Business Context and Reporting Period
Comcast Corporation filed a combined Form 10-K with wholly owned NBCUniversal Media, LLC for the fiscal year ended December 31, 2018. Comcast operates Cable Communications, NBCUniversal and, beginning October 9, 2018, Sky. The filing includes annual results and unaudited quarterly data; fourth-quarter 2018 revenue was $27.846 billion and net income attributable to Comcast was $2.511 billion.
Sky was acquired for approximately $39.4 billion in cash and contributed results for only October 9 through December 31, 2018. Comcast adopted updated revenue-recognition guidance retrospectively; management stated that the adoption did not materially affect consolidated results.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $94.507 billion | $85.029 billion | 11.1% |
| Operating income | $19.009 billion | $18.018 billion | 5.5% |
| Net income attributable to Comcast | $11.731 billion | $22.735 billion | (48.4%) |
| Diluted EPS | $2.53 | $4.75 | (46.7%) |
| Adjusted EBITDA | $30.165 billion | $27.956 billion | 7.9% |
| Net cash from operating activities | $24.297 billion | $21.261 billion | 14.3% |
| Total debt | $111.743 billion | $64.556 billion | 72.8% |
| Cash and cash equivalents | $3.814 billion | $3.428 billion | 11.3% |
- Consolidated operating margin was approximately 20.1%; Adjusted EBITDA margin was approximately 31.9%; net margin attributable to Comcast was approximately 12.4%.
- Investing cash outflow was $50.854 billion, including $38.219 billion for acquisitions, principally Sky. Financing cash inflow was $27.140 billion, primarily from debt issued to fund the acquisition.
- Capital expenditures were $9.774 billion, including $7.716 billion in Cable Communications, $1.730 billion in NBCUniversal and $222 million in Sky for the post-acquisition period.
- Available consolidated revolving-credit capacity, net of commercial paper and letters of credit, was $9.2 billion at year-end.
- Comcast repurchased approximately 140 million shares for $5.0 billion and paid $3.4 billion of dividends in 2018. The January 2019 annualized dividend was increased 10% to $0.84 per share.
Segment Performance
| Segment | 2018 Revenue | 2018 Adjusted EBITDA | Reported change |
|---|---|---|---|
| Cable Communications | $55.143 billion | $22.447 billion | Revenue +3.9%; EBITDA +6.5% |
| NBCUniversal | $35.761 billion | $8.598 billion | Revenue +8.9%; EBITDA +4.6% |
| Sky | $4.587 billion | $692 million | Post-acquisition period only |
| Corporate and Other | $1.403 billion | $(1.545) billion | EBITDA loss increased 12.6% |
- Cable Communications growth was led by high-speed internet revenue of $17.144 billion, up 9.3%, business services revenue of $7.129 billion, up 10.7%, and advertising revenue of $2.795 billion, up 14.1%. Video revenue declined 1.8% and voice revenue declined 3.2%.
- Cable Communications ended the year with 30.3 million customer relationships, including 27.2 million high-speed internet customers, 22.0 million video customers and 11.4 million voice customers. The segment operating margin increased to 40.7% from 39.7%.
- NBCUniversal benefited from the 2018 PyeongChang Olympics and Super Bowl. Cable Networks revenue increased 12.2% and Broadcast Television revenue increased 19.6%. Filmed Entertainment revenue declined 5.8% and Adjusted EBITDA declined 42.5%; Theme Parks revenue increased 4.4%.
- Sky reported 23.6 million retail customer relationships at year-end. Its reported results are not indicative of a full quarter of operations.
Material Changes Versus the Prior Comparable Period
- The Sky acquisition materially increased revenue, assets, goodwill and debt. Total assets increased from $187.462 billion to $251.684 billion, while goodwill increased to $66.154 billion, including approximately $29.9 billion attributable to Sky based on preliminary purchase accounting.
- Debt increased by approximately $47.2 billion, primarily from borrowings used to finance Sky. Comcast issued approximately $27.0 billion of senior notes and borrowed approximately $11.7 billion through sterling- and dollar-denominated term loans.
- Net income and EPS fell sharply because 2017 included a $12.7 billion tax benefit from the 2017 Tax Act. Excluding that unusual benefit, the year-over-year change is less pronounced, but the filing does not provide a single comparable adjusted net-income figure.
- Interest expense increased 14.8% to $3.542 billion due primarily to higher debt and Sky financing costs.
- Investment and other income shifted from $421 million of income in 2017 to a $225 million loss in 2018, including losses from Hulu, Atairos and equity securities; the 2018 loss related to Snap was $268 million.
- Corporate and Other Adjusted EBITDA losses increased primarily because of the wireless phone business and Sky transaction-related costs. Comcast excluded $355 million of Sky transaction-related costs and $125 million related to a legal settlement from Adjusted EBITDA.
Outlook, Risks, Contingencies and Unusual Items
- Management did not provide formal consolidated numerical earnings or revenue guidance in the filing. It expects 2019 capital spending to emphasize network capacity, business-service line extensions, wireless gateways, X1, cloud DVR, Sky Q, international OTT platforms and theme-park attractions.
- Comcast stated that it planned to pause share repurchases in 2019 to accelerate reduction of debt incurred for the Sky acquisition.
- Management expects Cable Communications video customers and voice revenue to continue declining, while programming expenses are expected to continue increasing, potentially at higher rates depending on contract renewals.
- Key risks include intense competition from fiber, wireless broadband, satellite providers and online video distributors; cord-cutting and audience fragmentation; rising sports and programming costs; advertising volatility; technology execution; cybersecurity and data privacy; regulatory changes; foreign-exchange exposure; Brexit-related uncertainty; litigation; labor disputes; and integration of Sky.
- Programming and talent commitments totaled $78.0 billion in the consolidated contractual-obligation table, including $11.7 billion due in 2019. Total reported contractual obligations were $202.7 billion, excluding certain uncertain or difficult-to-estimate obligations.
- A third party has an option related to an interest in certain theme-park revenue. The carrying value was $1.1 billion, while the estimated contractual obligation was $1.6 billion at December 31, 2018.
- Universal Beijing Resort is consolidated despite Comcast owning 30%. The resort had approximately $569 million of debt, and Comcast stated that its maximum risk of financial loss was its 30% interest because there were no guarantees or liquidity arrangements.
- Management and Deloitte concluded that Comcast maintained effective internal control over financial reporting, but Sky was excluded from the assessment and audit. Sky represented approximately 5% of 2018 revenue and 24% of year-end assets.
Important Facts for Investors to Verify
- Assess post-acquisition Sky performance on a full-period and constant-currency basis, rather than relying on the partial 2018 contribution.
- Reconcile reported net income and EPS with comparable results excluding the 2017 Tax Act benefit, Sky transaction costs and other unusual items.
- Monitor debt reduction, interest expense, refinancing needs and compliance with leverage covenants after the Sky financing.
- Track Cable Communications customer trends, particularly high-speed internet additions versus continuing video and voice losses.
- Evaluate whether programming-cost inflation, sports-rights commitments and retransmission fees pressure future margins.
- Review the preliminary Sky purchase-price allocation, including approximately $29.9 billion of goodwill and $20.6 billion of identifiable intangible assets, because the filing states that amounts remained subject to change.
- Verify the effect of the 2019 lease-accounting adoption and the integration of Sky on reported assets, liabilities and internal controls.