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Filed by Comcast Corporation Pursuant to Rule 425
under the Securities Act of 1933 and deemed filed
pursuant to Rule 14a-12 under the Securities
Exchange Act of 1934
Subject Company: AT&T Comcast Corporation
Commission File No. 333-82460
Date: May 2, 2002
The following conference call was held by Comcast on May 1, 2002:
Comcast Corporation
First Quarter Earnings Release Conference Call
May 1, 2002
Operator: And welcome, everyone, for the first quarter earnings release
conference call for Comcast Corporation. Today's call is being
recorded. At this time, for opening remarks and introduction,
I would like to turn the call over to Executive Vice President
and Treasurer of Comcast, Mr. John Alchin. Please go ahead,
sir.
John Alchin: Thank you, Operator, and welcome, everybody, to our first
quarter 2002 earnings call. Just before I proceed, I would
like to remind everybody of our Safe Harbor disclaimer and
that this conference call contains forward-looking statements
that are subject to certain risks and uncertainties. I would
refer you to our 10K for a full list of those risks and
uncertainties as outlined. The call this morning, we have
everybody here with Ralph, Brian, Julian, Larry Smith, Steve
Burke, Bill Costello. Steve will give you some additional
color on the terrific results that we had out of the Cable
Division this quarter. Bill will be available for Q&A on the
great results that have come out of QVC, and we will then open
to general questions and answers. The results have really been
fantastic this quarter. It is one of the best ever results out
of the Cable Division in terms of revenue and cash flow
growth. Revenue and operating cash flow are driven by over 60%
growth in addition of new service revenue generating units. In
fact, our Digital and On-Line products represented over 6.8
percentage points of growth. That is more than half of the
12.3% growth that the Cable Division reported in revenue for
this quarter, and we did this even though we had to transfer
100% of our High-Speed Data customers in the first quarter.
QVC results remain very strong in a rather soft retail
environment, and I would refer everybody to the front page The
Wall Street Journal article this morning that just highlights
how QVC continues to attract new buyers and also people who
want to get their products onto QVC. So, we had a great
quarter in our Content Division in the face of rather soft
advertising with almost 34% growth in operating cash flow
including our new channel, G4, which launched just recently.
The final point I would make before we go into the details of
the call is that we have just about completed the final
documentation on a $12.8 billion bank line of credit that,
along with our existing lines of $4.4 billion, gives us over
$17 billion of credit availability to meet the needs that we
have at closing and leaves us with about $3 billion of undrawn
availability at close. However, to drill down into the
results, on a consolidated basis, we reported 19.7% increase
in revenue to $2.7 billion and 28% increase in operating cash
flow to over $800 million. When we adjust those numbers only
to reflect the timing of acquisitions to present a pure
apples-to-apples comparison, revenues increased 12% and
operating cash flow 18.3%, and every one of our divisions,
Cable, QVC, and the Content Divisions, all reported double
digit revenue and operating cash flow growth. If we drill in
then to the Cable Division, we reported 12.3% revenue growth
to $1.47 billion. That is up from fourth quarter growth of
9.1%, up from first quarter last year 8.5%, and as I mentioned
a little earlier on, fully 6.8% of the points of growth, the
12.3% growth that we report for the quarter, came from our
Digital product and our On-Line data product. That is up 36%
from the levels of contribution made by those two products in
the first quarter of last year. Other drivers of revenue
include
consistent subscriber growth at almost 1%, 0.9%, bringing us
to a subscriber count of 8.511 million at the end of March,
adding about 40,000 subscribers in the first quarter of this
year. Further contribution from ad sales, which was up 13.6%,
better than the 7% decline that we had in the fourth quarter
of 2001. But, we really could not be more pleased with Cable's
operating cash flow growth, an increase of 13.5% to $598
million for the quarter, and there is a very strong trend line
developing here. We are up 11% in the first quarter of last
year, 12% by the time we got to the fourth quarter of last
year, 13.5% first quarter of this year. Margin was on a pro
forma basis, restated for the treatment of new accounting
treatment for franchise fees, up 50 basis points to 40.7%.
That is up from 40.2% a year ago, and even if we go back to
the old accounting treatment for franchise fees, you would
still see an almost similar increase in the operating margin.
As I mentioned before, the single-most important driver in the
first quarter of cable revenue and operating cash flow
continues to be new service RGU growth. We added fully 300,000
new service RGUs in the first quarter and over 1.3 million in
the last 12 months. That is a 59% increase in the number of
2.25 that we had at the end of first quarter last year,
bringing us to a total number of 3.58 million at the end of
the first quarter of this year. In the Comcast On-Line
product, our High-Speed Data product, we continue to see
strong demand despite the fact that we have to transition 100%
of our customer base from the Excite@Home network to our own
network in a six-week period. We finished the quarter with an
81% increase in the number of data customers from where we
were a year ago, an increase of almost 466,000 over that
period of time from a base of 575,000 a year ago. We finished
the quarter with 1.04 million customers. And, if you look at
what happened to our weekly ads during that period, weekly ads
throughout the quarter were about 7,000 a week, but if you
drill in behind that number, you find in January we were
adding less than 5,000 a week. That increased throughout the
quarter to give us an average of 7,000. We are now adding
almost 10,000 a week. So, the momentum has really built from
the slow-down that we incurred because of all of the effort
that was required in the transition. Furthermore, another
really strong development in this product line is that you see
an 8.5% increase in average revenue per unit for this product.
