be out of the circuit- switched business entirely by the middle of 2008. The impact from the unwinding of our circuit-switched phone service reduced our revenue growth by over 1% in 2007.

We continue to see strong growth in our CDV service, and see no reason why we can't double our business and achieve 20% to 25% penetration over the next couple of years. CDV is the cornerstone of our bundling efforts, and we believe we are still in the very early innings. At the end of the fourth quarter, about 16% of our total video customers had three services, and that's up from just 6% a year ago, in all 54% of our customers taking two or more services compared to 45% in 2006.

In addition to seeing continued success with our unlimited local and long distance service, we began introducing more service choices like an unlimited local offer, which includes per minute long distance, which will bundled together with our other services, in order to address a wider potential customer base. We are also very excited about rolling out CDV product enhancements in the second half of 2008 that will be first in the marketplace, which will take advantage of our totally IP infrastructure.

Moving onto slide 13, our advertising sales business had a difficult year in 2007, with revenue down 3% and 12% in the fourth quarter alone. Fourth quarter results reflect a lack of political spending and one fewer broadcast weak in 2007. We continue to see weakness in TV spot advertising spending levels in key categories such as domestic auto, real estate and retail, and in geographic areas like Florida and Michigan. Growth in cable advertising should be weak, especially in the first half of 2008 with a lack of political advertising.

We remain enthusiastic about interactive advertising, and we are working with the other cable MSOs to build an interactive advertising platform that will allow an easy and uniform way to buy and track interactive advertising across our different services, including television. Our capital plans include an increase in spending in this area to build this platform.

Moving onto slide 14, in 2007 we began to introduce Comcast Commercial Services throughout our footprint. We generated $384 million in revenue, up 46% versus the year before. 2007 has been about putting the building blocks in place for this new business. We now have key leadership in every single region, division, and at the headquarters level. We focused on hiring and training a professional sales force in all regions.

At the end of 2007, we have over 2100 employees dedicated to small and medium size business efforts, including about 750 business sales people and 1400 technicians. We estimate there are 5 million small to medium size businesses in our footprint, and that's been $12 billion to $15 billion in telecom services.

Our goal is to capture 20% of the market and build the $2.5 billion business by 2011. Commercial CapEx levels will accelerate in 2008, as we more actively pursue the Commercial Service market and deliver very strong double-digit revenue growth in this business during the year.

Moving onto slide 15, in summary as we look to 2008, we will continue to see solid growth due to new products. Digital, high-speed data and CDV each have significant growth ahead of them. Commercial will become a larger contributor in 2008, and interactive advertising will contribute to our growth rate as well in the future.

We are excited about product enhancements, such as higher data speed, more HD choices, going all-digital and all the unique cross-platform features that will be rolling out this year. We also think we have new marketing and pricing plans, which helps us do well in this economic environment. I am very optimistic about 2008. We have a great business and believe it will do very well in 2008 and beyond. Mike?

Michael Angelakis

Thanks Steve. Outlined on slide 16 are several key financial priorities. I'd like to spend a few minutes discussing these in more detail, as it should help you gain insight into how we manage the company.

Our first priority continues to be to secure long-term growth by profitably investing in our businesses, through organic development, appropriate strategic acquisitions, and also aggressively returning capital to shareholders. This approach is balanced and disciplined. We will continue to invest in our businesses, as it provides very attractive incremental returns and enhances our position for the future.

As we evaluate internal investments, our focus will be on creating value by delivering financial returns that are risk adjusted and well above our cost of capital. The company's strategy on acquisitions and investments has been to build long-term value by primarily focusing on business connected to our core cable business.

As Brian said, our revenue streams have diversified and the business is more complex. However, our approach will be extremely disciplined and execution-oriented when it comes to considering potential acquisitions. Our commitment to thoughtful capital allocation applies, not only to acquisitions and new investments, but also to regularly accessing our assets and redeploying capital where warranted.

In fact, since AT&T broadband, the company has been a net disposer of assets. From a financial perspective, besides revenue in OCF, we are very focused on unlevered free cash flow -- free cash flow and adjusted earnings per share, as they represent critical metrics in evaluating the strength of our consolidated business.

Another priority is returning capital to our shareholders. In the fourth quarter, we purchased $1.25 billion of our stock and for the full year, and we returned 132% of our free cash flow to shareholders through the share repurchase program. Today we have announced the initiation of a dividend that represents approximately one-third of our 2007 free cash flow in net income.

