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The Science of Hitting
The Science of Hitting
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Comcast: Leaning on Broadband Strength

A look at the company's first half results for FY20

August 02, 2020 | About:

Comcast (NASDAQ:CMCSA) recently reported financial results for the second quarter of fiscal 2020.

It was a mixed quarter for the company, with reasonable results in Cable Communications offset by short-term, pandemic-related headwinds at both NBCUniversal and Sky. For the company as a whole, revenues and adjusted earnings per share both declined by more than 10% in the quarter.

Revenues in the Cable Communications segment were unchanged from a year ago, with a 6% increase in the Connectivity businesses - High-Speed Internet (HSI) and Business Services – offset by declines in Video (down 3% year over year) and Advertising (down 30% year over year). Year to date, the Connectivity businesses have reported an 8% increase in revenue, with the results in the back half of the year likely to mirror this high single-digit growth rate.

The change in revenue mirrors the subscriber trends: Video ended the quarter with 20.4 million customers, down 6% from a year ago, as viewership is “rapidly shifting from linear to non-linear” options like Netflix (NASDAQ:NFLX). On the other hand, the number of high-speed internet customers increased 6% year over year to 29.4 million (this was the best second quarter of HSI net adds at Comcast in more than a decade, helped by churn at all-time lows). As shown below, the number of HSI customers at Comcast has increased by more than 70% since the end of 2010.

In addition, there remains room for additional long-term growth. As Comcast Cable CEO Dave Watson noted on the conference call, “Our number one priority remains broadband. With only 50% of the homes and businesses in our footprint taking our data product, there is plenty of room for growth as we continue to gain share of an expanding market.”

Mix shift from video to the higher margin connectivity businesses and continued leverage of non-programming costs has resulted in an improved margin profile for Comcast: During the quarter, Cable Communications EBITDA margins increased 170 basis points (excluding the RSN fee adjustment). Through the first half of 2020, margins have expanded by 140 basis points to 41.7%. In addition, capital intensity continues to decline (primary due to lower video CPE spending). The result has been an 11% year-to-date increase in net cash flow for the Cable Communications segment to $9.5 billion. The divergence between revenue and EBITDA growth in cable that I’ve called out in the past has continued to date in 2020 - and is likely to continue for years to come (management’s updated 2020 guidance calls for up to 100 basis points of margin expansion in the segment).

Between closed movie theaters and theme parks, NBCUniversal was materially impacted by the pandemic in the second quarter (Theatrical and Theme Parks revenues were both down by more than 90%). As a result, revenue and EBITDA declined by 25% and 30%. And while the reopening of the company’s parks in Orlando and Japan in June was an encouraging first step, the reality is that they are likely to operate at drastically reduced capacity for some time (the park in California remains closed). In addition, even when movie theaters eventually reopen, the company will continue to face short-term pressure on the income statement from a lack of releases throughout most of 2020 (in addition to box office revenues, these films generate sales in the quarters following their release as they move through the post-theater pay windows). Long story short, it appears likely that the adverse impact on NBCUniversal’s business results from the pandemic is still in its early innings.

Sky has also been impacted by the pandemic, most notably due to a lack of live sports, with the taking actions in the quarter to ensure that customers did not cancel their services. Those efforts were largely effective as the company has retained 99% of its total customers and 95% of its sports subscribers since the crisis began. In addition, Sky continues to be negatively impacted by market weakness in Europe, as well as the implication of legislative changes related to gambling advertisements in two of its key countries, both of which contributed to a large decline in ad revenues in the quarter. In the first half of 2020, constant currency revenues and adjusted EBITDA at Sky have both declined by high single digits. This is expected to worsen in the back half, as the business incurs sports rights costs that were delayed as a result of the pandemic.

For Comcast as a whole, free cash flow increased by 5% through the first six months of 2020, with the diververgence from the other financial results explained by a cash flow benefit from the timing of certain tax payments (extension of due dates for federal payments to the third quarter).

Consolidated net debt at quarter-end was roughly $90 billion, down $14 billion from a year ago, with the leverage ratio falling to 2.7 times net debt to EBITDA. As a reminder, Comcast was at roughly 3.5 following the Sky acquisition, with an expectation to return to a target of 2.2 within two years. While the company was on track to meet that objective a few quarters ago, it won’t happen given the short-term pressures being experienced at both NBCUniversal and Sky.

Conclusion

Here’s what I said about Comcast in my 2018 year-end portfolio review:

“Comcast is a well-run, high-quality business. Management has proven adept at navigating a changing landscape, in addition to demonstrating intelligent capital allocation and operational ability over many years. Over the course of an investment lifetime, you will do quite well if you partner with high-quality individuals like Brian Roberts and Steve Burke.”

Between the significant change underway in the U.S. pay-TV business, as well as the deleterious impact of the pandemic on the parks and studio businesses, now is the time when owners need to rely on management to navigate uncertainty. As CEO Brian Roberts noted on the call, "In the months ahead, there is going to be a lot of noise in the quarterly numbers.”

Personally, I remain confident in the abilities of the management team at Comcast. They are proven operators, with a track record of sound capital allocation and strategic decision-making. I also take great comfort in the fact that Cable Communications will continue to be a source of strength as NBCUniversal and Sky navigate difficulties in the short term.

I plan on being a shareholder in Comcast for years to come.

Disclosure: Long Comcast.

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About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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