Comcast Corporation (CMCSA) Q1 2014 Earnings Conference Call April 22, 2014 8:30 AM ET
Brian Roberts – Chairman and CEO
Michael Angelakis – Vice Chairman and CFO
Neil Smit – EVP; President and CEO, Comcast Cable
Steve Burke – EVP; CEO, NBCUniversal
Jessica Reif Cohen – Bank of America/Merrill Lynch
Doug Mitchelson – Deutsche Bank
Phil Cusick – JPMorgan
Craig Moffett – MoffettNathanson
Ben Swinburne – Morgan Stanley
Marci Ryvicker – Wells Fargo
John Hodulik – UBS
Brian Kraft – Evercore Partners
Vijay Jayant – International Strategy & Investment Group
Kannan Venkateshwar – Barclays
Good morning, ladies and gentlemen, and welcome to Comcast’s First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded. I will now turn the call over to Senior Vice President, Investor Relations; Mr. Jason Armstrong. Please go ahead, Mr. Armstrong.
Thank you, operator, and welcome everyone. Joining me on this morning’s call are Brian Roberts, Michael Angelakis, Steve Burke and Neil Smit. Brian and Michael will make formal remarks, and Steve and Neil will also be available for Q&A.
Let me now refer you to Slide #2, which contains our Safe Harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, in this call we will refer to certain non-GAAP financial measures. Please refer to our 8-K for the reconciliation of non-GAAP financial measures to GAAP.
With that, let me turn the call to Brian Roberts for his comments. Brian?
Thanks Jason, and good morning everyone. We’re off to a great start in 2014.
In cable, we added video subscribers again this quarter; grew broadband subscribers at a continued industry leading pace; and we once again generated very strong growth in business services.
NBCUniversal was even better, with significant ratings, momentum at NBC Broadcast highlighting the quarter, along with really strong film results. Overall, revenue increased nearly 14%, operating cash flow increased 10% and we generated over $2.8 billion in free cash flow.
Starting with cable, we continued to focus on innovation to position ourselves for the future and our customer metrics are responding with meaningful improvement in Triple Play penetration.
In video, we added 24,000 customers, the second quarter in a row where we have added customers.
In high-speed data, we added 383,000 customers and grew revenues at our fastest rate in two years. And in business services, revenue growth remained strong at nearly 24%, impressive given that we are now approaching $4 billion in annual run rate revenues.
We believe our X1 operating system provides our customers an unrivaled experience, making it easier to discover and enjoy tens of thousands of content choices, while at the same time integrating apps and social media. And consumers really like this experience. Voluntary churn for our X1 customers is down 20% to 30% relative to our broader base, while viewing has increased in both, linear and through on-demand and the metrics continue to get better.
These positive early results reinforce our decision to accelerate our X1 deployment this year, and we are now adding 15,000 to 20,000 X1 boxes per day, which is double our rate of deployment from just six months ago. Additionally, we are now rolling out a new XFINITY TV app, which enables our customers to live stream virtually their entire television line up on any IP device in the home and watch DVR recordings in the home or on the go.
In broadband, we recently increased speeds again for the 13th time in 12 years. Doubling speeds in our Blast products to 105 megabits, while our Extreme tier moved up to 150 for customers in the Northeast. And we’re not stopping there. Our focus on wireless gateway deployment is adding utility to our customers while at the same time helping us create the largest Wi-Fi footprint in the U.S. with over one million public Wi-Fi hotspots currently available to our customers.
We believe we are making real, tangible progress in customer service through simplifying the customer experience. In the first quarter, truck rolls declines roughly 500,000 or 8% compared to 2013. We recently launched the new My Account App, and early feedback has been very positive. The app allows customers to make payments, self-diagnose issues, manage devices and view technician appointments.
We are encouraged by progress we have made with customer service, but are going to stay vigilant and focused on further improvements over the course of 2014 and in the years ahead.
Over to NBCUniversal, the results were terrific this quarter. The headline is obviously the Sochi Olympics, which aired across our broadcast and cable networks and generated over $1.1 billion in revenues, and contributed positively to operating cash flow. Any way you look at the Olympics, it was a tremendous success.
