Comcast Corporation (CMCSA) Q3 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Comcast Third 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 third quarter earnings call. Joining me on the call are Brian Roberts, Michael Angelakis, Steve Burke and Neil Smit. As we have done in the past, Brian and Michael will make formal remarks, and Steve and Neil will also be available for Q&A. With the completion of the Universal Orlando transaction on July 1, we're now consolidating its results and have updated our pro forma presentation to include 100% of Orlando, as if that transaction was effective on January 1, 2010. Please refer to our trending schedules, which are available on our Investor Relations website to see the updated pro forma results for the past 7 quarters. We have also added D&A and operating income by segment to the trending schedules. 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 another quarter of strong performance across key financial, operating and product areas. Our primary focus has been on great operational execution and on extending our industry leadership. Let's begin with Cable, which really had an outstanding quarter, making this the fourth consecutive quarter of improving customer metrics. Our combined video, voice and data customer additions increased 13%. In addition to customer growth in high-Speed Internet and voice, we saw a continuing improvement in video, where we reduced our customer losses by 110,000 over last year's third quarter. High-speed Internet was, once again, the largest contributor to Cable's revenue growth. Every quarter this year, we've added more high-speed Internet customers than in the same quarter of 2010, and we continue to take share as we expand the differentiation between our high-speed service and DSL. Business services is also becoming a significant driver of our growth, as annualized revenue approaching $2 billion and 39% growth in the quarter. I'm excited about the prospects for this business, which continues to post strong results on the small end of the market and has a big opportunity still ahead with the midsized businesses. We are making significant progress in delivering a better service experience for our customers, with higher customer retention and service scores and increasing customer satisfaction. We recognize that we still have work to do, but I am really encouraged by the focus that Neil and the whole Cable team have on delivering the best customer experience and by our consistent steps forward in this effort. At the same time, we are driving product leadership in innovation. A couple of years ago, we decided to invest in DOCSIS 3.0 and to convert the majority of our analog bandwidth to digital. I'm happy…

Thank you, Brian. Let me begin by reviewing our consolidated financial results starting on Slide 4. Overall, we are very pleased with third quarter results. Third quarter consolidated revenue increased 51.1% to $14.3 billion, and consolidated operating cash flow grew 27.8% to $4.6 billion, reflecting strong organic growth in our Cable business, as well as consolidating the acquisitions of NBCUniversal on January 28 and the remaining 50% of Universal Orlando on July 1. Free cash flow for the quarter, which excludes the impact of the economic stimulus, increased 36% to $1.4 billion, primarily reflecting growth in operating cash flow, that was partially offset by an increase in working capital. In addition, third quarter free cash flow per share increased 39% to $0.50 per share. Earnings per share in the third quarter grew 6.5% to $0.33 per share from $0.31 per share last year. This quarter's EPS growth was negatively impacted by a $256 million or $0.05 per share decline in investment income that was primarily driven by noncash mark-to-market adjustments in our investment portfolio. Please refer to Slide 5. As I have mentioned previously, we view Comcast and NBCUniversal as 2 distinct pools of cash flow generation and funding capacity. As you can see on this slide, year-to-date we generated $5.1 billion of total free cash flow. In Comcast, which includes Cable Communications and Corporate and Other, accounted for just over $4 billion or 78% of total free cash flow, while NBCUniversal contributed $1.1 billion of free cash flow. In terms of capital allocation, our priority for both Comcast and NBCUniversal is to generate strong returns by investing in their core businesses. Beyond this investment, NBCUniversal retains its free cash flow to fund future equity redemptions, while Comcast allocates the majority of its free cash flow to consistently return capital…

Thanks, Michael. 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 a question for Mr. Smit. Over the past few quarters, we've seen your data net adds accelerate on a year-over-year basis, and the phone numbers net adds decelerate. I was just wondering. Is that a function of overt changes on your part in terms of marketing spend and product positioning or would you describe that as something organic that's just happening in the marketplace?

