Comcast Q1 Earnings: Increase In High Speed Internet Subscriber Base Leads Revenue Growth

Comcast (NASDAQ:CMCSA) reported its first quarter earnings recently. The company added 407,000 high speed internet subscribers to take its subscriber tally to 22.37 million subscribers at the end of the quarter. ^[1] However, the company lost 8,000 pay-TV subscribers in the quarter, which was a reversal from the 24,000 subscribers it gained in the same period a year ago. This result underscores the changing complexion of Comcast’s business. Even though the company made its name in the past selling cable services, it is the high speed internet segment that is leading the growth charge in recent years.

NBCUniversal’s revenues declined 4% in comparison to the year ago period, when it benefited from the 2014 Sochi Winter Olympics. ^[1] Excluding the 2014 Sochi Olympics and 2015 Super Bowl, NBCUniversal (NBCU) grew 8% for the quarter. NBCU has been an important growth driver for the company in the recent past and we believe that this segment will continue to benefit from the continued success of its cable and broadcasting networks, filmed studio and theme parks.

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High Speed Internet Segment Continues To Impress

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 22.37 million by the end of Q1 2015. The high speed internet business generated revenues of $3.04 billion in Q1 2015, 11% higher than the year ago period. ^[1] We expect that 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 75% in December 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.

NBCUniversal Feels Effects Of Last Year’s Winter Olympics

According to our estimates, NBCU contributes around 32% to Comcast’s value and includes the cable and broadcasting networks, theme parks and the movie business. NBCU reported revenues of $6.6 billion in Q1 2015, a 4% decline compared to Q1 2014. ^[1] NBCU had benefited from the broadcast of the Sochi Winter Olympics last year and the lack of a similar global event in 2015 hurt revenues. Excluding the effect of Sochi Olympics, NBCU grew 8% for the quarter and its broadcasting network segment grew 5.5%. NBCU’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 remained no.1 during the first three months of 2015. ^[2] 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.

Filmed entertainment revenues increased by 7% for the quarter, bolstered 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) NBCU’s theme park business performed extremely well and generated stable cash flow for the company. The theme park revenues jumped 34%, benefiting from higher attendance and per capita guest spending. The continued success of Orlando’s The Wizarding World of Harry Potter – Diagon Alley also boosted theme park revenues.

Pay-TV Segment Loses Subscribers

We estimate that the pay-TV operations contribute close to 30% to Comcast’s stock value. Cable companies have lost thousands of customers over the past few years, but Comcast has managed to slow the pace of subscriber losses in recent quarters, primarily due to its 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 pay-TV revenues were up 3% to $5.331 billion for the quarter. ^[1] However, the company lost 8,000 video subscribers in Q1 2015 as compared to 24,000 subscribers it gained in the prior year period. While bundling of services has helped Comcast’s cable communication segment grow, the pay-TV market is becoming increasingly saturated. The availability of content on online streaming platforms such as Netflix (NASDAQ:NFLX), Sling TV, HBO Go etc., is encouraging traditional pay-TV subscribers to cut the cord. It will be interesting to see how the industry shapes up in the near term and if Comcast can reduce its pay-TV churn with its triple play offerings.

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1. Comcast’s SEC Filings [↩] [↩] [↩] [↩] [↩]
2. 2014-2015 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 29 Ending April 12, 2015, April 14, 2015, Zap2it [↩]