Watchout For Comcast’s Pay-TV Subscriber Trends In Q2

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Comcast‘s (NASDAQ:CMCSA) will report its Q2 2014 earnings on July 22. While we expect steady growth in the broadband business, we are eager to see how pay-TV subscriber addition trends. Comcast was able to turnaround its pay-TV subscriber losses and posted modest gains in the previous two quarters primarily due to its triple play bundling packages. NBCUniversal’s results are likely to benefit from the continued success of its cable as well as broadcasting network, which ended 2013-2014 prime time season as No. 1 in key 18-49 demographic. [1] We expect to learn that the theme parks business to grew strongly in Q2 due to the inclusion of Easter holidays, which fell in Q1 in the prior year.

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Watchout For Pay-TV Subscriber Trends

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Comcast and other cable operators have been losing pay-TV subscribers for many years. However, Comcast managed to turnaround its subscriber losses in the previous two quarters. This can be attributed to the company’s triple play bundling packages, and its advanced platform of X1 and Xfinity Streampix. Q1 2014 turned out to be one of the best quarters for the pay-TV industry, stemming subscriber losses as the overall market rose by 202,670 subscribers. [2] However, it must be noted that first quarter usually tends to be good for pay-TV operators. We are eager to see if Comcast can continue to add subscribers in the near term. We continue to believe that the rise of alternative video platforms will weigh over Comcast’s pay-TV operations in the long run (See – Comcast’s Pay-TV Subscriber Turnaround Will Be Shortlived). We will be closely watching any update on the Time Warner Cable (NYSE:TWC) merger, which is currently being examined by the regulatory bodies for approval.

NBCUniversal Will Continue To Ride High

According to our estimates, NBCUniversal contributes around 25% to Comcast’s value and includes the cable and broadcasting networks, theme parks and movie businesses. The company’s bottom line likely benefited from its second quarter release of Neighbors, which had a production budget of $18 million and has so far grossed over $250 million at the global box-office. [3] However, it will be a tough comparison as last year’s second quarter earnings reaped benefits from the success of Fast And Furious 6.

NBCUniversal’s broadcasting network NBC has been riding high on the success of its programming and ended the 2013-14 prime time season at the top spot in key demographics.  This is for the first time in a decade that NBC ranked No.1 in its key demographics. The network benefited from the success of its shows such as The Voice and The Blacklist, which delivered higher ratings during the season. Ratings directly impact the advertisement income for content owners. NBC derives 70% of its revenues from advertising income. The network is poised to benefit from advertising growth.  According to Magna Global, the U.S. advertising revenues will grow by 5.5% in 2014 as compared to 1.3% growth witnessed in 2013. [4] The U.S. mid-term elections, the Winter Olympics and FIFA World Cup will boost the advertising growth in 2014. NBCUniversal benefited from its coverage of the Winter Olympics during the first quarter and posted 2.5 times growth in operating income as compared to the prior year quarter. NBCUniversal also took the No. 1 rank in upfront sales for the next season with 11% jump in effective ad pricing as compared to the prior year sales. [5] These facts further support our expectation of strong growth in NBCUniversal.

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Notes:
  1. BACK ON TOP:NBC WINS THE 2013-14 SEASON, Comcast’s Press Release, May 20, 2014 []
  2. US Pay TV Subscriptions Rise in Q1 as Cable Achieves Best Quarter in Years, IHS, May 15, 2014 []
  3. Neighbors, Box Office Mojo []
  4. MAGNA GLOBAL Advertising Forecasts: 2014, Magna Global, Dec 9, 2013 []
  5. TV networks wrap upfront ad sales; NBCUniversal nabs $6 billion, Los Angles Times, Jun 24, 2014 []