Comcast Corporation (CMCSA) Q2 2012 Earnings Report, Transcript and Summary

Douglas Mitchelson – Deutsche Bank Securities Jason Armstrong – Goldman Sachs Jessica Reif Cohen – Bank of America Merrill Lynch Craig Moffett – Sanford Bernstein Jason Bazinet – Citi Investment Research John Hodulik – UBS Benjamin Swinburne – Morgan Stanley James Ratcliffe – Barclays Stefan Anninger – Credit Suisse Marci Ryvicker – Wells Fargo Securities, LLC

Welcome to Comcast’s second quarter earnings conference call. At this time all participants are in a listen only mode. 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.

Welcome everyone to our second quarter earnings call. Joining me on the call here in Philadelphia is Michael Angelakis and joining us from London are Brian Roberts, 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 Number Two which contains our Safe Harbor disclaimer and remind you that this conference call may include forward looking statements such as certain risks and uncertainties. In addition, in this call we will refer to certain non-GAAP financial measures. Please refer to our 8K for the reconciliation of non-GAAP financial measures to GAAP. With that, let me now turn Brian Roberts for his comments. BB I’m here in London and this is indeed a most exciting time for all parts of the company Comcast and NBCUniversal and we’re off to a fantastic start with the Olympics. At NBC we’re achieving record breaking ratings and as you know we have significantly expanded our coverage so viewers have more choices than ever to watch the Olympics across nine broadcasting cable channels, on TV, and online in English and in Spanish. If you’re a Comcast Cable custom we’re making it available every minute, every medal, on every screen, really making TV everywhere a reality for our customers, many for the first time. We’re seeing record numbers on every channel, on demand, on the Internet, and on mobile. This reality is a huge technical undertaking and I have to say I’m thrilled so far. I’m equally pleased to report solid operating results for the second quarter driven by another outstanding quarter in cable. With revenue and operating cash flow growth of about 6% and cable free cash flow of $1.3…

Let me begin by briefly reviewing our consolidated financial results starting on Slide Four. Overall we are pleased with our second quarter results which reflects sustainable and profitable growth as well as the fundamental strength of our core businesses. Second quarter consolidated revenue increased 6.1% to $15.2 billion and operating cash flow increased 4.2% to $5 billion reflecting strong organic growth in our cable business as well as consolidating the remaining 50% of the Universal Orlando as of July 1, 2011. Free cash flow for the quarter, which excludes any impact of the economic stimulus increased just over 2% to $1.6 billion reflecting growth in consolidated operating cash flow and improvements in working capital partially offset by higher taxes as well as higher capitalized software and intangible asset expenditures. Our Cable Communications in corporate and other areas accounted for $1.3 billion or 86% of total free cash flow and NBCUniversal contributed $218 million or 14% of consolidated free cash flow. Free cash flow per share increased approximately 6% to $0.57 per share. Earnings per share for the second quarter grew 35% to $0.50 per share versus $0.37 per share in the second quarter of 2011. Excluding a $137 million non-cash non-recurring income tax charge in the second quarter of last year, our normalized EPS increased 19% in the second quarter. Now, let’s take a look at proforma results of our Cable Communications and NBCUniversal businesses on Slide Five. As you know, we believe the proforma presentation provides a more meaningful comparison of the operating performance of the businesses. Therefore, proforma results are presented as if NBCUniversal and the Universal Orlando transaction were both effective on January 1, 2010. For the second quarter 2012, consolidated proforma revenue increased 3.5% to $15.2 billion and consolidated proforma operating cash flow increased 1% to…

(Operator Instructions) Your first question comes from Douglas Mitchelson – Deutsche Bank Securities. Douglas Mitchelson – Deutsche Bank Securities: Two if I may, for Neil video subscription revenues accelerated the past three quarters even as video subscriber losses have improved I think for seven quarters now so it appears the improvement is not coming from discounting. Would you say that the competitive environment is getting better, would you say this is due to better company execution, and has the low hanging fruit being captured with regards to improving the video business? If not, what’s the top execution efforts that you think will impact the business going forward? For Michael, it appears NBC will be able to undertake repurchasing GE’s stake in 2014 with almost just cash on hand given the A&E deal. You’ve given us some debt level ranges in the past for the company overall. Since you were purchasing the lower end of that range should investors expect repurchases and dividends to move up to 100% or more of cable free cash flow next year to the extent you maintain the leverage at the low end of your target range?

