Start Time: 08:37
End Time: 09:39
Comcast Corporation (CMCSA)
Q4 2013 Earnings Conference Call
January 28, 2014 08:30 AM ET
Brian Roberts - Chairman & CEO
Michael Angelakis - CFO
Neil Smit - EVP, Comcast Corporation, President & CEO, Comcast Cable Communications
Steve Burke - EVP, Comcast Corporation & CEO, NBC Universal
Jason Armstrong - SVP, Investor Relations
Jessica Reif Cohen - Bank of America Merrill Lynch
Ben Swinburne - Morgan Stanley
Doug Mitchelson - Deutsche Bank
Phil Cusick - JPMorgan
Craig Moffett - Moffett Research
Marci Ryvicker - Wells Fargo
Jason Bazinet - Citi
John Hodulik - UBS
Kannan Venkateshwar - Barclays Capital Inc.
Good morning, ladies and gentlemen, and welcome to Comcast’s Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions) I’ll now turn the call over to Senior Vice President, Investor Relations Mr. Jason Armstrong. Please go ahead, Mr. Armstrong.
Sure. Thank you, operator, and welcome, everyone. It’s a pleasure to be here and I’m really excited to have recently joined Comcast. 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 be available for Q&A.
I know in my prior role, I would have been tempted to ask the question about recent press headlines around the consolidation in the cable sector. But our intension here today is to talk about our fourth quarter and 2013 results and we have no comment on press speculation or potential industry consolidation. Let me now refer you to slide number two, 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?
Thank you, Jason. And let me officially welcome you to Comcast and to this earnings call. We are all delighted to have you leading Investor Relations. We just celebrated Comcast’s 50th anniversary and it was a wonderful and emotional experience for many of the employees in the Company, and a chance to reflect on the past. But I have to say the best part is really thinking about our future, where the Company is headed, and all the opportunities that lay before us.
And as we exit 2013, we really have strong momentum across all our businesses and we’ve achieved some fantastic financial milestones in 2013. And today we’re reporting results for the fourth quarter and a full year 2013, strong results to demonstrate our confidence and optimism in the future of all our businesses, so we are increasing our dividend 15%, increasing our stock repurchase program authorization to $7.5 billion and announcing our plan to repurchase $3 million of stock during 2014.
Combined, this represents an increase in capital return to shareholders of over 30% from 2013 levels. We remain committed to returning a significant percentage of our free cash flow to our shareholders every year. Michael will discuss our results in more detail, but I want to provide a few highlights for both the fourth quarter and the full year performance.
So let me start with cable, which had a really strong year of revenue and operating cash flow growth. Our focus on innovation and enhancing the customer experience has driven meaningful improvement in our Triple Play subscriber trajectory. In fact, our customer metrics across each category of video, data and voice, improved in the fourth quarter and also improved for the full year.
In video, we added 43,000 subscribers in the fourth quarter which was really a remarkable improvement after 26 straight quarters of subscriber losses. High speed data continues to lead the way in both revenue and subscriber growth. We added nearly 1.3 million customers in 2013, which is a 6% increase and eighth year in a row of more than 1 million customer additions. And the bundling efforts continue to drive strong uptake of voice and we added nearly 800,000 voice subscribers in 2013.
And finally business services remains a critical growth driver adding close to $700 million and very profitable revenue growth last year. All in all, it was a fantastic year for cable and we ended on a high note with a very strong fourth quarter. The XFINITY brand is taking hold and the team is delivering consistent performance quarter after quarter. Neil Smit and all of the folks at Comcast Cable are doing a fabulous job.
At NBC Universal, Steve Burke and his team had a year that was just as successful. In fact I believe the single most important decision of 2013 was buying in the remaining 49% common stake from GE. We feel great about the improvements at NBC Universal, which have significantly exceeded our expectations.
Let me go through some of the highlights. Our cable networks continue to drive NBC Universal’s profitability. USA remains the highest rated cable entertainment network for the eighth year in a row and Bravo continues to rise again, gaining meaningful traction with its eighth consecutive best year ever. Over at broadcast, NBC ended this past fall in first place for prime time. And even without sports NBC was still tied for first place in the 18 to 49 demo.
