Comcast Corporation (CMCSA) Q2 2013 Earnings Conference Call July 31, 2013 8:30 AM ET
Brian Roberts - Chairman and CEO
Michael Angelakis - CFO
Neil Smit - EVP, Comcast Corporation, President & CEO, Comcast Cable Communications
Steve Burke - EVP, Comcast Corporation & CEO, NBC Universal
Marlene Dooner - SVP, Investor Relations
Jessica Reif Cohen - Bank of America Merrill Lynch
Jason Armstrong - Goldman Sachs
Doug Mitchelson - Deutsche Bank
Jason Bazinet - Citigroup
Ben Swinburne - Morgan Stanley
Phil Cusick - JPMorgan
Marci Ryvicker - Wells Fargo Securities
Craig Moffett - Moffett Research
Michael McCormack - Nomura
Bryan Kraft - Evercore Partners
Frank Louthan - Raymond James
Good morning, ladies and gentlemen, and welcome to Comcast’s Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded. (Operator Instructions)
I’ll now turn the call over to Senior Vice President Investor Relations, Ms. Marlene Dooner. Please go ahead, Ms. Dooner.
Thank you, operator, and welcome, everyone. Joining me on this morning’s call are Brian Roberts, Michael Angelakis, Steve Burke, and Neil Smit. As we’ve done in the past, Brian and Michael will make formal remarks, and Steve and Neil will also be available for Q&A.
As always, let me now refer you to slide number 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’ll 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, Marlene, and good morning everyone. I’m really pleased with this quarters results particularly the outstanding growth in high speed internet and a strong performance across NBC Universal’s businesses, leading us to having a very solid second quarter with revenue growth of 7%, cash flow growth of more than 8% and record second quarter free cash flow of nearly $2 billion.
Michael will discuss these results in more detail. Let me start by providing some highlights. Cable had another strong quarter with revenue and cash flow growth of nearly 6% and high speed internet business services and video continuing to power our growth. Business services has impressive organic momentum with the highest growth rate of all our businesses at 26%. We once again improved our year-over-year customer performance. We added an 189,000 combined video, voice, internet customers, which is a 37% increase from last year’s second quarter.
High speed internet led the way with 20% growth or 187,000 net additions. This was our highest level of high speed internet performance in net ads in the second quarter in the last five years. Our voice business also had another strong quarter with a 161,000 net additions and consistent with our goal of ongoing improvement in video, we reduced video losses by nearly 17,000 year-over-year. So helping to drive these results is our innovation which is delivering increasing differentiated and better services.
In the last six months, we substantially increased the speeds of our high speed Internet service for nearly 14 million customers or 70% of our base. And in the last year, we've increased service speeds across our entire footprint.
We also continued to expand the availability of Wi-Fi which is at the center of our strategy to offer our customers the fastest online experience across devices both inside and out of the home. We have now installed more than 4 million wireless gateways and increased our Wi-Fi coverage to 250,000 hotspots through both our cable partnership and our home hotspot initiative.
In video we have launched X1, our new cloud-enabled platform to more than half of our footprint and we're on track to have X1 available nationwide by yearend. Many of you have seen our demonstration of X2 and we will have this enhanced user interface in the market by yearend.
X2 illustrates how quickly we can now upgrade via software to provide a brand new experience to our customers on the same X1 hardware and platform. All-in-all, cable's having a great first half of the year and Neil Smit and his team continue to execute really well.
Let me now switch to NBCUniversal where we also have strong momentum. In the second quarter, every one of the NBCUniversal businesses contributed to revenue growth of nearly 9% and operating cash flow growth of 21%. Our Cable Networks drove strong cash flow performance in the second quarter. And we also benefited from steady progress at the theme park and in broadcast as expected.
We saw strengthening results from our cable entertainment networks particularly at USA and Bravo as well as strong sports performance from NBC's sports network which enjoyed its most watched NHL Playoffs in record and golf channel which recorded its most watched second quarter ever.
