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Comcast keeps costs under wraps
By Joseph N. DiStefano
Inquirer Staff Writer

Comcast Corp. and its complex finances faced new scrutiny when it bought AT&T Corp.'s cable systems to become the nation's biggest cable provider last year.

Pressed by investors, the Center City-based cable giant began telling more about its customers and its capital costs. To trim its towering $30 billion debt, Comcast sold assets and paid down loans. Ahead of schedule, Comcast reported higher sales and fatter margins.

"I'm thrilled with how well we exceeded all the original targets," chief executive officer Brian L. Roberts said Friday. "To have the ability to pay off basically $10 billion worth of debt in one year may be a world record. We're in the best financial condition in our history."

Yet, Comcast does not tell all. The company sees no need to support its buoyant big-picture numbers by detailing such basic expenses as marketing and programming costs, even though it used projected savings in those areas to help justify the $51 billion deal.

"We're delivering the bottom line. We shouldn't have to go through and detail it. What do you care where all this came from?" John Alchin, Comcast's co-chief financial officer, said in an interview last week. Indeed, many Comcast investors say they are content with the overall numbers and do not expect more spending detail - even if they would welcome it.

You will not learn much about Comcast's current expenses by looking in Comcast's recent financial statements. Unlike cable rivals Cox Communications and Charter Communications, Comcast has not broken out even basic spending categories.

Cox began listing expenses when it went public in 1995 because "it helps people understand our performance," and "it's the right thing to do," Cox spokeswoman Laura Oberhelman said.

At Charter, past accounting scandals helped persuade that company to make its books among "the most transparent" in corporate America, according to spokesman David Andersen.

But while Cox in particular uses its expense data to fuel a public campaign against high programming fees, Comcast feels no such obligation to show the public the relationship between what it pays suppliers - such as movie-maker HBO, sports purveyor ESPN, and cable-maker Commscope - and what it charges customers.

"Comcast doesn't want to be seen as the bad guys," bullying programmers and other suppliers into lowering their prices, said Kermit Eck, portfolio manager at Philadelphia-based Cooke & Beiler, a Comcast investor. The company prefers to negotiate in private.

Eck does not mind: "Even though they're not breaking out expenses," the company is reporting overall operating margins, and those look quite good, he said. Overall operating margins rose to 37 percent from 30 percent a year ago, not counting such costs as taxes, equipment depreciation or financing costs.

Investors "would love to have more detail" from Comcast, Alchin agreed.

But Comcast says it is enough to know that the company has been able to boost prices and attract many more users for its new premium video and Internet services (though not for its larger traditional cable service, which has suffered from cheaper satellite TV competitors).

Overall, Comcast's sale of West Chester-based QVC and other assets "have taken all of the pressure off our balance sheet," Alchin said.

The sale of Comcast's QVC stock to partner Liberty Media for more than $5 billion, after taxes, is the largest in a series of asset sales and stock conversions that Alchin says will trim Comcast's overall debt from about $30 billion last year to about $23 billion by the end of this year, with more cuts on the way. The company has also been replacing high-cost, high-fee bank debt with long-term, relatively low-rate bonds to reduce its financing expense.

But without more detail on operations costs, how far do investors trust Comcast's improved financial claims?

Enough for bond buyers to reduce the premium that Comcast pays investors to buy its bonds - though not enough for a coveted rating increase from Moody's or Standard & Poor's, at least not yet. Enough for stock investors to boost Comcast's stock 35 percent so far this year - but not enough to match most other big Nasdaq stocks (the Nasdaq Composite Index is up 40 percent) or the 250-company Nasdaq telecommunications index (up 60 percent). (Though it plunged last year on news of the costly AT&T deal, Comcast has risen faster than Cox and most other cable stocks in 2003.)

"It's information investors should have," Moody's credit analyst Neil Begley said. Yet, Begley said, investors have been reasonably accepting of Comcast's preference for not disclosing actual costs as it negotiates in private for lower prices.

The Standard & Poor's credit rating service, which a year ago gave Comcast its highest marks for the "transparency" of its annual reports, gets more information than public investors do - and that is enough for the service to determine Comcast's credit quality, S&P analyst Richard Siderman said.

Comcast debt now ranks in the low investment-grade range.

Earlier this fall, Comcast won some ringing endorsements from big Wall Street stock-selling firms after reporting its margins had improved in the third quarter.

Despite its merger challenges, Comcast has posted reasonably solid results and will likely outperform its competitors, according to Wachovia Securities. Merrill Lynch & Co. Inc. went further, praising Comcast's "flawless execution," as defined by higher-than-expected sales of data and online services.

Deutsche Bank reported Comcast has only just begun to cut programming costs and boost sales - though it also warned that the temptations for Comcast to use its improved finances to buy other companies "remain a wild card" in Comcast's future.

But even some believers say they would welcome more information about exactly how Comcast achieved those reported margin improvements.

"I would like a bit more detail on where they're getting their cost cuts," along with more detailed before-and-after merger comparisons, said Ronald A. Young, a former Hollywood movie studio CFO who now picks media stocks for Wachovia Corp.'s Evergreen mutual funds.

But Young has no plans to bet against what he sees as prevailing investor sentiment. The market, he notes, sees Comcast as a brand leader - the McDonald's or Coke of cable - and is willing to give it the respect and leeway that dominant companies often enjoy.

Is it a question of faith? "If you're an investor in this stock, you have to believe that at the end of the day Comcast is a well-run organization, is becoming much better organized," and is preparing for "big new revenues" and lower expenses, Young concluded.

Count Evergreen among the believers: The firm owns 1.8 million Comcast shares, worth more than $56 million, for its clients.

Not everyone is buying.

"On the surface it looks like [the AT&T merger] has done extremely well. But we need to see the numbers. It's too early to tell if they're going to get the cost savings, or the increase in revenues," said a bond manager at one of the nation's largest investment firms, who spoke on condition that he not be named because his employer does not want to criticize a lucrative bond sales client such as Comcast.

Nor has Comcast ended sniping from such longtime critics as Silicon Valley telecommunications analyst-turned-investor Andy Kessler, who opposed the AT&T deal. "Companies that report less information, especially in this post-scandal day and age, are doing themselves a huge disservice," he said last week. Eventually, "investors in the dark go elsewhere."

Alchin says most Comcast investors are more patient. "The benefit of [increased] financial flexibility," he said, "is that we don't feel pressure to perform quick resolutions" before the time is right. Comcast can wait, Alchin said, to make deals and disclose expenses when it feels the time is right.

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