Well, I think it's a little bit of both, Jason. HSI continues to grow, and we're over indexing versus last year, and I think that's primarily organic and that we have a superior product. With regards to the phone product, CDV, that has -- we did a really strong back-to-school campaign, and we're refocused more on single and double products, and we were less focused on Triple Play, and I think it showed in the video and the HSD results. As we were still indexing, if you look at year-to-date, 80% versus last year. So the indexing is still in line, and as we go into the fourth quarter, we'll return more to our normal marketing program, which is primarily focused on Triple Play.

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

Here's my really long one question. In SME, the growth was excellent, but it's a little bit slower. and I'm wondering if you could just talk about what's actually going on there because CapEx was lower as well. Over the last few quarters, it's slowed down. And can you give us the margin in that business? And then, Mike, on the buyback, I know you said you're going to address the buyback in the next few months. But with only $490 million less, it looks like you're going to run through the buyback before year-end. And I'm just wondering if you could say anything about the timing. And then finally, could you give us any color on advertising in Cable and broadcasting for the fourth quarter?

Okay, we have 3 questions there, Jessica. On the SME side, actually I wouldn't read anything into that at all. It's going at 39% for the quarter, obviously a bit higher for the year but that included some of the comps from last year where we had the acquisition of CIMCO and NGT. So that business has great momentum, and we're excited about it and investing in it. And that's particularly on the small part. On the medium side, we continue to invest pretty heavily as well. With regards to margin, it is an accretive margin. I've said publicly that the small side of that business right now has accretive margins for us, and we're very pleased with how that business is being managed. You're right on the buyback. We'll exhaust the authorization by the end of the year. We have just under $500 million left. So we will go through that by year-end. And then as I've mentioned before, we will sit down with our board and go through what we think the appropriate buyback and dividend will be for 2012. We feel good about that as well. You want to -- who wants to hit the advertising side? Steve?

Advertising business continues to be strong, stronger on the national side than the local side but continues to be strong. We're 90% sold out for the Super Bowl. We're seeing lots of demand for all sorts of cable and broadcast advertising, so that still continues to be a bright spot.

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

Maybe just one question on the NBC side. You called out earlier this year a couple of hundred million in additional investment. There is news last week around major investments in NBC-owned stations. I'm wondering should we be thinking here about another round of additional investing and anything you'd sort of call out around that.

The short answer on the owned stations side is, it's not a lot of money, and some of that money will come back. We've actually got some nice ratings momentum in some of the markets, including New York City. But the numbers are not big. I think the total investment we're talking about in terms of incremental head is in the $20 million, $30 million a year range.

The next question comes from the line of Craig Moffett with Bernstein. Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division: A question for Neil. Can you just update us a bit on where we are with Xcalibur and what we'll see in the next quarter from Xcalibur rollouts, particularly with the new interface and how you're positioning it? Because it requires a new set-top box, as I understand it, will it be positioned as a premium service and pricing and what have you?

Craig, so as you know, Xcalibur is our next-gen IP service, and it provides a better UI and access to a lot of different interactive services. We're testing down in Augusta right now, and we've been very pleased with the test results. I think in terms of rollout, we're currently working on a rollout. We'll go to a major market in the first half of the year, and then we'll be rolling it out on a more widespread basis during the year. And we'll be able to roll out Xcalibur across a variety of platforms including the Parker box that we have in Augusta, additional high-end set-top boxes and other COM devices, customer-owned and maintained devices, such as the Xbox and other devices. So from a positioning perspective, we're not quite clear how we want to position it yet. We're working on that into what customers it'll go and the pricing and whatnot. So that's work in progress.