The average revenue per unit increased to $40.10 from $36.95
in the first quarter of last year, but in fact if you look at
the increase over where we were in the fourth quarter last
year, we are up in excess of 14% because of some promotional
activities that were taking place in the fourth quarter. So,
customers are now paying us $39.95 for the monthly service
plus $5.00 for the modem if they lease the modem from us and
over 75% of the customer base do in fact lease the modem from
us. And, now that we are out of the transition, we are
continuing to see very stable churn in this product, absent
the impact of the transition in January as we wrapped up the
quarter and as we went into April, the churn numbers
stabilized at around 1.5% to 2% on the product. This is a
product that is now available to over 80% of our customer
base. Out of the 13.5 million homes that we have, fully 11.3
million homes have access to this product. That is up almost a
million homes from where we were at the end of 2001. This is a
product that by the end of this year will be available to 86%
of our homes. Over 12 million homes will have access to the
product at year end. It is also a product that we are seeing
rapid improvement in our operating cash flow margins.
Operating margins increased from about 10% to 15% in the first
quarter of last year to about 25% in the first quarter of this
year, and we believe that this margin can further improve into
the 30% to 40% range over the next 12 months as we continue to
increase the subscriber base. The four point improvement, 4
percentage point improvement in operating cash flow growth
from the On-Line product reflects our ability to cut costs
from the level that we incurred when we were on the
Excite@Home network where it was costing $12 to $13 a month
down to a level of about $7 to $8 per customer per month.
Steve is going to say more about the On-Line rollout strategy
when I wrap up the commentary on the Cable Division. Digital
had another terrific quarter. Demand was much stronger than we
expected. We finished the quarter with 2.54 million Digital
subscribers representing 51% growth or fully 862,000 additions
over the last 12 months from the 1.7 that we reported at the
end of the first quarter last year. We added over 204,000
subscriptions in the first quarter, up 29% over the first
quarter last year and essentially flat with where we were in
the fourth quarter of last year, and at the same time, we
continue to hold the average revenue per unit for each box at
about $10.60, up sequentially by about 1%. We have added
additional disclosure in our pro forma disclosure at the back
of the
2
press release this time, showing that each home has
approximately 1.3 boxes and this now means we are adding both
boxes and subscribers. The average Digital customer is now
paying us approximately $14.40, about 9% higher than the
$13.25 we reported in the first quarter of last year. The
margin on this product continues to remain very strong, in the
80% to 85% range. So, it continues to be a significant
contributor to operating cash flow. Just before I pass to
Steve to describe the next phase of Digital and an update on
the On-Line rollout, let me just reiterate guidance for the
quarter. All of the trends in the Cable Division bode well for
a very strong year in this division. We have accelerating
revenue and cash flow growth, and declining capital
expenditure. Capital expenditure in the Cable Division this
quarter at $358 million is down 18% from a year ago, and in
fact, our cap ex in the Cable Division is slightly front-end
loaded this year. We have completed rebuild of almost twice as
much plant in the first quarter as we had budgeted some 3,800
miles of an 8,000 mile rebuild that we had planned for this
year and it was completed in the first quarter. So, we
finished the quarter with 83.5% of our plant at 750 or 860
megahertz of capacity, and we are reiterating our guidance of
$1.3 billion for Cable cap ex for the year. The acceptance of
both Digital Cable and the On-Line service is far outstripping
our expectations, and this is further contributing to our
confidence in our ability to meet the guidance at year end.
With that, I will just pass over to Steve to go into further
detail before we go onto QVC.
Steve Burke: Thank you, John. When we put our budgets together this year in
September or October, we were looking at a world that was
post-September 11th and thinking about the impact on our ad
sales and the rest of our business, the consumption of new
products, uptick of new products. We were also looking at
@Home literally disintegrating in the need to shift to the new
network, and we were also realizing that at some point,
without a product enhancement, Digital growth would start to
slow down. The good news is now after the first quarter, it
appears that on all of those measures, all of those worries,
we are in much stronger shape than we thought we would be when
we put our budget together. So, it has been, I think, both a
strong quarter with solid results across the board, but I
think also a very strong indication that 2002 is going to be a
better year than we had originally budgeted a few months ago.
