Meet Comcast's Future Growth Machine

Aug.13.14 | About: Comcast Corporation (CMCSA)

Summary

Comcast is currently the largest cable operator in the country, which provides significant returns to shareholders.

A downside to size, however, is that growth is limited, because most of the company's sales are coming from fairly mature markets.

Moving forward, there's one small part of Comcast that has the potential to propel the business on the high-growth train, and it could take shareholders with it.

Currently, the largest cable networks provider in the world is Comcast (NASDAQ:CMCSA). Over the past three years, revenue at the company has soared 16% from $55.8 billion to $64.7 billion, as its Cable Communications segment shot up 12% from $37.2 billion to $41.8 billion, making up more than half the company's gain in sales.

Although this is interesting, what's even more interesting is that one small part of this segment accounted for 28% of Cable Communications' growth, while making up less than 8% of the segment's revenue. This part of the business, which is about to double after Comcast's purchase of Time Warner Cable (TWC), could prove to be a significant source of growth for the business not only for years... but possibly decades... to come!

It's all about the service, baby!

There's no denying that the Cable Communications segment is Comcast's largest set of operations, but the sad truth is that growth in the operation as a whole is slowing down. In 2011, the segment accounted for 67% of the business's revenue. Today, that number has declined to less than 65%, as Comcast's NBCUniversal operations are expanding at a nice clip. Without its Business Services operations, however, the disparity between NBCUniversal's sales growth and Cable Communications' would have been even greater, with the latter growing its top line by just 9% without it.

Business Services Comparison

(Dollars in Billions) 2013 2012 2011 Change
Comcast's Revenue $64.66 $62.57 $55.84 +15.8%
Business Services Revenue $3.24 $2.57 $1.95 +66.2%
Business Services % of Sales 5.0% 4.1% 3.5%
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According to Comcast's most recent annual report, its Business Services category, which provides small and medium-sized businesses cable services that includes website hosting, hosted voice services using the cloud, and document sharing and storage, saw revenue come in at $3.24 billion in 2013. This represents a significant 66% jump from the $1.95 billion reported two years earlier, and has been by far the company's fastest-growing category.

Medium-Sized Customers Are Booming

2013 2012 2011
Medium-Sized % of Total 19% 15% 12%
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As time progresses, Business Services is seeing a greater contribution to its top line coming from larger customers (its medium-sized businesses). According to its Annual Report, this group of subscribers represented 19% (or $615.8 million) of revenue in 2013. Although this is still a minority of the category's total revenue, it represents a significant jump from the 12% of sales (or $234.4 million) the company reported from this group of clients in 2011.

Time Warner Cable's contribution is significant!

With the acquisition of Time Warner Cable, Comcast's Business Services will go through one heck of a growth spurt. In 2013, Time Warner Cable's Business Services operations reported revenue of $2.31 billion, up 57% from the $1.47 billion management reported for the company's 2011 fiscal year. Most of this increase took place between the category's High-speed Data and Voice operations, with the former growing sales by 51%, from $727 million to $1.1 billion, and the latter soaring by 114%, from $197 million to $421 million.

Time Warner Business Services Breakdown

(Dollars in Billions) 2013 2012 2011 Change
Time Warner Revenue $22.12 $21.39 $19.68 +12.4%
Business Services Revenue $2.31 $1.90 $1.47 +57.1%
Business Services % of Sales 10.4% 8.9% 7.5%
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In the event that Comcast is successful in completing its acquisition of Time Warner Cable, the company's Business Services revenue should climb (using 2013's metrics) by 71% to $5.55 billion. This is, however, likely understated, because during the first quarter of 2014, Comcast's Business Services shot up by an extra 24%, from $741 million to $917 million.

Click to enlargeAdding on the 24% growth in these operations boasted by Time Warner Cable in its first quarter, from $537 million to $668 million, and assuming that each company's first quarter remains at the same percentage of total revenue this year as it saw last year, Business Services for the combined business could hit as high as $6.9 billion in 2014.

Takeaway

The past few years have been pretty good for Comcast. This is especially true of the company's Business Services category, whose sales have significantly outpaced the rest of the business. In an effort to grow the company as a whole, Comcast has decided to acquire Time Warner Cable, a move that will grow sales across the board, but that will have a particularly large effect on this small, but already fast-growing part of the company. If this transaction does come to fruition, Business Services will expand rapidly and will remain on track to drive revenue growth for this large, and otherwise tiring, behemoth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.