Comcast Corporation (NASDAQ:CMCSA) Q3 2023 Earnings Call Transcript

Comcast Corporation (NASDAQ:CMCSA) Q3 2023 Earnings Call Transcript October 26, 2023

Comcast Corporation beats earnings expectations. Reported EPS is $1.08, expectations were $0.95.

Operator: Operator: Good morning, ladies and gentlemen, and welcome to Comcast’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note this conference call is being recorded. I will now turn the call over to Executive Vice President, Investor Relations, Ms. Marci Ryvicker. Please go ahead, Ms. Ryvicker.

Marci Ryvicker: Thank you, operator. And welcome, everyone. Joining me on today’s call are Brian Roberts, Mike Cavanagh, Jason Armstrong, and Dave Watson. I will now refer you to slide 2 of the presentation accompanying this call which can also be found on our Investor Relations website and which contains our Safe Harbor disclaimer. This conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, during this call, we will refer to certain non-GAAP financial measures. Please see our 8-K and trending schedule issued earlier this morning for the reconciliations of these non-GAAP financial measures to GAAP. With that, I’ll turn the call over to Mike.

Michael Cavanagh: Good morning, everyone. And thanks for joining our third quarter earnings call. It was another strong quarter for us, with adjusted EBITDA up 5% and adjusted EPS up 13%. We generated $4 billion in free cash flow, which, combined with our expectation of Hulu proceeds in the near future, contributed to a pick-up in our share repurchases to $3.5 billion in the quarter. Our steady performance has been a direct result of how we’ve always run our company, which is with a focus on industry-leading performance, both operationally and financially, in each of our businesses, combined with a long-term, customer-centric approach to decision-making that ensures each business is positioned to win in the future. This has all been facilitated by a philosophy of investment in our businesses that has remained consistent through different economic and credit cycles, and particularly through the recent global pandemic.

Now, I’d like to highlight four areas in the quarter that show how this strategy is playing out before handing it over to Jason to review this quarter’s results in full. The first area I’d like to highlight is residential domestic connectivity, where we are very pleased with our performance and strategy as we navigate a highly competitive broadband marketplace. The customer experience provided by our broadband network, which has ubiquitously available gig speeds today and is on a path to ubiquitous multi-gigabit symmetrical speeds, combined with our wireless offering through our MVNO with Verizon and our own network of over 20 million Wi-Fi hotspots, enables us to provide world-class connectivity both in and out of the home to all of our customers everywhere in the most cost effective and capital efficient manner versus our competition.

Our broadband network and product leadership continue to drive strong residential revenue growth, which was up nearly 4% this quarter, fueled by very strong ARPU growth of 3.9%. We’re confident in our ability to drive continued ARPU growth because of our focus on constantly improving the product experience through investment and innovation, thus delivering more value to our customers. Having a truly excellent Internet experience as reflected in speed, reliability, coverage, security, and latency is constantly increasing in importance to all households as a result of the consumer experiences it enables. One of the biggest catalysts for recent growth in data usage is the accelerating transition of sports viewership to streaming platforms. The switch of a single Thursday night NFL game to streaming moved peak data usage on our broadband network from Sunday night to Thursday night, and that game comprises roughly 25% of all Internet traffic on Thursday nights.

Every internet service provider, fixed wireless in particular, will really be put to the test as this transition of sports to streaming continues, especially come January, when for the first time ever, an NFL playoff game will be aired exclusively on a streaming platform which will be our very own Peacock. The second item I’ll highlight is Peacock, which added 4 million paying subscribers during the quarter, saw greater than 60% revenue growth versus a year ago, and had the first year-over-year improvement in EBITDA since our launch in 2020. While we report standalone Peacock metrics given the significance of this initiative, we manage it as part of the broader NBCU media segment which includes the broadcast and cable networks to best leverage the advantages we bring to the streaming landscape.

We continue to be pleased with our progress in the few short years since we’ve pivoted our streaming strategy as a result of the ownership changes at Hulu. Looking ahead, we are sticking to our plans and still expect 2023 to be the peak year of EBITDA losses for Peacock, though we are now expecting 2023 Peacock losses to come in around $2.8 billion versus our original $3 billion loss outlook. And for 2024, we expect to show meaningful EBITDA improvement over 2023. The third area to highlight is our parks business, which generated a record high level of EBITDA, surpassing the previous record that we’d just set in second quarter. The reaction to Nintendo and Hollywood in Japan continues to be fantastic, and we are very excited about bringing the experience to Florida soon.

I was just in Orlando with the parks leadership team last week, reviewing our plans for the new Halloween Horror experience in Las Vegas and kids theme park in Frisco, Texas. I also spent a few hours on a site tour of the Epic Universe park, which is deep in construction and is simply breathtaking. So thanks to the momentum of our third quarter results and what we have in the pipeline, I could not be more excited about our parks business. The final area to highlight is our studios business, which is having a great year with three of the top five box office hits for the year so far in Super Mario Bros., Fast X, and now Oppenheimer, which grossed more than $900 million in worldwide box office in the third quarter and became the highest grossing biopic of all time.

This is a continuation of our solid track record where, since 2020, we’ve had at least two of the top five movies in worldwide box office. We believe that success in this business is not formulaic. It’s a craft rooted in creativity and originality. We’ve long focused on assembling a team of the most innovative filmmakers, Chris Nolan, Chris Meledandri, Steven Spielberg, Jason Blum, and Jordan Peele, to name a few, which positions us very well for the future in the studios business. More broadly, it is our consistent investment approach through past business cycles and the pandemic that is the reason for much of the success we’re experiencing today. We remain steadfast in supporting our businesses, even those that were hit hard during that time period.

For example, in studios, we never stopped believing that people want to experience great films in theaters, and that conviction enabled us to attract new partners like Chris Nolan who made a masterpiece in Oppenheimer. Similarly, while our parks business was closed or at limited capacity, we continued to invest heavily in our existing parks, including the VelociCoaster in Orlando, Secret Life of Pets in Hollywood, and the Nintendo Lands I had mentioned earlier in Los Angeles and Osaka, and we will be bringing Epic Universe to life in 2025. Our strong investment-grade balance sheet enabled these investments and puts us in strong and enviable position today. Now the business world must deal with pressures of much higher interest rates, which I believe will asymmetrically advantage us, given our low leverage and the long duration of our debt.

Since the end of 2018, we have refinanced over $40 billion or nearly 40% of our debt obligations, reduced net debt from $108 billion to $88 billion today, lowered net leverage by a full turn from 3.3 times to 2.3 times, increased the average life of our debt by more than four years to 17 years, while reducing the weighted average cost of our debt to 3.6% from 3.8%. Today, 97% of our debt is at fixed rates compared to just 82% at the end of 2018. We accomplished this while at the same time returning $45 billion to shareholders, including $24 billion via share repurchases and $21 billion in dividends. To sum up, we’re in a great place, especially given how the competitive dynamics in our industry might evolve in this higher-for-longer interest rate environment.

I expect that our focus on building businesses that are market leaders for the long term through strong execution, investment, and innovation will keep us in one of the strongest positions to perform for our customers, employees, and shareholders. Jason, over to you.

Jason Armstrong: Thanks, Mike. And good morning, everyone. I’ll take you through our strong third quarter and we’ll begin with our consolidated financials on slide 4. Revenue increased 1% to $30.1 billion, while adjusted EBITDA grew 5% to $10 billion. Our results were driven by six key growth areas we have highlighted this year: our connectivity businesses, including residential broadband, wireless, and business services connectivity; our theme parks; streaming and premium content; and our studios. Together, these growth areas generated more than half of our total company revenue in the quarter and grew at a high-single digit rate over the past 12 months. The growth in these areas, which on the whole are margin accretive, coupled with disciplined cost management drove our EBITDA growth and contributed to our adjusted earnings per share increasing 13% to $1.08.

Last, we generated $4 billion of free cash flow, while returning $4.7 billion of capital to shareholders in the quarter. Now let’s turn to our individual business results, starting on slide 5 with Connectivity & Platforms. As a reminder, our largest foreign exchange exposure is the British pound, which was up nearly 8% year-over-year. So in order to highlight the underlying performance of the business, I will refer to year-over-year growth on a constant currency basis. Revenue for total Connectivity & Platforms was flat at $20.3 billion. Our core connectivity businesses – domestic broadband, domestic wireless, international connectivity, and business services connectivity – increased 7% to $11 billion in revenue, while video, advertising, and other revenue declined 6% to $10 billion in revenue.

We’re focused on investing in and driving growth in high margin businesses, while protecting profitability in businesses with secular headwinds through disciplined cost management. And it’s working, underscored by the 100 basis points of margin expansion for Connectivity & Platforms in the third quarter, while margins for our domestic legacy cable business improved 160 basis points to 46.6%. Getting more into the details, residential connectivity revenue was up 7.5%, reflecting 4% growth in domestic broadband, 16% growth in domestic wireless, and 25% growth in international connectivity. Business services connectivity revenue was up 5%. Domestic broadband revenue growth continued to be driven by very strong ARPU, which grew 3.9%. Our commitment to network leadership and delivering it ubiquitously across our footprint enables customers to do more on our network.

They’re using more data and connecting more devices at faster speeds, which provides them with increasing value and underpins our ability to drive ARPU higher this year and beyond. At the same time, our residential broadband base remained stable, both on a year-over-year and sequential basis, with voluntary churn at record low levels for the third quarter. While back-to-school was a tailwind as expected, the broadband market remains highly competitive, particularly at the lower end. During the quarter, we recalibrated by pulling back on some of our promotional offers targeting this segment to remain consistent with our strategy of competing aggressively, but in a financially disciplined way. This means striking what we believe to be the appropriate balance between broadband subscriber growth and ARPU growth.

And as we continue to manage this balance, we expect ARPU growth to remain strong and our primary driver of broadband revenue growth with somewhat higher subscribers losses expected the fourth quarter compared to the 18,000 loss we just reported in the third quarter. We expect subscriber trends to improve over time as we remain focused on network and product leadership and also as we see the benefits of greater footprint expansion. We’ve grown our homes and businesses passed by 1.5% year-over-year to 62 million and we’re on of pace to meet or exceed our goal of 1 million new homes and businesses passed for 2023. This is a material step-up from 2022, and we should accelerate this again in 2024. Domestic wireless revenue increased due to higher service revenue, driven by strong momentum in customer lines which were up 1.3 million or 27% year-over-year to over 6 million in total.

This includes 294,000 lines we just added in the quarter. We continue to test some new converged offers, which along with the new iPhone launch should translate into accelerated line additions in the fourth quarter. With still only about 10% penetration of our domestic residential broadband customer accounts, we have a big opportunity and long runway ahead for growth in wireless. International connectivity revenue increased 25% to another record high, driven by steady mid-teens growth in broadband with the remainder driven by wireless, reflecting healthy growth in services and a particularly strong quarter of device sales. The 5% growth in business services connectivity revenue reflects stronger growth in enterprise and mid-market. The strong revenue growth in our connectivity businesses was offset by declines in video, advertising, and other revenue.

Video revenue decline was driven by continued customer losses. The lower other revenue reflects similar dynamics in wireline voice, and advertising was impacted by lower political revenue in our domestic markets, which in the fourth quarter will face an even more challenging comparison to last year. Connectivity & Platforms total EBITDA increased 3% to $8.2 billion, with adjusted margin up 100 basis points, again, driven by the mix shift to our high margin connectivity businesses, coupled with expense management. Continuing the trends seen in the first half of the year, every line item of expense improved year-over-year except for direct product costs. These are success based and tied to the growth in our connectivity businesses. In terms of the breakout in our Connectivity & Platforms EBITDA results, residential EBITDA grew 2.4%, with margin improving 110 basis points to reach 38.4%, driven by our favorable mix shift.

While business EBITDA increased 3.6%, EBITDA margin declined 60 basis points to 57.5%, reflecting investments we’re making in sales capacity to drive growth in the mid-market and enterprise segments. Now let’s turn to Content & Experiences on slide 6. Content & Experiences revenue increased 1% to $10.6 billion and EBITDA increased 10% to $2 billion, driven by record results at parks as well as an improvement in year-over-year Peacock EBITDA losses. Looking at the results of each segment. I’ll start with media, which combines our TV networks and Peacock, given we manage this as one portfolio. Revenue was slightly higher as strong growth in Peacock offset the challenging performance at our linear networks. Unpacking that further, domestic advertising declined 8%, reflecting softness in the linear market, partially offset by growth at Peacock, which increased nearly 40%.

Domestic distribution increased 4%, driven by Peacock subscription revenue growth of nearly 90% as we continue to grow our paid subscriber base. We ended the quarter with 28 million Peacock paid subscribers compared to 16 million a year ago, with 4 million net additions in the quarter. This result was driven by continued success in converting free Comcast bundled subscribers to a paid relationship as well as organic growth driven by programming, including the start of the NFL season and having the Big Ten for the first time as well as Super Mario Bros. landing exclusively on Peacock in our Pay-One window. Media expenses were slightly lower, reflecting effective cost management in our linear networks and the timing of Premier League costs, partially offset by higher Peacock expenses.

This resulted in a 6.5% increase in media EBITDA, with consistent EBITDA at our TV networks and improved year-over-year Peacock losses for the first time. As Mike noted, we believe Peacock’s financial performance will continue to improve and now expect full year 2023 losses will come in at around $2.8 billion, better than our previous outlook of $3 billion. However, keep in mind that, in the fourth quarter, we expect our overall media EBITDA results to be impacted by higher sports costs, reflecting a full quarter of the contractual rate increase in our NFL programming, the addition of Big Ten to our sports programming lineup, and higher Premier League costs compared to last year when games were paused for four weeks to accommodate the timing of the World Cup.

Turning to studios, Oppenheimer had a strong theatrical performance, delivering over $900 million at the box office. This success, coupled with the positive benefits from carryover titles from our strong film slate this year, resulted in EBITDA of $429 million. While this is a tough comparison to last year’s third quarter, which was driven by the strong performance of both Minions: The Rise of Gru and Jurassic World: Dominion, it still ranks as one of the highest EBITDA quarters in the history of studios. At theme parks, revenue increased 17% and EBITDA increased 20% to $983 million, our highest level of EBITDA on record. Our international parks continued to experience nice rebounds post-COVID. Leading this growths was Osaka, which benefited from strong demand from Super Nintendo World, and our park in Beijing achieved another EBITDA record, driven by increases in attendance and per capita spending.

In Hollywood, the positive consumer reaction to Super Nintendo World, which we opened earlier this year, drove strong attendance and per cap growth, helping Hollywood to deliver its best quarterly EBITDA in its history. In Orlando, our results were also strong, with attendance relatively in line with 2019 pre-pandemic levels and revenue substantially ahead. I’ll now wrap up with free cash flow and capital allocation on slide 7. As I mentioned previously, we generated $4 billion in free cash flow this quarter and achieved this while absorbing meaningful investments, concentrated in our domestic broadband network, footprint expansion, streaming, and theme parks. Total capital spending increased 16%, driven by higher CapEx, which remains within the envelope of the guidance we gave at the beginning of this year, including Connectivity & Platforms CapEx intensity to remain at around 10% and parks CapEx to increase by around $1.2 billion for the full year compared to 2022.

At Connectivity & Platforms, CapEx in the quarter decreased slightly to $2.1 billion, with CapEx intensity coming in at 10.3%. The year-over-year decline was due to lower spending in customer premise equipment and support capital, which more than offset the investments we are making to accelerate our growth in homes passed as well as to transition our US network to DOCSIS 4.0. Content & Experiences’ CapEx increased by $270 million, driven by parks, with Epic accounting for the majority of this quarter’s increase in spend. Working capital was fairly neutral in the quarter and improved by nearly $1 billion year-over-year, with more than half of this improvement reflecting the pause in production during the work stoppages associated with the writers and actors strikes.

We expect this benefit in working capital to reverse as we ramp up to our normal levels of production in the coming quarters. Turning to return of capital and our balance sheet, we repurchased $3.5 billion worth of our shares in the quarter, a step-up in our quarterly run rate relative to the first half of the year. In addition, dividend payments totaled $1.2 billion in the quarter for a total return of capital in the third quarter of $4.7 billion. We ended the quarter with net leverage of 2.3 times, in line with our target leverage. With that, let me turn it over to Marci for Q&A.

Marci Ryvicker: Thanks, Jason. Operator, let’s open the call for Q&A, please.

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Q&A Session

Operator: Operator: [Operator Instructions] Our first question comes from Ben Swinburne from Morgan Stanley.

Ben Swinburne: Two questions for the team on the cable business or connectivity business. Jason, as you mentioned, expenses continue to be a nice tailwind for growth. I think investors are focused on your ability to sustain that. You’ve been delivering kind of low to mid-single digit EBITDA growth in connectivity. Can you keep this up with expenses as a driver over the next couple of years or do you need revenue to accelerate? Maybe just talk about the opportunity you see ahead for the company. And then, I’m just wondering, you teased it a little bit with the iPhone commentary, but what’s the thought process around getting more aggressive in wireless? Do you want to avoid pressuring financials at all? Because it would seem like wireless and the ability – the potential for wireless to bring broadband growth up to higher levels has got to be something you guys are thinking about. So, love to just hear your considerations on that front. Thank you.

Jason Armstrong: It’s Jason. Let me start with the margin and expense question on the connectivity side. I think you’re right, we’ve been sort of consistently expanding margins. A large part of that is we had yet another quarter, as we mentioned in the upfront remarks, where every expense line item went backwards or declined year-over-year, which is a positive outside of direct network costs. And just as a reminder, those are costs that directly feed into our key growth businesses like broadband and wireless. So as we look forward, I think the construct is, and you sort of laid this out appropriately, we’ve got several revenue growth drivers within our connectivity business, namely residential broadband, wireless, and business services, and those are the higher margin businesses within all of Connectivity & Platforms.

So the mix shift that we’re seeing and undergoing, where those are the businesses that are growing against businesses that are not growing, has been a favorable mix shift for us and we expect it to continue to be a favorable mix shift. So I would look for continued opportunities in both expense and margin.

Michael Cavanagh: And I would just add – it’s Mike, Ben – that on the other part – as Jason has pointed out, the six growth driver businesses, the cable – components of that are all high incremental margin next dollar revenue, very high incremental margin, but there’s also the businesses that are – as we’ve talked about, are not in the six growth drivers that are being managed pretty aggressively, frankly, for continued ways to find efficiencies to offset the pressures on the top line. So we’ve got multiple things going on that I think are the tailwinds for continued ability to drive margins.

David Watson: Ben, this is Dave. So – and as both Jason and Mike said, it does start when you talk about margins with the top line, and so a real focus around healthy ARPU, total revenue growth in connectivity, so all of those things really I think are sustainable. And you go through a competitive phase like we are, but you’ve still got to keep your eye on the ball and we believe that, over time, in addition to driving good, healthy, making financially disciplined calls along the way, we will return to subscriber growth over time. And so, I think you add all that up, it’s – that’s the beginning part. Then your question on mobile, it’s such an important part of our strategy and it has been. We’ve built up the business, had consistent performance, and believe strongly we’ve got a long runway ahead.

And one of the things that we’re doing just to showcase kind of the focus for us is we are rolling out a buy one, get one offer. It’s scaled up at the very end of Q3. It’s really kicking off in earnest in Q4. It’s a straightforward, good, solid offer that will be accretive and will drive broadband benefits in doing so. We’re starting with the base and that’s – but it’s just an example that in both residential and in small business, we’ll continue to be very – I think very aggressive in mobile over time. So a lot more to come on mobile, but we’re encouraged and really like the runway ahead. Operator: Thank you. Next question is coming from Craig Moffett from MoffettNathanson.

Craig Moffett: I’m going to go to a different place, actually. Xumo, and maybe, Brian, if you could talk a little about this from a high level kind of strategic point of view. There’s been a lot of talk about the prospect for streaming services being rebundled into something that maybe is in some ways closer to what we used to have in the video world. I wonder if you could just talk about that a little bit and talk about how Xumo might fit into that and whether you think Xumo has the potential to actually become a meaningful part of your Connectivity & Platforms business.

Brian Roberts: Great question. We’re really excited about Xumo and the progress that we’ve made – we’re making together now with Charter, and it’s an amazing platform that started with X1, but now will be in televisions, it will be in devices, and it will be all over the nation and frankly all over the world. The heart and soul of it is our entertainment operating system which is global that includes Sky, all of Canada, Cox, and a number of other distributors that we now gradually build up to, all be helping to finance and help the innovation roadmap. So what is that innovation roadmap? It’s really like you’re suggesting, what do customers really want? They want a great platform, a great pipe. There want world-class content that they customize.

And they want someone to make it really simple for them and do the heavy lifting as you bounce in between services, and that is what we really built our company on all these years and this industry on. So it is somewhat ironic that we’ve unbundled to rebundle to unbundle to rebundle and everybody has a different version of that and we’re at a moment in time, but a lot of it is having one great platform that now the entire industry has and thankfully all of you on this phone who do not live in a Comcast market, which is many, are now soon going to be able to get these products, talk to your voice remote, and see how fantastic the experience is, whether you buy the cable bundle or not. And that’s a big point. As most of our sales now are broadband only, we want to make sure we are the best aggregator for streaming.

And then a logical next step will be us or others beginning to try to make it even easier for consumers to purchase and to switch packages. So it’s an important part of the roadmap and this was a big week in the Charter announcement. And I’m sure, in their call, they’ll talk about their commitment to the JV as well. Operator: Next question is coming from Phil Cusick from JPMorgan.

Phil Cusick: A couple for Dave. Dave, I think you said that you expect to get back to broadband growth over time, and as you expand the number of houses that you’re building, as Jason mentioned, I expect that that’s probably part of it. But can you talk about the contribution of that low end effort that you started? You mentioned on the first quarter call and the level of reversal that you’re doing here as well as recent competition from fiber and fixed wireless. And then second, if you can just talk about where wireless is right now, how the CBRS trials are going in Philadelphia, and any thoughts on timing to expand that. Thanks very much.

David Watson: You got it, Phil. So as we’ve said, and it’s – everybody has seen, it’s a pretty competitive environment. And so, when you – we have some continuation of some of the macro issues that we talked about, but we’ve also – as you brought up, we’ve also continued to see the expansion of both fiber and fixed wireless footprint. So we’ve gone through several competitive cycles where there’s – it’s really noted by a lot of new footprint that’s been added, and so we did start in the beginning of the year, made some adjustments in terms of offers that were really focused more on the lower end of the market, but part of our game plan is to – we’re going to continue to invest in a better network, better products, and compete aggressively, but we’re going to maintain financial discipline, and that means making certain decisions when it comes to balancing rate and volume.