Business Context and Reporting Period
Comcast Corporation, a global media and technology company, filed this combined unaudited Form 10-Q with NBCUniversal Media, LLC for the three and nine months ended September 30, 2015. Comcast’s principal businesses are Cable Communications and NBCUniversal, which includes Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks.
As of September 30, 2015, Cable Communications had 27.4 million customer relationships, including 22.3 million video, 22.9 million high-speed Internet and 11.3 million voice customers. Cable Communications generated 63% of consolidated revenue and 77% of consolidated operating income before depreciation and amortization during the first nine months.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $18.669 billion, up 11.2% | $55.265 billion, up 8.3% |
| Operating income | $4.001 billion; 21.4% margin | $11.996 billion; 21.7% margin |
| Net income | $2.041 billion | $6.357 billion |
| Net income attributable to Comcast | $1.996 billion; diluted EPS $0.80 | $6.192 billion; diluted EPS $2.45 |
| Operating cash flow | Not separately provided for the quarter | $13.813 billion, up from $12.302 billion |
| Capital expenditures | $2.165 billion | $5.862 billion |
- Consolidated operating income before depreciation and amortization was $6.184 billion in the third quarter and $18.406 billion for the first nine months.
- Cash and cash equivalents were $1.893 billion at September 30, 2015, compared with $3.910 billion at December 31, 2014.
- Total debt had a carrying value of approximately $47.8 billion and an estimated fair value of $53.2 billion. Current debt was $3.152 billion and long-term debt was $44.605 billion.
- Revolving credit availability totaled $6.7 billion, net of commercial paper borrowings and letters of credit. NBCUniversal Enterprise had $635 million of commercial paper outstanding.
- Comcast paid $1.823 billion of dividends and repurchased $5.770 billion of common stock during the first nine months. The quarterly dividend was increased to $0.25 per share.
- Comcast’s total assets were $158.958 billion and total equity was $51.965 billion at September 30, 2015.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 11.2%, while operating income increased 6.9%. Net income attributable to Comcast declined 23.0% because the prior-year quarter benefited from a $759 million reduction in income tax expense related to uncertain tax positions.
- For the first nine months, revenue increased 8.3%, operating income increased 7.9%, but net income attributable to Comcast decreased 4.1%. The effective tax burden was materially higher in 2015.
- Cable Communications revenue increased 6.3% in both the quarter and first nine months. High-speed Internet revenue rose approximately 10%, business services revenue rose 19.5% in the quarter and 20.4% year to date, while voice revenue declined and video customer counts continued to fall.
- Third-quarter NBCUniversal revenue increased 20.8% and operating income before depreciation and amortization increased 17.0%. Filmed Entertainment benefited from Jurassic World and Minions, while Theme Parks benefited from higher attendance and per-capita spending.
- For the first nine months, NBCUniversal revenue increased 11.5% and operating income before depreciation and amortization increased 16.9%. Broadcast Television revenue declined 2.8% and Cable Networks revenue declined 0.2%, primarily reflecting the absence of the 2014 Sochi Olympics; excluding major Olympics and Super Bowl comparisons, management reported stronger underlying growth.
- Operating cash flow increased 12.3%, but investing and financing outflows increased. Net cash decreased $2.017 billion during the first nine months, compared with a $2.829 billion increase in the prior-year period.
- Capital expenditures increased from $5.196 billion to $5.862 billion, driven primarily by X1, wireless gateways, network capacity, cloud initiatives and business-services expansion.
- Interest expense increased year to date to $2.028 billion, including $47 million of additional expense from early debt redemptions. Comcast issued $4.0 billion of senior notes in May 2015 and redeemed or repaid several maturing or higher-coupon notes.
Guidance, Outlook, Risks and Unusual Items
- Management expected the 2015 annual effective tax rate to be 37% to 39%, absent tax-law changes or further changes in uncertain tax positions.
- Management stated that liquidity needs are expected to be met through operating cash flow, existing cash and investments, available credit facilities and future financing. The company expects to continue allocating cash to debt repayment, capital expenditures, investments and shareholder returns.
- NBCUniversal agreed to acquire a 51% economic interest in the entity owning Universal Studios Japan for $1.5 billion, expected to close in the fourth quarter of 2015 and be funded with cash and commercial paper borrowings.
- Comcast committed to invest up to $4 billion in a new strategic investment company and to pay a $40 million annual management fee, subject to offsets.
- Programming costs, including sports rights and retransmission consent fees, are expected to continue increasing. Management intends to offset pressure through pricing, additional services, business-services growth and operating efficiencies.
- Key risks include intense competition from satellite, fiber, wireless and Internet video providers; changing consumer viewing behavior; advertising-market weakness; technology and cybersecurity disruptions; regulation; rising programming costs; content acceptance and production risks; loss of distribution agreements or key talent; labor disputes; international operations; and risks from acquisitions and strategic transactions.
- Unusual items included a $252 million share of a Weather Channel goodwill impairment, a $240 million gain from settling contingent consideration owed to General Electric, $335 million of gains on business and investment sales, $198 million of 2015 Time Warner Cable transaction-related costs, and $56 million related to a contract settlement.
- The planned Time Warner Cable merger and related Charter transactions were terminated on April 24, 2015. Management reported no material adverse effect expected from disclosed litigation, although legal matters could be costly, time-consuming or reputationally harmful.
- The filing states that there were no significant changes to previously disclosed risk factors or market-risk information, and that disclosure controls were effective.
Important Facts for Investors to Verify
- Assess whether high-speed Internet and business-services growth can offset ongoing video and voice customer pressure and rising programming expenses.
- Separate recurring earnings from the effects of the 2015 Super Bowl, 2014 Olympics comparison, film releases, investment gains, impairment charges and tax-position adjustments.
- Monitor leverage, debt maturities, commercial paper usage and liquidity after the planned Universal Studios Japan acquisition and continued shareholder returns.
- Review the impact of the $4 billion strategic investment commitment and related management-fee obligations.
- Evaluate the sustainability of NBCUniversal’s film and theme-park performance amid content volatility, advertising pressure and changing consumer behavior.
- Confirm the status and valuation sensitivity of $1.056 billion in Level 3 contractual obligations and other contingent liabilities.