Comcast Corporation (CMCSA) Q2 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Comcast Second Quarter Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded. I will 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, to our second quarter earnings call. Joining me on the call are Brian Roberts, Michael Angelakis, Steve Burke and Neil Smit. As always, let me 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, Marlene, and good morning, everyone. Today, I'm pleased to report that we achieved strong operating and financial results for the second quarter in Cable and in NBCUniversal. These results demonstrate our operational focus while also speeding up innovation and investing in content to strengthen our brands and our franchises. So let me begin with Cable. In the second quarter, revenue was up by nearly 6%. Operating cash flow increased by nearly 7%, and Cable generated $1.3 billion of free cash flow. Customer additions for our combined video, voice and data services increased by 18%, continuing the trend of improving year-over-year performance even in a seasonally weak quarter. Our high-speed Internet service was once again one of the real highlights and was the largest contributor to Cable's growth this quarter. The second quarter marks the eighth quarter in a row where we significantly outpaced the net additions of our competitors. This is due to strong execution and expanding differentiation between our high-speed service and DSL. Business services was another significant contributor to Cable's performance in the second quarter with 42% growth in revenue. This business has solid momentum, and we are continuing to build its capabilities for future growth, including expanding Metro E services to 20 of our major markets. We also made steady improvements in our operating performance metrics, marking another quarter with better customer retention and Service scores and higher customer satisfaction. We have real operational focus and are making our service and the overall XFINITY experience the best in the business. As we continue to use our scale to our advantage, we are delivering new products and faster innovation to our Cable customers. Our current and future services represent an exciting new product roadmap that includes higher-speed Internet, a growing array of IP and cloud-based applications, new…

Thank you, Brian. Let me begin by briefly reviewing our consolidated financial results starting on Slide 4. Overall, we were very pleased with second quarter results. Second quarter consolidated revenue increased 50.5% to $14.3 billion, and consolidated operating cash flow grew 28.5% to $4.8 billion. In addition to revenue and operating cash flow, we remain focused on free cash flow, free cash flow per share and earnings per share as important metrics in evaluating the performance and strength of the company. In each of these key metrics, our results in the second quarter were very strong. Free cash flow for the quarter, which excludes the impact of the economic stimulus, increased 12.2% to $1.5 billion, primarily reflecting growth in consolidating operating cash flow, partially offset by increases in working capital, cash interest expense and capital expenditures. Second quarter free cash flow per share increased 12.5% to $0.54 per share. We generated earnings per share of $0.37 for the second quarter. However, excluding NBCUniversal transaction-related costs and $137 million nonrecurring, noncash income tax charge resulting from a state tax law change, earnings per share increased 27.3% to $0.42 per share. Please refer to Table 4 in the press release for more detail on these items. Let's go to Slide 5. As you know, we view Comcast and NBCUniversal as 2 distinct pools of cash flow generation and funding capacity. Both Comcast and NBCUniversal's first priority is to generate strong returns by reinvesting in their core businesses. Beyond this reinvestment, NBCUniversal retained its free cash flow to fund future equity redemptions by General Electric, while Comcast allocated free cash flow to consistently return capital to shareholders. As I mentioned before, in the second quarter, our free cash flow increased 12.2% to $1.5 billion. For the first half of the year, we generated…

Thanks, Michael. So last week marked the 6-month anniversary since the closing of NBCUniversal. I think it's a perfect opportunity to hear from Steve Burke on how he's feeling.

Thanks, Brian. Since we just passed the 6-month anniversary mark for the NBCUniversal, it does seem a good time to give a quick update on how we're doing. The bottom line is we're off to a very good start. As we've said previously, 2011 is both a transition year and an investment year so we can better position the company's assets for future growth. The good news is we're making investments, and they're starting to work. We're also successfully juggling the goals of investing and growing operating cash flow at the same time. Now let me give you some examples of the types of investment we are making. I'll start with the new show, The Voice. Shortly after close, we realized The Voice was the type of broad-based concept that could be a big success for NBC, and we decided to really get behind it. We increased our production budget several times to make sure we would have 4 great coaches and high-quality performances. We then invested in marketing, so awareness was high when the show launched. Finally, we made The Voice the company's #1 promotional priority across all NBCUniversal assets, as well as Comcast Cable. The results surpassed our most optimistic expectations as The Voice became a bona fide hit and NBC's biggest new show in years. The Voice aired from April 26 to June 28 and along with America's Got Talent, The Voice helped NBC become the #1 network in the United States for 4 weeks at the end of the quarter. Despite the increased investment, The Voice also helped our financial performance in the second quarter at both the network and our own television stations. We've invested in other new shows for our primetime schedule and expect to have a competitive lineup this fall and next spring.…

Thanks, Steve. Before we turn to your questions, let me just turn to Neil Smit, who's now been running Comcast Cable for over a year. Neil, how are you feeling about the business?