If you look at the key indicators that we look at whenever we
analyze our business, all of our key indicators are in good
shape. As John mentioned, basic sub growth of 40,000 during
the quarter or .9% growth trailing. The Digital net ad number
of 203,000 is the strongest first quarter we have ever had for
Digital, and it now appears that we are going to be rolling
out our video-on-demand product quickly enough that there is
really no reason that we can see for our Digital net ads to
slow down this year if we can get video-on-demand out to 6
million of our 13 million homes by the end of this year, which
is our goal. High-Speed Data, the net ad number was comparable
to last year, but as John mentioned, it was really two
different stories. In the first two or three weeks in January,
we focused 100% of our attention on getting everyone converted
to the new network and getting that network stabilized. The
good news is for the last eight weeks, we have had a very
stable network. The customer contact rate in the last couple
of weeks, which is a very good surrogate for service quality,
is actually lower than it ever was under @Home. So, we think
we are in very good shape with a more secure, stabilized
network and the good news is in the month of March, after we
made the transition, our weekly net ads were 30% higher than
last year. I think as you come out of the first quarter into
the second, third, and fourth quarters you are going to see an
acceleration of our High-Speed Data business which is positive
both in terms of revenue growth, but also with the improving
economics that John mentioned in his overview. As it relates
to ad sales, we signaled in the fourth quarter that we thought
or hoped that this was going to be a bottoming of the ad sales
business. We were down 7% in the fourth quarter. We were up
13% this quarter, and when we look out into the future, we see
those positive trends continuing into the second quarter and
hopefully beyond. The good news is the regional interconnect
strategy, which we have talked about on these calls before, is
really what is driving this growth. We were up over 20% in the
regional portion of our business, and we see that continuing
as the 16 Interconnects that we have put in place over the
last year or so are really starting to kick in. So, when you
combine all that, it leads to a cash flow growth of 13.5%
which is also the strongest cash flow growth we have had in
the first quarter for a number of years. Typically our
business, the programming increases click in on January 1st,
and we take rate
3
increases through the year. The first quarter is normally
lower than where we would end up for the year. It is typically
our lowest growth quarter. So, I think we are well positioned
for the rest of the year. Our organization, I feel, is in very
strong shape. Ninety-five percent of our plant is rebuilt
which means we are competitive in 95% of our plant and we are
also stable. We do not have the stress and strain on our call
centers and our organization that rebuilds bring, and it also
means, as John mentioned, that our free cash flow for the
quarter rose to almost $240 million. In addition, all of the
integration work that we have been doing over the last two and
three years is now essentially complete. So, we are stable
from a management point of view in terms of integrating all
those systems and bringing them up to Comcast levels of
profitability. As we look toward sometime in the second half
of the year, merging Comcast Cable with AT&T Broadband, I
think we are in as good shape as we could reasonably hope to
be, and we look forward to the challenges ahead. John?
John Alchin: Thanks a lot, Steve. Let us move onto QVC. As I said at the
beginning, for those of you who missed it, a great QVC article
on the front page of The Wall Street Journal this morning. So,
congrats to the QVC team for the great results and to the PR
team for their timing on that article. Just could not have
been better. The revenue increased 12.4% to $994 million in
the first quarter. In fact, if you go back and look at the
trailing 12 months results for QVC, over $4 billion in sales
over the trailing 12-month period, a new threshold for QVC. At
the same time, operating cash flow improved 11.4% to $192.3
million. The domestic operation delivered revenue growth of
11.5% driven by Homes growth of 4% now in front of 73 million
homes, and sales per FTE growth of 7.4% now up to $11.46 from
$10.67 a year ago. Cash flow growth in the domestic operation
up 11.6% consistent with the revenue growth and resulting in
bottom line cash flow margins being stable at 22.6%. If you
look back to the gross profit margin though, you see a slight
decline down to 36.9%, but what is interesting with this
number, this is a result of a change in mix of the products
that QVC has been selling, selling more in computers in the
Home category and less in jewelry, a higher profit margin
business, but if you look at the trend lines though, still
very, very encouraging. Going back to 1998, the number was
35.1 increasing to 35.6 in 1999, 36 in the first quarter of
2000, and the 36.9 in the first quarter of 2002 continues that
very stable, upward trend line. But QVC continues to keep very
tight control on both fixed and variable expenses. Telecom
expenses are now about a third less than they were five years
ago. If you look at the numbers that they were paying five
years ago, it was about $.08 a minute down to $.03 a minute or
down from $.3.7 a minute in first quarter last year. If you
take into account that in the first quarter of this year, they
handled over 26.7 million calls with total minutes of 67
million minutes, you will understand why having just a
marginal change like that has a huge impact on bottom line
efficiency. The results out of Germany, Germany is now in the
black for the first in the history of the German operation.
Very encouraging to see revenue up 31% to over $60 million for
the quarter and continued increase in carriage up over a
million homes in the carriage to 24 million homes for the
quarter. Still operating at about 40% awareness given the
idiosyncrasies of television, channel tuning in that country.
No real news out of the UK operation. Basically flat in the
first quarter, revenue at $67.6 million and operating cash
flow up 5% to $5.8 million from $5.5 million a year ago. We
now have QVC Japan celebrating its first anniversary at the
beginning of last month. Revenue there almost $12 million for
the quarter, running very strongly relative to the budget.
Moving onto our Content Division, great results, 11.8%
increase in revenue, 34% increase in operating cash flow
representing an increase or reflecting an increase in carriage
across virtually all fronts in the Content Division. So, each
one, E! seeing a 6% increase in carriage for that channel, up
to 71 million homes. style up 85% to almost 20 million, 18
million homes style is now in front of with contracts within a
couple of years to be in front of over 40 million homes. Golf
almost a 25% increase to 47 million homes, and Outdoor Life
now consolidated in our numbers, up 23% to 42 million homes.