I think on the video side it really comes down to better execution. I think we’re executing better on the product side, we’re getting better product out there whether it’s X1 or cross platform, or the apps. I think on the service side we still have plenty of room for improvement but we’re getting more self service done, we’re getting reduced call time windows, we’re doing more self installs, repeat service levels down, and I think we’re targeting our marketing better and developing more channels whether it’s the online channel, or the retention channel, or the [inaudible] channel. I think that we’re developing or beefing up our channels. I don’t think the competitive environment is materially changed one way or another. I mean, I’d like to see housing sort of come back a little bit and the economy come back but I don’t think there have been material changes in the quarter.

I think we’re going right according to plan actually. I think we’re hopeful we can get the A&E transaction closed and as I mentioned, that cash will stay within NBCUniversal as NBCUniversal prepares for that redemption. On the Comcast Cable side, the real goal is to, as Neil just said, to deliver great operating results that convert to meaningful free cash flow. And as we are this year, we are providing the majority of our cable free cash flow back to shareholders in the form of dividends and buybacks. We’re now into the eight month of the year in the fourth quarter and early part of next year we’ll take a look at our return of capital strategy for 2013 which obviously again, will include dividends and buybacks and we’ll evaluate exactly where we are. But we’re executing really well on the operating side and I think we’re generating the free cash flow had hoped to and we’ve got a couple of nice benefits with the sale of the A&E asset as well as hopefully the close of the Spectrum Co asset sometime later this year. Douglas Mitchelson – Deutsche Bank Securities: Would you say that your leverage target is still in that 2.0 to 2.5 times range?

Yes. As I said, we want to keep a conservative balance sheet and don’t really look at the balance sheet completely connected to a return of capital because really return of capital to us is the payout ratio of free cash flow really in both pools. So on the NBC pool of cash that’s really a indirect equity redemption and on the free cash flow on Comcast Cable, that majority goes back to shareholders. So we do want to stay at sort of the low end of that range, that’s where our head is at, but don’t want to really connect too much our leverage with our return of capital. We really look at return of capital much more from a free cash flow payout ratio standpoint.

Your next question comes from Jason Armstrong – Goldman Sachs. Jason Armstrong – Goldman Sachs: Maybe a question and a clarification. The question is we’ve seen recent M&A in cable distribution at very healthy multiples. I guess that services sort of a couple of things, first as the largest synergistic buyer you could, I think, generate more accretion from these deals than the legacy buyers. Was there interest there on your part? Maybe help us think through that. Then I guess the second question that springs up is it highlights how inexpensive your stock is relative to at least what the transaction market is implying. Does this point you towards accelerating buyback activity? Then second just a clarification on the content licensing agreements, can you quantify the benefit you received last year maybe across the categories cable, broadcast, and film?

Why don’t we just go through there were three transactions. Obviously, we do make it a goal to look at everything. We think that’s important to really evaluate all the assets that are out there and I think we’re smarter investors and more educated so that if we do see something we like and it makes sense. The price was a pretty healthy price and we have a pretty high bar on our IRR as well as we look at stock buy backs and other competing uses for capital. We did not aggressively pursue those, we thought the price was pretty high in comparison to other areas we could utilize our cash. It has always been sometimes a spread between private and public multiples so I think we have a plan where on buying back our stock we’ve been really consistent in buying back our stock and have increased our buyback pretty consistently over the last years. So I’m not sure we’re going to quote accelerate it based on several private market deals. I think buying back 1.5 year-to-date is pretty good and significantly more than we did last year. Our goal is to continue to buyback the stock when we think it’s undervalued and be pretty aggressive on our return to capital strategy overall. Jason Armstrong – Goldman Sachs: On the content licensing?