Just last week, we announced the 10-year agreement that will bring NASCAR to our broadcasting cable properties beginning in 2015. The quantity and quality of content in this deal is a really significant step for the NBC's sports group.
In film, our focus is to continue to build franchises and we've had some ups and downs but we've had two big successes with Fast 6 in the second quarter and more recently with Despicable Me 2 from Chris Meledandri and a talented team at Illumination.
This is our first full quarter of ownership of all of NBCUniversal, and given the strong performance and market conditions that we had at the time we made our decision, I feel really great about the timing and structure of the purchase of the 49% interest. So the entire company is executing really well in our many different businesses. And with such a strong quarter and a great first half of the year, it makes us optimistic about our fantastic combination of businesses that have so many growth opportunities ahead.
Let me now pass to Michael to cover the second quarter results in detail.
Good morning. Thank you, Brian. Let me begin by briefly reviewing our second quarter consolidated financial results starting on slide 4. Overall, we are very pleased with our second quarter performance which demonstrates consistent execution, profitable growth and the fundamental strength in our businesses.
Second quarter consolidated revenue increased 7% to 16.3 billion and operating cash flow increased 8.4% to 5.4 billion reflecting strong organic growth in both our Cable Communications and NBCUniversal businesses.
Free cash flow for the second quarter which excludes any impact of the economic stimulus increased 25.4% to 1.9 billion and free cash flow per share increased 28.1% to $0.73 per share in the quarter.
This growth was primarily driven by increases in consolidated operating cash flow and improvements in working capital that reflected strong performance of our film slate and timing of production, which was partially offset by increased capital expenditures and cash taxes.
Earnings per share for the quarter increased 30% to $0.65 per share compared to $0.50 per share in the second quarter of 2012. On a consolidated basis, these are strong results. Now let's review the results of our businesses in more detail starting with Cable Communications on slide 5.
We are pleased with our second quarter performance of healthy revenue growth and improved customer metrics in our Cable Communications business. We continue to focus on executing the appropriate balance between customer and financial growth. In the second quarter, Cable Communications' revenue increased 5.8% to 10.5 billion driven by continued strength in high-speed Internet and business services as well as higher video and voice revenue.
As a result, total revenue per video customer increased 7.4% to $160 per month. Contributing to the revenue growth our rate adjustments, growth in our customer base and increase in the number of customers receiving higher levels of our services and an increasing number of customers taking multiple products.
From a customer relationship standpoint, we continued to make progress on our bundling strategy and at the end of the second quarter, 77% of our video customers took at least two products and 42% took all three services.
Despite the typical second quarter seasonality in many of our markets, we experienced strong growth in our customer metrics and showed year-over-year improvements across all our products. Combined video, high-speed Internet and voice customers increased by 189,000, a 37% increase in net customer additions compared to the second quarter of 2012.
We improved our video losses by 10% as we lost 159,000 video subscribers in the second quarter compared to a loss of 176,000 in last year's second quarter. As Brian mentioned, these are the best second quarter customer results for both our video and high-speed Internet services in the past five years.
Our second quarter video revenue increased 2.7% driven by the intact of rate increases partially offset by lower pay-per-view revenue which reflects fewer events in this quarter. In addition, the higher revenue reflects an increasing number of customers taking advanced services.
In the second quarter, we added 51,000 advanced service customers and now have 12.1 million Hi-Def into our DVR customer’s equals 55% of our video customers. High-speed Internet revenue was again the largest contributor to cable revenue growth with revenue increasing 8% driven by rate adjustments and continued growth in our customer base as we added 187,000 new high-speed Internet customers, a 20% improvement over last year.
We continue to improve and differentiate a high-speed Internet service and over the last year we have increased service speeds across our entire footprint, increasing our primary service from 15 to 20 or 25 megabits and doubled our blast service 25 megabits to 50 megabits.