Great news out E!. On Sunday, March 25th, with the most
watched day in the network's history, driven by record numbers
at the Academy Awards Pre-Show, a 3.6 rating over 3.7 million
viewers watching the channel on that date. Let me wrap up with
a couple of quick comments on two important items, the free
cash flow that we generated for the quarter and just
reiterating the point that I made on shoring up the liquidity
requirements that we need to close
4
the AT&T deal. We generated over $200 million of free cash
flow in the first quarter of this year, and essentially all of
this is driven by results out of the Cable Division. Cash flow
for the Cable Division increased over $70 million to $597
million and cap ex declined $155 million. So, when you look at
the components of free cash flow, you can see the results of
the completion or near completion of the rebuild as cap ex
declines and cash flow increases. We deliver the metric that
has been talked about for so long in very large numbers, and
the outlook for this year is for consolidated, free cash flow
generation between $750 million to $1 billion for the year.
And my final comment relates to the fact that we have now
arranged a $12.8 billion new financing to effect the close of
the merger of AT&T Broadband and this financing along with the
existing availability gives us over $17 billion of
availability, and we will have a need at close between $12 to
$13 billion. So, we should have a comfortable cushion over and
above of the availability that we have secured. With that, let
me pass to Brian for some closing comments before Q&A.
Brian Roberts: Thank you, John, and thank you, Steve. A fantastic quarter and
I think reaffirms our belief and commitment that this is a
fantastic industry and Comcast management team in the Cable
Division and in Content and in QVC and in the Corporate Group
could not be more pleased and proud of where we are as we
embark on what is clearly a major challenge and a major
opportunity as we get further along here toward closing AT&T
Comcast and making it a reality. Talking about AT&T Broadband,
we were obviously disappointed with the Cable subscriber
losses that they reported, but in the big picture, I think the
current management team is doing a lot of the hard work that
we all knew needed to be done to begin to move this massive
operation in the kind of direction that Comcast today enjoys,
and that involves redesigning the Digital package, rebuilding
customer care, beginning the cost-cutting effort which they
announced that they had reduced the work force and restarting
and really reenergizing the all-important rebuild program to
get their plant at the same level that our plant now enjoys.
But they are a small team, a handful of senior experienced
Cable executives who AT&T brought in, led by Bill Schleyer and
others, but we can expect and count on building on their
efforts when our really army of infrastructure, 250+ strong,
is able to work with their existing system management and
their team to put the best possible team on the field, but it
will be a much, I believe, accelerated program of getting the
business moving in a direction that we want it to end up being
at. But, there is nothing that I see that deters us on our
basic concept which was a "sub is a sub." When we made this
transaction, that was basically how it was valued, and when
you get to 22+ million customers and you talk about how to
integrate it, you do not do that with 22 million at a time.
You break it into small units, and that is how we are going to
approach it as we being the post-merger planning process. But,
the most important metric in analyzing the business is the
network rebuild, and they are properly focused on getting that
cranked up to begin to improve not just system reliability,
but the overall competitiveness and that is what, as they
pointed out, seems to be distinguishing or differentiating
them from everyone else in the industry and the sooner that
rebuild completes, the better, and we are committed to that.
But when I step back and certainly take any questions on any
subject, John is absolutely right. All the business
fundamental metrics are, this is a fantastic moment for the
cable industry, and it is ironic, given where the market place
is right now, this is the highest revenue and the highest cash
flow we have ever reported in the last five years, and at the
same time, the new products are selling better than we even
thought ourselves, and it is only the first quarter. So, with
that, let us open it up to questions, and we have members of
all the senior management, as John said, to take your
questions.
Operator: Thank you, sir. Investors wishing to ask a question may signal
us by pressing the digit one on your touch tone telephone. If
you question has been answered and you wish to be removed from
the queue, please press the pound sign. If you are using a
speaker phone, please pick up the handset before pressing the
numbers. And our first question today comes from Richard
Greenfield from Goldman Sachs. Please go ahead, sir.
5
Richard
Greenfield: When you look at the number of boxes for Digital that you are
shipping or selling per home, it looks like the number was
about 1.8 boxes per home versus your aggregate which was 1.3,
1.4. Is that a trend in terms of really focusing on driving
multiple boxes that we should expect to continue? And, what is
that mean you are doing from a pricing standpoint? Or, is it
really more of the new products that you have added onto
Digital, like VOD, etc. And, you mentioned the number of about
$240 million in free cash flow, John, can you just give us a
little bit of clarity on how you get to that number and how
much is Cable, how much is QVC, etc.? Thanks.
John Alchin: Steve, do you want to handle the box and then I will do the
free cash flow number?
Steve Burke: Sure. I am not sure where you are getting the 1.8 boxes per
home. I think the real number is more like 1.3.
John Alchin: That is the number if we look at just the first quarter, the
results there Steve show that the additions for the first
quarter have customers coming on with on average of 1.8 boxes.
Steve Burke: I understand. Okay. The basic strategy on Digital that we have
right now is to continue to extend Digital with the existing
assortment, and then in the second half of the year, to really
start to push video-on-demand. Our feeling is that this is
something that is going to happen at exactly the right time
when we would normally be plateauing Digital. For the first
quarter, what we did is sold a certain number of AO,
additional outlet, units most of which were at $6.95 to
further solidify our very top-end customers, and we will
continue doing that in the second or third quarter, but we
would see that 1.3 boxes per-home average maybe nudge up a
little bit but not dramatically.
