Comcast Q1 Earnings Preview: Subscriber Trends And NBCUniversal In Focus

May 1st, 2015 by Trefis Team
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Comcast (NASDAQ:CMCSA) will report its Q1 2015 results on May 4th. We expect the company’s high-speed internet 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.  We suspect that this trend has continued. The company’s media arm, NBCUniversal has been an important growth driver for the company in the recent past. We believe that NBCUniversal is likely to benefit from the continued success of its broadcasting network and its filmed entertainment segment.

Comcast also recently announced the termination of its merger agreement with Time Warner Cable (NYSE:TWC) due to regulatory pressure. [1] However, there is no break-up fee involved so the pay-TV provider will not be penalized for walking away from the deal. (Related – Comcast-TWC Merger Called Off; Where Do These Companies Stand Now)

See our complete analysis for Comcast

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Subscriber Losses Will Slow Down In Pay-TV Segment

We estimate that the Pay-TV operations contribute close to 30% to Comcast’s stock value. Cable companies have lost thousands of subscribers over the past few years but Comcast has managed to slow the pace of subscriber decline. The cable company lost 194,000 video subscribers in 2014 as compared to 267,000 it lost in the prior year. [2] 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. We believe that Comcast will continue to lose subscribers in 2015, albeit at a reduced pace.

The cable pay-TV industry has lost nearly 3 million subscribers in the last two years, reflecting the weakness in the industry. [3] [4] This can be attributed to a combination of market saturation, fierce competition and the rise of alternative video platforms such as Netflix, Hulu, etc. Rising pay-TV bills are making customers either drop their connection or cut back on their 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. [5] This reflects ‘cord-shaving’ where customers are opting for lower priced packages and it could be harmful for media companies in particular. In its Q1 earnings call, Time Warner Cable (TWC) did not show much inclination to pursue cost efficient skinny-bundles, similar to those introduced by rival Verizon. [6] TWC has stated that it does not want to be a pioneer on this initiative, but will be a fast follower if the trend catches on. It will be interesting to see if Comcast takes a different approach and concentrates on cheaper skinny packages.

Filmed Entertainment And Broadcasting Segments Will Lead NBCUniversal Growth

The company’s media arm, NBCUniversal grew 7.5% last year and reported revenues in excess of $25 billion. [2] According to our estimates, NBCUniversal contributes around 32% to Comcast’s value and includes the cable and broadcasting networks, theme parks and movie businesses. Even though filmed entertainment revenues dropped by 8% last year, they will be bolstered this quarter by a string of low budget hits including Fifty Shades of Grey and The Boy Next Door. (Related – Comcast: Fifty Shades’ Performance Epitomizes Universal’s Low-Budget Strategy) NBCUniversal’s theme park business is also trending well and is generating stable cash flow for the company. The theme park revenues jumped 18% last year, benefiting from higher attendance and per capita guest spending.

NBCUniversal’s broadcasting network NBC has been riding high on the success of its programming. NBC ended the 2013-14 season at the top spot in 18-49 demographics and continues to do well this year as well. [7] The network has benefited from the success of its shows such as The Voice, Chicago PD and The Blacklist, which delivered high ratings during the quarter. (Related – Comcast’s NBC: More Hits Than Misses In The First Quarter Of 2015) Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income.

High-Speed Internet Segment Will Experience Continued Growth

We estimate that high-speed internet segment contributes close to 24% to Comcast’s stock value. The segment’s subscriber base increased from 13 million subscribers in 2007 to almost 22 million by the end of 2014. [2]  The high-speed internet business has done well for Comcast due to rising demand for faster Internet and a corresponding decline in DSL Internet connections. Around 47% of Comcast’s subscribers receive Internet speeds of more than 50 Mbps, reflecting the demand for high-speed connectivity. [8] 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. [9] The cable industry will benefit from this growth as it accounts for almost 60% of the U.S. high-speed internet market. [10] Comcast itself is the largest player in the industry with close to 25% market share of the U.S. high-speed internet market. Given the surge in demand, we expect Comcast to continue to gain internet subscribers in the near term.

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Notes:
  1. COMCAST/TIME WARNER CABLE/CHARTER TRANSACTIONS TERMINATED, April 24, 2015, Comcast Press Release [↩]
  2. Comcast’s SEC Filings [↩] [↩] [↩]
  3. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
  4. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 03, 2015, Leichtman Research Group [↩]
  5. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal [↩]
  6. Time Warner Cable (TWC) Robert D. Marcus on Q1 2015 Results – Earnings Call Transcript, April 30, 2015, Seeking Alpha [↩]
  7. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 29 Ending April 12, 2015, April 14, 2015, Zap2it [↩]
  8. Comcast Corporations’ (CMCSA) CEO Brian Roberts on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
  9. Akamai’s state of the Internet Q3 2014, Akamai [↩]
  10. 3 MILLION ADDED BROADBAND FROM TOP PROVIDERS IN 2014, March 5, 2015, Leichtman Research Group [↩]