We did have a content licensing deal last year in the second quarter, it was signed in the second quarter. Obviously, those dollars did not flow into the second quarter of this year so that had impact primarily in cable networks and broadcasting for the most part. Jason Armstrong – Goldman Sachs: Can you quantify what the benefit was last year so we know sort of what the headwind in Q2 12?

You can really look at the content licensing side. In our trending schedule it gives you some directional area but I don’t think we want to go into specifics of what contracts were worth. I think we’re trying to be as transparent as we can on our trending schedules and it gives you some indicant of where content licensing was in the second quarter of 2011 versus now. I don’t think it’s appropriate for us to go into real specifics on dollars and cents.

Your next question comes from Jessica Reif Cohen – Bank of America Merrill Lynch. Jessica Reif Cohen – Bank of America Merrill Lynch: Two questions, on the Olympics it’s obviously a really great promotional platform that seems to be going as well if not better than excepted. Can you just talk to us about how you expect to benefit both short and longer term? And is it all beneficial to NBCUniversal or is there any benefits for the cable systems?

Let me start on the Olympics and we’re five days into a 17 day event so it’s by no means concluded at this point but we’re off to a very successful start. The first point I’d make is that even before the Olympics started this year we were over $100 million ahead of our ad sales goal. So there was a lot of demand I think for the time and we booked over $100 million more than our plan and more than we ever had booked before. Now that the Olympics have started the second positive variance if you will is in ratings which are way up versus forecast. We thought when we did the forecast for London that Beijing was sort of an A typical watermark. Beijing had some very interesting characteristics. Michel Phelps swam live during prime time, gymnastics was live, and so what we did was we went and looked at Athens and really budgeted closer to Athens than Beijing. The reality is that if you take the first five days of London and you compare them versus Beijing we projected to be down 20% versus Beijing and we’re actually up 9%. The reality is we’re up versus Athens 26% and we’re about 30% higher than our estimate. So really rating success pretty much across the board which all of you who follow this fragmented media landscape knows how A typical that is. We think that is because of the way we promoted the Olympics during the 100 days leading up to the Olympics. We think a lot of it is due to all of the effort inside NBC Universal which we call Symphony and also things that we’ve done with Comcast Cable. We also think that for the first time we have a strategy that embraces…

I think so. I think first of all given the trends, we stand a chance to make money on future Olympics, we’ll see. Obviously, the economy has a piece in that but I believe we made one of the biggest bets we’ve ever made in terms of the right deal we did for the Olympics a little over a year ago and we feel very good because all the numbers that I just mentioned to you are significantly better than we projected in our deal. As the world gets increasingly fragmented and it’s increasingly hard to amass the kind of audiences we’re amassing. 25 ratings at 11 o’clock at night, those types of audiences are so unique that I think over time they’re going to prove to be more and more valuable. At the same time, any of you who’ve watched our coverage on the NBC sports channel, you can see that we’re basically wall-to-wall Olympics and getting the kinds of ratings on our sports cable channel that we’ve never seen before which is going to make that more valuable both to advertisers and to our affiliates. I think we feel great about what London is showing us the Olympics are capable of doing and long term we’re delighted to have the asset. Jessica Reif Cohen – Bank of America Merrill Lynch: My second question was more on the cable side. Can you discuss what you expect with the Verizon JV? I mean, what would be considered disappointing and what would be considered a really big positive?

I think the JV is going very well. We’re launched in about 21 markets, 263 stores, it’s been a terrific partnership. From a regulatory perspective we anticipate approval of transaction sometime at the end of Q3 or Q4 and we’ve been working very constructively with the regulatory agencies on this and we look forward to a speedy and destructive approval.

Let me just add on to what Steve said. Obviously, all the data is excellent coming out of the Olympics and we’re really pleased with everything that’s going on. Getting a little granular just so folks remember, this was a legacy contract in terms of the Olympics and through purchase accounting the losses were eliminated, the losses that we expected out of this contract. So now that we’re over performing a bit, in the third quarter we’ll have a slight benefit related to the Olympics’ performance in our third quarter P&L which obviously is a nice positive to have compared to the previous Olympics that NBC Universal had. In addition, the way the cash flows flow, they’re a little bit different so we will have a negative impact in free cash flow in the third quarter. But really, everything has just gone great and we’re very pleased. I just wanted to make sure folks understand a little of those finer details.

Your next question comes from Craig Moffett – Sanford Bernstein. Craig Moffett – Sanford Bernstein: Two quick questions, given the incremental cash that comes in from A&E, does that change your calculus at all as to whether or not you would choose to buy in the last piece of NBC in 2014 as opposed to 2017? Then for Neil, just given how important it is I wonder if you could give us any very early insights on the X1 rollout in Boston operationally in terms of marketing and retention and that sort of thing?

I’ll take the first one. Not really, I think you’ve got to take a little bit of a step back. We’ve been in a little bit of a cleanup mode in regards to NBC Universal. If you remember, just about a little over a year ago where we bought out the other 50% with Blackstone with regard to theme parks and paid $1 billion for that so now that we own 100% of the Orlando theme park that was sort of a concerted effort to sort of look at an entity that we had that was a great deal and we’re very pleased with it. Then you look at A&E where we owned 15.8%, decided to sell it. We’re very pleased with the price. Also recently announced was the MSMNBC.com transaction which was a 50/50 relationship with Microsoft which we bought in that other 50%. So we’re really in a little bit of a cleanup mode and I think that’s probably coming to an end. Does it influence our decision in 2014? I really don’t know, it’s two years away from now obviously a lot can happen then. We’re obviously pleased with how NBC Universal is progressing since we’ve owned it for about 18 months or so, so I think that’s going to be a decision we make in about two years and dependent on a variety of factors. But all good news in terms of we’re cleaning up some of the areas and I think we’re benefitting nicely from cleaning those up.

So far the X1 has been very well received in Boston. We’re marketing it to HD Triple Play customers. We’re launching during the Olympics our first marketing campaign targeted at acquisition. Existing customers will get the X1 as requested subject to a one time installation fee. Remember that right now we’re using the new X1 boxes but we’re going to be extending the X1 experience over to a high end set-top boxes as well. As Brian mentioned in the call, we’re going to be launching Atlanta this week and we’ll be launching five markets, major markets during the course of the year.

Your next question comes from Jason Bazinet – Citi Investment Research. Jason Bazinet – Citi Investment Research: I just have a question for Mr. Burke. A lot of the cable networks are investing more in original content but the aggregate ratings seem to have come under pressure sort of in the aggregate across the whole ecosystem and I was just wondering if you could share with us your thoughts on what might be going on? Do you view it as something temporary and a function of the content that’s out there or something that may have more duration to it?

I think some of it is temporary or onetime. Nielsen did an adjustment of the universe which I think most people would say was a one time -2% to -3% in terms of ratings. But I think a lot of cable channels are making very significant investments in new programming. There’s a lot of competition a lot of fragmentation out there, a lot of DVR usage. I think there’s no question in terms of ratings it’s a tougher environment than it was a year ago. That having been said, we still love the cable channel business. If you think about it, it’s a dual revenue stream. One of the revenue streams is completely unaffected by ratings, that being the affiliates fees. Neil doesn’t like this part of the business but the affiliate fee growth I think in the industry is probably about 10%. We were 7% during the quarter but if roughly have your revenues are growing somewhere high single digits or double digits and then on the other side you’ve got advertising where in the recent up front, the cable up front I think our cable channels averaged high single digits and we had USA and Bravo I think on a CPM basis leading the market. If you put that all together it’s a really good business. That having been said, it’s harder to get ratings today than it was a year or two ago.

