Comcast Corporation (CMCSA) Q3 2012 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, and welcome to Comcast Third 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 the 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’ve 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 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. :

Thanks Marlene and good morning everyone. I am really delighted to discuss today's results, because so far this year, on nearly every front we have made great progress. Our company as a whole has come together really well and we have strong financial performance and real operating momentum that we believe is sustainable. Let’s start with Cable where quarter-after-quarter the team is delivering under Neil Smit’s leadership outstanding results. In the third quarter, revenue growth was 7%, operating cash flow grew by 7.7% and Cable generated free cash flow of $1.1 billion. Every part of the Cable business showed strength with revenue increases in all of our residential products, in business services and in advertising. We also extended the trend of improving customer performance and believe we are making headway because of our scale and our focus on transforming the customer experience. Also, our previous investments are now driving product leadership and accelerating on our innovation. Michael will cover the Cable numbers in greater detail, but let me give you some highlights. In the third quarter, we reduced our video subscriber losses by 48,000, eight quarter in a row of improvement and we had the highest third quarter revenue growth in four years. Voice had another good quarter with a 123,000 net additions and high speed data net adds of 287,000 grew by almost 10% over last year. We continue to gain share by offering a superior product, one of the fastest in the market. With best-in-class products for mid-sized customers and solid momentum serving small business, we generated 34% growth in business service revenues and when you put it all together our core Cable revenue, excluding advertising grew by 6% the highest level of growth since the first quarter of 2009. I often like to speak about new products…

Thank you, Brian and good morning everyone. Let me begin by briefly reviewing our consolidated financial results on slide four. Overall, we are pleased with our third quarter results which reflect strong execution as well as sustainable and profitable growth in our business. For the third quarter, consolidated revenue increased 15.4% to $16.5 billion and operating cash flow increased 9.5% to $5 billion, reflecting healthy organic growth in our Cable business and solid performance at NBCUniversal. Free cash flow for the quarter, which excludes any impact of the economic stimulus, increased 8.8% to $1.5 billion reflecting growth in consolidated operating cash flow, partially offset by higher taxes and capital expenditures. Free cash flow per share increased 12% to $0.56 per share for the quarter, and increased 22% to $2.24 per share for the first nine months of this year. Earnings per share for the third quarter increased over 136% to $0.78 per share versus $0.33 per share in the third quarter of last year. Excluding gains related to the SpectrumCo transaction in the sale of NBCUniversal Entertainment Networks, our normalized earnings per share increased 39.4% to $0.46 in the third quarter. Year-to-date earnings per share increased 67% to $1.72 per share versus $1.03 per share in the prior year. Again, excluding the gains on the asset sales I just mentioned in the NBCUniversal transaction and related cost and other non-recurring items in the first nine months of last year, our normalized year-to-date earnings per share increased 27.3% to $1.40. Now let’s review the 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. The proforma results are necessary for year-to-date only and are presented as of NBCUniversal and…

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

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Jessica Reif Cohen with Bank of America Merrill Lynch.

I have two questions. The first one is, you guys are in very unique position to answer this question but where do you think viewers are going besides NBC? I mean you really should have the data given the set-top boxes are they going to Cable on-Demand TV, everywhere iPads and what are you doing about the measurements system?

Okay, Jessica. We spend a lot of time talking about that. I think the fact is that people are watching more video today than they ever have. The challenge for a company that's in the television business is that much of that viewing is in places that is neither measured nor monetized. Obviously, SVOD has an impact, internet streaming has an impact. All the variety of things that have happened due to technology have given people so many more options for viewing that they are viewing more but they are viewing far too often in my opinion in places that are neither measured nor currently monetized. So, one of our challenges overtime is to make sure that, that changes so that the ecosystem continues to remain healthy.

Okay, I guess the second question is more general for both sides. Given the really fabulous performance on both side of the house, could you just align, I mean you’ve executed so well what is the next few priorities for each side?

