Comcast’s Broadband Business To Grow On Higher ARPU And Rising Demand For High Speed Tiers

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Comcast (NASDAQ:CMCSA) has seen rapid growth in its broadband business in recent years, both in customer relationships and revenues. The revenues have nearly doubled from $6.4 billion in 2007 to $12 billion in 2013 and the segment now account for close to 20% to the company’s overall revenues. [1] It also offers higher margins of close to 42%, according to our estimates. In 2013, the segment generated 22% of the company’s overall EBITDA. The increasing need for speed and connectivity is driving broadband growth in the U.S. The higher penetration of smartphones and use of multiple devices are aiding overall growth. Around 95% of households with Internet service at home have a broadband connection. [2] Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. These activities require high data volume, which explains why the reliance on fixed networks is far greater than that on mobile carriers. Moreover, the traditional boundaries between cable service providers and telecoms are getting blurred, with all operators looking to bundle video, voice, and data services. Customers tend to prefer receiving all their services from a single provider. This works out to be both cost-effective and more convenient (single bill for all services) to them. We believe these factors will continue to drive broadband growth for cable operators in the coming years. We also note that there is enough room left for broadband to penetrate in the U.S. Currently, broadband coverage is around 79% and is expected to cover more than 90% of the households in the long run. As you can see from the Trefis breakdown for Comcast’s valuation shown below, the broadband operations account for 30% of the company’s stock value.

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Comcast has seen rapid broadband subscriber growth over the past few years. From 13 million subscribers in 2007, the company’s subscriber base increased to 21.58 million by end of the third quarter this year. The overall industry (broadband service providers representing 93% of the industry) acquired 1.6 million net broadband subscribers in the first six months of 2014, taking the total subscriber base to 85.92 million, of which 59% were cable subscribers. [3] [4] Comcast alone acquired close to 40% of the overall subscriber additions during the first half of 2014 and now commands a broadband market share of close to 22% in the U.S.  Other cable operators such as Time Warner Cable (NYSE:TWC) have also seen rapid growth in the broadband operations. This can be largely attributed to the rising demand for speed and connectivity. Broadband penetration in the U.S. households now stands close to 80% as compared to 20% in 2004, according to Leichtman Research Group. [2]

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The company’s average monthly revenue per user (ARPU) for broadband services has also increased from $40.58 in 2009 to an estimated $48.21 in 2013. We expect this trend to continue in the coming years and forecast ARPU to be north of $60 by the end of our forecast period. This growth will primarily be driven by the rising demand for higher priced tiers with higher speeds. Around 50% of Comcast’s broadband subscribers receive Internet speed of 50 MBPS or more, reflecting the demand for high-speed connectivity. [5] This adoption is driven by the expansion of online video streaming and gaming services. Moreover, the rapid growth in business services is driving the ARPU upwards. For instance, Comcast’s 100 MBPS Deluxe plan for business is priced at $200, which is much higher than residential 105 MBPS Blast plan of $77 per month (regular price) available in certain locations. We estimate broadband EBITDA to be around $10 billion, representing close to 30% of the company’s overall EBITDA by the end of our forecast period.

We estimate revenues of about $68 billion for Comcast in 2014, with Non-GAAP EPS of $3.01, which is in line with the market consensus of $2.59-$3.24, compiled by Thomson Reuters. We currently have a $59 price estimate for Comcast, which is slightly ahead of the current market price of $57.

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Notes:
  1. Comcast’s SEC Filings []
  2. NEARLY 80% OF U.S. HOUSEHOLDS GET BROADBAND AT HOME, Leichtman Research Group, Oct 24, 2014 [] []
  3. 2Q 2014 – Actionable Research on the Broadband, Media & Entertainment Industries, Leichtman Research Group []
  4. 3Q 2014 – Actionable Research on the Broadband, Media & Entertainment Industries, Leichtman Research Group []
  5. Comcast Corporations’ (CMCSA) CEO Brian Roberts on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 23, 2014 []