Your next question comes from John Hodulik – UBS. John Hodulik – UBS: Just a quick question, a follow up on the X1 rollout, do you expect to be able to get the X1 platform rolled out across the footprint by the end of ’13? Then you talked about a number of offsets from a cost standpoint from efficiency and other cost cutting as you rollout X1 and Xfinity Home. Do you expect any real sort of noticeable impact on margins or cable cap ex as this roll out proceeds?

The X1 we haven’t really finished our ’13 planning yet but it’s certainly the intent to roll it out broadly across the footprint. As I said earlier, it’s been a great product and the customer reset activities have been terrific so we’re going to roll it out more widely but we haven’t finished ’13 planning. In terms of efficiencies, we do see them across primarily the customer service side including the tax side and we’re taking real noise out of the business. We’ve reduced $8 million truck rolls over the last two years while we’ve increased RGUs $2.8 million. That’s an example of efficiencies. We think we’re going to do about a billion self service transactions this year. Michael mentioned that, whether it’s billing or FAQs or whatever. But I think from a margin perspective we look at them as being kind of steady over the course of the year.

Your next question comes from Benjamin Swinburne – Morgan Stanley. Benjamin Swinburne – Morgan Stanley: Just on the cash flow outlook I think on one of the slides you point out that you’ve returned about 64% to 65% of cable free cash to shareholders. As we look at the rest of the this year I’m imaging that the cash taxes will probably be a swing factor around to bring that sort of payout ratio higher towards closer to 100%? I just wanted to know if you had any sort of color on the cash tax outlook or maybe the stimulus for the full year now that we’re half way through? Then I just wanted to come back, Neil you mentioned the JVs with Verizon wireless and how well they’re going. The fact that you’ve moved forward with those should that lead us to the conclusion that the Spectrum sale and the commercial arrangements are really too different transactions and sort of two different strategies and not necessarily connected to each other? I know the FCC DOJ seemed to sort of be looking at them a little bit together but I’d love to get your perspective.

You’re right, as we look at sort of the second half of the year, as I mentioned in the comments, we will spend a little bit more on cap ex. I think we’ll end the year pretty flattish but if you look at where we are for the first half compared to last year and then you look at the whole of last year, we’ll spend a bit more in cap ex. In the second half of the year we will have some cash taxes and some working capital so I think the number in terms of our payout ratio will trend upwards towards when you look at the full year versus just the first six months. So we feel pretty good about it and it’s running a bit ahead of plan which we’re pleased with and we’ll see how the end of the year turns out but your directional comments are correct. BB Let me just jump in on that second Verizon Wireless question. Even though technically they’re two separate contracts we’ve always believed that the government is looking at it holistically. I stand by Neil’s hope that by the end of the third or early in the fourth quarter we could get both transactions completed and continue with the roll out.

Your next question comes from James Ratcliffe – Barclays. James Ratcliffe – Barclays: Two if I could, one to follow up on an earlier question, it does look like video ARPU accelerated Q-on-Q but [HSC] ARPU slowed a little bit. Is that any indication of something fundamental going on or is this an allocation issue within bundles? Secondly, any takeaways from the Google Fiber announcement and any indication that they’re looking into expanding into any of the Comcast markets?

I wouldn’t read anything into the [HSC] ARPU. I mean it grew 3% and we grew the [inaudible] at a healthy rate indexing at 108 so I wouldn’t read anything into that. Concerning the Google Fiber roll out we have about 65,000 customers in the Kansas City area. It’s not clear how significantly impacted that will be but clearly pulling fiber, building a fiber network is hard work and heavy lifting and we look forward to monitoring the results. BB I guess on a broader context on that last question, we don’t really know but it kind of seems like a bit of a laboratory and all along when we showed our billion bip second demo in Chicago we were kind of hoping that there would be applications that continue to need more and more broadband. That’s fundamentally a really good thing for us. Obviously, there’s going to be competition but we have a great network that has tremendous flexibility and capacity to offer more speeds than we offering today and we’re constantly hoping that new applications and needs develop and that will be really I think positive development if we can help that happen. If Google can be part of making that happen, it’s part of what I think they’re doing but I don’t know for sure.

