Comcast Corporation (CMCSA) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Comcast's Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded. I would 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 fourth quarter and full year 2011 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. 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. I'm delighted to begin 2012 with this first call. Just thinking back a year ago, we were closing the NBCUniversal deal. We were making major management changes, bringing Neil Smit to fully run Comcast Cable, Steve Burke was beginning his first year at NBCUniversal, and it was a really, really important year for 2011 that had a lot go well. I'm thrilled to tell you that I think virtually across the board, our 2011 performance, as you can see in these fourth quarter's results and throughout the year, is right where we had hoped to be, and in some cases substantially better. And based on all of that, we're very pleased today to be increasing our dividend by 44% to $0.65 per share on an annual basis and that our board has approved a new $6.5 billion stock buyback program under which we plan to increase our repurchases of stock by 40% to $3 billion this year. Now the way we come to those conclusions of the optimism and good feelings we have about the company is based on the financial results. So let me start with Cable, which had an outstanding year, capped by a great fourth quarter of improving customer metrics combined with healthy financial results. In the fourth quarter, Video customer losses declined to 17,000, our best quarterly Video performance in almost 5 years. And for the full year, we reduced Video customer losses by nearly 40%. We also added 336,000 High-Speed Internet customers in the quarter, a 15% increase and marked the sixth year in a row of adding more than 1 million high-speed data customers. I really believe these improvements are sustainable because they are the result of our scale and our intensified focus on service and innovation, all…

Thank you, Brian. We are very pleased with our fourth quarter and full year results for 2011, which reflect profitable growth and the fundamental strength of our businesses. Based on our confidence in the ongoing performance of the company and as Brian just mentioned, we are increasing our total return of capital to shareholders in 2012 by 45%. We'll address our financial strategy a bit later, but now let's discuss our business performance for 2011 in more detail. For the full year of 2011, consolidated revenue increased 47.2% to $55.8 billion, and operating cash flow increased 25.8% to $18.4 billion, reflecting strong organic growth in the 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 full year, which excludes the impact of the economic stimulus, increased 30.1% to $7 billion, primarily reflecting growth in operating cash flow, which includes NBCUniversal, and partially offset by increases in working capital, higher cash-paid interest, capital expenditures and intangible asset expenditures. Free cash flow per share increased 31.9% to $2.52 per share in 2011. For the year, our Cable free cash flow accounted for $5.2 billion or 75% of the total, while NBCUniversal contributed $1.8 billion or 25% of consolidated free cash flow. Earnings per share for the full year grew 16.3% to $1.50 per share from $1.29 per share in 2010. Excluding NBCUniversal transaction-related costs and other nonrecurring items, our EPS increased 20.6% to $1.58 compared to $1.31 in 2010. Please refer to Slide 5. Let's take a look at the pro forma results of our Cable and NBCUniversal businesses. Pro forma results are presented as if the NBCUniversal and the Universal Orlando transactions were both effective on January 1, 2010. We believe the…

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

[Operator Instructions] Our first question comes from Craig Moffett with Sanford Bernstein. Craig Moffett - Sanford C. Bernstein & Co., LLC., Research Division: I'm going to try to slip in 2, if I can. First, on the strength in Video subscribers, are you seeing that as a competitive issue, or are you starting to see some tailwind from new household formation recovery in your markets? And then secondly, if you could just update us on your Wi-Fi expansion and whether you're thinking about a voice-over-Wi-Fi service as part of that? And if so, how would you fill the MVNO component in order to fill in where you don't have Wi-Fi coverage?

Craig, this is Neil. I think that our Video results are more a competitive issue. I think we're focused on product innovation and better customer service, and I think we've seen kind of sustainable results from those 2 areas of focus. The other factor that I would mention is that the RBOC overbuild has flowed in 2011. It was about 1.1 million homes versus 2.5 million in 2010. We're getting more flexibility in our programming agreements, as you've seen, so we're offering more content to more devices. So we're staying focused on product innovation and better service, and more to come there. Concerning the Wi-Fi build-out, we built out Philly, parts of New Jersey and Delaware. We're pleased with the results. We have about 4,000 access points. We'll be building out more markets, but it will be primarily focused on data versus voice-over.