Thanks, Brian. It's been an exciting year, and I've been really pleased with the team and our execution. We're innovating at an accelerated pace and delivering great new products to our customers. Our customer service is a focused priority and continues to improve. As a result, we're driving solid growth, both financially and from a customer perspective. And we believe this momentum is sustainable for several reasons. First, we're competing better with superior products. Our major platform initiatives, All-Digital and DOCSIS 3.0 are nearing completion with All-Digital in 89% of our markets, DOCSIS 3.0 deployed in 90% of our footprint and our Content Delivery Network for OnDemand in the majority of our markets. These major platform upgrades are the foundation enabling us to deliver better products to our customers to drive faster innovation. We're now delivering more high def and foreign-language programming, over 30,000 OnDemand choices, better program guides, more advanced advertising and higher speeds for our HSD customers. We've launched xfinityTV.com, our XFINITY TV app and catch up, keep up for VOD. And we're working on exciting new products, such as next generation TV, 1 gigahertz HSD and dynamic ad insertion. I feel like we're just getting started on the innovation front. Second, we're improving customer service. Our objective is to fundamentally transform the customer experience, focusing on getting it right the first time and improving the reliability of our service. We're doing this by standardizing best practices from across the country, which has improved both our effectiveness and efficiency. We're focusing on 2 different areas: convenience and reliability. From a convenience perspective, we're making it easier for customers to interact with us and on their schedule. We're providing customers a better online experience, and recently, we've also rolled out 2-hour service windows and a customer guarantee that we'll…

Thanks, Neil. Operator, let's open up the call for Q&A, please.

[Operator Instructions] Our first question comes from the line of Jason Bazinet with Citi.

I just have one for Mr. Smit and one for Mr. Burke. On the Cable side first, you guys I think have done a very good job managing margins in the context of a decelerating top line and lower net adds on the high contribution data and film product. And I think a lot of that has to do with cost cuts. I was just wondering if you look out sort of 1 or 2 years, do you see enough cost cuts that can occur that will still allow you to sort of maintain these nominally 41% OCF margins? And then on the NBCU side, I think the market is quite concerned about a deceleration in sort of the ad market. And so for Mr. Burke, I was just wondering if you could give us any color in terms of what you're seeing for Q3, and if there is a slow down, when you might first see it?

Hi, Jason, it's Neil. Concerning margins, it's hard to project too far into the future. I think the real benefits we see in the margin, 50 bps year-to-date has been from an improved mix of HSD and business services, as well as gaining efficiencies in some of our customer service metrics as I mentioned in my previous comments. I think we're just taking noise out of the system, and I think that will hopefully continue as we just get a better experience. But it -- that's being offset obviously by compressing video margins. So it's hard to project going forward, but we're going stay the course. HSD seems to be gaining share at a good clip, and business services is up 42%. So I think we see continued growth in both those businesses.

When you look at those reduced truck rolls and service calls, are those in the aggregate, if at all goes according to plan? Is the savings measured in the tens of millions or is it hundred millions? Is there any sort of sense you can give us just sort of, if this works, what sort of cost could come out?

Hey, Neil, let me take -- it's more in the tens of millions actually, Jason. And the only thing I would really say is when you start the question about decelerating revenue, if you actually take out advertising and you look at year-over-year revenue, last year, our revenue growth was like 3.8% on Cable and now we're x advertising, 6.2%. So between high-speed data, between business services, between some rate adjustments, I'm not sure I completely concur that we have a decelerating revenue line.

Let me jump in on advertising. The quick answer to your question is we don't see any signs of a deceleration right now. We're obviously concerned about the economy the way you would expect us to be. But so far, the advertising market continues to be strong. We had a very good upfront. We actually think some of our Cable channels really paced the upfront on the Cable side. And on the broadcast side our upfront was good too, and we'll see how the rest of the year goes.

[Operator Instructions]

Our next question comes from the line of John Hodulik with UBS.

Okay, I'm trying to figure out which question. The -- maybe a question for Neil. The -- I think one of the things that caught my eye was the slowdown in the programming expense growth both year-over-year and on a per-sub basis. And I guess looking forward again, maybe what's driving that? And do you think we're through the worst of the increases that we're going to see?