Based on our performance, it is our expectation that the dividend will increase over time. In addition to the dividend, we intend to use the remainder of our share buyback authorization by the end of 2009, of which 50% will be utilized this year. In order to meet these financial priorities, it is critical to maintain a healthy balance sheet.

I believe that maintaining a solid investment grading ratings is an integral part of our operational and competitive strategy, and this view is only been reinforced given the current turmoil in the credit market. Since I joined the company, capital expenditures and the related returns have been a focus of mine.

Beginning on slide 17, I'm going to discuss our 2007 capital expenditure program for cable. As we have mentioned, 2007 was a year of significant capital investment, particularly around digital and advanced digital services, CDV and small business. Cable capital expenditures increased 7% to $1.5 billion in the quarter, and increased to 29% to $6 billion for the full year. After a detailed evaluation and consistent with historical trends, CapEx continues to be predominantly growth and revenue-driven.

The direct impact of subscriber replacement and growth, and a deployment of set-top boxes can best be seen in the investments in CPE and scalable infrastructure. These categories make up 70% of the 2007 CapEx program. CPE is the largest component, representing over half of total CapEx, and it increased 28% or $686 million to $3.2 billion in 2007. Over the past 12 months, it includes a net addition of $6 million RGUs, and in deployment of almost $5 million digital set-top boxes; and 45% or $2.2 million were advanced set-tops, which are not included in RGUs. We installed two set-top boxes, on average, for every new digital customer added in 2007. Additionally, CPE included the customer equipment necessary to deliver CDV service to a net $2.5 million worth of new voice customers.

CDV equipment is the second most expensive component of CPE, and advance setup boxes being the first. In addition to the increase in CPE, in scaleable infrastructure, support capital increased to $792 million in 2007, from $529 million in 2006. Total support capital reflects more equipment, vehicles, and workspace, to support the additional employees hired to install, maintain and service our growing number of customers. As we highlighted earlier, our headcount increased by 10,000 in 2007.

We also invested over $150 million in starting Comcast's business services, supporting the 46% increase in commercial revenues in 2007 and positioning us for further growth in 2008.

Please turn to slide 18. As I discussed before, in addition to the traditional methodology, I think it is useful to evaluate our CapEx for 2007 and 2008 in a different, more simplified way, by categorizing these investments into maintenance, discretionary and growth buckets.

Maintenance includes investments that allows us to keep our competitive position and provide a foundation for growth. We think that this type of CapEx is the current and future cost of doing business. An example of this would be our need to buy additional CMTSs to expand our capacity, as customers' usage of our existing high-speed data increased.

We've determined that maintenance capital equals between 25% and 30% of the 2007 and 2008 investments. We've provided on our IR website an exhibit of today's presentation that provides support for how we arrive at our total maintenance CapEx.

Discretionary, which we believe is about 5% to 10% of our annual investments, is a small but important component our CapEx investment, since these investments lay the groundwork for future products and services. For this category we evaluate the strategic significance in the business cases to justify the investment. Typically, these investments, like addressable advertising, will eventually have attractive paybacks. However, they have longer-term horizons than is the case for our growth CapEx.

Regarding our growth CapEx, this 65% to 70% of our entire allocation is by far the largest component of our annual investment and is directly tied to revenue generation. We analyze the NPV and IRR of this investment. Essentially we look at the capital required to add, on a gross basis in new product-to-service like HD DVR set-top boxes, line extensions, or new RGU, against a lifetime of cash flows including churn that the investment will generate.

We are very confident that the incremental returns in cash flow generated by the investments in this growth category, which again represent over 65% of our total, are very attractive.

As we evaluate the combination of these three categories from a returns perspective, our focus is ensuring that these investments drive our profitable growth, are adjusted for execution risk, and exceed our cost of capital.

Please turn to slide 19. I believe the most constructive way to explain how we look at returns on investment is to do an example. In 2007 and 2008, the purchase of HD and HD DVR equipment is one of our largest investments, and represents nearly $900 million or $1 out of every $7 of our total 2007 capital program. In 2007 we exceeded our estimates by approximately $250 million for HD and HD DVRs.