The next question comes from Jason Bazinet with Citi.

Just have a question for Mr. Burke. On the Cable Networks side of the business, it seemed like expenses over the first 3 quarters of the year were growing pretty significantly and you had margin compression, and the expense growth seemed to stop in the fourth quarter of this year with pretty significant margin expansion. Can you just help us, spring 2012, in terms of how we should think about the level of investment or harvesting that's going on in the Cable Networks division?

Steve, you want to take that, or Michael?

Why don't I take it? Sorry, Jason. You really can't look at the quarter-by-quarter for the Cable Networks. We've made meaningful investments in Cable Networks, really trying to build each of the franchises and build value for those particular channels. With regards to the first 3 quarters versus the fourth quarter, I really wouldn't focus on 1 quarter. I would really focus on the entire year and how we've invested in new series for different channels and how we've marketed those as well. As we look to 2012, we feel pretty good about what our investment level is. We'll continue to invest in certain areas where there's other channels that we think need some additional help. But it's not going to be material, and I think the cruising altitude that we have for investment in the Cable channels feels about right.

Your next question comes from Jessica Reif-Cohen with Bank of America Merrill Lynch.

I have maybe a clarification and then a separate question. Michael, on the capital returns, I mean obviously, a very solid number for 2012. I think everybody should be happy. But can you clarify your outlook for 2013? If we assume that the balance of the buyback, the $3.5 billion, is 2013, your leverage then goes back to the mid onetime level. So how should we think about that, given your leverage target of 2 to 2.5x?

So, Jessica, I really wouldn't look into 2013. I wouldn't look at the $6.5 billion authorization as a marker for 2013. We're very focused on 2012. And as we've said before, we're really looking at a financial strategy for each year separately. So the reason for the $6.5 billion is to provide us with flexibility. We obviously ran out our authorization in the fourth quarter of 2011, and we really want to have as much flexibility as we can. And then we'll obviously sit down with our board at the end of 2012, and we'll look at our financial strategy again with a pretty fresh look on both dividends and buybacks for 2013.

And then my question for all. On NBCU, clearly, there's a lot of upside in every division. I was just hoping you could -- Steve, could talk a little bit about where you see the biggest growth opportunities over the next 1 to 3 years. And on the Cable side, can Neil or Brian, anyone discuss what you're seeing in terms of early indications of -- from the Verizon joint venture in terms of marketing? And you mentioned new products. Can you elaborate?

Jessica, this is Steve. Just to start on NBCUniversal, we obviously think there are a lot of opportunities, but if you look at 2011, that was really a year of integrating the 2 companies, making sure we had the right people in place and starting to invest in some of the businesses that we thought had real opportunity. And our goal for 2011 was to make those investments but not have cash flow go backwards, and we accomplished that goal. As you look out into 2012 and 2013, we're going to start to hopefully see some of the seeds we planted there bear fruit. We think there's real opportunity in Broadcast. We've said the network is going to take us a number of years to turn around. We had a very good week. Last week, The Voice is one of the top shows in America and, we think, is a franchise that we can help rebuild the network on, but that is going to be a multi-year effort. We also think we can see some improvement in Film, where our Film business has not been doing well. We have a very strong slate in 2012. We think our management team in Film is doing a very good job, and the films that we've seen that will be coming out later this year, we're very optimistic about. Cable Networks are extremely strong from really strength to strength. We have 20 cable networks that are all doing quite well, and we look at those being the core of the company. But we have opportunity there as well. So we're very optimistic, but I also want to caution people that we're still in the early innings of the integration process, and I don't want to get ahead of ourselves in terms of how fast some of these opportunities are going to be realized.

Concerning the Verizon Wireless rollout, we've rolled out to 4 markets now. We're pleased with the results. We're learning. We're working together. They've been great partners. I think on that front, it's probably early to tell. Concerning new products, in addition to Verizon Wireless, we've got XFINITY Home, our Home Security product, which is going very well and we're rolling out to more markets; Signature Support, which is a higher-end service for customers who need more help; Wi-Fi was already mentioned when I responded to Craig's question; and then our Xcalibur product, our high-end video product which we're branding X1. So those are examples of a number of different products we're rolling out right now.

More On Demand and more -- the Disney agreement, with other agreements we've got in place and things that we're working on, I think TV Everywhere, whatever you want to brand it, we call it XFINITY, obviously, is you're going to see a lot of progress in 2012 on getting more content available to consumers on more devices than in any year in the company.

Your next question comes from John Hodulik with UBS.

Two real quick ones. Maybe first for Neil. Obviously, I think the few Video losses for the fourth quarter's a sort of great harbinger of things to come. I mean, you typically see about 100,000 improvements sequentially in the first quarter, suggesting we're sort of getting to the point where, looking out into 2012 here, you could see potentially subscriber growth, if you could just sort of comment on that. And then maybe for Michael, the $6.5 billion buyback, you're -- just from your answer to Jessica's question. A quick follow-up would be, how did the SpectrumCo cash factor into that? I mean obviously, you could see another $2 billion in cash come by the end of the year. Could that potentially boost 2012 buyback? Or is that why you did the bigger authorization, or is that something that's going to factor into the numbers as we look into 2013?

John, it's Neil. On the sub-growth question, I mean, as I said earlier, I think we're focused on product innovation and better customer service. I don't think we'll see growth in the first quarter, the quarter where we're taking rate increases, but we're going to stay focused on our priorities, which is really delivering more value to the customers. Michael?

Sure. With regards to SpectrumCo and the sale of the Spectrum, it's not incorporated in our financial strategy for 2012. Just want to make that clear. Obviously, we have to close the transaction, which our best guess is in the latter part of the year. So we will utilize that SpectrumCo cash as we think about and evaluate our 2013 return-to-capital strategy. Also, I just want to make sure the $2.3 billion is a pretax number. We have a gain that we have on that. But really, when we think about SpectrumCo, first is let's get the transaction closed. Given what we think the timing of it will be, it will probably be in our 2013 evaluation.

Your next question comes from Jason Armstrong with Goldman Sachs.

Maybe just a follow-up on capital allocation. As we thought about sort of the pacing through last year, the excess cash was devoted towards taking down debt as opposed to refinancing. Is that still sort of the framework to use for 2012? And then question on the programming cost outlook and just maybe some more granularity on the contributors to 2012 being at the higher end of the historical range.

Why don't I take the first one on capital allocation? The reality is there's really not going to be that much excess cash. When you think about NBCUniversal's free cash flow, 100% of that is really dedicated to, I would say, sort of indirect equity redemption over time with General Electric. And then when you think about Cable free cash flow, about 90%-plus of that will go to the buyback and the dividend. Obviously, we also have some taxes to pay related to the reversal of the benefits of the economic stimulus. So over time, our view is for 2012, we've got our balance sheet kind of where we want it to be, but there's not going to be really excess liquidity I think is a term you utilized.

Jason, this is Neil. Concerning the programming increases. I mean, the rates really fluctuate based on renewals an roll-offs. We project for 2012 increases to be in the mid- to high single-digits, probably at the higher end of that range. I think we're getting longer terms and more flexibility in our contracts to deliver what Brian mentioned earlier, which is more content across more devices. I think it's important to note that we've grown Video gross margin dollars on a per-sub basis as we've upgraded to higher levels of service and advanced services. So we're very focused on the business, and we really want to deliver more value to our customers by getting more flexibility in the rights.

The next question comes from Doug Mitchelson with Deutsche Bank.

A question for Michael or Neil on Cable margins for the year. Given the balance of innovation and investment against efficiency, should we think about the positive impact of political advertising offsetting the faster programming cost growth that's potentially in 2012, so maybe flattish overall Cable margins? And then I did want to follow up on Craig and John's question. I'm not sure in the answer to John's question you said this or not, Neil, but is 1Q '12 sort of for sub growth starting the way 4Q and 2011 ended, if that's a fair question?