John Alchin: And one of the things we are not sure of, Rich - what was that
number in the first quarter last year. We put this out as just
additional disclosure because others were doing it this way,
but what is really, really important to us is to measure the
average revenue per unit. In the fourth quarter, average
revenue for the unit for Digital boxes was about $10.45, and
here we see an increase to $10.61. So, however these boxes are
selling, on average, across the entire base, we are generating
$10.61 of revenue per box for each and every box. To hit the
question on the free cash flow, $212 million, that is after
gross cap ex of $399 million, cash taxes of about $30 million,
and net cash interest of $167 million, delivering $212 million
for the quarter. That is split approximately 50-50 between
Cable and QVC with virtually 100% of the growth in that number
coming from Cable because of the metrics of increased cash
flow and declining cap ex, as I described in the formal
comments.
Brian Roberts: Let just close with one other point on that question. One of
the things that we have now gotten better at is something that
is intuitive but it requires a lot of training in having your
operation up, and that is having the call centers sell the new
products. With the amount of volume of phone calls that we
take and for new customer orders, we keep track of something
called the DSI, the Digital Sell-In, rate. Our DSI was over
40%. So, whether we are better off selling multiple sets of
Digital or a higher product, there is no real sales
commission, no marketing cost. Our HIS, our High Speed Sell-In
rate is now over 10%. So, all people calling up to get Cable
television, we are selling the product much better, and that
is something we track every month in every call center around
the country and that may also contribute to our ability to now
be moving more of these boxes both first and second set boxes
and High Speed Data.
Richard
Greenfield: Thanks a lot. The additional disclosure is really appreciated.
John Alchin: Thanks, Rich. Next question?
6
Operator: I have Niraj Gupta from Salomon Smith Barney. Please state
your question.
Niraj Gupta: Hi. Good morning. First question: John, you talked about how
the HSD provisioning costs are down to $7 to $8 a month, which
is largely consistent with what you guys have been saying
recently. Could you give us a sense of what an all-in,
inclusive, incremental cost for each Hi-Speed Data customer
is, if you include marketing? Can you guys take a stab at
that? The other two questions are: Given what we saw with
respect to the QVC domestic margin in the first quarter, i.e.,
flat year over year, should that be the assumption we carry
for the balance of the year? Or, should we expect
ever-so-modest margin expansion on top line? Lastly....
John Alchin: Niraj, how many parts are there to this question?
Niraj Gupta: Just three, John. So, this will be the last one. On QVC,
second question is, do you guys pay Cable MSOs up-front
distribution fee each year, like HSN does? In addition to your
5% of revenue, and if so, how do you guys treat that? Is that
something you capitalize and amortize below the EBITDA line?
Or take through your cash flow? Thanks.
John Alchin: Let me handle the data question, and the up-front payment
question on QVC or maybe I can give that to Bill as well and
have Bill handle the margin part of the QVC question. If you
look at the Data product, we generated all in, including
acquisition costs and everything, approximately 25% operating
margin reflecting a month or 6 weeks or so of having
relatively smooth operations on our own network. That is an
operating cash flow margin on that product that we expect to
continue to see improvement throughout the remainder of the
year. On a run rate basis, we are currently probably just
north of about 30%, 33%, and by year end we expect that number
to increase to approximately 40%. So, without giving any other
breakdown, that is the profitability that is coming out of
that product. Our business in QVC, and I will have Bill add
further color to this, is a retail model driven by 5%
commissions to each of the MSOs who carry the signal. It does
not rely on other launch payments or anything else that is
made. Anything else that is done in that model is all
relatively immaterial to the overall scheme of things which is
driven by the 5% commission line. Bill, do you want to pick up
anything else on that and also add color on the margin?
Bill Costello: Yes, I think that is correct, John, with regard to the launch
fees. Every agreement with the cable operators is different
and once in a while we might give some additional payments for
channel placement, and if we do, and as John mentioned, it is
not that material, but when we do that, this would be for
getting a lower channel position over a period of years, and
that would be amortized and included below the line. It is not
really a launch fee per se. With regard to the question on the
margin, and I assume you are talking about our EBITDA margin,
which was flat, 22.6% this year versus 22.6% last year.
Assuming we hit our top line goals, which is revenue increases
for the base and QVC.com business in the low double digit
area, we should see some improvement in the EBITDA margin, but
I would expect somewhere in the area of 25 to 35 basis points
throughout the rest of the year. We will not see the
phenomenal increases that we have had in the past because I
think we are operating the business right now at a very, very
high efficiency rate, and although there is some other cost
benefits to be had, we have really done a good job over the
last several years of wringing out as much as we can. So, I
think the leveraging of the fixed cost over a higher revenue
base should continue to boost our margin, bottom line, EBITDA
margin by about 35 basis points a year.
John Alchin: Thanks a lot, Bill. Next question, Operator?
Operator: Our next question comes from Jeff Dorsey of Wellington
Management. Please state your question.