John, no, I think on the programming side, it all kind of depends on the timing and the roll-offs and the renewals of the contracts. So it does fluctuate quarter-to-quarter and even in some cases, month-to-month. I wouldn't read much into that. I think we're still projecting kind of mid to high-single digit of growth rate in programming expenses.

Our next question comes from the line of Jessica Reif-Cohen with Bank of America Merrill Lynch.

So, Steve, I guess I'll go with you. There still seems to be really big buckets of opportunity at NBCU. I was just hoping you could maybe lay out some of the timeframe when we might see some of the things like retrans and reverse comp? Are there content deals just like Netflix? I mean Netflix International's starting to do deals as is Amazon. And on that whole content side, what is your view of content ownership, given increasing? There seem to be more buyers out there.

Okay. You asked one question with a lot of different parts. I think in general, we see this year and next year probably as investment years. We think the business, particularly on the broadcast side, has not gotten the investment necessary to really compete. And so I think our focus right now is on product and making sure that we have a competitive NBC primetime schedule, making sure that the stations have the right kind of resources to be competitive in the local markets. And the juggling act that we're going through, which we've been successful at for the first half is to continue to grow OCF while making the investments that are going to pay off in the future. I do think that content is more valuable today than the day that we did the deal. It's interesting if you go back. It's over 18 months ago when we actually signed the deal with General Electric. I think retransmission consent now is a bigger number than it was then. The kind of money that online video providers are paying for content is infinitely, almost significantly greater than it was 18 months ago. So in my opinion, content is more valuable and the outlook, particularly for Broadcast Television, is much rosier than it was 18 months ago. But at the same time, I want to caution everyone, we're in fourth place at NBC. And we've got a lot of investments, and we've told people that it doesn't happen in 1 year, probably won't even happen in 2 years, it might take 3 or 4. I'm very confident we will get there, but we need to invest and -- along the way, I wouldn't expect any miracles financially or in terms of performance.

I just want to add. I agree, Jessica, the way you asked the question I think is inherently that these businesses are bullish, and that there's been a good 18 months. And I think I would concur -- I think we inherited some agreements, so we may not be the first out of the blocks with retransmission fees or reverse comp. But you see other companies' results, you see the marketplace, it's pretty transparent. So I think Steve is focused absolutely properly in building our franchises and building our channels. And that there's now a way to see monetization whether it's new media or retrans or other sources of revenues internationally as you suggest. So we're pleased and out of the block, but it's been 6 months. And I think we got to have realistic expectations.

Our next question comes from the line of Jason Armstrong with Goldman Sachs.

On video, just a question on basic sub losses. I think last year in 2Q when you had elevated losses you talked about categories or subs that you're losing in, for instance, over-indexing sort of these B1 single product subs. I'm wondering if you can help us think through what's going on now and maybe broadly thoughts on sort of competitive versus Cable subscribers sort of leaving the industry?

Jason, I think on the video side, we are still seeing a significant percentage of our subs, who are cutting off due to our B1-only subs. So that's a continuing trend, and it has been for the last 3 or 4 quarters. I think the Q2 is a seasonally our weakest quarters. We had 1.5 million additional RBOC overbuilds, and we still improved subs 10% and grew ARPU, resi ARPU anyway, 4.9%. I think what we saw in the quarter we saw a slowdown in connects in mid-May. I think it's primarily due to the sluggish economy. We responded very quickly by adjusting our channel mix, more DRTV, more digital, more direct. And we saw a connect improvement in late June and into July. I think from the competitive perspective, I think the economy, as I said, is still slow. And it's caused some more aggressive offers. However, I don't think it's markedly different than what we've seen in the past, and we'd understand how to compete. I mean, my focus is really getting the quick response to the changing market conditions via target marketing sales effectiveness and retention. And our -- overall, our total subs at HSD, video and phone were up 18%. So I think we can compete effectively.

Our next question comes from Doug Mitchelson with Deutsche Bank.

Question for Michael. If Jessica can stick to one questions and so can I. Can you just remind us what Comcast target debt leverage is? And I understand your view returning capital once per year, to the extent you're building excess financial capacity this year, how might that play into return of capital strategy next year? Do you look at buying in NBCU early? Do you look more aggressively at Cable acquisitions or do you have a year of potentially above trend share repurchases in 2012? Any comments on that would be helpful.