One of the most -- it's Brian. One of the most significant aspects that appeals to us, and we're seeing that as we tweak it, is having the guide be on -- in the cloud and being able to move quickly and make changes and tweaks and modifications and create new apps. So we have an app we're testing. For instance, we saw yesterday within the sports area where you get just instant access to all the various games on television, and you know what's happening right now and you can change or just get updates or little video snippets, variety of things that also work on the iPad shortly. And so very, very exciting for the road map of innovation when you move the brains out of the box into the cloud.

The next question comes from the line of Doug Mitchelson with Deutsche Bank.

Brian, you highlighted this is the fourth quarter in a row of subscriber improvements. I think this is the best year-over-year video improvement since 2003, which is remarkable. So my one multipart question here is whether the momentum can continue for fifth quarter and beyond. And so Neil, on your side, are the biggest improvements behind us because you leveraged All-Digital? And specifically, what are you seeing in the December quarter so far? And then Michael, sort of same concept. You've had terrific margin expansion this year. Is that something that can continue? Or are we sort of rebased going to All-Digital

Doug, from a video perspective, we've been pleased with the results. I think it's based on a number of different factors. One is, I think, we're competing with better products. When the platforms were extended, with DOCSIS and All-Digital and CCDN, we're able to have better content, more content, better guides and XFINITY TV apps, which has now been downloaded 3.3 million times, as Brian mentioned. I think we're improving our customer service from both the reliability and convenience perspective. We're offering more customer service features online, for example. I think we've improved our retention and our focus there. We're doing better customer roll-offs, and I've been really proud of our field teams and how they're servicing the customer better. And I think our marketing investments have paid off. We increased marketing this quarter. It was very targeted, and the XFINITY brand is now taking stronghold. Non-customer consideration is up over 45%. So I believe that a lot of those investments are sustainable as it pertains to the actual subs themselves. We're pleased with the initial results. It's very early in the quarter to tell, but we'll keep focusing on it and offering new products and services on our video business.

I'll take the margin question, Doug. The team has done a great job on margin improvement. As you can see, we're up 60 basis points for the quarter, as well as 60 basis points for the year. There's always some positives, some negatives. Some positives are we have improving product mix, which, as I said, business services and High-Speed Data and phone are certainly accretive. We also, as Neil has mentioned, are gaining real efficiencies in the business. So improving customer service in other areas is really actually helping on the operating cost, and that's been great results. We do have some negatives. Programming costs are a challenge. We continue to focus on that. But also we're making some real investment, whether it be marketing, as Neil just mentioned, or new services like we're doing a lot more in the midsize, where we're making some real investment. We're launching security, where we're doing some real investment. We're -- Xcalibur, we just talked about as well. So I feel pretty good about the margin. I think the team's done a great job, and I would look, hopefully, we can keep pretty stable margins.

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

Maybe a question for Michael. On the -- you had some constructive comments on CapEx. But now at the end of the DOCSIS 3.0 and the All-Digital rollouts, can you shift some CapEx into new priorities? For instance, can you spend more in commercial and induce the growth rates there? And maybe just the benefits you've been seeing in CPE sort of start to flatten out or maybe go away with the rollout of the new boxes with Xcalibur.

Well, one thing I want to make perfectly clear -- Neil, can jump in -- is I don't think we are "robbing from Peter to pay Paul" at all. I think we're investing a meaningful amount in new services like business services on the medium side. So I think we're being pretty aggressive with how we're funding those opportunities or security or Xcalibur or other kinds of areas. When you think about CapEx overall, I think, right now, we're just about 12.5% year-to-date with regards to our capital intensity, and I think as we enter the fourth quarter and go into 2012, we have a pretty good shot of bringing that intensity down a bit, while still being pretty aggressive of investing in areas where we think are terrific growth opportunities that have high ROI. So capital has been a focus of ours, and I think the team's done a great job of investing smartly in -- DOCSIS 3.0 and the All-Digital project are just great examples of terrific investments for us.

Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Just one clarification and an actual question. Michael, on the accounting -- acquisition accounting revisions, I know you mentioned those are noncash. Are those just true-ups of purchase price accounting that you have to run through the income statement and then we're sort of done? Or is that something that you think is going to flow through?