Based on the investment in the incremental cash flows we generate from the deployment of this equipment, it's clear to us that we are creating significant financial value with these investments as we generate an access of a 30% after-tax IRR. We are obviously quite pleased with this type of investment as the risk of execution is marginal, and the return is significantly in excess of our approximate 8.5% weighted average cost-to-capital.

Today we are providing more detail here than previously. In the future we will continue to provide additional transparency on capital expenditures and their associated returns. Importantly, as we stated before, we believe CapEx as a percentage of revenue peaked at approximately 20% in 2007.

With 2008, total consolidated CapEx is expected to decline to approximately 18% of revenue. Our 2008 CapEx outlook assumes a decline in our core residential CapEx including CPE expenditures, despite an increase in our average cost per set-top box, reflecting higher cost of CableCARDS Separable Security.

It also assumes that we will continue to ramp up our capital investment to grow our commercial services business, as well as invest in bandwidth enhancing projects like, doing all digital in certain markets, as Steve mentioned. Our outlook, which is based on consolidated CapEx, also assumes a similar amount of capital at the corporate and other business unit level, as we spend in 2007.

Let's move on and take a look at our balance sheet statistics on slide 20, where we highlight some of our leverage and coverage metrics. With total debt north of $30 billion, I believe maintaining solid investment grade ratings is important in order to successfully access the capital market, as we mange our periodic maturities and appropriately plan for investments. But more importantly, absolute of debt is our leverage and coverage ratios. We are focused on maintaining an investment grade rating today that translates into a leverage ratio of approximately 2.5 to 3 times.

We think it is prudent to maintain our investment grade rating, particularly given the current turbulence and the credit markets, the uncertain economic environment, and the funding capabilities of our competitors. It's important for me to also highlight, the given the timeframe around our buyback program, and initiation of a dividend, we are not de-levering. We will continue to use the financial strength of our business to invest for profitable growth that maintains our competitive advantage, and also allows for a substantial return of capital.

Please turn to slide 21. Over the last three years, we have returned $8 billion of capital from share repurchases, and reduced the total number of shares outstanding by over 11%. As I mentioned, we intend to complete our current repurchase authorization of 6.9 billion by next year, the end of 2009, in addition to initiating a quarterly dividends with an annual rate of $0.25 per share.

When you factor in this buyback and dividend commitment, our targets equate to over $8.4 billion over the next 24 months. This is a total of $16.4 billion return to shareholders from the periods of 2005 through 2009. Our ability to return this significant amount of capital is only possible because of our confidence in the business, its opportunities and its ability to generate meaningful free cash flow.

With that I will now hand the call over to Marlene to begin our Q&A.

Marlene Dooner

Thank you, Michael. Before we open the line for Q&A, let me point out that we have included two exhibits of today's presentation on our Investor Relations website. One of the exhibits provides details on how to arrive at maintenance capital. The second exhibit provides a pro forma on cable and consolidated 2007 numbers, including insight, which represents the right base for comparisons in 2008. Again, these exhibits can be found on our website under financial information and then fourth quarter 2007 earnings.

With that, operator, let’s please open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions). Your first question will come from the line of Jessica Reif-Cohen from Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Happy Valentines Day, everybody. I have two questions, one is could you give us a little bit more color on the interactive advertising initiatives and why you said there is no political advertising in '08 or why you don't expect that and second you said that you are going to increase marketing in '08. Could you also discuss any customer service initiatives? Thanks.

Steve Burke

Okay, Jessica. We, the cable company’s have been getting together and starting to lay the foundation for a truly national interactive advertising platform, which I think is one of the most exciting upside that we have in the business. I want to caution everybody, this is complicated stuff but we've made a lot of progress, we're putting real money into our capital budget, this year $50 million to $70 million on interactive advertising infrastructure. So this is going to be something that is very real and very significant in terms of its contribution to our business if you go out to '09 and '10.

In terms of political. Political is definitely going to have an impact on '08 advertising but not until the second half of the year. We didn't have political in a very major way at the end of 2007 but we would see as we get into the second half of 2008, political being very significant.

In terms of marketing and customer service, I look at our budget this year both on the operating side and the capital side, as what I would call a fighters budget. In other words, we've made investments in marketing, in customer service, we put capital into go digital and all digital in 20% of the market DOCSIS 3.0. We are budgeting to come out swinging and that is both on the marketing side and the investment and product development and customer service. That's all baked into the plan and that's how we intend to run the business.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Marlene Dooner

Thank you. Operator, next question please?