I'll take the sub number, then I'll turn it over to Michael for the margin number. I mean, I think the way I described the first quarter is the trends that we're seeing seem to be sustainable. We've seen very strong response to our offers and we -- in the customer service and the increased value that we're delivering I think customers have responded well to. We've beefed up our channels, whether it's direct marketing or direct sales, and we're executing, I think, pretty well right now. But I think that while we won't grow, we'll be in a close range is the way I described the first quarter, and we're really focused on execution. Michael?

Yes. I'll take Cable margins. I think political advertising in 2012 will obviously help, but it's not really going to move our margins, given the size of political advertising versus the size of the overall business. Obviously, it's a benefit. With regards to 2012, don't want to give guidance, but I think we see a little bit of the same versus 2011 is -- the real headwind is on programming costs which you mentioned, but we're going to have some benefits related primarily to product mix. As you can see with high-speed data and with Voice and with Business Services, those are growing really nicely and accretive to margins. So I don't want to give any predictions on margin, but I think stable is a pretty good way to think about it.

The next question comes from Ben Swinburne with Morgan Stanley.

I have 2 and I wanted to come back to the Video business. Brian, maybe you or maybe Neil can comment on X1 or the Xcalibur rollout and put it into context for us. It seems like if you look back over the last 2 years, you've had some major innovations, like DOCSIS 3, Project Infinity, All-Digital. Where does X1 fit into all that? How much of the sort of an experience changer is this for the customer in 2012? How broad do you deploy it? And related to that, I want to just ask about the CapEx outlook maybe for Michael. Intangibles were up in the 2011 year. I think you had about $1 billion, and that might be related to software on the X1 platform. Does your comment about flat CapEx to sales in '12 include intangibles? Does that move that comment around at all? Just want to get a clarification there.

Okay, Ben, this is Brian. Let me maybe start, and, Neil, if you want, feel free, or Michael can answer that second question. My view is that in 2012, X1 is a beginning of a new way of communicating with the television device which is coming from the cloud, not solely from the box. But it will be in hundreds of thousands of homes. Obviously, that's not tens of millions -- that's not the big number for us. It will be in multiple markets, and we will be stable, and it will radically improve the experience, in my opinion, over time. But more importantly, it is creating the unlocking mechanism to future innovation, which will then reside on the best servers in the cloud that can be upgraded, state-of-the-art, without having to ever come back to your house and can be done quickly, not over years, but over weeks and months. Those UI changes and other things that we want to do as we create better search products and we have the need with more On Demand. And so I think it's got the same kind of long-term strategic implications that some of those other products you've mentioned. In 2012, it's really getting it commercialized in a number of key markets. Another part of the strategy is -- that this accomplishes, is the beginning of allowing us to get on to other devices. We obviously are not operating in a vacuum, and we are very cognizant of the exciting changes in the consumer electronics space. And we want to position our company to take advantage of the innovation, not trying to necessarily fight it and want to make it as simple for our customers as possible, so we have an agreement with Xbox. We're working with Samsung. We'll be working with others throughout the year, and I think our Comcast technology group is doing a super job of changing the way we historically look at how we deliver our products to consumers. And so getting things into the cloud out of the cable box will have broad implications over time, and 2012 is a year to make it happen and get it started.

So why don't I take the CapEx and software intangibles question? With regards to Cable CapEx, as I said in the remarks, Ben, I think that you'll see some trending downward in terms of intensity as a percentage of Cable revenue. So the team's done a phenomenal job of managing that. We're investing for growth in a lot of that, as Brian and Neil have mentioned on this call. So I really look at CapEx as trending slightly downward as a percentage of revenue and bringing that intensity a bit down. With regards to software and intangibles, one of the reasons for the increase is, obviously, NBCU now has added to that number and that free cash flow. But you've got to really look at 2 of them combined. As we've talked about and Brian mentioned just now, the Cable business is spending more on the software and areas in the cloud. That's an important investment for us. It allows Neil's team to really increase the speed of innovation, and I think we've got a pretty good number of what we're spending. That's a pretty stable number, sort of in the range. Also, NBCUniversal has been spending a bit on software and intangibles, and that's one of the reasons for the increase. So I think the number for all of 2011 that's in our press release is $954 million. I don't want to get too specific, but that's in the range.

The next question comes from James Ratcliffe with Barclays Capital.

