PHILADELPHIA—Comcast Corp. on Wednesday reported an 8 percent increase in second-quarter profits, a solid performance in the face of a seasonally slower quarter made tougher by a decelerating economy.
While the nation’s largest cable operator lost basic video subscribers in the quarter, such losses were in line or better than what analysts had expected. Notably, Comcast, also the country’s second largest Internet service provider, showed that it was taking market share from rival phone companies, which reported much weaker broadband gains.
Free cash flow was a highlight of the quarter, more than tripling to $1.2 billion—at a time when many companies face liquidity issues—as capital expenditures fell by 20 percent.
Investors cheered the news, driving up shares of Comcast by $1.18, or 6.2 percent, to $20.36 in morning trading.
Brian Roberts, Comcast’s chief executive, said in a conference call with analysts that business was solid in spite of a challenging economy.
“As revenue and units are growing more slowly, we are appropriately focusing on expenses,” he said.
Philadelphia-based Comcast posted second-quarter net income of $632 million, or 21 cents per share, compared with $588 million, or 19 cents per share, in the quarter a year earlier.
Revenue rose 11 percent to $8.55 billion.
Analysts polled by Thomson Financial were expecting, on average, slightly higher profit of 23 cents per share on revenue of $8.54 billion.
The second quarter is traditionally slower for the company because snowbirds and students disconnect their cable for the summer.
Operating cash flow was up 8 percent to $3.36 billion. But free cash flow soared, as the company’s spending on wiring new communities fell by 50 percent in the housing slump. Last year, the company also spent money meeting the federal July 1 deadline that required cable operators to start using new boxes with separable security.
Comcast lost 138,000 basic subscribers in the quarter but added 320,000 digital customers. Total video revenue was up 3 percent to $4.73 billion. Video customers on average paid $63.98 a month, up 4 percent.
Comcast said it will be shifting 20 percent of its market into digital in the second half of 2008. But the company acknowledged that the transition has its problems. In Chicago, Comcast has already switched 70 percent of customers. But a portion of the rest who aren’t low income will need a technician to make the switch, which could be seen as intrusive.
High-speed Internet added 278,000 new subscribers, down 18 percent from 2007. Revenue was up, though, by 10 percent to $1.8 billion even as customers on average paid $42.01 a month, a 3 percent decline year-over-year. The increase in new customers more than offset lower prices.
“As it turns out, the telco’s (telephone companies) loss has been Comcast’s gain,” said Craig Moffett, an analyst at Sanford Berstein in a research note. “Cable is taking (broadband) share and it is taking it in gulps.”
He said Comcast’s 278,000 new Internet customers represent 75 percent of the broadband market gains reported by Internet service providers thus far. For the second quarter, Moffett believes cable’s broadband gains will represent 85 to 90 percent of all new ISP customers.
But casting a shadow over broadband are sanctions expected to be imposed by the Federal Communications Commission for Comcast’s management of Internet traffic. The company has been accused of blocking traffic, which it denies. Comcast said it has delayed traffic for the heaviest users so others won’t be bogged down.
Nevertheless, Roberts said Comcast is considering “adjusting our management techniques to go to a bit more of a consumption-based model” where Internet plans take usage into account. He did not say whether it means there will be a cap on usage with extra fees for going over.
In the quarter, Comcast’s digital voice business added 555,000 net new customers, down 20 percent from a year ago, but revenue also was up 77 percent to $636 million. Customers paid $39.48 a month on average, down 7 percent.
Since launching phone service three years ago, Comcast is now the fourth-largest phone company in the country and expects to add over 2 million customers this year.
Advertising revenue was down 2 percent to $399 million, with particular softness in auto and housing ads but partially offset by higher political spending. Programming revenue was up 10 percent to $366 million. Comcast owns E!, Style Network, The Golf Channel and others.
Comcast also reaffirmed guidance for an 8 percent to 10 percent increase in revenue and operating cash flow for 2008. It also expects free cash flow to increase 20 percent or more.
