Prime Results, But Subprime Reaction

In what is quickly becoming the cable industry’s version of deja vu, Comcast last Thursday reported yet another quarter of strong revenue and cash-flow growth, and the stock market responded by driving the cable operator’s shares down by nearly 5%.

Comcast stock fell as low as $26.40 per share on July 26 (down 7.5% or $2.14 each) before rebounding slightly to close that day at $27.21 per share, down 4.7% or $1.33 each.

It was a tough day for most publicly traded companies — the Dow Jones Industrial Average finished the day down 311 points, mainly because of concerns about the subprime credit market.

Comcast wasn’t even the biggest loser in the cable sector — Time Warner Cable finished last Thursday, down 4.3%, or $1.77 per share, to $39.53. Rounding out the sector was Charter Communications (down 34 cents or 7.8%); Cablevision Systems (down 91 cents or 2.5%); Mediacom Communications (down 50 cents or 5.1%) and Time Warner Inc. (down 62 cents or 3.1%). Among direct-broadcast satellite service providers, EchoStar lost the most ground, its shares declining $1.47 each, or 3.4%, to $42.26 per share. DirecTV Group fared better, finishing the day at $22.98 per share, down 89 cents or 3.7%.

Comcast reported cable revenue of $7.33 billion in the second quarter (up 12%) and cable operating cash flow of $3.03 billion (up 13%), driven largely by strong growth in digital subscriber and telephony additions. It was Comcast’s 28th consecutive quarter of double-digit operating cash flow growth.

Comcast added 823,000 digital customers — the highest level of digital additions in company history — and 670,000 Comcast Digital Voice customers — its highest level to date — in the second quarter. But 95,000 basic subscriber losses in the period, an increase over the 91,000 subscribers lost in the prior year, and 330,000 high-speed Internet customers (below the 350,000 to 450,000 additions some analysts were expecting) pointed to the possibility that the triple play of voice, video and Internet access was losing some of its halo effect.

In a conference call with analysts, Comcast executives downplayed the basic-subscriber losses, adding that the second quarter is usually a tough one for basic additions as college students and snowbirds leave for their summer residences. Last year, Comcast lost about 91,000 basic subscribers in the second quarter.

“That Comcast lost basic subscribers in a seasonally-weak second quarter is not a surprise,” wrote Sanford Bernstein cable and satellite analyst Craig Moffett in a research report. “That the size of the loss didn’t improve from last year, however, is a disappointment.”

But Moffett said in a later report that the sell-off in Comcast stock was unwarranted and investor sentiment was affected more by what the company didn’t say — it didn’t raise guidance or increase its stock buyback plan — than by what it did.

“The results themselves don’t warrant a strong reaction (in either direction),” Moffett wrote. “And history suggests that sell-offs in the wake of Comcast quarterly results — something that has occurred with some frequency at Comcast — are generally rapidly reversed over the coming weeks and months.”

Adding pressure to the basic subscriber losses was Comcast’s focus during the period on adding digital subscribers ahead of the July 1 Federal Communications Commission ban on digital set-top boxes with integrated security features. About 621,000 of the 823,000 new digital customers signed on for Comcast’s digital starter package, its lowest digital tier.

“I think there is no question that when you prioritize digital and have as much activity as we did, that prioritization takes your eye off of other things,” Comcast chief operating officer Steve Burke said on the conference call.

Burke added that Comcast has regularly lost subscribers in the second quarter, only to see those customers come roaring back in the third and fourth quarters. There is no reason to believe that won’t happen this year.

“We don’t consider it a cause for concern,” Burke said.

Burke blamed the flat high-speed Internet additions on Comcast’s focus on converting new properties acquired from Adelphia Communications and Time Warner Cable.

“During those conversions we actually added a lot less subs than the year before,” Burke said. “If you look at the trends in the classic Comcast systems, they’re actually pretty good. I think the second half of the year is going to look a lot like the second half of last year, and maybe even a little bit better.”

In the second half of 2006, Comcast added a total of 120,000 basic customers, erasing its second-quarter deficit and finishing the year with 24.2 million customers, an increase of 80,000 subscribers over the prior year.