IP Democracy: Comcast Failed to Reach 'Altitude' in Q3 07 as Subs. Slip

Comcast issued its Q3 07 earnings report (full report here) today and it looks like the nation's top cable operator hit some kind of a growth plateau. Although revenues and cash flow grew by respectable amounts, subscriber growth across the board went down, including for Comcast Digital Voice, which experienced its first quarterly growth decline since the operator launched the competitive voice service.

Cable revenues grew by 11.3% year-over-year to $7.4 billion. (Due to an acquisition completed in August and not included in Comcast financial data on a pro forma basis for Q2 07, sequential changes in financial metrics can't be accurately computed). Cash flow advanced by 13% to $2.98 billion and operating cash flow margins ticked up year-over-year from 39.6% in Q3 06 to 40.2% in Q3 07.

But, Comcast continued to lose basic video customers, running against high hopes the operator had late last year that it would return to basic subscriber growth in 2007. During the quarter, Comcast lost 65,000 basic subscribers and the company's penetration rate is perilously close to slipping below the 50% mark. At the end of the quarter, Comcast served 24.2 million basic customers, representing only 50.1% of homes passed.

Digital video growth cooled during the quarter, with Comcast adding 489,000 net new digital customers, a run-rate down 12.5% year-over-year and nearly 40% sequentially. At the end of the quarter, Comcast served 14.67 million digital customers, reflecting 60.7% of basic subscribers.

High-speed data growth was off the mark too. During the quarter, Comcast added 450,000 net new high-speed customers, down 16.4% year-over-year but up 35.5% sequentially. At quarter's end, Comcast counted 12.89 million broadband customers or around 27% of homes that are capable of buying the service.

The real surprise was the unexpected weakness in Comcast's Digital Voice service, which, until this quarter, had steadily posted increased gains each quarter. Comcast added 662,000 net new digital voice customers during the quarter, down from the 673,000 net new voice customers added during the previous quarter.

During the company's earnings call, Comcast executives acknowledged the underperformance, but offered only cryptic solutions for jumpstarting growth in the coming quarters. "We're seeing increasing competition and a softer economy and as a consequence a slightly slower growth rate," CEO Brian Roberts said.

President Steve Burke said that cable's rivals, who initially lagged the industry in terms of rolling out triple-play packages of services, "are spending a lot more money" now in catching up with cable. The weaker economy doesn't help either, although cable has historically been recession-proof. "In difficult economic times people are more reluctant to upgrade or add products," Burke said.

Burke added that Comcast will "sharpen its marketing tactics" by rolling out a lower-speed, lower-priced cable modem service to reach more budget-conscious consumers. While still emphasizing the triple-play package, Comcast will also roll out single-product and dual-product (voice and high-speed combos) offers.

"It's now time to add a lower speed tiers and a two-product bundle with just phone and data," Burke said.

As to why digital voice growth suddenly stalled, Comcast was even less specific. "We don't think we're at cruising altitude with phone," Burke said, warning that "linear" analysis of quarter-to-quarter gains can be misleading. Comcast will expand its digital voice service footprint by 10% in the coming quarters, which should boost more growth.

The concept of "altitude" was also invoked in terms of whether cable is contemplating the addition of a wireless voice service as part of its product mix. "It would be wonderful if we had perfect clarity on wireless," Roberts said. "We're working with Sprint and the other cable MSOs to reach a perfect altitude in that venture."

Given how low Comcast's share prices have sunk over the past year, it will buy back an additional $7 billion of its stock, the company also announced today, raising the amount of funds authorized for stock buybacks to $8.2 billion.

Posted by Cynthia Brumfield on October 25, 2007 10:26 AM to IP Democracy