On Thursday, Comcast (CMCSA, Financial) reported financial results for the final quarter of fiscal 2019. Inclusive of a record fourth quarter, Comcast added 1.1 million net customer relationships in 2019. This primarily reflects strength in broadband (up 1.4 million net subscribers) and wireless (up 816,000 subscribers), offset by losses in video (down 733,000 subscribers) and voice (down 173,000 subscribers). In my opinion, the most important data point at Comcast continues to be growth in high-speed internet customers: 2019 was the 14th consecutive year that the company has added more than one million net broadband customers, driven by a continued increase in homes passed and higher penetration of those homes (i.e. market share gains).
The trends in the Cable Communications segment in the fourth quarter were similar to what we’ve seen recently, with revenue growth driven by residential and business services (collectively up 9% for the year to $26.6 billion). As highlighted above, that growth has been driven by a mix of customer growth and higher rates, including from higher value-add services. As CEO Brian Roberts noted on the conference call, the connectivity businesses are delivering an improved experience to a growing customer base, as well as improved financial results for the company:
“We continued to reap the benefits from our investments to improve the customer experience, setting all-time best results for many key metrics, including agent contact rate and first-call resolution. We're increasing customer satisfaction and driving unnecessary costs out of the business. All-in, this led to 1.1 million net customer relationship additions, our best year on record.”
As it relates to the component of Cable Communications focused on serving businesses, Chief Financial Officer Mike Cavanagh highlighted why this continues to be a long-term opportunity:
“On the business services side, revenue increased 8.8% to $2 billion in the fourth quarter, driven by a 4.1% increase in business customers year-over-year and a 4.3% increase in revenue per business customer as we've added new products including WiFi Pro and Security Edge. We ended the year at nearly $8 billion in business services revenue with an addressable market in our footprint of approximately $50 billion. There is no shortage of new customers or additional revenue for us to capture in this margin accretive growth business.”
For the year, Cable Communications revenues increased 4%, with Ebitda up 7% to $23.3 billion (margins increased 140 basis points to 40.1%). In addition, capital intensity continues to improve, primarily due to decreased video customer premise equipment (CPE) spend as subscriber counts decline, with segment capital expenditures down 11% for the year. As a result, segment net cash flows increased 18% in 2019. As noted on the conference call, management expects another year of revenue growth, margin expansion (helped by a continued improvement in non-programming operating expenses) and reduced capital intensity in 2020, suggesting that another double digit increase in segment cash flows is attainable.
While Cable Communications continues to report solid numbers, results in the other segments have room for improvement. Adjusted for the 2018 PyeongChang Olympics and Super Bowl LII, revenues at NBC Universal declined 1% in 2019, reflective of a high-single digit decline in Studio Entertainment and a tough fourth quarter in the theme parks business. It’s worth noting that Comcast is making meaningful investments in its parks, but it will take time before we see any material benefit on the income statement from those outlays. Super Nintendo World at Universal Studios Japan will open later this year, followed by a Beijing park in 2021 and a fourth Orlando gate in 2023.
At Sky, pro forma constant currency revenues increased 1% in with Ebitda flat year over year, comparable to the growth rate for the year. The company had 24.0 million customer relationships at year end, up 2% from the fourth quarter of fiscal 2018. As noted on the conference call, management expects segment Ebitda to decline by a few hundred million dollars in 2020, reflective of generally stable results relative to 2019, offset by a few growth investments such as the accelerated deployment of Sky Q and the launch of a broadband offering in the $7 billion Italian market.
Conclusion
For the year, cash flows from operations increased 6% to $25.7 billion, with free cash flow growing at a comparable rate to $13.4 billion (inclusive of capital expenditures related to Universal Beijing Resort). The majority of this cash flow was used throughout the year for debt repayment, with the long-term debt balance declining by roughly $10 billion in 2019; as a result, the leverage ratio fell half a turn to 2.8 times (the target is for leverage to fall to 2.2 times by year-end 2020).
As Roberts noted on the call, this was the tenth year of double-digit earnings per share growth at Comcast out of the past 11 years (earnings in 2019 increased 15% to $3.10 per share).
Personally, I see no impediment to continued grow. I believe that Comcast should win with its connectivity centric strategy, along with the associated margin benefit from mix shift towards these higher margin business lines (note that Cable segment profit margins are expected to improve by up to 50 basis points in 2020). At roughly 15 times trailing earnings, I believe this is one of the more attractively valued, high-quality businesses currently on offer from Mr. Market. For that reason, I’m quite comfortable continuing to hold a sizable position in Comcast – and I’d love to make my position larger if Mr. Market became more accommodating.
Disclosure: Long Comcast.
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