The turnaround in broadcast is happening even faster than we had anticipated. At Theme Parks, we exceeded $1 billion in operating cash flow for the first time. In 2014 and beyond, we believe we will continue to benefit from a range of additional attractions including Harry Potter and New Hotels. We expect this to continue strong momentum in Parks. And over at Film, we had a record 2013 in terms of box office which was the largest in Universal's history. But we were even more focused on profitability where operating cash flow was up over $400 million last year alone.
In 2014 we turned a ramping production and building a strong pipeline for 2015. NBCU is a wonderful diversified portfolio media asset and all four major segments of the business had strong performance in 2013. So as we think through the priorities for 2014, we’re excited about our businesses and are going to continue to invest to enhance our differentiation and to drive growth. We are innovating faster than ever before and our investments are paying off.
We will continue to invest in high speed data with a focus on delivering the fastest speeds to the home as well as the fastest speed within the home. And with only 38% broadband penetration of our homes passed, we believe there is a significant room for continued growth. We have now increased speeds 12 times in 12 years. In addition, we currently have wireless gateways installed in over one third of our high speed data homes and expect 2014 to be another significant year of deployment.
Our X1 service is now available in all of our markets and we will accelerate our spending around this deployment, intending to reach the majority of our customers in the next few years. Michael will talk more about this in his remarks, but the initial user feedback in customer metrics are very encouraging. We will also continue to aggressively extend our reach and capability set in the small and mid-sized business segment where we still see substantial opportunities for profitable growth. So I think this is truly an exciting time in so many ways for our cable business.
Turning to NBCUniversal; we entered 2014 with the Olympic Games just a couple of weeks away. Let me spend a few moments here because the games are an incredible opportunity to start off the year and our plan is pretty amazing. We're going to deliver the most comprehensive Winter Olympics we've ever had. We will have roughly 500 hours of TV coverage across the NBC broadcast network, NBC Sports, USA, CNBC and MSNBC. As a result, I am pleased to say that our ad sales are at an all-time record for Winter Games.
The games are also a great way to demonstrate the type of innovation and integration we continue to drive across the entire company. Every event is going to be available live online for the first time ever in the Winter Games. This will equate to roughly 1,000 hours of live streaming available at NBCOlympics.com, at our NBC Sports Live Extra app.
Like no other event to-date, the Olympic Games have been and continue to be a watershed moment and opportunity for TV everywhere helping to drive awareness and usage. So offset [ph] subscribers will be able to consume our content both in and out of the home and on mobile platforms. It really is a fantastic way to start the year and a great way to showcase the strength and the integration of our wonderful portfolio of assets.
Let me know turn it over to Michael to cover the results in greater detail.
Good morning. Thank you, Brian. 2013 was a strong year with financial strategic performance for the company and we are very pleased with our fourth quarter and 2013 full year results which reflect consistent execution, profitable growth and the fundamental strength of our businesses.
Based on our confidence and the core strengths of the business and our positive operational momentum, as Brian just mentioned, we are increasing our total return of capital to shareholders in 2014 by more than 30%. I will address our 2014 financial strategy a bit later, but now let's discuss our business performance for 2013 in more detail.
Let me begin by briefly reviewing our consolidated financial results on Slide 4. For the full year, excluding 1.2 billion of revenue generated by the London Olympics and 259 million of revenue from the Super Bowl in 2012, consolidated revenue increased 5.8% to 64.7 billion. On a reported basis, full year consolidated revenue increased 3.3%.
Full year 2013, again excluding the impact of the Olympics in 2012 and costs associated with the termination of a pension plan this year, our operating cash flow increased 8.3% to 21.5 billion. On a reported basis, consolidated operating cash flow increased 7.3%.
Free cash flow for 2013 increased 6.9% to 8.5 billion and free cash flow per share increased 9.2% to $3.19 per share. This growth was primarily driven by increases in the consolidated operating cash flow and some timing benefits in working capital related to the performance of our film slate, as well as favorable comparisons to production spending and the rights for 2012's Olympics. These improvements were partially offset by increased capital expenditures and cash taxes.
On a reported basis, full year earnings per share increased 12.3% to $2.56 from $2.28 in 2012. However, excluding gains on asset sales, favorable tax adjustments, investment losses and pension termination costs, EPS grew 28% to $2.47 per share in 2013. Table 4 in our press release provides more detail on EPS. These healthy consolidated results reflect a strong execution in performance of both our cable and NBCUniversal businesses.
