Sell Off: Comcast's Record Digital Adds Don't Appease the Street

Even if the Dow hadn’t dropped more than 300 points Thurs, Comcast’s stock appeared to be damned. Despite 4 consecutive quarters of RGU adds and strong digital and phone numbers, the MSO’s stock closed down nearly 4% as Wall St concentrated on its 2Q basic sub losses and slowing HSD growth. Analysts were quick to dismiss the panic. “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,” said Sanford Bernstein’s Craig Moffett. He said the results shouldn’t have warranted a strong reaction in either direction, noting that the MSO didn’t raise guidance or increase their share repurchase plan. Oppenheimer’s Thomas Eagan called the pullback a good buying opportunity. Digital customers skyrocketed as Comcast pushed digital boxes ahead of the FCC’s July 1 set-top integration ban. About 6 months ago, Comcast opted to buy out the production runs of low-end and advanced set-top boxes so that it could install as many of the now banned boxes before the July 1 deadline. The result? An addition of 823K digital subs—almost 2.5 times the 337K subs added in 2Q06—and a record 2.1mln digital box installs. Comcast now has nearly 60% of its video sub base taking digital. Only about 202K of the digital adds are taking the full digital service. The other 621K are taking the digital starter service. Digital starter subs only pay a $1 or $2 more in subscription rev, but they generally generate about $4 in incremental rev per sub each month because of VOD buys, execs said. All the focus on getting those digital boxes out of inventory seemed to hurt basic subs. While it’s traditional for operators to lose basic customers in 2Q, some were alarmed at how high Comcast’s loss was—95K. “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 other things,” said COO Steve Burke. Comcast’s 330K HSD adds were significantly below its 536K adds in 1Q. Burke blamed some of that on the system conversions for Adelphia and Time Warner Cable systems. “During these conversions, we typically take our foot off the gas in terms of marketing. In the classic Comcast systems, we did slightly better than last year for the quarter,” he said, adding that the company expects HSD to increase significantly in the 2nd half of the year. Phone had a record quarter, with 671k net adds and revenue almost doubling to $420mln. Comcast’s net income rose to $588mln from $460mln for the Q, while revenue climbed 31% to $7.7bln. Operating cash flow increased 13% to $3bln.