Comcast Q3 Earnings: NBCUniversal, High Speed Internet Drive Growth

October 29th, 2015 by Trefis Team
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Comcast (NASDAQ:CMCSA) released its Q3 2015 earnings report on Tuesday, October 27th. [1] NBCUniversal has been an important growth driver for the company in recent quarters, and once again contributed heavily towards this quarter’s growth. NBCUniversal’s numbers were boosted by the unprecedented success of its Universal film studio. Blockbusters such as Jurassic World, Furious 7 and Minions have helped Universal break the record for highest yearly gross ever by any studio.

Additionally, Comcast added 320,000 high speed Internet subscribers but also lost 48,000 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 has been 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.

Our price estimate for Comcast stands at $67, implying a premium of close to 10% to the market.

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See our complete analysis for Comcast

Universal Studios Leads NBCUniversal’s Growth

NBCUniversal constitutes approximately one-third of Comcast’s total value and includes the cable and broadcasting networks, theme parks and movie businesses. NBCU reported revenues of $7.15 billion in the third quarter, a 21% jump as compared to the prior year period. [2] The main catalyst for NBCU’s impressive showing was the filmed entertainment segment, which grew 64% during the quarter. Comcast’s Universal movie studio has had a banner year so far, becoming the first studio to deliver three blockbuster hits in a single year that crossed the $1 billion mark at the global box office – Jurassic World, Furious 7 and Minions. The studio has also benefitted from smaller but still impressive hits such as Fifty Shades of Grey and Pitch Perfect 2 (related Why Universal Studio Is Becoming Increasingly Important To Comcast’s Value?). This run helped the studio break the record for highest yearly gross ever by any studio in just 7 months. [3] Universal is sitting on a $5.66 billion haul for 2015 with three months still left on the calendar. [2] Additionally, NBCU’s theme park business performed well and generated stable cash flows for the company. Theme park revenues jumped 14%, benefiting from higher attendance and per capita guest spending. The continued success of Orlando’s The Wizarding World of Harry Potter – Diagon Alley and Fast and Furious: Supercharged also boosted theme park revenues.

NBCU’s broadcast revenues grew 11% for the quarter. [2] NBC managed to end the 2014-15 season at the top spot in 18-49 demographics, benefiting from the record-breaking viewership for the Super Bowl and the popularity of its shows such as The Blacklist and The Voice. [4] However, the lack of any freshman hits was disappointing for the network. The success of this season’s new series Blindspot has gone a long way in rectifying this situation for NBC. Based on its impressive ratings, the freshman drama became the first new series of the 2015-16 TV season to be picked up for the full season. [5] Other shows such as Heroes spin-off Heroes Reborn and Best Time Ever with Neil Patrick Harris have also gained some traction with the audience. 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 advertising income for content owners, and NBC derives around two-thirds of its revenues from advertising income.

Subscriber Growth Propping Up High Speed Internet Revenues

High speed Internet has remained the leading growth factor for cable companies for quite some time now, and we believe that this trend will continue in the near term, driven by an improving economy and still-growing demand for high speed connectivity. According to a report by Akamai (NASDAQ:AKAM), the U.S. ranks 45th in the world in terms of high speed Internet penetration (speeds exceeding 4 Mbps), with 77% of all Internet connections meeting that threshold. [6] Given that only 77% of Americans have high speed access, there is still some room left for additional high speed Internet penetration, which would benefit the cable industry in particular as it accounts for 57% of the U.S. high speed Internet market. [7] Comcast is the largest player in the industry, with an approximately 24% share of the U.S. high speed Internet market.

The overall high speed Internet industry (17 largest players representing 94% of the industry) acquired 1.52 million new subscribers during the first half of 2015, taking their total subscriber base to 88.9 million. [7]) Comcast added close to 600,000 subscribers during the same period, representing approximately 40% of total net additions in the entire industry. The subscriber growth continued in the third quarter, and the company added 320,000 new subscribers, bringing its high speed Internet subscriber base to 22.87 million as of September 30, 2015. [2] The business generated revenues of $3.13 billion during the quarter, 10% higher than the year ago period. [2] We expect this trend of growth to continue, and Comcast should continue to gain Internet subscribers throughout our forecast period.

Pay-TV Subscriber Base Declines At Reduced Rate

The past several years have been tough for cable companies in the U.S., as they experienced significant challenges in retaining their pay-TV subscribers. Their combined subscriber base has gone down from 54.3 million at the start of 2011 to less than 49 million subscribers at the end of Q2 2015. [8] [9] This decline is a result of a combination of market saturation, fierce competition among cable companies, and the increased threat from telcos AT&T (NYSE:T) and Verizon (NYSE:VZ). Moreover, many consumers are opting for a lower-cost mixture of over-the-air TV, Netflix (NASDAQ:NFLX) and other over-the-top viewing options.

By the end of Q3 2015, Comcast’s subscriber base stood at less than 22.3 million, down 48,000 for the quarter. [10] However, this performance was a 41% improvement from Q3 2014, and the best third quarter result in 9 years. [1] Comcast has been actively addressing the issue of subscriber churn by providing advanced features to its customers. The company accelerated the rollout of its X1 platform, which has advanced features such as online streaming capabilities, on-demand video, better user interface, DVR and others. ((Comcast’s X1 deployment accelerates to 40K boxes a day, reaches 25% of footprint, October 27, 2015, FierceCable)) Comcast credited the X1 platform for significantly reducing its video subscriber churn during the earnings call. [11] Comcast’s triple play bundling plans have also played a role in improving subscriber retention. Consequently, we believe that Comcast will continue to lose subscribers in the near term, but at a reduced pace.

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Notes:
  1. COMCAST REPORTS 3RD QUARTER 2015 RESULTS, October 27, 2015, Comcast Investor News [↩] [↩]
  2. Comcast’s SEC Filings [↩] [↩] [↩] [↩] [↩]
  3. Universal Pictures, with $5.53-billion take, sets global box-office record, August 5, 2015, LA Times [↩]
  4. Ratings: NBC Wins 2014-15 TV Season; CBS Is Still Most Watched Network, May 20, 2015, TVLine [↩]
  5. NBC’s ‘Blindspot’ Gets Full-Season Pickup, October 9, 2015, The Hollywood Reporter [↩]
  6. Akamai’s state of the internet Q2 2015 report, Akamai [↩]
  7. ABOUT 360,000 ADDED BROADBAND IN 2Q 2015, August 18, 2015, Leichtman Research Group [↩] [↩]
  8. MAJOR PAY-TV PROVIDERS LOST ABOUT 470,000 SUBSCRIBERS IN 2Q 2015, August 17, 2015, Leichtman Research Group [↩]
  9. MAJOR MULTI-CHANNEL VIDEO PROVIDERS ADDED ABOUT 380,000 SUBSCRIBERS IN 2011, March 20, 2012, Leichtman Research Group [↩]
  10. Comcast’s SEC Filings [↩]
  11. Comcast’s (CMCSA) CEO Brian Roberts on Q3 2015 Results – Earnings Call Transcript, October 27, 2015, Seeking Alpha [↩]