Operator

Your next question will come from the line of Craig Moffett from Sanford Bernstein.

Craig Moffett - Sanford Bernstein

Good morning and my thank you for all the extra detail on capital spending. Two questions if I could. First, it looks like you've had some margin expansion looking backwards and my guess is you're seeing less -- with less housing velocity, you're seeing less activity in terms of churn and that sort of thing, as people do start buying houses and moving as much. Wouldn’t you expect continued margin expansion next year and your guidance is projecting essentially flat margins and then looking at your EBITDA growth guidance and the implied reduction in capital intensity, it looks like it would suggest more than 20% free cash flow growth and that you are guiding to 20% free cash flow growth. I wonder if you could just comment on that as well?

Michael Angelakis

Sure. A couple of questions in there, Craig. With regards to margin expansion, 07 was clearly was one where we expanded our margins. As we look forward, we are going to be monitoring that very closely but as Steve just said, we are making meaningful investments in the marketing and the advertising side and the customer service side. So our guidance has a range but it's certainly a number we are going to monitor very, very closely.

With regards to EBITDA guidance, in terms of growth for 08 we are looking at between 8% and 10% that's clearly a range and when you translate that from CapEx into free cash flow, free cash flow has many other items related to taxes and interest expense. So I think we're being realistic with our guidance and obviously there's a range in there that you have to look at with regards to what the OCF growth will be in ’08. But I think that free cash flow has many factors to it and we are trying to monitor that as well very carefully.

Craig Moffett - Sanford Bernstein

Thanks. And you didn't mention switched broadcast video in the capital budget. I was just wondering if you have any comments on that as well?

Steve Burke

We have about 15% of the country budgeted to be laid up for switched digital video during 2008.

Craig Moffett - Sanford Bernstein

Okay, thanks.

Marlene Dooner

Thanks, Craig. Operator, next question please.

Operator

Your next question will come from the line of Ben Swinburne from Morgan Stanley.

Ben Swinburne - Morgan Stanley

Thanks, good morning guys. Two questions, first on SME. You had laid out a capital budget, I think over a long period of time, back in your analyst day in May. You came in a little under budget in 2007 but could you just talk about that business, '08, '09 what the capital budget looks like from here. If the equipment is ready is to go from multiline MTA perspective?

And then just more broadly on the competitive environment. What are you seeing, where you have FiOS and the U-Verse competition. Is it something that you can comment on in terms of competitive threat, market share loss, pricing trends? Any color there would be helpful.

Steve Burke

Okay, first on small and medium size business. There is no question as we ramp the business, it is going to more capital intensive. We are getting -- I'm getting impatient that it's not ramping faster, it really is starting to move but not as quickly as I wish it was. If you look at some of the other cable companies, they have commercial businesses that are much bigger than ours, even not adjusted to the fact that we are much larger.

So we are putting in a lot of attention. We've hired a 2,100 people in the business, we've got really every system in the country right now mobilized, we've got a phone launched in addition to high speed data. So you're going to see a real ramp. It's very hard to tell how fast that ramp is going to be and how much capital that business is going to take because that's a business with very high returns, which we think is very complimentary to everything else we do and we certainly don't want to be in a position where we put out a capital number and then slow the business down to hit that capital number.

In terms FiOS and U-Verse there is no question, Verizon is real and is taking some subscribers from us. We believe we're taking a multiple of the subscribers from them on the phone side and they are taking from us on the video side. But Verizon is real, we track it very carefully and there is no question that their builds are where they said they would be and they are gaining penetration.

Even in the FiOS areas we are still continuing to expand our High-Speed data business nicely, our telephone business nicely. So I think, head-on-head we are competing just fine and FiOS is in a real minority of our company now, less than 10% of our home's passed have FiOS.

In terms of U-Verse Ben, we were seeing much less of a competitive effect from U-Verse. It's hard to tell where they really are, it's hard to tell where they are really gaining customers and I don't know whether that's because they can’t make the product scale or they are having technical problems or maybe they are having more of an impact than we believe, although I don't think that's the case.

DIRECTV and EchoStar are also strong competitors so. So we are seeing a very competitive video marketplace. I think the good news is we are doing extremely well with phone. We believe we are going to have very good year with High-Speed data and as we get into commercial and interactive advertising, when you put it all together and really look at revenue and cash flow growth and free cash flow, it's all going to be a good story.

