On Thursday, Comcast (CMCSA) reported financial results for the first quarter of 2020.
Comcast added 371,000 net customer relationships in the quarter. Strength in broadband (+477,000 net customers, the best quarterly result in over a decade) and wireless (+862,000 lines) were offset by declines in video (-1,020,000 customers) and voice (-209,000 customers).
The trends in the Cable Communications segment were similar to what we’ve seen in recent quarters, with revenue growth driven by residential and business services (collectively +9% for the quarter to $7 billion). As highlighted above, connectivity growth has been driven by a mix of net customer growth helped by record low churn and a roughly 4% increase in average rates.
For the quarter, Cable Communications revenues increased 5% to $14.9 billion, with Ebitda up 6% to $6.1 billion (margins increased 60 basis points to 40.7%). In addition, capital intensity continues to decline, primarily due to lower Video CPE spend, with segment capital expenditures down 7% in the quarter. As a result, Cable net cash flows increased to $4.8 billion. All-in, the playbook at Cable continues to go as planned. For the year, management still expects up to 50 basis points of margin expansion in the segment.
However, while Cable had a good quarter, the remainder of Comcast’s businesses struggled.
At NBCUniversal, revenues and Ebitda declined by 7% and 25%, respectively, most notably due to the impact of Covid-19 on Theme Parks and Filmed Entertainment. The company’s Universal Studios Japan park has been closed since late February, with the Orlando parks closed since mid-March. While closures will continue to be a material headwind in the short-term (along with delayed releases for some of the company’s marquee film franchises), CEO Brian Roberts provided some perspective on the long-term value of the company’s parks:
“There is no doubt that our theme parks will re-open, and when they do, I believe we will benefit from strong pent-up demand. We love these businesses. They have been one of our fastest growing businesses over the last ten years. They are extremely profitable, historically resilient, and enjoy high barriers to entry.”
NBCU faces structural headwinds from cord cutting, a fact that was apparent in the Cable Communications segment results. The number of pay-TV customers declined 5% year-over-year. This is a problem for Cable Networks and Broadcast Television (with the exception of content licensing), with distribution and advertising revenues both declining low-single digits in the quarter. The company is investing in offerings like Peacock to try and mitigate the impacts of cord cutting; we’ll see in a few quarters if those efforts take hold and lead to higher engagement among consumers.
At Sky, constant currency revenues declined 4%, with Ebitda down 15% to $550 million. The company ended the quarter with 23.9 million customer relationships, up 1% from a year ago. As noted on the call, the postponement of many sporting events across Sky markets, overall macroeconomic weakness in Europe and the continued unfavorable impact from a regulatory change related to gambling advertisements in the UK and Italy have negatively impacted results. These headwinds are not expected to abate in the short-term, with Ebitda over the next six months expected to decline by more than 50% year-over-year.
Conclusion
For the quarter, Comcast generated $3.3 billion in free cash flow, with roughly 30% used to fund the dividend. Balance sheet deleverage continues, with net debt at quarter's end of $94 billion compared to $105 billion a year ago. As a result of these repayments, the net debt to adjusted Ebitda ratio is down to 2.8, roughly half a turn lower than a year ago. Management had previously set an expectation that leverage ratio would decline to roughly 2.2 by year-end 2020, but given the short-term pressures, that now appears unlikely:
“We expect the significant disruption from COVID-19 on EBITDA at NBCU and Sky to pressure our leverage ratio until the affected portions of those businesses have returned and ramped back up. As a result, we no longer expect to resume share repurchases in 2021.”
While the lackluster results we’re currently seeing are disappointing and likely to worsen in the coming quarters, that’s a reality of running a business in an uncertain world. Sometimes the tide is at your back and sometimes it’s against you. It’s clearly a headwind for Comcast right now.
Long-term, I continue to believe that this is a high-quality collection of assets, most notably Cable Communications. In addition, I think their other businesses will prove more valuable than many investors or the market is giving them credit for. In my opinion, Comcast is undervalued as it stands. For that reason, I’m comfortable continuing to hold a sizable position in the company, and will consider making it a larger position at the right price.
Disclosure: Long CMCSA
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