Your next question comes from Stefan Anninger – Credit Suisse. Stefan Anninger – Credit Suisse: Two questions if possible, Michael you talked a little bit about the cap ex efficiencies that Comcast has been gleaning this year and I think you’ve done that for the last several quarters. Can you just talk a little bit more about those, maybe provide a bit more color? You talked about some of it on the CPE side. And then your longer term optimism around sort of continued efficiencies in the cap ex spending and what we might expect going forward. Then perhaps you could provide a little bit of color on how the local advertising trend are looking in the third quarter?

On the cap ex side really my hat is off to the team, I think they’ve done just a great job of really effectively managing cap ex and I would say at the same time really playing offense with regards to innovation. Just look at all the different products we’re talking about now compared to a year or two ago when we didn’t have that. So we’re bringing capital intensity down basically both in terms of percentage and dollars. There’s been a number of projects, some come and go, a couple of years ago we had DOCSIS 3.0 and then we had all digital, and now we’re spending some dollars on business services more aggressively. The reality is I think we’re hitting a stable sort of cap ex number. It may move up a little bit, it may move down a bit but when we look at a whole year capital plan we’re pretty much coming into I think, stability because we’re still investing in the network, as Brian said, to make sure we have the best network but we’re also investing in new product areas and service areas. I don’t think from a dollars stand point you’re going to see sort of that continuing trend down compared to several years ago. I think from a percentage of revenue standpoint I think we’re going to show some modest benefits in terms of that intensity. There’s a lot that goes into our capital expenditure plan at cable and I think they’re doing a great job at how we manage it. With regards to local, I think that we’re doing really well in local both on the NBC Universal side and on the Comcast Spotlight side. On the Comcast Spotlight side up about 4% and obviously we’re entering the political season. So the core business seems pretty stable, automotive has come back relatively nicely and obviously we’re going to benefit in third and fourth quarter with regards to political.

Your last question comes from Marci Ryvicker – Wells Fargo Securities, LLC. Marci Ryvicker – Wells Fargo Securities, LLC: Two questions, I think Q2 ARPU came in a little bit better than expected. Is it conceivable for ARPU to accelerate as you roll out home security, Skype, etc?

I think we were pleased with the ARPU, the lift this quarter at 8%. I think it’s too early to tell with the new products they’re just beginning to gain momentum, we’re just beginning to market them. Home security we’ve got rolled out to 95% of the footprint but it’s in the very early days. Certainly that’s the intent, we add more products on to our network and build ARPU over time but I think it’s too early to tell right now.

I’d just elaborate. Obviously, we’ve put on 400 to 500 basis points of new Triple Play customers. So last year we had 35% to 36% of our customers taking all three services. That number is now closer to 40%, that obviously helps with ARPU as well as all the event services that Neil mentioned. So overtime we’re hoping to continue to grow ARPU. Marci Ryvicker – Wells Fargo Securities, LLC: Then in high speed data, any feedback from subs with your move to the higher cap of 300 megs and the related data usage plans? BB As you know we announced two different flavors of plans. One was capacity linked with the tier that subs are buying into and two was just being able to buy blocks of capacity. Caps are gone. We raised the amount people could consume to 300 gigabytes as a base limit. So we have not announced the markets for the roll outs yet but I would expect something shortly.

There will be a replay available of today’s call starting at 12:30 pm eastern standard time. It will run through Wednesday August 8th at Midnight eastern standard time. The dial in number s 855-859-2056 and the conference ID number is 93213388. A recording of the conference call will also be available on the company’s website beginning at 12:30 pm today. This concludes today’s teleconference. Thank you for participating. You may all disconnect.