Brian Roberts

Well, I guess I would like add to that. I think we all try it and have anticipated for years that the day where you have increasing competition will be coming and we've diversified our revenue. I just want to emphasis the point that this industry is well-positioned I think to be in a position to put out a plan like we've just announced, that we'll factor in increasing subscriber losses, but despite you are going to have healthy EBITDA and revenue growth because of the run rate that we have on the data business. It may grow a little slower but it's still growing, it's terrifically possible and we have now, as Steve mentioned, the higher speed, the lower speed.

The phone business, we are only around 10% penetrated. We feel that's finally reached, we think that cruising out too and that's going to continue to go and our wireline business as an RGU matter is substantially winning market share in wireline products, compared to our wireline competitors and their RGU growth in the wireline business.

So I think, and then you layer on a longer term roadmap where you have already deployed fiber across the, basically the entire footprint and make your products better and better each year and that's factored into this plan. I like our position.

Ben Swinburne – Morgan Stanley

Thanks, guys.

Marlene Dooner

Thank you, operator next question please.

Operator

Your next question will come from the line of Jeff Wlodarczak from Wachovia.

Jeff Wlodarczak - Wachovia

On the repricing of $99 triple play after the 12 month promotional period, are you able to reprice those subs materially higher and can you talk about the churn around that repricing?

And then second on guidance for 8% to 10% consolidated EBITDA growth that includes your content business which is growing sort of 20% - 30%. Can we ply your cable EBITDA growth could be less than 8% to 10% in 2008? Thanks.

Steve Burke

Why don't we take the second question first and just -- no that's not what we are implying. I think when you just, our view is 8% to 10% for whole company. Mike you want to add to that?

Michael Angelakis

Yeah, I am happy to add to that. Our content business obviously is a relatively small portion of the whole, so it is growing a little bit stronger than the cable business but the cable business will be growing right in that range.

Jeff Wlodarczak - Wachovia

Thanks.

Steve Burke

In terms of the $99 promotion resetting after 12 months, what we look to do is to have a reset of about $20, what we have found is that as the economy has softened, it’s harder to get the $20 than it was. And one of the reasons why we've introduced these economy tiers is, there are some people who get to the end of the 12 months and say I can only or I only want to pay $99 and now with the slower speed, high speed data product we can say okay, you can stay at $99 but you'll have a slower data products. So we are still shooting for the $20. The majority of customers do stay with us and we are able to upgrade them but with this lower speed high-speed data product somebody who wants to stay at $99 will be able to do so.

Jeff Wlodarczak - Wachovia

Thanks.

Marlene Dooner

Thanks, Jeff. Operator next question please.

Operator

Year next question will come from the line of Ingrid Chung with Goldman Sachs.

Marlene Dooner

Operator, can we take the next question please.

Operator

We move to the next question and the next question will come from the line of Vijay Jayant with Lehman Brothers.

Vijay Jayant - Lehman Brothers

To get the philosophical view on the mix between the buyback and the dividend, you know 1.4% dividend in the year is a very good start but it’s similar to other large scale media companies but it’s probably a percentage point lower than the SMP. Just kind of philosophically, why buyback more versus dividend if you could give us a context? Thanks.

Steve Burke

Let me start and then Mike can add color here. First of all, we appreciate your observation that we view it as a start. For the majority of the company’s history we've had a dividend. When we got into the period of years we were dusting in and rebuilding the business. We were ramping new products and we were putting the business to work, the money to work that way and we pushed quite a lot of stock. We do feel that with the free cash flow now resuming its steady march forward, we hope we're going to be able to be in a position to do a dividend. We have bought stock. We've talked to a lot of investors about the proper insight in that mix and you can get many different points of view and I think we feel it’s a good balance.

And looking at our debt ratings and looking at BBB, BBB-plus companies was one consideration another is what the SMP, another is what the SMP media companies in that index are doing. I believe the SMPs are around 2% yield. The other factor we looked at was, what is the payout of our actual free cash flow? Last year's free cash flow, as Mike mentioned on the call, came in at around $2.3 billion, $750 million dividends is about a third of that. So we feel we try to have a very meaningful start, $750 million a year and because we also wanted to buy the stock in an accelerated fashion, which we’ve also announced today.

