Comcast is reaping the rewards of its network investment and new service initiatives, today reporting major increases in revenue and operating income. Even before making major inroads with its voice-over-IP service, Comcast is ratcheting up the average revenue per user selling video-on-demand, HDTV and other advanced programming, while continuing to grow its Internet access revenue. Comcast reported a 64% overall improvement on profit for its new digital products.

At the same time, Comcast saw growth of its Internet access service slow in the face of tough competition from telco DSL sales and its voice service penetration decline as it continued the transition off an older circuit-switched platform and onto VoIP.

The cable giant said it earned $5.6 billion in net revenues, a 10% increase for the second quarter of 2005 compared to the second quarter of 2004, including six percent growth in video revenues and 29% growth in Internet revenue, even though growth in the number of Internet subscribers. Net profit rose to $430 million, or 19 cents per share, from $262 million, or 12 cents per share, a year earlier. Video revenue jumped 5.9% to $3.4 billion, based on the addition of 284,000 new digital customers in the second quarter, an increase of 13.3%, and higher ARPU. Basic subscribers slipped, due to what the company calls seasonal changes, but the percentage of Comcast’s cable customers now on digital service went up 13% to give the company 43% penetration of digital among its cable customers.

Wall Street initially cheered the results, which topped estimates for both profit (by 15 cents a share) and digital video subscriber growth. Comcast’s stock was up 2.5 % in pre-market trading but by mid-morning had re-trenched to a 1.4% gain.

“We are extending our competitive advantage with industry-leading products,” said Brian Roberts, chairman and CEO. “In video, we are continuing to expand our On Demand, HDTV and DVR offerings, and are beginning to rollout our enhanced basic--100% digital service. We recently announced an important new agreement with Starz Encore that significantly enhances our On Demand service, adding more than 325 top movies a month to the 3,500 program choices our customers enjoy today. In June, our customers viewed over 112 million On Demand programs, a 10 million increase in 3 months, as we continue to provide an unmatched product with more choice and customer value.”

Comcast High-speed Internet service revenues were up 29% to $982 million in the second quarter, based on the addition of 297,000 new subscribers. Comcast now has an 18.9% penetration rate of available homes for its cable modem service, even though the growth rate has slowed. A year ago, the company added 327,000 new cable modem subs in the second quarter.

“Comcast had strong results, but they were weaker than expected during the past quarter,” said telecom analyst Jeffrey Kagan. “Growth in the business does not come from cable television, but from services like broadband and telephone. Comcast is not really in telephone yet, and broadband sales, while strong, were weaker than expected. The big question is, is this slowdown temporary or is it a sign of things to come?”

Comcast’s VoIP story is more complex than that of cable brethren such as Time-Warner and Cablevision, which are aggressively selling digital phone service based on VoIP. The company added 15,000 Comcast Digital Voice customers based on VoIP, as it expanded its network reach late in the quarter. But those additions were offset by predicted declines in circuit-switched telephony customers, which Comcast inherited from AT&T and which it is phasing out gradually in the transition to VoIP. As a result, there was a gain of only 2000 net new phone customers in the second quarter of 2005 and cable phone revenue 4.0% from the second quarter of 2004 to $170 million in the second quarter of 2005.

“We believe Comcast Digital Voice will be the next engine for growth and are ramping up the rollout of this service in markets like Philadelphia, Indianapolis, Boston, Hartford, Chicago and Portland,” Roberts said. “We are on track to extend our offering to 15 million homes in 20 markets by year end and expect to offer our fully featured digital voice service across our 41 million homes by the end of 2006.”