At the end of the quarter, 33% of our residential high-speed customers take a higher speed tier above our primary service and our penetration was now at 37% of home stats. With regards to our voice service revenue, it increased 2.4% for the quarter reflecting growth in our customer base as we continue to focus on the value of our triple play bundle.
In the second quarter, we added 161,000 new voice customers, a 2% increase over last year as we successfully converted single and double play customers to triple play and acquired new triple play customer relationships. At the end of the second quarter, our voice penetration was 19% of home stats.
Moving from our consumer to our commercial businesses, we continued to experience momentum in business services which was our second largest contributor to cable revenue growth during the second quarter with revenue increasing 26.4% to 788 million for the quarter.
The small end of the market where businesses with less than 20 employees account for nearly 85% of business services revenue and continue to be a significant driver of our growth. The midsized business which is growing at a higher than 50% annualized rate continues to represent approximately 15% of this group's revenue.
Switching to our cable advertising group, revenue increased 1% during the second quarter. However, when you exclude the impact of last year's political revenue, our core cable advertising revenue grew by 5%.
Please move to slide six. Second quarter cable communication’s operating cash flow increased 5.7% to $4.3 billion representing a consistent margin of 41.4%. In the second quarter total expenses in cable increased 5.8%, primarily reflecting higher programming expenses and advertising and marketing promotional expenses as well as additional costs related to the expansion of business services in XFINITY Home.
Programming expenses increases 8.1% in the second quarter reflecting higher rates in step ups related to certain agreements, increasing retransmission consent fees and our expanding content lined up on multiple platforms partially offset by a delay in certain network launches. We are pleased with our management of these costs year-to-date but continue to expect programming expense growth to accelerate to low double-digits in the second half of 2013 due to planned step ups in certain contracts and the timing of network launches. As a result we expect our full-year programming expanses to increase by approximately 10%.
In addition advertising, marketing and promotion expenses increased 8% reflecting higher overall media spend and a continued investment in direct sales to support growth and enhance our competitive position in both our residential and commercial businesses. These increased marketing efforts have had a positive impact on our core customer metrics as well as promoting new products such as X1 in XFINITY Home. We continue to offset these increased expenses through modest rate adjustments, in improving product mix, an increasing number of customers upgrading to higher levels of service such as HD and DVRs and faster internet speeds as well as further efficiency gains.
We continue to pursue efficiency gains in the second quarter as we reduced our activity levels by nearly 1 million truck rolls even as we added 189,000 total new customers. Customers continue to elect self-installations, which in the second quarter accounted for 40% of our total installations, compared to 28% in the second quarter of last year. In addition, we now have 31% of our customers managing their accounts online.
All of these improvements result in a better experience for our customers and improve productivity for our cable operations. Now let’s move on to NBCUniversal’s results, please refer to slide seven. For the second quarter of 2013 NBCUniversal’s revenue increased 8.9% and operating cash flow increased 21.3%. Now to take a closer look at the individual segment’s at NBCUniversal.
For the second quarter cable networks generated revenue of $2.4 million an increase of 7.7% driven by an new content licensing agreement, a 4.4% increase in distribution revenue and a 5.7% increase in advertising revenue as ratings pressure at some of our cable networks was more than offset by a strong scatter market. Cable networks operating cash flow increased 8.9% to $860 million in the second quarter reflecting improved revenue performance and lower advertising, marketing and promotional expense partially offset by a 9% increase in programming and production cost as we continue to invest in original programming to enhance our franchises.
With regards to our broadcast television segment, revenue increased 11.6% to $1.7 billion in the second quarter reflecting an increase in advertising due to higher prime time ratings driven by the timing of key shows primarily the voice and higher retransmission consent fees offset by lower content licensing revenue due to the timing of content availability. Broadcast’s operating cash flow increase 6.4% to $206 million in the second quarter reflecting higher revenue in increased programming and production costs associated with the timing of certain shows and our prime time schedule.