You're right. It is primarily all purchase price accounting adjustment, so it is noncash. It does go through the P&L. That's one of the reasons why we sort of showed you the adjusted operating cash flow. Because its noncash, it really doesn't impact the year-over-year performance. So we wanted to show you, and you can look at Table 6 in our press release that really articulates what those numbers look like, but -- to give you accurate comparisons. But we're pretty much done with purchase price accounting. So we hopefully won't see anymore meaningful numbers going through the P&L.

Our next question comes from the line of Stefan Anninger with Credit Suisse. Stefan Anninger - Crédit Suisse AG, Research Division: Could you expand a bit on your HSD net adds and what proportion are coming as naked HSD subs versus bundled subs? Would it be fair to assume that naked HSD subs as a proportion of total HSD gross adds is growing? And given that, what are your longer-term plans with respect to pricing and packaging in naked HSD as it gets incrementally tougher to grab share from DSL, as maybe the low hanging fruit within the DSL base goes away?

Stefan, this is Neil. HSD has been a great product for us, and I think we are successfully targeting DSL homes and taking share there because it is a better product. Our HSD-only subs as a percent of the HSD total are in the range of 10% to 15%. They've grown year-over-year, call it a couple of points. We will continue to offer -- go after that segment, and we'll use it also with an -- we have an HSD leading offer, within it combines HSD with either video or in some cases, phone. And that also has been a successful product for us. We're kind of -- we don't have a predetermined marketing plan. We kind of go with what sells best and what the consumers want, and we'll continue to adjust our pricing and packaging in that way.

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

If you could address My Choice TV a little bit. First of all, what sort of results you've seen in the rollout thus far? And also, what sort of ability do you have to roll it out wider, and what margin impact would that have? Would it be a traditional scenario if the customer doesn't take a bundle of channels he wouldn't be paying programming costs on the channels? Or would that negatively impact margins?

James, well, as you know, we're always testing new packaging and pricing. My TV Choice being one of the alternatives. We're testing in at about 3 different markets. It's constructed so that you have a get started package with 40 to 50 channels, and then it get started plus that has that, plus sports. And then people can add on $10 theme packs, such as kids or sports or news and entertainment. We've seen -- I think its very early to tell in terms of the test results, and all these things are done within the parameters of our existing programming deals, and I think the concept there was to offer consumers more choice, and I think they're responding well to that, but it's very early to tell.

Our next question comes from the line of Marci Ryvicker with Wells Fargo.

I just have a clarification. I think a question was asked on the $300 million investment in the cable and broadcast nets that you mentioned at the beginning of this year. Are you still comfortable with this level? And can you just talk about your progress with that so far?

Well, I think we're still sorting through investment opportunities and finding a lot of places where we think the business requires investment. I think what we tried to signal to people is that we thought this would be a flattish year in terms of operating cash flow, and that we would be making those investments in 2011 and 2012. The obvious question is, are you going to make a lot more? I think once you've got yourself at a level where you're making the right amount of investment in certain businesses like prime time and the cable channels, you don't need to exceed that level. So I think we're where we thought we would be. I don't think there's a huge amount of incremental investment in cable and broadcast. But on the other hand, we're still finding areas where we think there are very good ROI, solid investments that we don't want to box ourselves in. It's only been 9 months since we arrived and started making these investments. So I don't think there is a material increase. But on the other hand, when we find something that we think is worth investing in, and I think the World Cup soccer rights for Telemundo were a perfect example. If you're going to be in the business of Hispanic television, there are 2 major players. We have 20% market share, Univision has 80%. The premier property is World Cup soccer, and we think we structured a very attractive long-term deal to get those rights for Telemundo and certainly don't want to box ourselves into not being able to make those investments when they present themselves.

Our next question comes from the line of Vijay Jayant with ISI Group.