Michael Angelakis

Fine, I think you hit it right, all the points. I mean, we're trying to strike the right balance between the dividend and the repurchase and our payout ratios both on free cash flow and net income and hopefully as Brian said, we'll be able to continue to increase our dividend as we go forward.

Vijay Jayant - Lehman Brothers

Thanks.

Marlene Dooner

Thanks, Vijay. Next question please, operator.

Operator

Your next question will come from the line of Spencer Wang with Bear Stearns.

Spencer Wang - Bear Stearns

Thanks for taking my question, two questions. First on basic video business, your penetration did actually dip below 50% by the end of the year. So I was wondering if you could just talk a little bit about the likelihood of future price increases, given the competitive environment and then secondly can you just update us on your thoughts on wireless and what you may or may not plan to do with the spectrum from the AWS auction? Thanks.

Steve Burke

I'll take basic and then I'll pass to Brian for wireless. The fact of the matter is in our video business and this is the same for us, AT&T, Verizon, and DirectTV, anybody who is in the video business. The major cost that we all have to bare is programming and programming prices are going up. And so, it's hard to imagine the business not having a retail price increase on a pretty consistent basis and we are seeing that right now with Verizon, with the satellite companies seeing that AT&T is taking up DSL prices. I don't think the notion that price increases are a thing of the past, really is in our thinking.

Let me more broadly talk about basic in our penetration. We are in five businesses now, which is not how people normally think of cable companies. But we are in video, voice, data, commercial and advertising. And videos is one of the five, it happens to be the biggest of the five and one of the components of video is basic subscribers. So really when you look at the whole company, I think it's obvious, traditionally basic subscribers was all there was. But it really kind of minimizes the sort of success or lack of success in the company and it really is much fair, I think to look at revenues and operating cash flow.

And because those other business and because High-Def and DVRs and other parts of our video business are growing well, I think that really balances out whatever happens with basic subscribers nicely and we would certainly think that the video business itself should continue to grow through price increases, through pay-per-view, through DVRs through High-Def etcetera.

Brian Roberts

And that's why we are doing things like Project Infinity and trying to constantly improve our High-Def offerings and our on-demand offerings. And having positioned the company to be ready for this kind of competition that frankly we can't control all the behavior of the competitors and you just have to have multiple businesses to grow and that's why I'm excited about the plan.

Okay, to the wireless question, I think nothing's really changed in wireless, our focus remains on finding a way to extend our services, to provide some form of mobility, to find features that integrate well with our services and are compelling the consumers to provide us with incremental revenue growth.

To the AWS spectrum, which covers most of the country and our footprint that we own with the other cable operators in SpectrumCo. It gives long-term flexibility, there is nothing new, what SpectrumCo is doing is as probably always planned as when you acquire that I expect you got to have it cleared for it to have any usefulness. As SpectrumCo is beginning that clearing process, it's a multi-year regulatory driven process. So there is really nothing new, I think it's important to stress that the strategy has not changed and that we're studying what's the best way to utilize that, if at all. But we're not seeing an impact from the wireless business in the results that we reported today or in our plans for 2008.

Spencer Wang - Bear Stearns

Great. Thank you very much.

Marlene Dooner

Thanks, Spencer. Operator, next question please.

Operator

Your next question will come from the line of Doug Mitchelson with Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Great, thank you very much, two questions. Steve, could you give us the selling levels for high-speed data and phone and the triple play, so we can just compare that with the other penetrations you're trying to achieve there. And then Mike, I agree with Craig that the new disclosures regarding CapEx will be appreciated. In order for CapEx to be in the 18% of revenue for 2008, as you look further out in time, where do you ultimately see CapEx settling out as a percentage of revenue. I know some, I'm hoping that at some point I could eventually get the 10% of revenue, does that make any sense? Thank you.

Steve Burke

Okay. I'm not going to give you the precise selling levels, they bounced around a little bit but I think it's fair to say that our selling levels on all three of those products, high-speed data, phone, and triple play are significantly higher than our current penetration levels. So in the case of high speed data for example we are at 27% penetration. We have a lot of markets which sell in levels at 40% or 50% and the phone sell in levels much higher than the current phone penetration of 10%. The same thing with triple play.

Doug Mitchelson - Deutsche Bank

I guess just in time I just changed my question for you, Steve. I mean you mentioned about the balances of five products that you are now selling. I think, some might be concerned that the basics of this the building blocks from which you sell over the rest of them. Can you make any comments on that?

