There is clear strength in Comcast‘s (NYSE:CBS) overall business as the company heads into 2013 with aggressive plans. Results for Q4 2012 demonstrated significant improvement in the company’s pay-TV business, continued strength in broadband, healthy growth in NBCuniversal’s revenues and higher adoption by small and medium sized businesses. Comcast, like other cable companies, has been plagued by consistent pay-TV subscribers losses for the past few years. However, the company seems to have a come a long way and unlike its rival Time Warner Cable (NYSE:TWC), has shown greater commitment toward improving its pay-TV business. The Xfinity brand is proving to be successful. Improved customer service, on-demand and subscription streaming as well as efficient bundling are also paying off. In addition to this, Comcast announced that it will acquire the remaining 49% stake in NBCUniversal, which is currently held by GE. Although this acquisition was expected eventually, the timing comes as a surprise. Perhaps Comcast sees a greater value in NBCUniversal’s content business and therefore deems it in its best interest to complete the acquisition now.
- Where Comcast Stands In The U.S. Pay-TV Market
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- Threat To Pay TV Business Can Negatively Impact Comcast’s Value
Cable Business Showing Strength
Comcast reported a loss of 7,000 net pay-TV subscribers, which is an improvement over loss of 17,000 net pay-TV subscribers in Q4 of 2011.  If we compare it against the last quarter, i.e. Q3 2012, we note an improvement of roughly 110,000 net subscribers losses.
As a result, Comcast’s pay-TV revenues also grew by 2.9%, which is the best quarterly growth that the company has recorded in this business in last four years.  This success has resulted from improved bundling, the success of Comcast’s Xfinity brand and continued fast growth in business services. At the end of 2012, 75% of our Comcast’s pay-TV customers subscribed to at least two products and 40% took all three services (broadband, pay-TV and voice).  These figures remained flat compared to Q3 2012, but improved compared to the fourth quarter of 2011. Comcast also saw 32% growth in its business services that partially drove the revenue and subscriber additions.
Despite its slow growth, pay-TV business is most important for Comcast constituting about 40% to its value. The company has an opportunity to improve its product mix in this business by marketing its streaming subscription service Xfinity Streampix, promoting HD & DVR as well as pay-per-view videos, raising prices and integrating its service across different device platforms. There exists a significant opportunity for business services where Comcast is still targeting small and medium sized businesses. If it can strike a few deals with big firms that will pave way for many more such deals and Comcast could take share from telcos.
The broadband business is doing well and the company ended the quarter with 341,000 net subscriber additions.  Overall in 2012, Comcast gained 1.2 million broadband subscribers. The average revenue per subscriber (ARPU) continues to benefit from customer upgrades to higher tiers. This fast paced growth in broadband is likely to continue as long as customers continue to drop their old DSL connections.
What Helped NBCUniversal?
NBCuniversal benefited from a ratings improvement at its NBC broadcasting network, and better attendance and spending at theme parks & resorts. NBC is off to a great start in the new season. After three weeks of the opening of its 2012-13 broadcasting season, NBC was up 15% in ratings compared to the same period last year while the other broadcasting networks were down by 12% to 24%.  Comcast reported in January that NBC has been the number one broadcasting network among 18-49 demographic for 13 out of 15 weeks of the new season. 
Although Parks & Resorts did well, what matters is the performance of NBCUniversal’s cable networks which bring close to 75-80% of its profits. Cable networks saw only 3% growth in 2012, with 5% growth in subscription & licensing revenues and 2% growth in ad revenues.  Needless to say, ad revenues suffered slightly due to lower ratings.  NBCUniversal should perhaps do what it has done for NBC, and invest more in original programming to ensure that this ratings decline doesn’t become a persistent trend.
As far as 2013 is concerned, Comcast expects programming costs to grow by a low double-digit rate.  This might put some pressure on margins, but the company will offset that by increasing prices, promoting advanced services such as HD and DVR and by creating operational efficiencies. A lot will also depend upon how the broadband business grows and whether the growth in its profits can offset margin pressure in pay-TV business.
We are in the process of updating our valuation model for Comcast in the light of recent earnings and will have an update ready soon.
Our price estimate for Comcast stands at $41, implying a slight premium to the market price.Notes:
- Comcast’s SEC Filings [↩]
- Comcast’s Q4 2012 Earnings Transcript [↩] [↩] [↩] [↩] [↩] [↩]
- NBC Has Best Fall Season Start in 10 Years, PR Newswire, Oct 16 2012 [↩]
- FOR THE FIRST TIME IN 10 YEARS, NBC WINS THREE STRAIGHT IN-SEASON WEEKS IN TOTAL VIEWERS WITHOUT OLYMPICS HELP; NBC IS #1 OUTRIGHT IN 18-49 AT THIS POINT IN THE SEASON FOR THE FIRST TIME IN NINE YEARS, UP 24 PERCENT VS. ITS YEAR-AGO AVERAGE, Comcast Press Release, Jan 8 2013 [↩]