Now let's review the results of our business units in more detail starting with cable communications on Slide 5. In 2013, cable communication had another year of strong financial results and improved customer metrics. Cable communication's revenue increased 5.6% to 41.8 billion for the full year reflecting solid growth in our residential businesses and continued strength in business services partially offset by lower political advertising.
In 2012 we generated 240 million of political ad revenue making our 2013 comparisons challenging. As a result, cable advertising revenues declined 4.2% for the full year. However, excluding the political ad revenue, core cable advertising increased 4.8% for the full year. Excluding advertising revenue, the cable business has generated consistent results with the revenue increasing 6.2% for the year which is consistent with the growth rate in each of the last six quarters as we've appropriately balanced financial and customer growth.
We continue to experience real strength in our customer metrics and ended the year with improvement across all of our products. In the fourth quarter we added 649,000 total video, high speed Internet and voice customers, a 29% increase in net customer additions over last year's fourth quarter. For the year we added 1.8 million total customers, a 17% increase in net additions compared to 2012 despite a more competitive environment with an additional 2.3 million overbuilt homes in our markets this year.
These results demonstrate we are competing better and have intensified our focus on customer retention in the value of our Triple Play strategy. We are growing our customer relationships, increasing the number of customers receiving higher levels of services and have an increasing number of customers taking multiple products. At year end, 79% of our video customers took at least two products and 44% took all three services versus 40% in 2012.
As Brian mentioned, we added 43,000 video customers in the fourth quarter. This marks improvement over the 7,000 video subscriber losses in last year's fourth quarter and the first time we've gained video subscribers since 2007. For the full year, we reduced video losses by nearly 10% compared to 2012 even with an aggressive increase in our overbuilt service areas.
Our excellent platform and industry-leading on-demand service are best-in-class products and we are successfully upgrading non-video customers and improving retention. High speed Internet also delivered impressive subscriber performance as we added 379,000 new customers in the fourth quarter, an 11% increase over last year.
For the full year we added 1.3 million new customers, the eighth year in a row that we added more than 1 million high speed Internet customers and now have a total of almost 21 million high speed Internet customers. Voice also delivered solid growth. We added 227,000 new customers in the quarter, a 35% increase.
For the full year, we added 768,000 new customers for a total of approximately 11 million. This is a 25% for the year over 2012's net additions as we have successfully converted single and double-play customers to Triple Play and acquired new Triple Play customer relationships. At the end of 2013, our voice penetration was 20% of homes passed.
As we review the individual service categories, we reported healthy video revenue growth of 2.3% for the fourth quarter and 2.9% for the full year, driven by the impact of rate increases in an increasingly number of customers taking advanced services. We added 658,000 advanced service customers in 2013 and now have 12.4 million high-def and/or DVR customers, equal to 57% of our video customer base.
High-speed Internet revenue was again the largest contributor to cable revenue growth, as revenue increased 8.7% for the quarter and 8.3% for the year, reflecting continued growth in our customer base, rate increases in an increasingly number of customers taking higher speed services. At the end of the year, 36% of our residential high-speed customers took at least a 50 megabit speed. Our high-speed Internet service is clearly capturing market share as we continue to improve and differentiate our product through service and speed enhancements.
Voice revenue increased 3.7% for the fourth quarter and 2.8% for the full year, driven by growth in our customer base as we continue to focus on the value of the Triple Play. Business services was the second largest contributor to cable revenue growth for the quarter and for the year, with revenue increasing 25.3% in the fourth quarter and 26.4% for the full year as total 2013 revenue was 3.2 billion. The small end of the market where businesses with less than 20 employees continues to grow nicely and we’re focused on executing our market by market plan. We are also making progress penetrating mid-size enterprises and this business now represents 20% of this group’s revenue and is growing at an accelerated rate.
Business service’s continues to experience momentum and represent a large and attractive opportunity for the company. With approximately 10% to 15% market share this is a substantial opportunity for additional growth. When you evaluate our cable business in aggregate, our total revenue per video customer reached $164 per month in the fourth quarter, a 6.8% increase over last year.
Now let's move on to Slide 6. In 2013 cable communications operating cash flow increased 5.8% to $17.2 billion resulting in stable margins as we effectively managed higher programming expenses and absorbed increased expenses to support new initiatives in the deployments of X1 and wireless gateways across our footprint, as well as the expansion of business services and XFINITY Home. Programming expenses increased 8.6% in 2013 slightly below our original estimates but nonetheless reflecting higher rates in step ups related to certain agreements in increasing retransmission consent fees in sports program and costs.