Steve Burke

Well it can be the building blocks but we have millions of customers that don't take video and take either high speed data alone or phone alone or some combination. So there really is a real opportunity, I think, when you have 24 million homes that don't take video from us. That we can go to or even somebody who doesn't take video, but likes their satellite service, so we can go and offer telephone and high speed data. So I think there is really an opportunity there and I think our feeling is that even though the high-speed data business is maturing, if you do the math there's probably on the order, if we end up getting to 40% penetration of homes, they probably are in the order of 6 or 7 million more high speed data customers, which could mean four or five more years of really good growth of over a million subs a year.

And then in phone at 10% penetration we're really just getting started. COX and Cablevision have lots in neighborhoods and markets where there are 40%, 50%. So I think phones got a long way to go and you've asked a very good question because the selling rate in theory gives you some sense for where you can end up and the selling rate for those two products plus the triple play is way in excess of where our penetrations are.

Brian Roberts

And I think that one of the products that, Steve, not even mentioning that much is like I think last year. We saw lot more High-Def DVRs. That's an incremental revenue stream, it doesn’t show up as a RGUs. It doesn’t show up as a basic stuff, necessarily if it's an already digital customer in terms of the growth as a change. But that's how we were able to get the average ARPU for the entire company over $100 for the first time. So ultimately you’ve got to look at the whole picture. Mike, you now want to answer the CapEx question?

Michael Angelakis

Sure, Doug. As you know in our guidance for '08, where we have great visibility, the percentage of revenue for CapEx program is coming down from 20 to 18. And as Steve has mentioned that CapEx program includes, I think, an offensive budget which has a lot of initiatives. Beyond 2008 it's obviously difficult to forecast, but I think, our belief is you will see a slow trend downward as a percentage of revenue.

Doug Mitchelson - Deutsche Bank

Alright, thank you.

Marlene Dooner

Thanks, Doug. Operator, we will make this the last question, please.

Operator

Thank you. The final question will come from the line of Bryan Kraft from Credit Suisse.

Bryan Kraft - Credit Suisse

Thank you. How do margins trend for commercial going forward. I think you've said in the past that margins will be 50% in this segment. Obviously last year you took on a lot of cost to ahead of scale in the revenue. So as you scale more this year, can you give us a sense of where the margins will be by the end of the year and when commercial actually becomes accretive and then also just real quick if you could comment on the debt expense and how that's been churning for the last couple of quarters. I know you had a big increase last year? Thank you.

Brian Roberts

Most was accretive now and we've said that previously and the contribution from commercial will grow very nicely this year and next year. It's very hard to tell precisely, exactly where exact margin would be that's a very good high margin business. That business should be, if not 40, 50, in that range margin business as we go forward.

Michael Angelakis

I guess I'll take the bad debt question, as I mentioned that in one of the conferences. In the first nine months in the year, we did see a tick up through the third quarter of that debt. Actually in the fourth quarter I think that's come down a little bit as we've instituted some more collection and credit screening policy. So we think we are on top of it and managing it pretty well.

Steve Burke

Let me just finish the call then by saying that as you sum it up, this is a -- and I appreciate the patience for those that are still on the call. We took a little more time in laying out, really I think a comprehensive strategy, a good analysis of what happened in '07, a lot of time spent on preparing the '08 plan, so that we can feel comfortable that factoring everything that happened and is happening in the marketplace that we can achieve our plan.

And that plan now allows us to focus on in addition to revenue and cash flow. Really resume the free cash flow focus that the company has had and will have on growing that metric significantly at a fast rate. And that allows us to consistently return capital to shareholders, while and as importantly or more importantly focusing on building the business for the long-term shareholder growth, which comes from investing in good returning projects, but at the same time strategically significant projects that allows us to have better products than anybody in the market. And I think this is a good plan. We're excited about the year and look forward to updating you as we progress.

Marlene Dooner

Thank you all very much for joining us.

Operator

We have no further question at this time, there will be a replay available of today's call starting at 11:30 am eastern time. It will run through Friday, February 15th midnight central time. The dial-in number is 800-642-1687, and the conference ID number is 30449562. The recording of the conference call will also be available on the company's website beginning at 12:30 pm today.

This concludes today's teleconference. Thank you for participating. You may all disconnect.

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