Last Thursday, Comcast Corp. (CMCSA, Financial) reported results for the final quarter of fiscal 2020. It was another year of impressive growth in the broadband business, with Comcast adding 2 million high-speed internet customer relationships in 2020 – the best result in the company's history. This is the 15th consecutive year that Comcast added more than 1 million net broadband customers, with the total nearly doubling over the past 10 years.
Broadband subscriber additions, as shown below, has been attributable to continued growth in homes passed and penetration (a higher share of homes passed) – and as CEO Brian Roberts noted on the conference call, there's still room to keep going: "With just over 50% penetration of our footprint, there remains plenty of opportunity for future growth."
In a year that presented significant disruption and uncertainty, Cable Communications was a ballast for Comcast. The connectivity businesses (residential high-speed internet and business services) were the primary drivers, with revenue climbing 8% to $28.8 billion. This offset slight declines in Video (down 2% to $21.9 billion), with the overall segment reporting 3% revenue growth to $60.1 billion. Over the same period, segment-adjusted Ebitda increased 9% to $25.3 billion. As shown below, Comcast has delivered outsized profit growth in Cable in each of the past four years, resulting in meaningful margin expansion for the segment (up 400 basis points since 2017).
In addition to revenue growth and margin expansion, capital intensity continues to improve (primarily due to decreased Video CPE spend); for the year, segment capital expenditures declined 4%. As a result, segment net cash flows increased 14% in 2020 to $18.7 billion. As noted on the call, management believes these strong results will continue ("we have all of the pieces in place for 2021 to be a very strong year"). While Cable faces a more difficult comparison given the strong customer additions in 2020, I still believe they can achieve the double-digit growth in segment cash flows achieved in the past few years.
While Cable Communications reported solid numbers in 2020, Comcast's other business segments struggled (largely due to pandemic-related headwinds). Revenue at NBCUniversal declined 17% in 2020, primarily due to large drawdowns at Theme Parks and Filmed Entertainment. Unsurprisingly, given the fixed cost nature of some of these businesses, adjusted Ebitda declined even further (down 29% year over year to $6.3 billion).
At Sky, constant currency revenue declined 4%, with adjusted Ebitda falling by more than one-third to $2 billion. The company had 24 million customer relationships at year-end, unchanged from a year ago. As noted on the conference call, management still believes Ebitda can double over the next few years, but off the 2020 base; said differently, they believe that Sky can report $4 billion in annual Ebitda – surely a nice improvement off a weak 2020, but less impressive when viewed relative to 2019 Ebitda of $3.1 billion.
Conclusion
For the company as a whole, revenue and adjusted earnings per share declined by 5% and 17% in 2020. Free cash flow of $13.3 billion was roughly unchanged from the year-ago period, with the decline in profitability offset by a reduction in working capital and capital expenditures. The majority of free cash flow has been used for debt repayment, with the net debt balance declining by roughly $18 billion since the Sky deal closed at the end of 2018.
In summary, it was a difficult year for Comcast. Admittedly, much of it was out of their hands (there's not much you can do when theme parks and movie theaters are closed). But that doesn't change the conclusion: the company faces tougher decisions at NBCUniversal and Sky than it does in Cable Communications. Time will tell if management is up to the task at hand, or even if they're willing to consider different ideas to try and maximize the value of these assets. In my opinion, the current valuation suggests market participants have real doubts about how effectively Comcast will navigate those challenges - and based on what has happened in the past 12 to 18 months, I'm more aligned with that view than I used to be (and the disclosure of vague metrics like the number of Peacock signups is not enough to alleviate my concerns).
For that reason, while I still own a meaningful stake in Comcast, I've lost some of my prior conviction. I'm less confident in the long-term competitive position at NBCU and Sky, as well as management's willingness to accept reality with open eyes and respond accordingly (invest aggressively or find a buyer for the assets, with the worst option being indecision and thumb-sucking).
I think I have some further soul searching to do on this one.
Disclosure: Long Comcast.
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