NBC prime time averaged 21.4 million viewers during the Olympics, up 6% from the 2006 to Torino Olympics, the last winter games held in a similar time zone which is especially notable given the growth in live streaming hours. Speaking of live streaming, the Olympics generated 61.8 million visitors across all platforms, a 29% increase relative to the prior Olympics 2010 in Vancouver. And the experience was further enhanced for Comcast Cable customers, where for the first time Comcast offered the NBC Sports Live Extra app on X1, which enabled our customers to watch 500 extra hours of live streaming content on their television.
The broadcast story goes well beyond the Olympics this quarter. It is really an incredible turnaround story. Bob Greenblatt and his entire team have done a terrific job. The momentum we achieved in the fall has carried through into 2014, led in part by an amazing transition in late night with both the Tonight Show Starring Jimmy Fallon and Late Night with Seth Meyers off to excellent starts. In fact, NBC is positioned to end the full season as the number one network in the coveted 18 to 49 demographics for prime time and late night.
We’ve also made strong progress with our NBC-owned stations. I am now pleased to say that nearly 75% of our local newscast now rank one or two in the market, which is up from 50% just two years ago.
In cable networks, NBC Sports Network had its most watched quarter in the network’s history supported by unprecedented live programming hours record viewership for the Sochi winter games, strong NHL viewership and the English Premier Leagues, three most watched months in U.S. cable history. Bravo also had its best quarter in network history among all key demos.
Our film division also had a strong quarter and is reflective of our focus this year on lower cost films with a much better financial risk-reward profile.
And the theme park segment saw a stable attendance despite the unfavorable shift in spring holidays in the first quarter which will correct in the second quarter. With the upcoming opening of Harry Porter 2 in Orlando and the added hotel capacity with the opening of Cabana Bay, the theme parks are setup for strong performance in the second quarter and beyond.
NBCUniversal has real momentum. And we believe this is sustainable throughout all of 2014. So all in all, I am really pleased with the operating results across our entire business.
I’d like to spend a quick moment on our merger with Time Warner Cable. The more we get into the planning efforts on our side, the more confident we are about the potential and about the potential synergies. We see significant benefit for consumers in our ability to offer our innovative and industry-leading products to a larger residential footprint, along with opportunities in business services and advertising.
The opportunity in this merger remains very compelling. Time Warner Cable shareholders will get 23% stake in the combined entity, and share in the upside of a company with tremendous potential to create value for customers and shareholders.
In addition, there has been a lot of talk about potential divestitures, and Michael will detail how we see the opportunity to create value there as well. Our proposed merger with Time Warner Cable is an exciting and unique opportunity and we remain confident that the combination will strengthen a world class organization that will benefit customers, employees and shareholders.
So with more on the first quarter, let me turn it over to Michael.
Good morning, and thank you, Brian. We begin 2014 with solid financial results, which reflect consistent execution, profitable growth in the fundamental strength of our businesses. Let me begin by briefly reviewing our consolidated financial results on Slide 4.
We are very pleased with our first quarter results which reflect profitable growth across all of our businesses. First quarter consolidated revenue increased 13.7% to $17.4 billion reflecting solid growth in our cable business and an exceptional performance in NBCUniversal, partially driven by the success of the Sochi Olympics.
For comparison purposes, when you exclude the $1.1 billion of revenue generated by the Olympics, our consolidated revenue increased at healthy 6.5% during the quarter. Consolidated operating cash flow was strong and increased 10% to $5.5 billion. This result includes $17 million of expenses related to the Time Warner Cable merger, which is included in our corporate and other segment.
Excluding these costs, consolidated operating cash flow grew 10.4%. Free cash flow for the quarter decreased 10% to $2.8 million. And free cash flow per share decreased 8.5% to $1.07 per share as growth in consolidated operating cash flow was offset primarily by higher working capital related to the Olympics and higher expenditures for film and TV production. Excluding this working capital impact, free cash flow growth would have been positive. We’ll provide more detail on this topic later in the presentation.