Moving to film entertainment, our second quarter revenue increased 12.8% to $1.4 billion driven by higher theatrical revenue from the strong box office performance of “Fast & Furious 6, from higher content licensing revenue from the availability of prior films in the international TV market and higher home entertainment revenue driven by the continued success of “Les Miserables”. Films operating cash flow increased $116 million to $33 million reflecting a strong performance of the studio’s film slate.
Switching to our theme park segment, revenue increased 1.1% to $546 million and operating cash flow decreased 1.6% to $231 million reflecting the fact that the holidays occurred in the first quarter of this year compared to the second quarter of last year. Even with this shift theme parks are performing well as a solid result are driven by healthy attendance and increased per capita spending which continue to benefit from the success of the Harry Potter attraction in Orlando and the Transformers attraction in Hollywood partially offset by an increase in operating cost to support the addition of new attractions.
Let’s move to slide eight, to review our consolidated in-segment capital expenditures. Consistent with our plan in the second quarter consolidated capital expenditures increased 17.1% to $1.5 billion compared to $1.3 billion in the second quarter of 2012. In year-to-date capital expenditures have increased 16.5% to $2.9 billion reflecting increased investments at both cable and NBCUniversal. Cable Communications, second quarter capital expenditures increased $160 million or 10.4% to $1.2 billion, equal to 11.9% of cable revenue versus 11.4% in the second quarter of 2012.
The increase primarily reflects higher spending on CPE such as advanced digital box’s including X1 in wireless gateways, our continued investments in network infrastructure to ensure our leadership in video and high-speed internet, as well as the expansion of new services that will generate attractive returns such as business services and XFINITY Home. Year-to-date cable communications capital expenditures have increased 7.1% to $2.3 billion representing 11.3% of cable revenue. We continue to expect that for the full-year of 2013 cable capital expenditures will increase by approximately 10% compared to 2012.
At NBCUniversal capital expenditures for the second quarter of 2013 increased $104 million to $260 million and year-to-date have increased $256 million to $523 million. This higher CapEx is primarily driven by the increased investments in theme parks as we build new attractions. We're now accelerating NBCUniversal’s capital investment plan primarily driven by the theme parks investment in new attractions such as Transformers and expansion of Harry Porter in Orlando as well as Despicable Me in Hollywood. As a result of this acceleration we now expect NBCUniversal’s full-year 2013 capital investment plan will increase by approximately 50% from 2012 to approximately $1.1 billion.
The investments we’ve made in our theme parks over the last few years have reset the level of our parks profitability and have yielded very strong returns. We expect these investments to do the same. Please refer to slide nine.
As I mentioned earlier, we generated consolidated free cash flow of $1.9 billion in the second quarter, an increase of 25.4% compared to last years second quarter. This result translates in a free cash flow per share increase of 28.1% to $0.73 per share. For the first half of the year we generated $5.1 billion in free cash flow an increase of 10.7% over the first half of 2012. In year-to-date free cash flow per share has increased 13% to $1.90 per share.
We ended the second quarter with consolidated debt of $46.6 billion plus $725 million of subsidiary preferred stock resulting in a debt to operating cash flow leverage ratio of 2.3 times. We view our balance sheet as a strategic asset and are focused on strengthening our financial position over the next few years with the medium-term leverage ratio target of 1.5 to 2 times.
We are executing on our 2013 financial plan, and year-to-date we have returned $1.9 billion of capital to shareholders including share repurchases totaling $1 billion and dividend payments totaling $942 million. Overall we're very pleased with the operational and financial progress we have made during the first six months of this year. We believe that our disciplined investments along with our focus on execution will continue to generate healthy organic growth and yield positive results.
Now let me turn the call over to Marlene for Q&A.
Thanks, Michael. Operator, let’s open up the call for Q&A please.
Earnings Call Part 2: