Business Context and Reporting Period
Comcast Corporation filed a combined unaudited Form 10-Q with NBCUniversal Media, LLC for the three and nine months ended September 30, 2016. Comcast operates through Cable Communications and NBCUniversal’s Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks segments. Cable Communications represented 63% of consolidated revenue and 76% of operating income before depreciation and amortization for the nine months.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $21.319 billion | $18.669 billion | $59.378 billion | $55.265 billion |
| Operating income | $4.440 billion | $4.001 billion | $12.595 billion | $11.996 billion |
| Operating margin | 20.8% | 21.4% | 21.2% | 21.7% |
| Operating income before D&A | $6.835 billion | $6.184 billion | $19.657 billion | $18.406 billion |
| Net income attributable to Comcast | $2.237 billion | $1.996 billion | $6.399 billion | $6.192 billion |
| Diluted EPS | $0.92 | $0.80 | $2.62 | $2.45 |
| Net cash from operating activities | Not separately provided | Not separately provided | $13.497 billion | $13.813 billion |
Q3 operating income before depreciation and amortization margin was approximately 32.1%; the nine-month margin was approximately 33.1%. Net income attributable to Comcast margin was approximately 10.5% in Q3 and 10.8% for the nine months.
- September 30, 2016 cash and cash equivalents were $2.807 billion, versus $2.295 billion at December 31, 2015.
- Total debt carrying value was approximately $60.4 billion, consisting of $3.333 billion current debt and $57.095 billion long-term debt. Estimated fair value was $69.4 billion.
- Available consolidated revolving credit capacity, net of commercial paper and letters of credit, was $6.6 billion. Commercial paper outstanding totaled $1.605 billion.
- Nine-month capital expenditures were $6.562 billion, cash paid for intangible assets was $1.163 billion, and acquisitions totaled $3.904 billion.
- Nine-month free cash flow, calculated as operating cash flow less capital expenditures, was approximately $6.935 billion before intangible-asset payments and acquisitions.
- The quarterly dividend was $0.275 per share; $1.944 billion of dividends were paid during the nine months. Comcast repurchased 61 million shares for approximately $3.8 billion.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 14.2% and nine-month revenue increased 7.4%; Comcast-attributable net income increased 12.1% in Q3 but only 3.4% for the nine months.
- Revenue growth reflected the 2016 Rio Olympics, which contributed approximately $1.6 billion of consolidated revenue, including $1.2 billion of advertising revenue. Excluding major sporting events, revenue growth was 5.5% in Q3 and 5.2% for the nine months.
- Operating income rose 11.0% in Q3 and 5.0% for the nine months, but operating margin declined modestly because programming, production and other operating costs grew faster than revenue.
- Cable Communications revenue increased 6.9% in Q3 and 6.5% for the nine months. High-speed Internet revenue increased 8.8% and 8.4%, while business services revenue increased 15.5% and 16.6%. Voice revenue declined 2.4% and 1.5%.
- Cable Communications had 28.3 million customer relationships, 24.3 million high-speed Internet customers and 22.4 million video customers at September 30, 2016. Internet customers increased 1.448 million year over year; video customers increased 170,000.
- NBCUniversal revenue increased 28.3% in Q3 and 10.3% for the nine months. Broadcast Television benefited substantially from the Olympics, while Filmed Entertainment revenue declined 7.9% in Q3 and 20.0% for the nine months due largely to stronger prior-year film releases.
- Theme Parks operating income before depreciation and amortization increased 62.4% in Q3 and 53.1% for the nine months on a reported basis, driven by Universal Studios Japan, new attractions and favorable Japanese yen translation. On a pro forma basis, growth was 17.1% and 9.8%.
- Comcast acquired DreamWorks Animation on August 22, 2016 for $3.8 billion, assumed $381 million of debt and recorded approximately $2.56 billion of preliminary goodwill in Filmed Entertainment. DreamWorks contribution to current-period revenue and net income was not material.
- Operating cash flow declined $316 million, or 2.3%, for the nine months, while capital expenditures increased $700 million and acquisition spending increased $3.618 billion.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected a 2016 annual effective tax rate of 37% to 39%, absent tax-law changes or significant changes in uncertain tax positions.
- Management stated that liquidity and capital requirements are expected to be met through operating cash flow, existing cash and investments, available credit facilities and future financing.
- Comcast expected approximately $1.2 billion of additional share repurchases during the remainder of 2016, subject to market conditions. The board authorization was $10 billion with no expiration date.
- Comcast anticipated launching a Comcast-branded wireless phone service in 2017 using Verizon’s network; offering parameters remained under evaluation and the service would require working capital, particularly for handset procurement.
- Programming expenses are expected to continue increasing and may pressure Cable Communications margins. The company also faces competition, changing consumer viewing behavior, advertising-market volatility, technology requirements, regulation, content acceptance and renewal risks, cybersecurity and network-disruption risks, labor disputes, international exposure and acquisition-integration risks.
- DreamWorks-related unusual items included $50 million of severance costs in Filmed Entertainment and settlement of a $146 million tax receivable agreement liability. The assumed DreamWorks debt was repaid during Q3.
- The company recorded a $108 million pretax gain from the sale of The Weather Channel product and technology businesses. A prior-year $252 million Weather Channel impairment reduced the comparability of equity income.
- Time Warner’s investment in Hulu diluted Comcast’s interest from 33% to 30%; Comcast recorded a $159 million deferred gain subject to future recognition if related options expire unexercised.
- Pending litigation includes patent-infringement and ordinary-course claims. Management did not expect the ultimate liabilities to materially affect results, cash flows or financial position, but litigation could be costly and harm reputation.
- The filing states that disclosure controls were effective and that there were no significant changes in risk factors from the 2015 Form 10-K.
Important Facts for Investors to Verify
- Whether Olympic-related revenue and costs, as well as favorable theme-park trends, create difficult comparisons after 2016.
- The sustainability of high-speed Internet and business-services growth relative to video and voice declines.
- Programming-cost inflation and its effect on Cable Communications margins and cash generation.
- DreamWorks integration, final purchase-price allocation, goodwill valuation and future content performance.
- Debt reduction plans, interest expense, commercial paper exposure and the effect of acquisition financing on leverage.
- Capital intensity, including cable-network upgrades, customer-premise equipment, theme-park investment and intangible-asset spending.
- The timing, economics and working-capital requirements of the planned wireless service.
- Adoption impacts of new revenue-recognition, financial-instrument, lease and share-based-compensation accounting standards.