Yes, I don't really want to comment on 2012 because we've been, I think, quite clear and transparent that we really are articulating what our financial strategy will be on a year-by-year basis. But what I can say is our leverage for June 30 on a consolidated basis was approximately 2.2x, which is close to the midpoint of our target range, which is between 2 and 2.5. When we bought NBC -- I;m sorry, when we bought Universal Orlando, we consolidated another roughly $1.4 billion of debt, so that popped us up to about $41 billion. I think we'll end the year at the low end of our range. I think that's pretty clear. And I think we're going to have a discussion with our board with regards to the share repurchase program, which will be exhausted by the end of the year. Obviously, dividend will be discussed and other strategic efforts will be discussed as well. And I think as we've done in the years before, we'll be quite balanced and measured in articulating what the strategy is for 2012.

Maybe you'll be frustrated with this follow-up, but is your goal over time to generally stay within the target leverage range or could you see periods where you end up below or above?

That's a hard question, obviously. Our target range is exactly that. It's our target range. But going back to your first question with regards to an early buy-in of NBCUniversal, I really don't see that in the cards. I think we're 6 months into the transaction. I think that we're very pleased with the transaction, and our partnership with General Electric I think is going fine. So we really like the way we've structured the deal. We really like the way our incentive or carried interest works. And I think that will be steady as she goes with regards to that particular effort.

The next question comes from Craig Moffett with Bernstein. Craig Moffett - Sanford C. Bernstein & Co., Inc.: Another question for Michael, if I could just drill down on that a little bit. So on the cash flow question that is, you've got the option if NBC exercises its put in 2014 on its portion, you've got the option to call the remainder in 2014 of NBCU early. First, can you just update us on your thinking about how you'd like that to go aspirationally? And would you preserve cash in anticipation of that option even if you don't know it's going to be exercised and would that inform the rate at which you return cash?

So what we've been really clear about is we have 2 pools of capital. One pool is within the Comcast side, which the majority is being used to return capital through buybacks and dividends. Then with the NBCUniversal pool, which is primarily being used for ultimately an equity redemption from General Electric. Now #1, General Electric has to exercise their redemption right. We can't force that redemption right, which is 3 years from now. So obviously, pretty far away. If they so choose to exercise that right, then we have, you're right, the option to increase from roughly 68% to 100%. I think we'll evaluate that very carefully at that point in time. That's quite a ways away. And our goals at NBCUniversal generate the financial capacity to meet that possible redemption. So it's hard to forecast what one will do in 3-plus years from now. But also if we were to exercise our option, we would extinguish the carried interest, which would last another 3.5 years, which we believe has real value creation for our shareholders. So it's a good spot to be in and something that we will evaluate really carefully in about 3 years from now. But I want to make sure the point is that the goals at NBCUniversal, its free cash flow is really being utilized to build that capacity to meet that potential redemption in year -- in 3-plus years.

Your next question comes from Ben Swinburne with Morgan Stanley.

Brian, if you look out at the popularity of a lot of these over-the-top services and if we assume that they're incremental to pay TV -- I mean it suggests that there's a lot of demand out there just more Video On Demand on multiple devices. And Comcast has invested a lot behind that with its XFINITY platform. When you look at your opportunity out there, does it make sense to explore going and offering additional streaming video product sort of outside of your Cable bundle and maybe even both in footprint, but especially out of footprint? I mean, there's 50 million homes in the U.S. that can't get any service from Comcast. IP allows you to do a lot of things you couldn't do before on the video front. Bandwidth speeds are going up around the country. It just seems like you've built an infrastructure that has huge opportunity beyond what we might traditionally think of as the Cable business. I just wondered if you could talk about that a little bit.

Well I think we're pretty focused inside the footprint. And with 50 million plus homes having all the products that we have to sell, I think we're -- we agree with your assessment that there's more demand, more desire for new devices. One of the reasons to invest in NBCUniversal was to have a products to sell internationally and throughout the entire United States. So we have that today through NBCUniversal. But I don't think there's yet a business model that we've seen that returns to our shareholders where you have relationships with customers that way outside of our footprint that we can make money. We had some free On Demand product with Fancast. It did not prove profitable. We've now kind of -- we made that into XFINITY TV, trying to make TV everywhere happen where we have the content relationship and the customer relationship and extending that to all devices. That's our focus for now. And I think Neil summarized really well a lot of the progress that's been made. I do think we're leading in some of this innovation. Some of those products we might be able to wholesale to others as we have our digital media center in Denver. We might be able to do that to other distributors in a way that takes some of this investment and lays it off nationally. But I think it's better when you already have a relationship with the customer to add these services on.

Your next question comes from the line of Stefan Anninger with Credit Suisse. Stefan Anninger - Crédit Suisse AG: Can you discuss where you are with the XFINITY rebranding campaign and how close you are to the completion of that project? It appears to have been very successful and unique. Would you expect a change in PSU growth as that process slows or do you think that it hasn't provided you with a big boost in terms of PSU growth?

