Last week, Comcast (CMCSA) reported financial results for the second quarter of fiscal 2019. It was another good quarter, with revenue, EBITDA and adjusted earnings per share (EPS) all up double digits (largely reflectiing the inclusion of Sky). In pro forma results, which include Sky’s results in both periods, revenue increased 1% and EBITDA increased 8%.
Revenues in the Cable Communications segment increased 4%, led by 10% growth in the Connectivity businesses - High-Speed Internet (HSI) offered to residential customers and Business Services. The growth in Connectivity was partially offset by Video (down 1% year-over-year), which lost 244,000 subscribers in the quarter. Overall, the segment benefited from a combination of net customer growth of 3.4% and higher average revenue per customer relationship.
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 130 basis points to 40.5% (adjusted for lower Wireless losses, segment EBITDA margins expanded by 60 basis points). For the year, management now expects segment EBITDA margins to expand by at least 100 basis points versus 2018, compared to prior guidance of up to 100 basis points.
The net result of 4% revenue growth and expanding margins was a 7% increase in segment EBITDA to $5.9 billion (with EBITDA per relationship up 4%). Results continue to be helped by operational improvements such as a continued shift towards digital customer interactions. Just like last quarter, these efforts are leading to happier customers who are less likely to leave for another service provider (“record churn in broadband”). That data point also supports the idea that the importance of the bundle as a retention tool is waning, at least for a subset of customers. The divergence between revenue and EBITDA growth in Cable continued:
Cable Communications capital expenditures declined 10% in the quarter; lower capital intensity (primary from video CPE spending) and higher margins are driving significant financial improvements for Comcast, with segment net cash flow up 22% in the first half of 2019.
NBCUniversal revenue declined 1% to $8.2 billion, reflecting a tough comparison in the Filmed Entertainment division (down 15%). NBCUniversal's adjusted EBITDA increased 8%, led by high-single-digit growth for Cable Networks and Broadcast Television (collectively).
Sky's pro forma revenue increased 2% (in constant currencies), with adjusted EBITDA up roughly 20%. Sky ended the quarter with 24 million customer relationships, up 4%.
Year to date, cash flows from operating activities increased 14% to $14.3 billion. Free cash flow has increased 20% to $8.8 billion, or roughly $1.90 per share.
Consolidated net debt at quarter end was $104 billion, with the leverage ratio declining to 3.1x. As a reminder, Comcast has made a commitment to return to its pre-Sky leverage ratio (roughly 2.2x) within two years. Based on my math, it appears that the company is on track to meet its leverage commitments in the stated timeframe (particularly if it liquidates its equity stake in Hulu).
Conclusion
The solid results from the Cable Communications segment in the first half of the fiscal year suggests that Comcast’s core business is as strong as ever. In addition, I'd argue they continue to have a long runway of growth ahead (2019 is on pace to be the 14th consecutive year that it has reported more than 1 million net broadband adds). As CEO Brian Roberts noted on the call, “Connectivity is the focal point of our customer relationships, enabled by our world class network.” He's playing the cards he's been dealt masterfully. While the stock has had a nice run, shares are reasonably valued at roughly 15x forward earnings. I continue to hold a material position in Comcast common stock.
Disclosure: Long Comcast.
Read more here:
A Look at Union Pacific's 2nd-Quarter Results
Microsoft: The Cherry on Top of an Impressive Year
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
