Comcast (CMCSA, Financial) reported fourth-quarter and full-year results for fiscal 2018 on Wednesday morning (as I noted in my year-end review, Comcast is one my largest holdings). I tend to think there’s too much noise in quarterly results, so the numbers presented here are for the year unless otherwise noted.
In 2018, revenues increased 11% to $94.5 billion. That increase includes a significant benefit from the inclusion of Sky, with revenues in the legacy Comcast businesses climbing 6%.
The Cable Communications segment, which provides video, internet and voice services to residential and business customers, had a solid year, with revenues and earnings before interest, taxes, depreciation and amortization up 4% and 7%. As CEO Brian Roberts noted on the call, the company’s connectivity centric model has paid off:
“The strategy is clear: deliver the best products and experiences while improving our focus on keeping the customer at the center of everything we do. In the fourth quarter, customer relationships increased by 258,000 and EBITDA growth of 7% was the best fourth quarter in eight years. For the full year, we added 1 million net new customer relationships, driven by our thirteenth consecutive year of over one million broadband net adds… We also made progress in transforming the customer experience and taking unnecessary complexity and activity out of the business. Over 75% of transactions are now being completed through digital touch points, and in the past year alone, we have reduced agent handled calls by 15 million and truck rolls by 1.5 million, all while adding one million new customer relationships.”
For the year, the residential high-speed internet business reported $17.1 billion in revenues (+9%), driven by a combination of the new customer growth mentioned above and higher ARPUs. The outcome was similar in Business Services, with revenues up 11% to $7.1 billion (as noted on the call, this is a $40 billion opportunity in the company’s footprint, providing a substantial runway for margin accretive growth over time). In total, Comcast ended the year with 27.2 million high-speed internet customers, a 5% increase over the past 12 months (penetration among homes and businesses passes increased by roughly 200 basis points to 47%).
Comcast is able to achieve higher revenue and Ebitda per relationship because the value of the Internet product to customers is increasing. Consider this comment from the fourth quarter call:
“We are delivering more value in our offering, and the utility of broadband continues to grow. Our customers median monthly data usage was over 170 gigabits per month for the second half of 2018, up over 30% year-over-year.”
Growth in the connectivity businesses more than offset a slight reduction in the company’s Video business. It’s interesting that despite all the talk about cord cutting and the impact of vMVPDs, Comcast’s video customer count and revenues both declined less than 2% in 2018 (video penetration of homes and businesses passed fell 100 basis points to 38%). As management has communicated previously, their Video strategy is to remain focused on the customer segments that they can serve profitably (think double and triple play households).
Contrast that with the model of another leading pay-TV provider, AT&T (T). In its most recent quarter, AT&T’s video customer count was roughly flat at 25.2 million domestic subs. But that came with a 9% decline in revenues, reflective of the fact that roughly one million Satellite subs were replaced with a comparable number of over-the-top (OTT) subs as the company makes a big push forward with DirecTV Now.
What that means is that the company is effectively trading subscribers with ARPUs on the order of about $110 per month for subscribers with ARPUs that are at about half that level (rough estimate). Considering that a large percentage of these subscriber expenses are unchanged (think programming costs), the impact on profitability is even greater than the hit to revenues. I’m more comfortable with the bet Comcast is making.
When you put it all together, Cable Communications is at a point where mid-single digit revenue growth, slight margin expansion from mix shift towards the margin accretive businesses, and less capital intensity are driving significant growth: For the year, segment free cash flow increased 13% to $13.4 billion. I expect similarly attractive results in the coming year.
NBCUniversal revenues increased 9% and Ebitda increased 15% in 2018. There are a number of moving parts here that reflect timing issues (like the Super Bowl, the Olympics and the nature of the Filmed Entertainment business), so I don’t draw major conclusions from the year-to-year swings at NBCU. Broadly speaking, ratings have been (relatively) strong on their channels and the company’s “big events” strategy appears to be working, with mid-teens Ebitda growth in the Cable Networks and Broadcast TV businesses. In addition, while the Theme Parks business also faced one-time issues (Japan), the underlying results seem to be strong (with significant investments planned in the coming years to drive continued growth).
For 2018, adjusted net income increased 22% to $11.8 billion. As a result of $5.3 billion in repurchases, the share count declined 3%, with earnigns per share increasing 26% to $2.55 per share (Comcast plans to pause repurchases in 2019 as it focuses on debt reduction following the Sky deal).
As we look forward to 2019, the core connectivity business is on solid footing. That provides a foundation that gives management a bit of breathing room as it relates to some other areas like Sky, Xfinity Mobile, and the long-term impact of cord cutting. From my perspective, management has earned a longer leash due to a long-standing track record of sound capital allocation and strategic execution. I remain quite confident that Brian Roberts and Steve Burke (among others) will make intelligent decisions that create long-term value for shareholders.
I won’t dig into the specific assumptions in my model, but I think the stock remains undervalued. I own a sizable position, so take this for what it’s worth, but I think you can get to a fair value estimate in the mid-$40s per share with conservative assumptions. Time will tell whether that’s correct.
Disclosure: Long Comcast.