Stefan, I think from my perspective, the XFINITY campaign is never really complete. I think in brand building, you have to continue to innovate and put new products out. You have to continue to market creatively and bring more value to the customer. So I think brand building is never over. I think we have seen good results. And the XFINITY branding we've seen double-digit increases, an intent to purchase and consideration from competitive customers. So I think it will continue. I think in terms of ability to drive the PSUs, I think a lot of that's in the marketing of the product, it's in the product itself, and it's in the execution of the sales team. So it's all of 3 things combined, and it's obviously in the customer service. So I think PSUs are driven in part by the branding, but it's got to be backed up by great product and great service.

The next question comes from the line of James Ratcliffe with Barclays.

Neil, can you talk about on a relative basis, how you're doing on share, particularly in data, in markets where you phase FiOS or U-verse versus markets where you just face a traditional DSL product?

I think we're competing well. I mean, as I mentioned earlier, we had 1.5 million incremental RBOC overbuilds. We're about 22% AT&T and 14% FiOS, and we compete well on those markets. I think in terms of share capture -- I think where we're really gaining share right now is in the HSD product, as you noted. And I think it's primarily because we have just a far superior product to DSL. Competes effectively with FiOS from a speed perspective, and we believe we can outperform U-verse on that product. So I think we're going to continue to push the HSD and the Video products. And I think the Triple Play still holds true.

Our next question comes from the line of Michael McCormack with Nomura.

Just a quick question on the high-speed data side regarding ARPU expansion obviously, some pretty good results there. You do see people trading up in the higher tiers and then also in high speed, the increased speeds, is that a response to competitive threat?

No, I think it's not so much a response to a competitive threat as it is. We want to continue to demonstrate product leadership. So as Michael mentioned, we've got 105 meg in 80% of our footprint. We're going to be testing higher speeds. Brian demoed 1 gig. So from my perspective, that's all about demonstrating product leadership. We have made the investments in capacity that are required to continue to support that. And I think in Q1, we got about 40% of the entire industry's net adds, and we represent, call it, 20% to 25% of the industry subs. So we're going to continue investing and continue demonstrating leadership there. I think the way to think of the higher product speeds is they provide an umbrella. So generally speaking, when we launch to higher speeds, the whole -- all the various speeds tiers trade up. So it provides an umbrella effect over the other tiers.

Michael, let me just add if -- I don't know if you have this information. But our high-speed ARPU is up about 4.2% in the quarter to $43.88.

Your last question comes from the line of Bryan Kraft with Evercore Partners.

Just want to understand what you're seeing in terms of subscriber trends in the third quarter so far. I know it's early, but it would just be helpful to understand if you think the same underlying strength in unit trends that you had in the fourth quarter and the first quarter are still there? Or if you think the economy and incremental competition have reduced it at all?

Well I think as I mentioned earlier, we adjusted quickly to kind of a slowdown in mid-May. And the connect growth came back the end of June and seems to have continued in July. Also I think we're very focused on retention. And a lot of the year-over-year improvement in subs that we've demonstrated in the last 3 quarters has been driven by improved retention of our customers. Connects are kind of in line, but retention's really been driving the numbers. And I think a lot of the things we're doing, better credit screening and better call handling and better promotional roll-off tactics and centers of excellence for retention are all those things combined for a better retention result. So the good news is I think we responded quickly and changed the marketing mix, and we seem to have got the connects volume going again.

Yes, I just would like to end the call then and just say, I think it's -- look, these are the second quarter. It's steady here for the first few weeks, but a lot happens in September. So it's hard to tell. And obviously, there is economic news on the horizon that rattled some of the markets yesterday, and we just all have to see. That being said, I really believe we got a plan. We're executing well. I'm really pleased with how well both businesses are performing, and I think that we're continuing to have a roadmap to some of those questions that were asked at the end there. There is a roadmap for innovation and Steve's building, in a sense, a similar roadmap for program innovation. Hopefully, it's a little different. But we're investing and at the same time, we're getting good financial results. So we'll talk to you all in 90 days. Thank you very much.

Thank you, Brian, and thank you, all, for joining us this morning.

There will be a replay available of today's call starting at 12:30 p.m. Eastern Standard Time. It will run through Wednesday, August 10 at midnight Eastern Time. The dial-in number is (800) 642-1687, and the conference ID number is 77696651. A recording of the conference call will also be available on the company's website beginning at 12:30 p.m. today. This concludes today's teleconference. Thank you for participating. You may all disconnect.