Broadband And NBCUniversal Will Drive Comcast’s Q4 Earnings

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Comcast (NASDAQ:CMCSA) will report its Q4 2014 results on February 24th. We expect the company’s broadband business to continue to perform well, while its Pay-TV business will likely continue losing customers. However, Comcast has been able to slow down its Pay-TV subscriber losses in previous quarters primarily due to its triple play bundling packages and it will be interesting to see if this trend continues. NBCUniversal’s results likely benefited 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]

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Broadband Subscribers Will Continue To Grow

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From 13 million subscribers in 2007, Comcast’s broadband base increased to around 21.5 million as of September 2014. [2]The broadband business has done well for Comcast, due to rising demand for faster Internet and a decline of DSL Internet connections. Around 47% of Comcast’s broadband subscribers receive Internet speeds of more than 50 Mbps, reflecting the demand for high-speed connectivity. [3] The use of multiple devices and higher penetration of smartphones is aiding the overall demand for high-speed Internet.

Currently, high speed Internet penetration in the U.S. is around 73% of households and it is estimated to cover more than 90% in the long run. [4] The cable industry will benefit from this growth as it accounts for close to 56% of the U.S. broadband market. [5] Comcast itself is the largest player in the industry with close to 25% market share of the U.S. broadband market. Given the surge in demand, we expect Comcast to continue to gain broadband subscribers in the near term.

Pay-TV Will Reduce The Rate Of Decline

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. The cable company lost 81,000 video subscribers in Q3 2014 as compared to 127,000 it lost in the prior year period, marking the best third quarter in the past seven years. [2] Similarly, it saw a decline of 144,000 in Q2 2014 but the figure was much better than a loss of 162,000 subscribers in the prior year period. 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 cable Pay-TV industry witnessed a decline of 1.7 million subscribers in 2013, reflecting the weakness in the industry. [6] This can be attributed to a combination of market saturation, fierce competition, the 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 have seen more than 4% decline in penetration over the past four years. [7] 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 stem the losses to its subscriber base in Q4 2014.

NBCUniversal Will Continue To Be Strong

According to our estimates, NBCUniversal contributes around 24% to Comcast’s value and includes the cable and broadcasting networks, theme parks and movie businesses. Even though filmed entertainment revenues dropped by 15% last quarter, they will be bolstered this quarter by a string of low budget hits including Dracula Untold, Ouija, Dumb and Dumber 2 and Unbroken.

NBCU’s theme parks business is trending well and is generating stable cash flow for the company. The theme park revenues jumped 19% and benefited from higher attendance and per capita guest spending, primarily due to the opening of Harry Potter Diagon Alley last year. The company also 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).

NBCUniversal’s broadcasting network NBC has been riding high on the success of its programming. NBC ended a full season (2013-14) at the top spot in 18-49 demographics for the first time in 10 years and continues to do well. [8] The network has benefited from the success of its shows such as The Voice, Law and Order: SVU, Chicago PD and The Blacklist, which delivered high ratings during the quarter. Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income.

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Notes:
  1. NBC Finishes No. 1 In 18-49 Demo For 2013-14 Primetime Season, September 16, 2014, Deadline []
  2. Comcast’s SEC Filings [] []
  3. Comcast Corporations’ (CMCSA) CEO Brian Roberts on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 22, 2014 []
  4. Akamai’s state of the Internet Q3 2014, Akamai []
  5. 86.6 Million Get Broadband from Top Cable and Telephone Companies, November 18, 2014, Leichtman Research Group []
  6. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group []
  7. Pay TV’s New Worry: ‘Shaving’ the Cord, October 9, 2014, The Wall Street Journal []
  8. NBC is Number One Among Adults 18-49 and with Total Viewers in Week 15 Ending January 5, 2014, Zap2it []