As we look to 2014, we expect programming expense growth to accelerate to approximately 9% to 10% for the year driven by several factors including once again meaningful increases in retransmission consent fees, higher sports programming costs and step ups for recently completed long-term agreements. In addition we continue to be very proactive in expanding our on-demand library, in expanding our rights to multiple platforms. We believe we're leading the industry by offering the most robust on-demand and TV Everywhere services giving us a meaningful competitive advantage.
We once again believe we have appropriately planned for these programming expense increases and are confident we can effectively offset these costs through modest rate adjustments, further efficiencies and improving product mix as well as increasing the number of customers upgrading to higher tiers of service. As a result we expect to maintain relatively stable margins. We continue to achieve efficiencies in our operations and improve our customer experience with improved customer service tools and self service options. At year end more than one-third of our customers are managing their accounts online with 9 million unique visitors, a 42% increase over the prior-year.
In addition more customers are electing self installations which accounted for 42% of our total installations in 2013 compared to 30% last year. As a result of these efforts we reduced our truck rolls by 3.5 million in 2013 and in over the last two years we’ve reduced our truck rolls by approximately 8 million. We’re also more efficient and specialized in our call centers with centers of excellence dedicated to sales, billing, service and retention.
Just as a reminder, when we report first quarter earnings in April we’ll be changing our disclosure of customer metrics from an SEC equivalent or EBU basis to a billable unit’s methodology. At the end of the first quarter we’ll also restate our customer metrics for 2013 making it easier to compare 2014 metrics as we report them. We believe this change will reinforce our operating focus on customer relationships and align our customer count methodology with the rest of the industry.
To wrap up the cable segment our XFINITY brand continues to build positive awareness and our performance in 2013 clearly demonstrates that we are executing well and competing effectively with our improved products and services. We are pleased that the cable group has delivered strong, consistent results, and in 2014 we remain focused on sustainable profitable growth and plan to build on this positive momentum.
Now lets move on to NBC Universal results which are presented on Slide 7. Excluding any impact from the Super Bowl and Olympics in 2012, NBC Universal’s full-year 2013 revenue increased 5.7% and operating cash flow increased 18.7% reflecting strong results across all business segments. For 2013 on a reported basis NBC Universal’s revenue decreased 0.7% and operating cash flow increased 15.2%. Now let’s take a closer look at the individual segments at NBC Universal.
Our cable networks generated full-year 2013 revenue of $9.2 billion an increase of 5.4% driven by 6.5% increase in distribution revenue and 4.3% increase in advertising as ratings pressure at some of our cable networks was offset by higher pricing. Cable networks operating cash flow increased 6% to $3.5 billion in 2013 reflecting improved revenue performance partially offset by an increase in programming and production costs as we continue to invest in original programming and experience higher sports cost reflecting more NHL games this year versus last year and the launch of the English Premier League on NBC Sports Network. In addition we had higher advertising, marketing and promotion expense to support the launch of these new shows and events.
With regards to our broadcast segment, we ended the year on a strong note with fourth quarter revenue increasing 11.5% to $2.2 billion and operating cash flow growing 54.8% to $140 million driven by higher primetime ratings from the success of The Voice, The Blacklist and Sunday Night Football. Full-year 2013 results were a bit muted due to difficult comparisons to 2012 that included a Super Bowl, Olympics and higher political advertising. However excluding the Super Bowl and the Olympics, broadcast revenue increased 5.4% and operating cash flow increased 45% to $345 million in 2013 reflecting the meaningful progress we have made in this business in terms of improved ratings, higher advertising revenue and increased retransmission consensus.
Moving to film entertainment, 2013 was a record year for NBC Universal as it enjoyed the best Box Office performance of its history, driven by outstanding success of Despicable Me 2 as well as the strong performances of Fast & Furious 6 and Les Misérables. As a result revenue increased 5.7% to $5.5 billion and operating cash flow increased over $400 million to $483 million in 2013.
Switching to our Theme Park segment, we had another terrific year. Full-year revenue increased 7.2% to $2.2 billion and operating cash flow increased 5.3% reaching $1 billion for the first time a very exciting milestone for this business. The strong results were driven by strong attendance and per capita spending at both parks reflecting the continued success of Harry Porter in Orlando and the Transformers attraction at both parks. To summarize NBC Universal we are just very pleased with the progress made at NBC Universal and since the original announcement our operating cash flow has increased approximately 50% on a pro forma basis.
