Last week, Comcast Corp. (CMCSA, Financial) reported results for the third quarter of fiscal 2019. As CEO Brian Roberts noted, it was another solid quarter in terms of customer acquisition: “Cable had its highest third quarter broadband net additions in ten years, which drove its best quarterly net additions in total customer relationships on record [+309,000, an increase of 3.4% year-over-year].”
While that sounds impressive, I think it comes with an asterisk: the results are inclusive of more than 200,000 wireless net adds, a relatively new business for the company (they now have 1.8 million wireless lines). In my opinion, the more important data point is the 963,000 (net) high speed internet (HSI) subscribers added year to date (up 1.3 million over the trailing twelve months). As a result, it is nearly certain that 2019 will be the 14th consecutive year that Comcast has added more than one million net HSI customers, with each subscriber paying the company $600 - $650 a year.
The financial trends in the Cable Communications segment continue along the same trajectory we’ve seen in recent quarters, with growth driven by residential and business services (collectively +9% in the quarter and +10% year to date). That is offset by declines in areas like Video, where the number of subscribers was down nearly 3% year-over-year. As CFO Mike Cavanagh stated on the call, “Video is still an important and profitable component of most of our relationships, but we continue to be disciplined and are not chasing unprofitable subscribers.”
Year to date, Cable Communications' segment revenues have increased 4%, with EBITDA up 8% (margins +140 basis points to 39.8%). In addition, capital intensity continues to decline (decreased Video CPE spend as subs decline, with segment capital expenditures down 12% through the first nine months of 2019); as a result, segment net cash flow increased at a mid-teens rate year over year. As noted on the conference call, management expects the improvement in capital intensity to extend beyond 2019. In addition, they will continue to see margin benefits from mix shift to connectivity in Cable Communications.
The shift in strategic focus (leading with connectivity) is addressing long-term structural growth in the market. As CEO Brian Roberts noted on the call, “It goes without saying the utility and demand for high-speed and reliable internet access are ever increasing. We see this in our customers' behavior: monthly data usage more than doubled in the last 3 years, and our power users are connecting nearly 20 devices in their homes daily… more customers continue to choose Xfinity.”
While Cable Communications continues to march forward, I would argue that the results in the remainder of Comcast’s business segments have been a bit disappointing (granted, some of this is timing). Adjusted for the 2018 PyeongChang Olympics and Super Bowl LII, year to date revenues and EBITDA for NBCUniversal have been flat and +4%, respectively. It’s worth noting that Comcast is making meaningful moves in the theme parks business (both domestically and abroad), but it will be a few years before we see a return on those investments.
At Sky, pro forma revenues are down 4% year to date (up 2% adjusted for currency headwinds), with EBITDA +10%. Customer relationships were up 2% to 23.9 million, but that’s inclusive of a loss of nearly 100,000 subs in the third quarter. Management called out “tough macroeconomic conditions,” in addition to timing related issues from record streaming growth in the second quarter related to Game of Thrones and the Sky Original series Chernobyl, both of which were exclusive to Sky Atlantic. As noted on the call, “we expect to return to customer growth in the fourth quarter."
Year to date, cash flows from operations at Comcast increased 5% to $19.5 billion, with free cash flow up 4% to $10.9 billion (inclusive of capital expenditures related to Universal Beijing Resort, FCF through the first nine months of the year increased marginally). To date, they have returned $3.2 billion to shareholders and repaid roughly $11 billion of debt. Comcast also received more than $5 billion from a collateralized obligation with a syndicate of banks that essentially monetized a substantial portion of the value that they will receive from Disney (DIS, Financial) for their stake in Hulu – “The minimum total equity value and ownership floor guarantee minimum proceeds of approximately $5.8 billion upon exercise of the put or call.”
At quarter end, Comcast had $97 billion in consolidated net debt, with a leverage ratio (net debt to pro forma adjusted EBITDA) of 2.9 times (compared to 3.3 times at the start of the year). They remain on target for leverage to fall to roughly 2.2 times by year-end 2020.
Conclusion
The results from Cable Communications – and in particularly the connectivity businesses – continue to meet my expectations; improving customer retention despite less emphasis on bundling is very encouraging. The fact that they’ll add more than 1 million net broadband customers for the 14th consecutive year clearly indicates they are delivering a product that is meeting customers’ needs in a growing marketplace. By my math, the connectivity businesses collectively accounts for a quarter of Comcast’s run rate revenues and more than 40% of its profitability.
In terms of valuation, Comcast trades at 14 to 15 times forward earnings. While the stock has done well year to date (up roughly 35%), I still believe the shares are reasonably valued at current levels. At this time, I’m quite comfortable continuing to hold a sizable position in Comcast.
Disclosure: Long Comcast and Disney.
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