NBCUniversal Boosts Comcast’s Q3 Earnings

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Comcast (NASDAQ:CMCSA) recently posted its earnings for the third quarter with strong gains in its broadband operations. NBCUniversal benefited from solid growth in its theme parks business, driven by the higher attendance at The Wizarding World of Harry Potter. The broadcasting revenues grew 8% driven by higher advertising income and content licensing fees. [1]

The cable company lost 81,000 video subscribers as compared to 127,000 it lost in the prior year period, marking best third quarter in the past seven years. The company continued to benefit from triple play bundling and posted 5% growth in cable communication revenues. Earnings per share rose  52% to $0.99 including favorable tax adjustments. Normalized earnings grew 12% to $0.73 a share. [2] The cable giant once again posted good results with balanced growth in its cable communication as well as NBCUniversal segment.

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Strong Growth In Broadband Segment

Broadband was the largest contributor to cable revenue growth, with revenue increasing 10% to $2.84 billion, driven by continued growth in the customer base. Comcast added 315,000 new broadband customers during the quarter. Business Services continued to see double-digit growth and revenues grew 21% to $1 billion. Growth in broadband was driven by rise in demand for speed and connectivity. Around 50% of Comcast’s broadband subscribers receive Internet speed of 50 MBPS or more, reflecting the demand for high-speed connectivity. [2] The use of multiple devices and higher penetration of smartphones is aiding the overall demand for high-speed Internet. We expect Comcast to continue to gain broadband subscribers in the near term driven by its triple play bundles. We estimate broadband revenues will be north of $13 billion (including the business services segment) and command an EBITDA margin of around 42%, generating EBITDA of over $5 billion for 2014.

Pay-TV Subscriber Losses Decline In Q3

We estimate that the pay-TV operations contribute close to 35% to Comcast’s stock value. Cable companies have lost thousands of customers over the past few years, but Comcast managed to slowdown the pace of subscriber losses in recent quarters, primarily due to its triple play bundling. The pay-TV revenues were up 1% to $5.18 billion for the quarter. [1] While bundling of services has helped Comcast’s cable communication segment grow, the pay-TV market is saturated with fierce competition and the increased focus of providers on acquiring higher-value subscribers. The availability of content on alternative platforms such as Netflix (NASDAQ:NFLX) or direct streaming options, such as HBO Go and CBS All Access, may encourage some of the subscribers to cut the cord. Moreover, rising cable bills may force some of the customers to shave their packages, which could lead to lower average monthly subscription fees. [3] The industry is also going through a phase of consolidation with the proposed mergers of Time Warner Cable (NYSE:TWC) with Comcast and DirecTV (NASDAQ:DTV) with AT&T (NYSE:T). It will be interesting to see how the industry shapes up in the near term and if the cable giant can continue to reduce its pay-TV churn with its triple play offerings. We estimate that in 2014 pay-TV revenues will be around $22 billion with an EBITDA margin of around 42%, which will translate into EBITDA of over $9 billion for the year. This forecast also includes the pay-TV operations under business services segment.

Theme Parks Drive The Growth For NBCUniversal

NBCUniversal revenues grew over 1% to $5.92 billion during the third quarter. While the theme park revenues jumped 19%, filmed entertainment revenues dropped by 15%. The decline in movie business was on expected lines as the prior year quarter benefited from the wide success of Despicable Me 2. The theme parks benefited from higher attendance and per capita guest spending, primarily due to the opening of Harry Potter Diagon Alley on July 8. The company recently got the nod to develop a $3.3 billion theme park in Beijing, China, and it will also include a Universal themed resort hotel (Read More – Comcast To Build A $3.3 Billion Theme Park In Beijing). Coming to television, broadcasting revenues grew 8% to $1.8 billion driven by higher advertising income and content licensing fee. While advertising income grew 4% to $1.15 billion, content licensing fees jumped 13% to over $400 million. [1] It must be noted that NBC for the first time in 10 years ended a full season (2013-14) at the top spot in 18-49 demographics. Into the first two weeks of 2014-15 season, NBC continued to retain the top spot in 18-49 demographic. [2] 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. [4] Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income.

We estimate revenues of about $68 billion for Comcast in 2014, with Non-GAAP EPS of $3.02, which is in line with the market consensus of $2.86-$3.10, compiled by Thomson Reuters. The company’s stock rose over 3% after the third quarter earnings were released. We currently have a $60 price estimate for Comcast, which we will soon update based on the third quarter earnings announcement.

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Notes:
  1. Comcast’s SEC Filings [] [] []
  2. Comcast Corporations’ (CMCSA) CEO Brian Roberts on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 23, 2014 [] [] []
  3. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal, Oct 9, 2014 []
  4. The Voice Season 7 Fall ratings is better than last year’s, Hallels, Sep 26, 2014 []