Jeff Dorsey: No question. Sorry.
7
John Alchin: Thanks, Jeff. Next question?
Operator: Our next question comes from Richard Bilotti of Morgan
Stanley. Please state your question.
Richard Bilotti: Good morning. Obviously margins improved in the overall Cable
business, and some of that is the acquired properties from
last year, but what you did not mention on the call was
programming costs trends, and I am specifically interested in
understanding now that you are almost done with the rebuilds,
what are your programming costs trends looking like going
forward? For instance, are program costs increases on the
Basic or the Video side lower in systems that have been
rebuilt, where you are no longer adding channels? Does that
apply, therefore, to next year? Meaning when we look at 2003,
if there are no new channel launches on the analog side, do we
see some abatement of the growth of programming costs
pressure? I am talking about basically programming costs
trends X whatever savings that you might get from the AT&T
merger, more related to your channel addition strategy and the
underlying organic growth of programming.
Brian Roberts: Okay. This is Brian. Let me take a shot at that. I think you
are absolutely right that when the rebuild activity abates,
and I do not have a specific breakout done that way, the
expanded Basic which is not then adding lots of new products,
will just logically begin to slow down. I think we have seen
some trends that are encouraging, but what is really part of
the equation is constantly trying to tweak the Digital to come
up with more and more appealing Digital content such that the
Digital package can continue to expand in its revenue, as John
was outlining earlier, each year. So, we have found ways and
we have layers of Digital, we have a Digital Basic, a Digital
Plus, and now we are beginning and what I would like to shift
that question to a little bit if I might, is our excitement
with VOD, video-on-demand. We really see somewhat of a
replication of the Cable model and perhaps an improvement on
the Internet model, and that is there will be three buckets of
VOD content. For years we have all talked about
movies-on-demand, and we are making great progress, and I
think you are going to see some announcements this week and
next on major studio relationships with various VOD providers,
which is going to inure to our benefit, but impulse-on- demand
product is one bucket. The second bucket is subscription VOD
which is, the best example is if you buy HBO Plus, whether we
charge more for that or not is a separate issue or they charge
us more or not is a different question, you can access any of
the HBO movies or "Sex in the City" or "Sopranos" anytime you
want and maybe even earlier than it is broadcast, and these
kinds of experimentations are going to be very exciting. But,
the latest category is what we are calling "Free VOD" or "Free
Video-on-Demand" where if you come into Digital, and this is
what Steve was talking about, giving folks a reason to take a
Digital box who maybe do not want to subscribe to HBO or Starz
or Showtime or who have not yet done Movies-on-Demand that in
our 1,500 hours of content that we can put on a Digital server
that we will have running this summer in our first market, 750
hours of that 1,500 we are going to offer to the same content
companies you are talking about in your question to say,
"Would you like to take the best biographies on A&E and have
them available to customers, including the commercial," or
"Would you like to have the nightly news broadcast rebroadcast
any time a consumer wants it until the next night," or a
sporting event that they could not watch live but they want to
get at any time. It is a controlled personal video recorder
where there is a relationship between a content company and
the cable company to create the best-of experience for the
consumer. In that mix, and the reason I bring this up now, if
you take the combined AT&T Comcast around $3.5 billion of
content purchasing, can we find ways and win-win ways to
expand the content to this new platform, do it in a way where
we begin to get the consumer to want to buy or want to push
the Okay or the Buy button and pay nothing for it. If you look
at the Internet, every time you clicked, if it costs $.10 we
all would not be out there surfing the Net the way we are
today where it is "free," and I think that it is a marvelous
model that we are now in conversations with the content
company. So, we do not break out the relationship just by
Basic or VOD or new launches or now Digital. It is a
relationship on how to make the best value-add using the Cable
technology to expand their reach and to make a compelling
consumer proposition. All in all, we are quite satisfied with
the progress we are making, look forward to testing this new
product this summer.
8
Richard Bilotti: Thank you very much.
John Alchin: Next question please, Operator?
Operator: Our next question comes from Jessica Reif Cohen of Merrill
Lynch. Please state your question.
Jessica
Reif Cohen: Thank you. Your Data growth is phenomenal. Where do you think
peak penetration as a standalone ISP will be and how much
further can multiple ISPs take your business? Could you also
comment, given the growth in margins throughout the year,
where do you think peak margins on this side of the business
will be?
Brian Roberts: Well, let me kick it over to Steve after one up-front comment
on Data growth because I think you are absolutely right. Given
the transition, and in fact, if you look at the weekly ad
rate, in January it was what John?
John Alchin: We started out at less than 5,000, and we are now doing very
close to 10,000 a week.