Earnings per share for the first quarter increased 31.5% to $0.71 per share versus $0.54 per share in the first quarter of 2013. To provide a clear comparison, when you exclude gains on sales and acquisition-related items, our comparable EPS increased 33.3% to $0.68 per share.
Now let’s review the results of our business units in more detail, starting with cable communications on Slide 5.
We are pleased with our first quarter performance of healthy financial and customer growth in our cable communications business. Before I discuss the details, I would like to highlight an important change we have made to our customer metrics. Beginning this quarter and as we have previously announced, we are changing our methodology for counting video customers from an equivalent billing units or EBU approach to a billable customers method.
This decision changed how certain establishments billed under bulk agreements are reported, such as apartment complexes, healthcare facilities and other multiple dwelling units or MDUs. Under the new billable customers’ method, as Comcast has the ability to individually bill tenants for additional services not included in the bulk property agreement, the total number of units served at that property accounted as individual customers. If we are unable to provide additional service, it is counted as one customer.
Previously we had counted and reported these types of customers on an EBU basis, by dividing monthly revenue received under a bulk contract by the standard monthly residential rate. Because of the nature of the calculation, customer counts under the previously EBU method can artificially decrease or increase as residential rate changes occur in the markets.
In addition, the billable customers’ method improves our customer transparency and aligns our customer count methodology with the rest of the cable industry. This change has also been incorporated into our trending schedules including review of these video customer metrics for 2013, making it easier to compare metrics as we report them.
Also we will now disclose the number of our customer relationships and our average revenue per customer relationship. So for the first time, we are disclosing our customer relationships of $26.8 million, which increased by $124,000 in the first quarter, indicating that we have a relationship with nearly one out of every two of the 54 million residential and commercial passing.
We continue to experience real strength in our customer metrics with positive net-additions across all of our products. Similar to our strong fourth quarter, our momentum in video continued in the first quarter. We added 24,000 new video customers in the first quarter compared to a net loss of 25,000 in last year’s first quarter as we continue to execute with improved products, improved customer support and better retention efforts.
This growth is an accurate comparison using the billable customers’ method for the first quarter of 2014 in ‘13. If we compared video customers using our previous EBU method, we added 4,000 video customers in the first quarter compared to a net loss of 60,000 in last year’s first quarter.
Moving onto high-speed data. The service also continues to gain share as we differentiate our product to service and speed enhancements. We added 383,000 new data customers in the first quarter, and recently announced that we are increasing speeds again marking the 13th time in 12 years that we have increased speeds.
In addition, our voice customer base grew by 142,000 in the first quarter proving that voice continues to add value to the bundle.
First quarter cable revenue increased 5.3% to $10.8 billion, reflecting growth in our residential businesses, continued strength in business services and solid results in our advertising group. Total revenue per customer relationship increased 4.5% to $134 per month and reflects volume growth, rate adjustments, a higher contribution from business services and increasing number of our customers taking multiple products.
We are continuing to have success converting single and double play customers to Triple Play. And at the end of the first quarter, 68% of our customers took at least two products and 36% took three products, compared to 33% at the end of last year’s first quarter.
As we look at our service categories, we reported video revenue growth of 1.3%, reflecting modest rate adjustments to about 69% of our footprint in the first quarter, and an increasing number of customers taking advanced services. We now have 12.6 million high-def and/or DVR customers equal to 56% of our video customers.
High-speed internet revenue increased 9% during the quarter, making it again the largest contributor to cable revenue growth, driven by continued growth in our customer base, rate increases and increasing number of customers taking higher speed services. At the end of the quarter, 38% of our residential high-speed customers now take our Blast and Extreme products and received at least 50 megabits of speed.
Voice revenue increased 2.1% for the first quarter, driven by growth in our customer base as we continue to focus on the value of the Triple Play. We continue to successfully convert single and double play customers to Triple Play, and acquire new Triple Play customer relationships. In fact, we added 155,000 Triple Play product customer relationships during the quarter.
Moving from our residential to our commercial businesses, revenue increased 23.9% to $917 million and was again the second largest contributor to cable revenue growth during the first quarter. This growth is impressive considering business services now approaching a $4 billion run rate business. Our share continues to grow, but we have only captured about 20% of the small end of the market and about 5% share of the mid-sized business segment. Our optimism here continues as business services represent a large and attractive opportunity for the company.
