Comcast’s Q3 Earnings Preview: Pay-TV Subscriber Trends And NBCUniversal In Focus

Comcast (NASDAQ:CMCSA) will report its Q3 2014 earnings on October 23. While we expect steady growth in the broadband business, we are eager to see how pay-TV subscriber additions trended in the quarter. The company lost 144,000 subscribers in the previous quarter, marking its best Q2 for this metric in the past six years. ^[1] Triple play bundling has helped Comcast gain more subscribers in the past few quarters. The company’s media arm, NBCUniversal (NBCU) has been an important growth driver for the company in the recent past. We believe that NBCU is likely to benefit from the continued success of its cable as well as broadcasting network, and the theme parks. We will be looking for an update on the recent nod to develop a theme park resort in Beijing.

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Pay-TV Subscriber Trends Were Positive In The Recent Past

We estimate that the pay-TV operations contribute close to 35% to Comcast’s stock value. Cable companies have lost thousands of subscribers over the past few years but Comcast has managed slowdown the pace of subscriber decline. Looking at the previous three quarters, Comcast added 67,000 subscribers in the two quarters ending March 2014 and it saw a decline of 144,000 in Q2 2014. However, second quarter is usually a weak quarter for pay-TV industry and the figure was much better than a loss of 162,000 subscribers in the prior year period. ^[1] The better subscriber trend in the recent quarters was primarily a result of high triple play bundle sales, the best in past three years.  However, it may not last for long.

The pay-TV industry witnessed a decline of 166,000 subscribers in 2013, reflecting the weakness in the industry. This can be attributed to a combination of market saturation, fierce competition, rise of alternative video platforms and the increased focus of providers on acquiring higher-value subscribers. Rising pay-TV bills are making customers either drop their connection or shave the existing plans. For instance, popular cable networks such as ESPN and TNT has seen more than 4% decline in penetration over the past four years. ^[2] This reflects ‘cord-shaving’ where customers are opting for lower priced packages and it could be harmful for media companies in particular. We are eager to learn how the pay-TV industry trends in the near term and if Comcast manages to grow its subscriber base in 2014.

We estimate revenues of about $22 billion for Comcast’s pay-TV operations in 2014. An estimated EBITDA margin of 42% will translate into EBITDA of $9.21 billion for the year.

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. While the company will benefit from the success of Lucy in the third quarter, it will be a tough comparison with the prior year quarter, which benefited from high box-office grossing of Despicable Me 2. Lucy was made with a production budget of $40 million and has grossed more than $415 million at the box-office globally. ^[3]

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.  Into the first two weeks of 2014-15 season, NBC continued to retain the top spot with 2.8 rating in 18-49 demographic. ^[4] The network has benefited from the success of its shows such as The Voice and The Blacklist, which delivered higher ratings during the quarter. The Voice ratings moved up for the current season to 4.1 in 18-49 demographic as compared to 3.7 rating seen in the prior season. ^[5] Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income.

NBCU’s theme parks business is trending well and is generating stable cash flow for the company. Revenues grew 13% higher in the previous quarter amid spring holidays and higher guest spending. We expect theme parks revenues to grow 8% for the year to $2.38 billion. A growth in ticket prices and higher guest spending will boost the revenues in the near term. In a recent development, Comcast got the nod to develop a $3.3 billion theme park resort in Beijing, China. The new resort will be spread across 300-acre site and will include a Universal themed resort hotel. ^[6] We will be closely watching for any update on this front and also look for any tentative timeframe of resort opening.

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1. Comcast’s SEC Filings [↩] [↩]
2. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal, Oct 9, 2014 [↩]
3. Lucy, Box Office Mojo, As of Oct 19, 2014 [↩]
4. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 2 Ending October 5, 2014, Zap2it, Oct 7, 2014 [↩]
5. The Voice Season 7 Fall ratings is better than last year’s, Hallels, Sep 26, 2014 [↩]
6. UNIVERSAL THEME PARK AND RESORT PLANNED FOR BEIJING, Comcast’s Press Release, Oct 13, 2014 [↩]