Brian Roberts: So, the trend is only getting better, and one of our problems,
Jessica, is really knowing where does Data, where does Digital
end. Our goal is to keep coming up with compelling
propositions in the description of the product that just makes
that answer unlimited or unanswerable at this moment. So, what
are we doing in Data? Well, one thing would be multiple ISPs,
and as you know, we announced United On-Line, Net Zero. AT&T
Broadband announced Juno and a regional Massachusetts ISP. We
really do believe that again, in a win-win,
non-governmentally-mandated way multiple ISPs can help us. We
are working with other broadband content, just as with VOD to
enhance Digital, whether that is voice-over-IP or whether that
is folks like Real Networks and what they are doing or
whomever, we want to create the experience. But, the first job
was to stabilize the network, to get it to perform better than
the at-home network was performing, to allow us to have
multiple ISPs, and finally and probably most importantly, was
to get it to DOCSIS 1.1 so that we can begin to differentiate
the experience by charging people who are interested in more
consumption more and people who are interested in more speed
more and people who may be interested in always-on but not
high-speed less, and to have bandwidth-on-demand and to also
have the ability to have two-way at higher bandwidth rates,
which is what Cable Labs is working on. All of that is what
was the benefit of this painful conversion that we had to go
through, and I think we did a fabulous job. Steve?
Steve Burke: Well, if you look at our mature markets, we have penetrations
significantly in excess of 20% now. We also have in many of
our markets, our on-line sell-in rate, in other words the
percentage of people who are new to Cable who would move in,
who also take on line is over 20%. So, I think going over 20%
with the existing configuration should be no problem at all.
We look at this in a similar way to Digital in that you keep
evolving the product and you need each evolution to occur
before the life cycle starts to flatten. The type of things
that we are working on now that we have our own network, Brian
mentioned tiering introducing a tier above the $45 rate and
also eventually introducing a tier below, although I think you
have to be careful with cannibalization before you do that.
Multiple ISPs we see as being additive to the business. I
think the track record at Time Warner Cable with Earthlink and
AOL would suggest that they really are getting a lift. So, we
are excited about that. And then new products, home
networking, we think is clearly an opportunity to get an extra
$10, $15, $20 a month in recurring revenue. Security we have
some ideas on a security product, and their audio, gaming,
streaming media, etc., and I think the idea is as with
Digital, once you get a cable modem in someone's house, that
is just the beginning, and you keep refining and making the
product more rich so that you can layer on more revenue and
drive penetration deeper.
John Alchin: Next question please, Operator?
9
Operator: Our next question comes from Raymond Katz of Bear Stearns.
Please state your question.
Raymond Katz: Good morning. Two things. First of all, Digital penetration,
it looks like it is going to be close to 30% by the end of the
year, and I am sure there are systems where you are at that
now. Could you talk to us about spectrum, analog spectrum
recapture, can you start that soon if you are at 30% and you
are pushing all your premium customers now onto Digital? Can
you get that recaptured soon? What should we expect rolling
forward, say, a handful of years, what would use that spectrum
for? Brian, can you just elaborate a little bit more on the
model VOD that you talked about? Specifically with the
Movies-on-Demand and Release Windows?
John Alchin: Steve, go ahead.
Steve Burke: Well, in terms of Digital penetration growing and recapturing
analog Spectrum, our feeling is that the Cable business is a
gradual business. So, what has been happening to us as we have
had individual systems reach penetrations up in the 25%, 30%
range is we have started to recapture analogue spectrum
already, and we have done it, we have taken back pay-per-view
channels. We have taken back, in some cases, analog pay
channels. So, that is a process that has been occurring. That
process will accelerate as Digital reaches a higher
penetration level. In terms of usage, I think the most
immediate major use is going to be Video-on-Demand where we
have allocated four analog channels to Video-on-Demand but
have a feeling that our Video-on-Demand product, as Brian
described, could be robust enough that you may want to
allocate more than four analogue channels, which I think would
ultimately be a good problem to have because it would indicate
that simultaneous usage would get above 10% and into the 15%,
20%, 25% range which would indicate that the product would be
going into a completely different level of attractiveness
which, after all, is really the purpose of the on-demand
strategy that we are looking at expanding.
Brian Roberts: I think one of the things with Movie Windows is obviously the
desire in the cable industry to over time find a model to move
them from where they are today closer to home video and in
some event-type cases, even try to play around with some
special events only on cable where, who knows? Maybe it is
earlier or a sneak preview or whatever. In order to do that,
we have to get the product going, and I think we are going to
show some real progress in that regard, and the model will
allow for the studio, movie by movie, company by company, to
determine if it wants to begin to experiment with different
ways of making this more attractive. At the same time, what we
are talking about in the free world is getting people used to
pushing and getting what they want now. Give them a sample,
give them something that they want, and of course, for the
broadcast network, if I just did "60 Minutes" and I am
throwing it away until next week, and it does not have a
shelf- life value, and they can re-sell the advertising and
(inaudible)...their rating, is that not something, and to
advertise their network, why would we not want to offer that
product? And, that gets people used to click and watch, and
then one day they see a movie, they click, and they buy. I
think if you could do the Internet all over again, you would
have a lot of surfing around and you would have a lot of
levels of clicking that would have some fees, but the free
nature of it was critical to its success, and I believe that
is a little bit of what we are thinking about while we are
waiting for the volumes and the dollars to allow for more
meaningful events to premier in Cable.
John Alchin: Next question please, Operator?
Operator: Our next question comes from Alan Gould of JP Morgan. Please
state your question.
Alan Gould: Yes, thanks. Two questions. John, can you tell us a little
more about the (inaudible)...you have set up? What is the
average life of the security is?