A question for Neil. As you've done all these investments on All-Digital and DOCSIS 3.0, can you talk about the evolution of the video plan from an MPEG to an IP network and really the benefits and the costs of doing that and really how long could we see that evolution happen?

Vijay, well, as you referred to we've extended both All-Digital and DOCSIS 3.0, as well as our CCDN investments, and that's been really positive from both a capacity perspective, as well as the channel perspective. Concerning IP, we currently distribute all of our VOD and our national linear TV in IP over the backbone. We then convert it to MPEG, transport it to our regional hubs so that our services are compatible with the existing deployed set-top boxes. I think the other thing that's happened is all of our back-end systems we've converted to Web services architecture. So we can do things like the iPad app and deploy new apps very quickly and easily. So we've made a lot of currently existing investments. I think over time, using IP, there'll be significant benefits as we gradually migrate customers over the IP platform. It's more efficient, and we can innovate faster, as Brian referred to earlier. So that's the way to think of it. A lot of the investments have been made, and we'll gradually migrate to IP over time. So I think it's a great platform. It's efficient, and it enables us to innovate faster.

Our next question comes from the line of Frank Louthan with Raymond James. Frank G. Louthan - Raymond James & Associates, Inc., Research Division: Can you give us a little more color on the SME part of the business? You said you've increased some of the marketing spend. Was that also in the SME side? And what's the outlook for sales reps that you're hiring for the next 12 months? Are you pretty full there? Or are you looking to expand the sales force?

Frank, we did spend higher in marketing in the business services side. As Michael referred to with CapEx, where we see growth, we'll invest. And so we were happy to invest more in marketing. The small and medium businesses doing very well, and we're just getting into the midsize business, both with Metro-E and PRI, our hosted voice. From a hiring perspective, we hired up pretty significantly already to service the midsize market. We're seeing revenue, which will become more material in '12 and '13. We'll continue to invest in that growth. We think both markets, the small and medium, as well as the midsize are great opportunities. And we've got a great team there, who's growing the business in good strides. And we continue -- I think we'll continue to see the growth in that business.

Next question comes from the line of Phil Cusick with JPMorgan. Philip Cusick - JP Morgan Chase & Co, Research Division: Can you talk a little bit about programming costs? We continue to see this rising. You talked about the sort of expecting that to continue from here. But what do you see going forward? Are we sort of moving through this retrans agreements? And is there any change in the direction either up or down over the next sort of year or so?

Well, I think in the quarter, it's hard to measure quarter-by-quarter as a percentage -- not to measure but to kind of draw a conclusion from that because the contracts are kind of firm in one quarter and begin in another. So I think we will continue to see programming costs rise, as Michael referred to. We're looking at the high single-digit increases, that would be including retrans. And we'll continue to manage them as best we can. I think that overall, our focus is continuing to leverage that programming in the most effective manner we can to offer great services and a great experience to our customers so they don't have to reason to go anywhere else.

The final question comes from the line of Tom Eagan with Collins Stewart.

I have a question on voice. Given that the lackluster results we've seen from other cable operators, there's been considerable concern about the prospects of this business. I was wondering if you could comment on how you guys determine what the best value is for this business. Is it you keep the price where it is and to maybe grow high subscribers? Or is it something else?

Well, I think we look at the whole experience for our customers and the best value for our customers. It's always a balance of rate and volume, and that's kind of part of what we do in any subscription business. And we look at how it plays within the overall bundle, which has still been a very effective value proposition as Triple Play churn comes down, so we feel strongly about continuing to offer voice and include that in a package. I think we're going to continue to invest in that product. We'll have some great new features and functionality coming out in the next quarter or 2. So voice will be a mainstay of our offering, and we'll continue to balance rate and volume.

Thank you. 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, November 9 at midnight Eastern Time. The dial-in number is (800) 585-8367, as well as (855) 859-2056, and the conference ID number is 12595426. The 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.