For Comcast, Growth In Subscriber Base Leads To Strong Q4 Results

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Comcast (NASDAQ:CMCSA) reported its fourth quarter and full year earnings on February 24th. The subscriber numbers were positive for the company. The company added 375,000 high speed internet subscribers in Q4 2014 to take its subscriber tally to 21.96 million subscribers at the end of the year. [1] The company also added pay-TV subscribers in the fourth quarter, which was a reversal from the subscriber losses in the previous two quarters. The improved subscriber numbers are largely due to triple play bundling. Triple play bundling is the combining of the three services offered by Comcast — pay-TV, high speed internet and voice — into one package. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale.

The company’s media arm, NBCUniversal (NBCU) grew 2.3% for the quarter and has been an important growth driver for the company in the recent past. [1] We believe that NBCU is likely to benefit from the continued success of its cable as well as broadcasting network, and the theme parks.

The company also mentioned that it was optimistic that it will complete its $45.2 billion merger with Time Warner Cable (NYSE:TWC) in “early 2015”. [2] The merger is currently under review by the Federal Communications Commission (FCC).

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See our complete analysis for Comcast

Pay-TV Subscribers Increase But At A Slower Rate

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 slow the pace of subscriber losses in recent quarters, primarily due to its triple play bundling. The pay-TV revenues were up 1.3% to $5.19 billion for the quarter. [1] However, the company only gained 6,000 video subscribers in Q4 2014 as compared to 46,000 subscribers it gained in the prior year period. The fourth quarter is usually one of the more productive quarters for Comcast due to the holiday season and this tapering off in net subscriber additions is a worrying sign. 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. 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.

High Speed Internet Segment Continues On Its Merry Way

The high speed internet business has done well for Comcast on rising demand for faster Internet and a decline of DSL Internet connections. From 13 million subscribers in 2007, Comcast’s high speed internet subscriber base increased to around 22 million in 2014. The high speed internet business generated revenues of $2.9 billion in Q4 2014, 10% higher than the year ago period. [1] We expect high speed internet revenue will continue to increase as the U.S. high speed data market is growing rapidly, driven by an improving economy and growing need for higher speed and connectivity.

High speed internet has remained the leading growth factor for the cable companies for quite some time now. There is a boom in demand for broadband in the U.S., due to a growing need for speed and connectivity. The use of multiple devices and the higher penetration of smartphones are boosting the overall demand for high-speed Internet. Smartphone penetration has seen rapid growth from 54% in December 2012 to nearly 74% in November 2014. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. Video streaming, for instance, requires high data volumes, which explains why the reliance on fixed networks is far greater than that on mobile carriers. We expect Comcast to continue to gain Internet subscribers in the near term, in part driven by its triple play bundles.

A Successful Merger Will Be Immensely Beneficial To Comcast

Comcast and Time Warner Cable decided to merge in early 2014 and the merger is currently under review by the Federal Communications Commission (FCC). A favorable decision will be immensely beneficial to both the companies. Comcast has said that the transaction will generate approximately $1.5 billion in operating efficiencies. Moreover, it will benefit from the merger synergies, especially on the advertising front. The merger could potentially have an impact on the rising content costs. The Pay-TV industry has been battling with content owners over distribution agreements for the last few years. An increase in carriage fees directly impacts the end customer as cable companies tend to pass on these costs to their subscribers. If the merger goes through, Comcast will service roughly 30% of the Pay-TV market and will gain significant leverage on the distribution front. The company can potentially reshape the entire industry and tame the content owners over distribution fees as content owners will not be able to afford losing such a large number of viewers. The operating efficiencies coupled with reduced content costs could will improve operating margins. This could potentially stabilize consumer subscription rates, which have been increasing consistently over the past decade.

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Notes:
  1. Comcast’s SEC Filings [] [] [] []
  2. Comcast’s (CMCSA) CEO Brian Roberts on Q4 2014 Results – Earnings Call Transcript, February 24, 2015, Seeking Alpha []