Comcast Q2 Earnings Preview: High-Speed Internet And NBCUniversal Will Lead Growth

July 21st, 2015 by Trefis Team
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Comcast (NASDAQ:CMCSA) will report its Q2 2015 results on July 23rd. [1] We expect the company’s high-speed internet business to continue to bring in more customers, while its pay-TV business will likely continue losing customers. However, Comcast has been able to slow  its pay-TV subscriber losses in previous quarters, primarily due to its triple play bundling packages and we believe that the trend has continued. The company’s media arm, NBCUniversal, has been an important growth driver for the company and contributes more than 32% to Comcast’s value, according to our estimates. We believe that NBCUniversal’s numbers will be boosted by the unprecedented success of its film studio, Universal. Blockbusters such as Furious 7, Jurassic World, Fifty Shades of Grey and Pitch Perfect 2 have helped the studio rake in $3.8 billion at the global box office during the first six months of 2015.

Our price estimate for Comcast stands at $64.8, implying a slight premium to the market.

See our complete analysis for Comcast

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High-Speed Internet Segment Will Continue To Grow

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 22 million at the end of Q1 2015. [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. Almost 50% of Comcast’s 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 76% of households and it is estimated to climb to  around 90% in the long run. [4] The cable Internet provider industry will benefit from this growth, as it accounts for almost 60% of the U.S. high-speed internet market. [5] Comcast itself is the largest player in the U.S. high-speed Internet market and is still going strong. Given the surge in demand, we expect Comcast to continue to gain Internet subscribers in the near term. Taking a longer term perspective, we believe that Comcast will be able to increase its market share of the high-speed Internet market from below 23% in 2014 to almost 25% by 2021.

NBCUniversal Revenues Will Be Boosted By Universal’s Exceptional Performance

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 more than 32% to Comcast’s value and includes the cable and broadcasting networks, theme parks and movie businesses. Comcast’s Universal movie studio has had a banner year so far, delivering hit movies, including: Furious 7 (grossed 1.51 billion [6] worldwide), Jurassic World ($1.48 billion [7] worldwide), Fifty Shades of Grey ($570 million [8] worldwide) and Pitch Perfect 2 ($277 million [9] worldwide). (Related – Why Universal Studio Is Becoming Increasingly Important To Comcast’s Value?) This amazing run has helped the studio reach the $3 billion mark at the global box office in record time. [10] Universal is sitting on a $3.8 billion haul for 2015 with six months still left on the calendar. [11] The studio looks set to add to its spoils with recent release Minions ($469 million [12] worldwide as of July 17) also going strong.

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 the 18-49 demo category and repeated the feat for the 2014-15 season as well. [13] The network has benefited from the success of its shows such as The Voice, The Blacklist and Chicago PD, which delivered high ratings during the quarter. (Related – Expected Improvement In NBC’s Performance Will Reduce Comcast’s Risk) Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income. 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, benefitting from higher attendance and per capita guest spending. Consequently, we believe that NBCUniversal will continue to perform exceedingly well for Comcast in the coming quarters.

Pay-TV Segment Will Lose Subscribers, But At A reduced Rate

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 down 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. [14] [15] This can be attributed to a combination of market saturation, fierce competition and the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), Hulu etc. 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. [16] This reflects ‘cord-shaving’ where customers are opting for lower priced packages and it could be harmful for pay-TV companies in particular. Consequently, we believe that Comcast’s market share of the pay-TV market will trend downwards throughout our forecast period, decreasing from 22.3% in 2014 to around 21% by 2021.

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Notes:
  1. COMCAST TO HOST SECOND QUARTER 2015 EARNINGS CONFERENCE CALL, June 23, 2015, Comcast News Release [↩]
  2. Comcast’s SEC Filings [↩] [↩] [↩]
  3. Comcast Corporations’ (CMCSA) CEO Brian Roberts on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
  4. Akamai’s state of the Internet Q1 2015, Akamai [↩]
  5. 3 MILLION ADDED BROADBAND FROM TOP PROVIDERS IN 2014, March 5, 2015, Leichtman Research Group [↩]
  6. Furious 7, Box Office Mojo [↩]
  7. Jurassic World, Box Office Mojo [↩]
  8. Fifty Shades of Grey, Box Office Mojo [↩]
  9. Pitch Perfect 2, Box Office Mojo [↩]
  10. Universal Reaches $1B Domestic, $3B Global Box Office In Industry-Record Time, June 14, 2015, Deadline [↩]
  11. ‘Jurassic World,’ ‘Furious 7′ Push Universal to Record Year, June 14, 2015, Variety [↩]
  12. Minions, Box Office Mojo [↩]
  13. Ratings: NBC Wins 2014-15 TV Season; CBS Is Still Most Watched Network, May 20, 2015, TVLine [↩]
  14. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
  15. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 03, 2015, Leichtman Research Group [↩]
  16. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal [↩]