Our cable advertising group also performed well as the first quarter revenue increased 6.2% reflecting higher automotive advertising and political revenue. Excluding this political revenue, our core cable advertising increased 3.2%.
Please refer to Slide 6. First quarter cable communications operating cash flow increased 4.3% to $4.4 billion, resulting in a margin of 40.9% compared to 41.3% in the first quarter of 2013, primarily driven by a lower level of rate adjustments and the impact of two one-time items, including weather-related expenses incurred during the quarter and the benefit from an NHL walkout rebate in the first quarter of 2013.
If we exclude these one-time items, operating cash flow would have been about one point higher and margins would have been flat. We are focused on maintaining stable operating margins even as our programming costs increased. And as we support new initiatives including the deployments of X1, the deployments of the wireless gateways and expansion of business services and XFINITY Home.
Programming expenses increases 8.8% in the first quarter of 2014, driven by increases in retransmission consent fees, higher sports programming costs, and step-ups for recently completed long-term agreements. We also continue to increase the amount of content we provide to our customers across multiple platforms.
As I mentioned previously, we still expect programming expenses to grow at approximately 9% to 10% for the full year of 2014.
We are effectively offsetting these higher programming expenses with an improving product mix as we add more high-speed data, voice and business service customers and upgrade existing customers to higher levels of services such as HD and DVRs and faster internet speeds. In addition, we also continue to gain operating efficiencies and as Brian mentioned, we reduced truck rolls by 500,000 or 8% year-over-year, even as we added new customers and upgrading existing customers to additional products.
Customers also continued to elect self-installations, which in the first quarter accounted for 47% of our total installations, up significantly from 38% in the first quarter of last year. In addition, we now have 36% of our customers managing their accounts online.
So as we begin the New Year, our cable communications business is off to a solid start and performing well on all fronts, financially, operationally enhancing the product, accelerating innovation and improving our customer support.
Now let’s move onto NBCUniversal’s results, which are presented on Slide 7. For the first quarter of 2014, NBCUniversal’s revenue increased 28.8% and operating cash flow increased 37.6%. These exceptional results were driven in part by the success of the Sochi Olympics. Excluding any revenue impact on the Olympics, NBCUniversal revenue increased a healthy 8.1%.
Now let’s review the individual business segments at NBCUniversal. For the first quarter, cable networks generated revenue of $2.5 billion, an increase of 12.6% and included $257 million of revenue associated with the Sochi Olympics. Excluding the Olympics, revenue increased 1% driven by a 4.4% increase in distribution revenue, partially offset by a slight decline in advertising revenue of 1.4% as increases in price were offset by ratings pressure at some of our cable networks.
Cable networks operating cash flow increased 4.2% to $895 million, reflecting higher revenue, partially offset by our continued investment in original programming and higher sports programming costs, including the impact of the Olympics and the launch of the English Premier League on NBC Sports Network.
With regards to our broadcast segment, first quarter broadcast television revenue increased 72.8% to $2.6 billion including $846 million of revenue generated by the Olympics. Excluding the impact of the Olympics, broadcast revenue increased 17% reflecting higher ratings due to the continued success of our prime time line up; more hours of the voice airing during the first quarter compared to last year; the strength of our news division including Today and Nightly News, and the impressive performance in late night.
Broadcast operating cash flow increased $157 million to $122 million for the first quarter, reflecting a profitable Olympics, higher advertising revenue from improved ratings and increased retransmission consent fees. Given NBC’s rating improvement and strength across the NBC channel portfolio, we are anticipating that this will be a very successful upfront for our company.
Early client discussions have been very positive and suggest this could be a meaningful correction year where we can capitalize on our progress in rating success and hope to close the monetization gap we have mentioned in previous calls.
Moving onto filmed entertainment, this is clearly off to a great start with first quarter revenue increasing 11.1% to $1.4 billion and operating cash flow increasing $219 million to $288 million, reflecting higher theatrical revenue from the solid box office performance of our slate, including Ride Along and Lone Survivor and the international performance of The Wolf of Wall Street.