Jessica, I think on our side its heads down execution where we continue to rollout X1; we have got it in four markets now. We will be rolling out two other markets and major markets in the next couple of weeks. I think on the marketing side it’s continuing to refine our targeting of high value subscribers, and I think on the operation side it’s really to execute well on our service delivery. We are taking truck rolls out; we are taking noise out of the system. I think the division presidents are doing a great job of that. And finally, it’s continue to accelerate our new businesses, business service has been growing at 34%. We are getting into the mid-market now. XFINITY Home, the home security and automation product is that rolled out across all our markets now and we are going to continue accelerate on the new business side.

And in terms of NBCUniversal obviously we are doing better but we still have a lot of businesses that are underperforming by my standards by the standards that we all have for them. Broadcast I think is our biggest opportunity and the fact that NBC has been number one for the first four weeks of the season in demo, is a very positive start for the season for us and we want to continue that. But I think broadcast profitability could be dramatically higher than it is currently and hopefully we are going in the right direction on that. And then I think monetization across the company in terms of affiliate fees, advertising, CPMs we have a lot of upside and we have only been together with NBCUniversal now for 18 months, 20 months and we feel like we are on the right path but there is a long, long way to go.

Thanks, Jessica. Operator let's go the next question, please.

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

Thanks and good morning. maybe I will ask the of regulatory video subscriber question, if you continue this pace of year-over-year improvement in video subs, it would suggest to get actually had video subscribers in the fourth quarter, is there any reason for us to not expect that would you express any sort of caution around that statement? And then second question we saw, I think (inaudible) cable recently tweets some modem fees that was sort of the most recent pricing lever we’ve seen in the industry, what are the key levers they give you in today’s pricing across the different cable product categories, thanks?

Jason, on the video side, I think we are executing well on both the product side, the marketing side and the service side. We’ve rolled out new video services X1 is going out, it’s rolling over the today's market, as I mentioned. I think we have got a really nice balance between rate and volume. Our video rate was up 5% and our volume was we reduced losses by about 29%. So I think we stuck a nice balance there. I think on the [HSD] side, we took equipment charges, we had equipment charges last year, and we have been driving ARPU up for and to at least the eight sequential quarters its been, I think we struck a nice balance there what drives the rate increases right now is primarily speed, but we are driving additional services like a home security, and what not whether we get the video increases in the fourth quarter, I think we just have our head down, we are focusing on execution and block and tackle things.

Yeah, I just had a quick follow-up to that; last year in the first quarter there was a chance that we may go positive, we didn't because there were large price hikes implemented across a wider portion of base and I think people are expected, is there anything in fourth quarter whether its price hikes or other sort of activity that would tell your fourth quarter may have more video headwinds than we otherwise would expect?

Hey Jason, it’s Michael. There is really not any abnormal expectations in the fourth quarter, but I think as Neil said, the team is really just trying to make progress everyday and execute and I think we’ve done that over the last eight quarters in a row. So we’ll see how the fourth quarter comes up, we are optimistic, but we've got a lot of days left in the fourth quarter.

Thanks Jason, operator lets go to the next question please.

Our next question is from the line of Doug Mitchelson with Deutsche Bank.

Thanks, one for Michael and one for Neil. The question for Neil, I think along with Apple this was about the only conference call in TMT so far that's not mentioned macro issues and many businesses showed weakening during the quarter. How much of the 3Q sub improvements in video and data were driven by gross add improvements versus churn improvements. Is there any favorable or unfavorable market momentum, macro or competitive worth noting? And for Michael, I think Comcast is an unusual stretch where you are incented to raise your gross debt leverage maybe into the very high end of your target range given the very low cost of debt and the new issue market, but you are already in the $9 billion cash position. So I know you are asked this every quarter, but how do you think about the level of gross debt and gross debt leverage the company carries relative to the attractiveness of the debt markets right now? Thanks.

Hi Doug, it’s Neil. On the video side, I wouldn't say there are any unusual circumstances that would affect the video momentum going forward into the fourth quarter. The competitive market seems, there is no major change there and I think we are executing well on and we did recognized balance between rate and volume.

