On Thursday, Comcast (CMCSA) reported financial results for the first quarter of fiscal 2019. It was a solid start to the year, with revenues, Ebitda, net income and adjusted earnings per share all increased by a mid-teens percentage (with a lot of help from the inclusion of Sky).
Within the Cable Communications segment, High-Speed Internet (HSI) and Business Services (the Connectivity businesses) generated $6.5 billion in revenues (up 10%). This double-digit growth was offset by Video ($5.6 billion in revenues), which was down 1% year-over-year. Growth in Cable Communications was driven by a combination of higher rates and customer additions, with the loss of over 100,000 video customers offset by 375,000 net new broadband customers. It’s worth noting that the value of Comcast’s broadband offering to its customers continues to increase along with demand for higher speeds and data needs; as an example, median monthly data usage in the company’s residential business now exceeds 200 gigabytes per month (up 34% over the past year).
The mix shift from Video to HSI and Business Services comes with an improved margin profile for Comcast: In the quarter, Cable Communications Ebitda margins increased 200 basis points. The net result of this activity was revenue and adjusted Ebitda growth of 4% and 10%, respectively – the best quarterly Ebitda growth at Comcast Cable in over a decade. This result was also helped by operational improvements around non-programming operating expenses, such as reduced repair times, fewer truck rolls and a continued shift towards digital customer interactions. In adddition to saving Comcast time and money, these improvements also lead to happier customers -- who are subsequently less likely to churn (with residential broadband customer retention in the quarter setting a record).
As shown below, we’ve seen some divergence between revenue growth and Ebitda growth in the Cable segment over the past 12 to 18 months. I expect that to hold in the coming quarters.
It’s worth noting that Cable Communications capital expenditures (capex) declined 19% in the quarter (to $1.4 billion) and fell nearly 300 basis points as a percentage of segment revenues. Lower capital intensity (primary from video CPE spending) is driving significant increases in free cash flow for the segment (up 25% year-over-year to $4.0 billion) and for Comcast as a whole.
Wireless revenues in the quarter were $225 million, up 20% year-over-year. The company reported 170,000 net additions and ended the period with 1.4 million customer lines. While the pace of customer growth is slowing (they added nearly 200,000 lines in first-quarter 2018), the losses are declining as well: Wireless lost $100 million in the first quarter, roughly half of what it lost in the year-ago period (“benefit from scaling up the business”). Personally, I’m still skeptical on the Mobile strategy, but it’s small enough that it doesn’t materially impact the Comcast investment thesis (hopefully I’m wrong and it works out).
NBCUniversal revenues were down double digits in the quarter, reflecting the inclusion of the Olympics and the Super Bowl in the year ago period. On an adjusted basis, NBCU revenues increased by 5%, with Ebitda up double digits. Theme Parks was a headwind to growth (with revenues and Ebitda both flat year-over-year), but this was largely a timing issue.
On a pro forma basis, Sky revenues declined 5% to $4.8 billion (up 2% in constant currency). Adjusted Ebitda declined 11% on a constant currency basis, reflective of the higher costs associated with acquiring sports rights (Serie A and the Champions League in Germany and Italy). Sky ended the quarter with 23.7 million customer relationships, up 3.5% over last year.
For Comcast as a whole, cash flows from operating activities increased 32% in the quarter to $7.2 billion. Free cash flow was up by 50% to $4.6 billion, or roughly $1.0 per share.
Consolidated net debt stands at $106 billion, compared to pro forma trailing 12-month adjusted Ebitda of roughly $33 billion (3.2x net debt to Ebitda). As a reminder, Comcast was at a pro forma net leverage ratio at about 3.5x following the Sky acquisition, with a commitment to return to a target of 2.2x within two years. From current Ebitda levels, that will require it to repay another $25 billion or $30 billion (assuming some growth in Ebitda). Considering the significant cash generation in the Cable Communications segment, along with the decision to pause share repurchases in 2019, it appears that the company is on track to meet its leverage commitments in the stated timeframe.
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.”
Considering what we’ve seen from the Cable Communications business in the past few quarters, I’m as confident in Comcast’s core business as ever. In addition, I’m still happy to be partnered with this management team for the long run. Barring a material increase in the stock price from current levels, I will continue to hold a meaningful position in Comcast.
Disclosure: Long Comcast.Ă‚
Read more here:Ă‚
Focus on the Movie, Not the SnapshotÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here
