Comcast Q2 Earnings: High Speed Internet Segment And NBCUniversal Lead Revenue Growth

Comcast (NASDAQ:CMCSA) reported its second quarter earnings recently. ^[1] The company added 180,000 high speed internet subscribers but also lost 69,000 pay-TV subscribers during the quarter. 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. 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 in the foreseeable future. The company’s media arm, NBCUniversal (NBCU) has also been an important growth driver for the company and grew 20% for the quarter. NBCU’s numbers were 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. We believe that NBCU will continue to grow in the coming years, benefiting from the continued success of its film studio, cable and broadcasting networks, and theme parks.

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

See our complete analysis for Comcast

High Speed Internet Segment Continues to Grow

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 22.55 million by the end of Q2 2015. Comcast’s high speed internet customers now exceed its pay-TV subscriber base. The high speed internet business generated revenues of $3.1 billion during the quarter, 10% higher than the year ago period. ^[2] 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. 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.

Universal Studio Contributes Heavily To NBCUniversal’s Growth

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 $7.2 billion in Q2 2015, a 20% jump as compared to Q2 2014. ^[2] This was an impressive bounce-back for the segment as its revenues had experienced a 4% decline in the previous quarter. The main catalyst for NBCU’s impressive showing was the filmed entertainment segment, which grew 93% during the quarter. Comcast’ Universal movie studio has had a banner year so far, delivering hits such as Furious 7 (grossed $1.51 billion ^[3] worldwide), Jurassic World ($1.52 billion ^[4] worldwide), Fifty Shades of Grey ($570 million ^[5] worldwide) and Pitch Perfect 2 ($277 million ^[6] 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. ^[7] Universal is sitting on a $3.8 billion haul for 2015 with six months still left on the calendar. ^[8] The studio looks set to add to its spoils with the recent release Minions ($644 million ^[9] worldwide as of July 17), which is also going strong. Additionally, NBCU’s theme park business performed extremely well and generated stable cash flow for the company. The theme park revenues jumped 26%, 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.

NBCU’s broadcast revenues remained flat for the quarter. NBCU’s broadcasting network NBC managed to end the 2014-15 season at the top spot in 18-49 demographics, benefitting from the record-breaking viewership for the Super Bowl and the popularity of its shows such as The Blacklist and The Voice. ^[10] However, the lack of any freshman hits was disappointing for the network. NBC is pulling out all the stops in order to rectify this situation and has lined up an impressive roster of new shows for the next season, including Wesley Snipes-starrer The Player, Chicago Fire spin-off Chicago Med, Heroes spin-off Heroes Reborn, Best Time Ever with Neil Patrick Harris, Blindspot and Game of Silence. NBC will also be broadcasting the 2016 Rio Olympics, which will undoubtedly bring in plenty of viewers. Consequently, we believe that the network is in a good position to maintain its ratings. Ratings directly impact the advertisement income for content owners and NBC derives 70% of its revenues from advertising income.

Pay-TV Subscriber Base Shrinks, Albeit At A Reduced Rate

We estimate that the pay-TV operations contribute close to 30% to Comcast’s stock value. The company lost 69,000 pay-TV subscribers in the quarter, which is less than half of the 144,000 subscribers it lost in the same period a year ago. ^[2] 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 4% to $5.4 billion for the quarter. ^[2]

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. 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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1. COMCAST REPORTS 2ND QUARTER 2015 RESULTS, July 23, 2015, Comcast Investor News [↩]
2. Comcast’s SEC Filings [↩] [↩] [↩] [↩]
3. Furious 7, Box Office Mojo [↩]
4. Jurassic World, Box Office Mojo [↩]
5. Fifty Shades of Grey, Box Office Mojo [↩]
6. Pitch Perfect 2, Box Office Mojo [↩]
7. Universal Reaches $1B Domestic, $3B Global Box Office In Industry-Record Time, June 14, 2015, Deadline [↩]
8. ‘Jurassic World,’ ‘Furious 7′ Push Universal to Record Year, June 14, 2015, Variety [↩]
9. Minions, Box Office Mojo [↩]
10. Ratings: NBC Wins 2014-15 TV Season; CBS Is Still Most Watched Network, May 20, 2015, TVLine [↩]