Two quick ones, if I could, on the Cable business. First of all, can you talk a little bit about the relative performance you're seeing on HSI and areas where there -- you face fiber, quasi-fiber competition versus areas where you're going up against standard DSL? And secondly, I know it's early, but any reads or takeaways thus far from the My TV Choice deployments in terms of customer interest and where those customers are coming from?

James, this is Neil. I think generally speaking, we've performed much better in the DSL markets, and I think that's due to the billions of dollars of investment we've made in the plant. Capacity, we continue to increase, and we just got a -- what we feel is a better product versus DSL. I think generally speaking, in the fiber markets, we're competing well. They're aggressive competitors, as are we, and I think the bundle is a real value proposition. Concerning your second question, My TV Choice, we continue to look at packaging possibilities, and My TV Choice has been a -- we've discovered a lot and learned a lot from that rollout, and we'll continue to experiment. I think that we will look at how we can get more flexibility in packaging and delivering the right package to the right consumers, and that will be a component in that for this year.

The next question comes from Stefan Anninger with Crédit Suisse. Stefan Anninger - Crédit Suisse AG, Research Division: Could you comment on how you might evaluate the opportunity to buy out the portion of NBC you don't own today? Of course, your ability to buy out the entire stake in the near term will depend on what GE might decide to do. But assuming that GE would opt to redeem half its stake in 2014, maybe you could discuss how you would think about the opportunity, and would it simply depend on the price of the last, let's say, 25% of the JV you would purchase? Or is there more at work there?

Stefan, it's Michael. We're still pretty early days into this. We've owned NBCUniversal now for just over a year. We have really 2.5 years left before we would have to have that discussion, so obviously, we'll learn a lot more then. So we gave a lot of thought to how we structured the transaction with GE. We want to make sure that we retained our flexibility on our capital structure. We want to make sure we retained our flexibility on return of capital. We have, in our view, a pretty attractive carried interest. So I think we are very pleased with how NBCUniversal is performing and also the structure that we put in place with GE. So I really wouldn't want to front-run that. I think that we have to make a decision in a couple of years or 2.5 years, and then we'll revisit it then, and then we'll revisit it again in 6 years. So there's a long, long road here, and for us to alter the structure, I just don't see it right now.

The last question comes from Marci Ryvicker with Wells Fargo.

Neil, I just want to get a better understanding of your subscriber performance in the quarter. Do you feel that Comcast is gaining market share? Or is the entire pay-TV sector healthier? And then a follow-up to this. I know in the prepared remarks, there was mention of better churn. I'm just curious if the gross-adds part of the equation is also trending better.

Marci, I'll answer those in reverse. We had -- churn did improve for each of the 4 quarters on the year, and I think that was due to a few factors. One is, I think the field teams are just executing better on customer service, and they've done a nice job there. And I think that we've built up our retention focus as a channel. And so we're more focused on the offers and the destination pricing for customers who want to churn and for different reasons. I think concerning the -- whether we're gaining market share or not, I mean if we're losing subs, we're not gaining market share, and we don't like to lose subs. So our objective is to grow the business, and I think it's primarily due to the -- we're staying very focused on delivering more value, as Brian mentioned. And the second thing is we're just going to continue to improve customer service. I think we've built the foundation of it, and now we've got to continue to transform it. So I think we're going to continue to drive the business. We're very focused, and I think the teams are executing well. And that will be our focus going forward.

I just want to just add, Marci, that -- and maybe end the call on this thought, which is, Neil, I think a big part of it is your leadership -- I think the entire Cable team had an outstanding 2011, and part of it is the scale that we have, the ability to make the investments several years ago that are paying dividends now to try to have leading products that perhaps not everybody has. And so I begin -- I think this is several quarters in a row where we're trying to make that XFINITY experience the best in the market. And we may not get back to full growth on Video for a while, because we don't see housing growth at the moment, but someday, that's going to happen. But more importantly, I think this is just terrific execution by the Cable team and sets us up for 2012.

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, February 22 at midnight Eastern Time. The dial-in number is (855) 859-2056, and the conference ID number is 40671374. 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.