And there is nothing in terms of housing or in terms of the overall macro environment that you would call out.

No I think the housing is neither a headwind nor a tailwind, we haven't seen any material changes; we've seen slight housing improvements in some of our markets but overall nothing unusual there.

I'll take the second question Doug, regarding sort of cash balance and debt. Actually after the third quarter we actually did another bond issuance for NBCUniversal of approximately $2 billion and that cash has gone and is sitting on the NBCUniversal’s balance sheet. So as we sit here today our debt is about $41 billion give or take and our cash balance is approximately $11 billion. So we have taken advantage both on the Comcast side as well as on the NBC side of what we consider to be historically low interest rates and have issued two sets of bonds, $2.25 billion on the Comcast side and $2 billion on the NBCUniversal side. So we feel pretty good in terms of where we are and our growth target has really not changed between 2 and 2.5 times and we obviously look at total debt as well and that's where the balance is.

And I guess I was getting to Michael is this sort of a historic opportunity to take leverage up to an unusual level given the attractiveness of the new issue marketing, and given you are such a big company and such a big issue where its obviously a very interesting question for you.

I mean you do have to pay debt back. So I think from our standpoint the way we look at is we have roughly $11 billion of debt in cash, $6 billion of that, actually a little bit more than 6 is at NBCUniversal and really that cash is going to be utilized eventually for equity redemption, and on the Comcast side we do have a little bit more than $4 billion or so of which some of that is a Spectrum Co. proceeds and some of them is a recent bond issue. We have some maturities coming up in the end of this year and in the fourth quarter, but I think we feel pretty good that we've been opportunistic in terms of how we've accessed the capital markets and will continue to do so when we think rates are exceedingly attractive.

Our next question is from the line of Craig Moffett with Sanford Bernstein.

Two quick question if I could. Michael, first, lets just continue on with that same thought. Given the cash balance at NBC, can you talk about how you're thinking has evolved with respect to the timing of the equity redemption? And then, Neil and and/or Steve if you could just comment on the political ad environment for the fourth quarter, and how we can expect to see that roll through the cable business in particular but also at NBC?

Okay. Why don’t I take the first one in terms of the cash balance? We feel very good that we built up the liquidity and flexibility at NBCUniversal with regard to it's cash balance and 2014 will be here before we know it and we’ll evaluate it at that point in time. As Steve said, we're approximately 20 months in to managing and owning NBCUniversal and we have about this little bit more than that before we have to make a decision with regard to July of 2014. So we've clearly have some runway to evaluate it. We really like the structure we have. We were good partner, and partnership with GE is working out well. We have a lot of faith in the team and how NBCUniversal is performing. So we feel good that we're building up the financial flexibility and that we have the runway to make a decision in 2014.

Craig, on the political side we had a strong quarter in Q3 and I think that’s continues in to Q4, but the core business was also very healthy without political and the extra broadcast, we're still up 6%. Auto seems strong, and so I think the team is executing very well there and political remains strong going in to Q4.

Would you expect that (inaudible).

Universal as you know that most of the political spending is local. There was a little bit of national and then the local was very specific. Unfortunately we don’t know a television station in Ohio. Most of our own station markets did not have a lot of political because they were not battleground stakes.

Would you expect that the fourth quarter benefit would be larger than the third quarter benefit though and if so how much?

Yes I would expect it to be higher than the third quarter, but I wouldn’t venture to say how much.

Our next question is from the line of Jason Bazinet with Citi.

Just have a question for Mr. Burke. Given the trajectory what’s going on with cable network ratings on the linear side, do you mind just elaborating on your posture as we move into 2013 as it relates to generating smart revenues from your content. Is that something you think you will increase, stay flat or you will continue to pursue it in figure ways to sort of monetize your content?

Well as viewership trend have changed you have got to adjust the way you monetize your eyeballs, and I think one of the new major areas for any cable channel or broadcast channel can monetize their content is SVOD. In a way it’s a new form of the traditional syndication model where at a certain point after the shows have aired in their primary run on a broadcast for cable channel they have been sold into another market and SVOD has emerged as a major revenue source, and our belief is that revenue source will continue. It might change, different companies might do different things and new entrants might come into the market or leave the market, but it’s clearly there and something that you need to pay attention to and monetize. The same things happening with the internet and electronic sell through, I think both the television and the movie business there are more different ways to monetize your content today then ever, but in some way it is more complicated than ever, because viewers are watching more different screens.

And you feel like, you aggregate trade off today is still positive for you in terms of the net gains on the SVOD side and the erosion on the linear side?

I think so, and we will see. There is a chance that it will be lumpy. There will be new technologies that merged and there will be times when those technologies allow us to monetize in a way that’s greater and we have historically and then maybe other times that are less. But I think in general these new technologies will be great realizing the real base of our cable business is officially the fees we get from the MVPD community and the advertising.

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

Thanks, two questions the first, Comcast has signed a bunch of programming agreements and taking the Disney and scraps so I think there is one some discussions of News Corp either now or coming soon. It might be early but it could be very helpful if you can talk about your expectations for next year either in terms of total programming expense on the P&L programming expense growth per [side]. Second question is any more color on X1 how this is trending the number of boxes, the response from Boston and that will be very helpful?

Why don’t I take the programming question. I think the team has done a great job this year with our programming increases. They are certainly a bit lower then we had forecasted. However that being said we do expect a bit in the fourth quarter that number to increase a bit. As we think about ‘13, I think you are going to see some continue pressure, we do have lumpy contracts that come up and so forth. I don't want to get into too much detail, but I can just tell you I think the team has really done a great job. We have a lot more rights over many different platforms, and I think that probably in the fourth quarter and to a bit into 2013, we will see some additional pressure on programming and I think we will be able to manage through that.

On the X1 product we've rolled it out in four markets today, and we are going out to two more major markets the next couple of weeks. As I mentioned earlier, we’ve got very positive feedback so far where we've rolled it out. And I think the important thing to remember with the X1 is its more than just a guide, it’s the IP delivered video platform that enables us to adjust the product and upgrade different services in a very short time frame, and so it takes time to prep the markets and roll them out and train the service technicians but we are very encouraged by the initial rollout of the product.

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

Steve any more color on the flat ad sales of Cablenet this quarter? You mentioned ratings, but I didn’t know of the Olympics, so how you guys are allocating Olympic revenue might have hit that, is there's any comment on how Q4 looks. And then maybe a question for Brian, I think I asked this a couple of years ago and it didn't sound like you guys were that excited about this opportunity, but if you look at what Amazon was talking about last night and how much success they are having with Prime Video and what you can do on the technology front going out of market. I am just wondering if Comcast NBC combined thinks there's an opportunity to develop customer relationships outside of your historical cable footprint. It just seems like with your scale it doesn't have to be necessarily a full blown video business, but something that could actually expand your addressable market beyond your $50 million homes.

In terms of cable advertising as an accounting matter, some of the Olympics advertising that was on our cable channels was actually reflected with the Olympics in the broadcast segment and that depressed our advertising a little bit and then the quarter was not our strongest quarter in terms of cable ad sales.

On the other question you asked, I think we are very focused right now, we've just got so many business opportunities that are businesses we know and we think can perform better. Steve has talked about a few, Neil’s got a really good momentum and plan and we don't see the profitability or the logic to not want to extend the relationships in the markets we serve. Out of the markets we don't serve it’s not clear what the business opportunity for us is certainly from a content company just to Steve’s answer there are new businesses that emerge and we always want to take advantage of that by selling and partnering with those companies. So we are pretty focused. I think we like the trajectory we are on and the results I think speak for themselves.

Operator, let’s have the next question please.

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

Two if I could. First of all, can you walk us through what the impact if the Hockey Lockout goes on where we would see that in the numbers either both in the NBC and on the cable side and how like not so essentially it was loaned via NHL on the contract would be treated, and secondly on the business services side, has there been any change in your strategy toward CapEx and your willingness to build out to locations with less certainty about the revenues given that you have a larger base and hence more knowledge about it? Thanks.

I take the hockey one. We have a lot of businesses that are related to hockey whether its NBC Sports Network or whether it's the regional sports network or obviously Comcast SpectrumCo and in that net it’s immaterial to the whole company in terms of lockout but I can tell you we're in a pretty disappointing with regard to lockout. I don't think we should say a heck of a lot more James. I think that we're just hopeful that the ownership and their players can get together and get on with the season. So for me, corporate standpoint, the impact is immaterial. I think we're just hopeful that both sides will come to resolution and go back and play the game.

Yeah, James on the businesses services side, our slots in terms of build out of our network to address the opportunities hasn’t really changed that much. We're seeing strong growth on this small business side which is about 85% of our revenue and on the mid-sized market it's about 15% and growing of a smaller base. We extend our network where we see the opportunities and it's a great ROI so far and we will continue to invest in that business.

And I think James, if you look at our trending schedules on business services, you can see that capital expenditures dedicated to business services has been increasing, that’s both to see sort of the middle-sized business where we are doing extension. If we just look at how it was two years ago, it's up roughly 50% over 24 months and I think that reflects pretty good investment. The team does a great job on being disciplined with those investments.

Thanks James. Let’s go to the next question please.

Our next question will come from the line of Stefan Anninger with Credit Suisse.

One of the elements of the NBCU opportunity that excites investors is the retrans opportunity. It's something you discussed a bit in the past but I was wondering if you be willing to update us on your thinking there now. Where you stand with respect to discussions with the cable operators and DBS and telcos that offer video and on that note, is reversed compensation something that you would consider asking for in the future? Thanks.

Well, I think in fairly rapid fashion over the last two years or three years, the industry has settled in on it’s not really a rate card but I think there is a general agreement as to what the right kind of structure for retransmission consent is and that’s across the four networks and with a major distributors. And we will participate according to those kinds of sort of established structures. What we have to do is wait for our existing affiliation agreements to expire and negotiate new ones. We have about 25% of our sub base up in this calendar year, calendar 2012; and we have had a number of discussions ongoing and some of those have been concluded at this point at least in handshake fashion and we are getting what we think is a fair price for retransmission consent. We have also done a lot of deals with our broadcast affiliates in which we share in the retransmission consent fees that they negotiate and we believe that those agreements are similar to the kind of agreements that ABC, CBS and Fox are negotiating as well. So, obviously retransmission consent is a major positive for all broadcast businesses including NBC and I think we are right on schedule, right on where we thought we would be in terms of getting those deals done.

Thank you, Stefan. Operator, we are going to now take the final question and then we are going to come back to Brian for a short statement that he wants to make.

Our final question will come from the line of John Hodulik with UBS.

Okay, thanks. Guys can you give us a quick update on where are in terms of the Wi-Fi build out and the wireless strategy now that the you have the SpectrumCo deals close and may be how long, we need to wait to until, we can expect see some products on the from the [JB], thanks?

Hey, John, on the Wi-Fi side, we continue to build our markets gradually. We’ve implemented a number of rollouts in the cities where we have the hotspots going through based on usage and we rollout the product. We are also establishing in-home and small business hotspots concerning for us partnership, we have been really working on the infrastructure, we are launching stores, we have got about 550 launched and we are working with agents as well, we’ve developed a point in system sales products that we are well for their in-store agents and we are developing products together that we think will be very exciting for consumer. So more to come on that front but overall we are very pleased with the partnership.

Okay, well. Thank you all for the call. I just wanted to end on a really said tragic note. Many of you may hear or read about awful murder of two young children by their nanny yesterday in Manhattan. And the father and the children was part of our CNBC family. So I just want to say on behalf of all us at CNBC and Comcast and NBCUniversal and many others around the nation have touched and said we are by this unspeakable act and we will do everything we can to support their family in their awful time. Thank you all and we will go back to our jobs, but have them in our thoughts and prayers.

Thank you all for joining us this morning.