John Alchin: Alan, we are having trouble hearing you. Can you speak up?
Alan Gould: Is that better?
10
John Alchin: Oh, that is way better. Thank you.
Alan Gould: Can you tell us a little bit about the debt line that you
have? What is the average interest rate? What the debt
maturities are? How much you plan to eventually have fix
floating? And secondly, what do you expect your price
increases of Basic Cable to be this year?
John Alchin: Steve, do you want to handle the price increase?
(inaudible)...already.
Steve Burke: Yes. In terms of price increases, we would be in the same
range that we have been over the last few years, which is 5%
to 6%.
Alan Gould: And those happened in the first quarter, Steve?
Steve Burke: No, those come in throughout the year. We have a lot of
increases in the August through November timeframe. They sort
of come in ratably. We do not have a particular day and time
when all 8.5 million subscribers take increases; it comes in
over time.
John Alchin: And, Alan, our average cost of debt is under 6% at the end of
the first quarter, it was about 5.89%. We have a relatively
high ratio of fixed to floating at the moment in the 85 to 15
range. I think, going forward, we have something that we
manage constantly. We have had ratios more consistently over
time in the 60-40 range. Obviously what we draw down at
closing of the merger at the outset absent any activity in the
bond market in anticipation or in advance of closing would
result in initial drawings being 100% floating, taking this
number down dramatically from the 85- 15 that we are at now.
And, then subsequently, if we did any bond offering into the
market place, we would have the ability through hedging to do
swaps back from fixed back to floating. So, somewhere between
60-40, 75-25 is where we have historically been.
Alan Gould: Okay, thank you.
John Alchin: Next question please, Operator?
Operator: Our next question comes from Tom Wolzein of Sanford Bernstein.
Please go ahead.
Tom Wolzein: Good morning, gentlemen. Related in two parts. One, how you
are on the maturity of the debt going forward. Secondly, does
the fact that you have solved the cash needs for closing, are
you okay for the following year for your cash needs, and does
all of this reduce any pressure on you to try to do a fast
resolution, perhaps having to pay taxes on TWE?
John Alchin: Sorry, Tom, I did not mean to duck the maturity issue. We have
very modest maturities on our own balance sheet in the 2002,
2003, 2004 timeframe. The facilities that we put in place for
the AT&T merger involve financings that are about 50-50 split
between longer term, 2 to 5 years, and short term being 364
days facilities. The 364 day component of the financing
arrangement is directed primarily at giving us a bridge into
the bond market, and yes, the financing we have arranged takes
into account virtually any need that we can see from here
through the next 18 to 24 months.
Brian Roberts: I do not want to comment on TWE publicly except that we are
hopeful to get a private resolution, but that conversation is
best left to private discussions. It is ongoing.
John Alchin: Do we have one last question, please, Operator?
Operator: Our final question comes from Michael Kupinski of AG Edwards &
Sons. Please go ahead.
11
Michael
Kupinski: Thank you. With the company's focus on advertising, given the
merger and the platform that you had so eloquently talked
about, how interested in getting those LA systems and
consolidation in the LA market, especially with the prospect
of Adelphia LA systems on the market, and I know AT&T owns an
interest in those, could you acquire those Adelphia systems
prior to the approval of the merger? And are lawmakers looking
at the aggregate number of subscribers given the AT&T
partnerships and ownerships that you might have, could you
roll up some of those companies' insistence without the ire of
Congress? So, perhaps if you could just give us an update on
some of your hearings or what the Senators had concerns of
yesterday?
Brian Roberts: Last week. This is Brian. Let me say that we were, what you
are referring to is the Senate Judiciary Subcommittee Hearing
that took place on the merger, and people have to draw their
own conclusions although a number of the Senators commented
that they did not see an anti-trust issue with the merger. So,
we were pleased with that, and I think it was a very good and
fair hearing and do not anticipate anything that would have
changed our estimate of when the deal will close. If anything,
we are hoping to make it happen a little sooner, not a little
later, but we will stand by our estimates at this point.
Rather than getting into any specific market and specific
potential transactions by other companies, I would just say
that the government is looking at it in aggregate. There could
be lots of swapping that goes on. We are not any, at this
point, we have plenty to work on if we can make it less
markets with more concentration in those markets for the way
we run the business in the clusters, that is always desirable
and whether that is adding one particular cluster or getting
out of a particular cluster and adding systems that are
contiguous somewhere else, we will leave that to others, but
we are not looking at anything except how to get the new
company to have the kind of margins that our company today
enjoys with the kind of new product success and with the kind
of focus on operations that I think has made results like
today possible. That is really where we are focused, and any
one individual market is not the center of attention at this
point.
John Alchin: Thank you, all. We are available for anybody who has any
follow-up questions. So, look forward to another great quarter
and a terrific year. Thank you.
Operator: Thank you. There will be a replay immediately following
today's conference call, and it will run through tomorrow
night at midnight. The dial-in number is 630-652-3000, and the
passcode is 5605377. Once again the number for the replay is
630-652-3000, and the passcode is 5605377. A recording of the
conference call will also be available on the company's Web
site. This concludes today's teleconference. Thank you for
participating. You may all disconnect.
12
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13