Now let’s move to Slide 8 to review our consolidated and segment capital expenditures. We believe that operational excellence and strategic differentiation drive shareholder value. So we have an operating strategy that is execution focused and a financial strategy that is focused on risk adjusted returns. Our strategy support these goals by investing in our business where there are attractive opportunities, maintaining a strong balance sheet and providing a consistent and sustainable return of capital to shareholders. Our number one priority remains generating strong and sustainable returns by investing in our businesses. In both cable and NBC Universal we are investing to strengthen our competitive positions and to support attractive organic growth opportunities.
As we planned 2013 consolidated capital expenditures were $6.6 billion compared to $5.7 billion in 2012 reflecting increased investments at both cable and NBC Universal. At cable communications 2013 capital expenditures increased 9.8% to $5.4 billion equal to 12.9% of cable revenue. This capital plan primarily reflects higher spending on CPE including our new X1 boxes and 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 such as business services and XFINITY Home.
In 2013 we began the deployment of our X1 service and we are very pleased with the early customer feedback. Clearly this is an improved experience for our customers making it easier to navigate through the 10s and 1000s of content choices we offer. Early results show that X1 customers use our video-on-demand service more and our VOD revenue for these customers is higher.
In addition more X1 customers are subscribing to DDR and upgrading to Triple Play. And we are also seeing reduced churn levels among these X1 customers. Based on the early positive customer results and strong double-digit returns of X1, we plan to accelerate the pace of deployment to reach the majority of our video customers over the next three years.
In addition to this X1 acceleration, we plan to deploy additional wireless gateway to enable our customers to receive the fastest in-home Wi-Fi, increase network capacity and continue to invest to fuel the expansion of both business services and XFINITY Home. As a result, our 2014 capital investment plan will increase approximately 100 basis points to approximately 14% of cable revenue from approximately 13% in 2013.
At NBCUniversal, in 2013, we had a similar approach. Capital expenditures increased 397 million to 1.2 billion, primarily driven by increased investments in theme parks as we build new attractions including Transformers and expansion of Harry Potter and Orlando and Despicable Me and Harry Potter in Hollywood.
In 2014, NBCUniversal's capital investment plan remains stable at 2013's level as we continue to invest in theme park attractions including Harry Potter at both parks. Our theme parks' OCF has increased from 400 million in 2009 to over 1 billion in 2013 as a result of new investment.
Over the same time, combined attendance at both parks has increased over 40%. We remain excited and optimistic about the next phase of Harry Potter opening in Orlando this summer and expect this to generate strong returns by increasing profitability and attendance and continuing the transformation of our parks into must-visit destinations.
The vast majority of both cable and NBCUniversal's investment plans are growth-oriented capital and should yield attractive IRRs coupled with strong strategic advantages.
Let's move on to Slide 9. We continue to have a strong commitment to deliver a consistent and sustainable return of capital to shareholders through a combination of dividends and buybacks. In 2013, we returned 4 billion to shareholders and with today's announcement our total return of capital is increasing 32% to 5.2 billion in 2014. This incorporates a 15% increase in our dividend to $0.90 per share on an annual basis and a plan to repurchase 3 billion of our stock in 2014, a 50% increase compared to our 2012 buyback. This total return represent a payout of 62% of our last 12 months free cash flow and 77% of our last 12 months net income.
In addition, our Board of Directors had increased our stock repurchase program authorization to 7.5 billion. We have consistently increased our annual dividend since we instituted it in 2008 at $0.25 per share. Today, a newly announced level of $0.90 per share represents 33% of our last 12 months net income and raises our current dividend yield to approximately 1.7% which is relatively in line with the S&P 500.
Since 2008 and through our return of capital commitments in 2014, we will have returned 24 billion to shareholders including 9 billion in dividends and repurchasing 15 billion in shares. By all measures we believe 2013 was a very successful year. As we begin 2014, we are positive and feel very good about our financial strength, our operating momentum and the attractive opportunities ahead at both cable communications and NBCUniversal. We look forward to executing on those opportunities ahead and continue to achieve profitable growth and build value for our shareholders.
Now, let me turn the call back to Jason for Q&A.
Thanks, Michael. Operator, let's open up the call for Q&A please.
Earnings Call Part 2: