COMCAST CORP quarterly report, Q3 FY2019

Business Context and Reporting Period

Comcast Corporation filed a combined Form 10-Q with its wholly owned subsidiary, NBCUniversal Media, LLC, for the three and nine months ended September 30, 2019. Comcast operates through Cable Communications, NBCUniversal and Sky. Sky was acquired in the fourth quarter of 2018 for approximately $39.4 billion, materially affecting year-over-year comparability because Sky was not included in the comparable 2018 reported results.

Key Financial Metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Revenue	$26.827 billion	$22.135 billion	$80.544 billion	$66.661 billion
Operating income	$5.340 billion	$4.836 billion	$15.878 billion	$14.495 billion
Net income attributable to Comcast	$3.217 billion	$2.886 billion	$9.895 billion	$9.220 billion
Diluted EPS	$0.70	$0.62	$2.15	$1.98
Adjusted EBITDA	$8.553 billion	$7.313 billion	$25.822 billion	$21.974 billion
Net cash from operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$19.462 billion	$18.507 billion

Reported operating margin was approximately 19.9% in Q3 2019 versus 21.8% in Q3 2018, and 19.7% for the first nine months versus 21.7% in the prior-year period. Adjusted EBITDA margin was approximately 31.9% in Q3 2019 versus 33.0% in Q3 2018, and 32.1% for the first nine months versus 33.0% in the prior-year period. Margin comparisons were affected by the Sky acquisition and higher amortization.

Revenue drivers: Q3 Cable Communications revenue increased 4.0% to $14.584 billion, led by high-speed internet, business services and wireless. NBCUniversal revenue declined 3.5% to $8.295 billion, while Theme Parks growth partly offset declines in Cable Networks, Broadcast Television and Filmed Entertainment. Sky contributed $4.554 billion.
Segment profitability: Cable Communications Adjusted EBITDA increased 6.7% to $5.801 billion in Q3, with a 39.8% margin. NBCUniversal Adjusted EBITDA increased 1.6% to $2.091 billion. Sky Adjusted EBITDA was $899 million, up 38.3% versus pro forma Q3 2018 results.
Cash and liquidity: Cash, cash equivalents and restricted cash totaled $3.602 billion at September 30, 2019, down from $3.909 billion at December 31, 2018. Available revolving credit capacity, net of applicable amounts, was $9.2 billion; no amounts were outstanding under the revolving facilities.
Capital allocation: Nine-month capital expenditures were $6.866 billion, cash paid for intangible assets was $1.686 billion, dividends paid were $2.778 billion and common-stock repurchases were $432 million, primarily employee-plan activity. The company paused its share repurchase program for 2019 to reduce Sky-related debt.

Debt, Liquidity and Balance Sheet

Total debt had a carrying value of $100.9 billion and estimated fair value of $114.1 billion at September 30, 2019. Long-term debt, including the current portion, totaled approximately $100.9 billion on the consolidated balance sheet.
During the first nine months, Comcast repaid approximately $10.0 billion of debt and borrowed $516 million. Repayments included early redemptions of $3.4 billion of senior notes due 2020.
In August 2019, Comcast entered into a $5.2 billion collateralized term loan due March 2024, secured primarily by minimum guaranteed proceeds associated with its Hulu put/call arrangements with Disney. The collateralized obligation was $5.165 billion at September 30, 2019.
Comcast reported total assets of $256.374 billion and total equity of $79.160 billion at September 30, 2019, compared with $251.684 billion and $72.502 billion, respectively, at December 31, 2018.

Material Changes Versus the Prior Comparable Period

Consolidated revenue increased 21.2% in Q3 and 20.8% for the first nine months, primarily because of the Sky acquisition. On a pro forma basis, Sky’s Q3 revenue declined 4.2% as reported in dollars but increased 0.9% on a constant-currency basis.
Operating income increased 10.4% in Q3 and 9.5% year to date, while interest expense increased 40.6% and 43.1%, respectively, primarily from debt used to finance and debt assumed in the Sky acquisition. Q3 interest expense also included a $56 million early-debt-redemption charge.
Amortization increased 81.5% in Q3 and 83.6% year to date, primarily from acquisition-related intangible assets, including Sky. Sky-related acquisition accounting adjustments increased depreciation and amortization expense by $53 million in the first quarter.
Cable Communications continued to gain high-speed internet customers but lose video and voice customers. At September 30, total Cable Communications customer relationships were 31.2 million, including 28.2 million high-speed internet customers and 21.4 million video customers.
Broadcast Television revenue declined 9.1% in Q3 and 14.9% year to date, partly because the prior-year periods included the 2018 PyeongChang Olympics, Super Bowl and FIFA World Cup-related benefits. Filmed Entertainment revenue declined 6.2% in Q3 and 4.7% year to date, while Theme Parks revenue increased 6.8% and 4.8%, respectively.
Operating cash flow increased 5.2% year to date, but investing cash use increased to $10.912 billion from $8.590 billion, reflecting higher capital expenditures, investment purchases and Universal Beijing Resort construction spending. Financing cash use was $8.826 billion versus $1.134 billion of financing cash provided in the prior-year period.

Outlook, Commentary, Risks and Unusual Items

The filing does not provide formal quantitative earnings or revenue guidance. Management states that it expects to fund liquidity and capital requirements through operating cash flow, existing cash and investments, available credit facilities and future financing.
Management expects continued declines in video and residential voice customers and video revenue because of competition and changing viewing patterns. Programming expenses are expected to continue increasing and may grow faster because of future contract renewals.
Management is focused on higher-margin high-speed internet and business services, cost management and reducing losses from wireless. Wireless losses improved to $94 million in Q3 and $285 million year to date from $178 million and $552 million, respectively, in the comparable periods.
Sky’s reported results were affected by foreign currency movements, higher sports programming costs and weakness in advertising, including regulatory changes affecting gambling advertisements in the United Kingdom and Italy.
Significant unusual or nonrecurring items included Sky acquisition-related costs of $33 million in Q3 and $168 million year to date, gains on equity securities including Snap and Peloton, Hulu-related gains, and prior-year gains from business disposals.
Comcast owns approximately 33% of Hulu after the May 2019 transaction and may require Disney to purchase its interest, or may be required to sell it, as early as January 2024. The arrangements provide a minimum guaranteed proceeds amount of approximately $5.8 billion, subject to the transaction terms, but those proceeds are pledged to the collateralized term loan.
Universal Beijing Resort is being developed with Comcast holding a 30% interest. The company consolidates the project, which had $2.4 billion of assets and $1.7 billion of liabilities at September 30, 2019. Management states that Comcast’s maximum risk of financial loss is its 30% interest because there are no guarantees or other financial commitments.
Principal risks include intense competition, online video substitution, advertising-market weakness, rising programming costs, content acceptance, regulatory and litigation exposure, cyberattacks and system disruption, foreign-currency and international operating risks, labor disputes, and execution and integration risks related to Sky.
The company adopted the new lease accounting standard on January 1, 2019, recording approximately $4.2 billion of operating lease assets and $4.8 billion of operating lease liabilities. The adoption did not materially affect results or cash flows.

Important Facts for Investors to Verify

Assess organic operating performance separately from the reported impact of the Sky acquisition and related acquisition accounting.
Monitor leverage, interest expense, debt maturities and the collateralized Hulu obligation, including the restrictions on Hulu proceeds.
Evaluate whether high-speed internet and business-services growth can offset ongoing video and voice subscriber losses and rising programming costs.
Review Sky’s constant-currency performance, customer additions, advertising trends and sports-rights costs.
Examine the sustainability of cash flow after capital expenditures, content investments, Universal Beijing Resort spending, dividends and debt repayments.
Consider the effect of acquisition-related amortization, investment gains and losses, foreign-currency translation and other unusual items on reported earnings.
Confirm the status and funding requirements of Peacock, Universal Beijing Resort and other strategic initiatives, as the filing provides no formal quantitative guidance for these activities.