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April 27, 2006

Great Quarter From Comcast

Comcast (CMCSA/K) reported better than expected results. Across almost every important financial and subscriber metric, the results were at the high end of expectations or better than expected. This just the start of a string of good results tat will feature double digit top line growth, slightly expanding margins, leveraged EBITDA growth, and growing free cash flow. The market is finally coming around to my long held view that results will be good for a couple of years before the competitive challenges from RBOCs, internet bypass, and satellite companies impact financial and subscriber measures. If that is the case, the shares go up before they go down. That is what is happening now and I think there is more upside to the stock.

The key financial figures for Comcast are in its cable division which provides 95% of revenue. The quarter was better than expected even after expectations had strengthened in recent weeks. Revenues grew 10% and EBITDA grew 12%. Both were ahead of expectations for 8-10% growth. Capital spending was flat vs. a year ago so growth in EBITDA flowed through to cash flow from operations. This is exactly the financial model the street wants to see and the shares are rising accordingly today.

At the subscriber level the numbers were equally good. Basic subs reversed their recent negative growth as the company added 47,000 subscribers. This is higher than any published estimate I am aware of. Digital subs grew by 340,000, about 50,000 ahead of expectations. High speed subs grew by 437,000, about 70,000 ahead of expectations. VOIP telephony new subs came in at 211,000, slightly above expectations. Importantly, pricing held across all products as ARPUs at the product or household level were flat or higher against a year ago. Competition may be brutal but so far at least CMCSA's superior product offerings and bundling are easily holding their own...

I think there are a couple of things at work at the subscriber level. First, new video products like VOD, DVRs, and HD are gaining increasing traction. Second, the VOIP telephony rollout is broadening and beginning to have spillover benefits. Put these two things together and you have lower churn which raises net adds and helps pricing and margins.

These trends have been largely evident at Cablevision (CVC) and Time Warner (TWX) over the past year. Comcast's results have lagged a bit as they were behind n the VOIP rollout. The market has been refusing to pay for a potential acceleration at Comcast or the good results at CVC and TWX. Now that the industry leader has joined the party with actual results that support the bull case, CMCSA shares are responding.

Management maintained full year guidance despite the better than expected results. I think this is because it is early in the year and 2Q is seasonally weak. I think guidance goes up following 2Q results. Estimates will go up right away.

The shares are headed higher as the VOIP rollout expands and advanced TV services continue to attract customers. These trends will remaining place deep into 2007. CMCSA has another 10% upside at least over the next year.

Posted by Steve Birenberg at April 27, 2006 03:20 PM in Comcast/Cable TV