Switching to our theme park segment, revenue increased 5.4% to $487 million, reflecting increases in per capita spending and stable attendance despite the shift in spring holidays which occurred in the first quarter of last year, but will occur now in the second quarter. Operating cash flow decreased 1.5% to $170 million for the first quarter, reflecting higher operating costs to support new attractions.
In the second quarter, we are very excited about the opening of Harry Porter 2 in Orlando as well as having a spring holidays in full swing.
Now let’s move to Slide 8 to review our consolidated and segment capital expenditures. Consistent with our plan, consolidated capital expenditures for the quarter increased 6.4% to $1.4 billion compared to the first quarter of ‘13 reflecting increased investments at both, cable and both NBCUniversal.
At cable communications, first quarter capital expenditures increased $51 million or 4.6% to $1.1 billion, equal to about 10.6% of cable revenue versus 10.7% in the first quarter of 2013. The increase was primarily driven by higher spending on CPE, including our new X1 platform and wireless gateways. The level of CapEx spend this quarter benefited from the timing of equipment purchases and will ramp throughout the year.
We continue to expect that for the full year of 2014, cable capital expenditures will increase with capital intensity increasing to approximately 14% of cable revenue compared to 12.9% in 2013 as we accelerate the deployment of X1, deploy additional wireless gateways, increase network capacity and continue to invest in expansion of business services and XFINITY Home.
So we move to NBCUniversal, first quarter capital expenditures at NBCUniversal increased $28 million to $291 million, primarily reflecting increased investments in facilities as well as theme parks as we build new attractions including new Harry Porter attractions in both parks and a fashioned attraction in Hollywood.
As I mentioned in February, we expect that NBCUniversal’s 2014 capital expenditure plan will remain relatively stable to 2013’s level.
Now let’s move to Slide 9. As I mentioned earlier, we generated consolidated free cash flow of $2.8 billion in the first quarter, a decrease of 10% as growth in consolidated operating cash flow was primarily offset by increased working capital, which was mainly driven by ad sales receivables for the Olympics and net productions spent at our film and TV studios. Excluding the $636 million swing in working capital, free cash flow would have increased during the quarter.
We are executing on our 2014 financial plan and increased our return of capital to shareholders by 35% in the first quarter to $1.3 billion, including share repurchases totaling $750 million and dividend payments totaling $508 million for the quarter.
Let me now turn to Time Warner Cable. And as Brian mentioned, offered some thoughts on our return of capital strategy and potential divestitures. As has been reported, when shareholder approval for our acquisition of Time Warner Cable is obtained later this year, we intend to increase our repurchase plan by $2.5 billion. This is in addition to the current plan of $3 billion for Comcast, for an expected total of $5.5 billion in share repurchases during 2014.
In addition, as you know we have committed divestitures in our Time Warner Cable transaction. We do not comment on rumors, but I will outline our philosophy in financial perspective on this subject. There are a number of potential structures for us to evaluate, maximizing value for our shareholders who will guide our decisions. Some key considerations include amongst others; our ability to divest subscribers in the most tax efficient way possible; our ability to shrink our equity base and/or deliver cash to our shareholders; and our ability to maximize our presence in our most strategic markets.
In addition, we anticipate that any divestiture plan will be leverage neutral event for Comcast. In other words, the extent that we sell properties for cash or spin properties any cash proceeds after neutralizing or maintaining our existing leverage ratio can be used for return of capital to Comcast shareholders.
This is complex and we believe value enhancing to our shareholders. There is a lot of work to be done in addition to the integration effort and we will provide regular updates as we continue to refine our thinking and analysis.
So let me wrap up by saying we are very pleased with our operational and financial performance this quarter. We have started the year off strong. We are making tremendous progress and are focused on continuing our momentum throughout the year. We are excited about the Time Warner Cable merger and the synergy opportunities it presents. We believe it will be accretive on a free cash flow per share basis and are confident that our disciplined investments and our focus on execution will continue to generate profitable growth.
Now let me turn the call over to Jason for Q&A.
Thanks, Michael. Operator, let’s open up the call for Q&A please.
Earnings Call Part 2: