Comcast (CMCSA) reported its Q2 2012 financial results recently. The key takeaways include the possibility of pay-TV subscriber turnaround in the future and continued strength and tremendous success of the company’s broadband business. As far as NBCUniversal is concerned, it is the cable networks and broadcasting business that matter, and they saw a decline in profits due to higher programming costs and lower licensing revenues.
Pay-TV Losses Continue, but Future Could be Better
Comcast lost 176,000 net pay-TV subscribers in the recent quarter bringing its full-year losses to 213,000. Q2 tends to be seasonally weak quarter and higher losses were expected. Despite losing 176,000 net pay-TV subscribers, Comcast did better compared to Q2 2011 losses, which implies that trend is improving for the company. What is further interesting to note is that Comcast now has close to 21 million digital TV subscribers implying that close to 95% of its pay-TV subscriber base is on digital platform. Since a substantial portion of subscriber losses was concentrated in the analog base, we expect a better future for the company as it approaches complete digital transition.
Furthermore, even though losses continued, pay-TV revenues grew due to increase in ARPU (average revenue per subscriber). The increase in ARPU can be attributed to adoption of HD/DVR services, video-on-demand, Xfinity Streampix service and general rate increases to combat rising programming costs. The company now has close to 11.2 million HD/DVR subscribers, which implies a penetration of 54% in its subscriber base. As the digital base expands, it will become easier for the company to market these advanced services that require digital platform. We expect HD/DVR penetration to continue to increase in future, amounting to close to 70% by the end of our forecast period.
Comcast’s strategy is now going to be innovation. Its recent expansion of X1 digital platform that combines the TV viewing, recording and on-demand experience within a single platform is an example of the same. The company seems to be getting basics right by improving customer service and going forward, its pay-TV business success will depend upon how it enhances the user experience and gives the term "TV Everywhere" its true meaning.
Broadband Remains Strong
Comcast gained 156,000 broadband subscribers in the recent quarter, bringing its total net additions for this year to 594,000. Given that Q2 is seasonally weak for cable business, the healthy subscriber gain demonstrates the strength of Comcast’s broadband business. The growth comes as customers drop their DSL services to upgrade their internet connection to broadband, which is faster. AT&T (T) is leader in DSL Internet services and has seen a consistent decline in this subscriber base. What helps Comcast is that AT&T’s U-Verse service is only present in a fraction of its footprint, thereby making it easier for the company to convert these DSL customers to its own subscribers.
Besides subscriber gain, Comcast has managed to improve its broadband ARPU (average revenue per user) as its subscribers continue to adopt high speed tiers. Given the increased demand for video streaming over the internet, subscribers do not mind paying more for faster speeds. This bodes well for Comcast and other cable companies such as Time Warner Cable (TWC), and gives them an edge over the satellite companies.
NBCUniversal Investing More
NBCUniversal’s profits declined this quarter. This was partly due to a relatively bad performance of its movie business and reduction in profits from media networks (cable and broadcasting) due to higher programming fee and lesser licensing revenues. As far as investors are concerned, they should be worried about media networks, which account for more than 80% of NBCUniversal’s profits. Although performance wasn’t that great this quarter, NBCUniversal is investing more in original programming and sports (Olympics 2012) in order to boost its ratings in the future. This might squeeze short-term profits, but will be beneficial in the long run.
Cautionary Note to Investors
Improvement in pay-TV and strength of broadband are going to be primary drivers of Comcast’s stock, and the reason to invest in the company. However, investors should not forget that the telco footprint is still low and is likely to increase in the future. For example, currently the companies such AT&T and Verizon (VZ) are present in 40% of Comcast’s footprint and this proportion has increased over the last year. There is no doubt that telcos are gaining pay-TV and broadband subscribers at a brisk pace and as their footprint increases, cable companies including Comcast might feel competitive pressure that could hurt their growth. Telcos have an edge over cable companies as they can bundle their wireless services as well.
Our price estimate for Comcast stands at $37, implying a premium of little under 10% to the market price.
Disclosure: No positions.