Comcast Corporation 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Comcast Corporation filed a combined Form 10-Q with NBCUniversal Media, LLC for the three and nine months ended September 30, 2014. Comcast operates primarily through Cable Communications and NBCUniversal, which includes Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. The interim financial statements are unaudited.
As of September 30, 2014, Cable Communications served 22.4 million video customers, 21.6 million high-speed Internet customers and 11.1 million voice customers, representing 26.9 million total customer relationships.
Key Financial Metrics
| Comcast consolidated | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $16.791 billion | $16.151 billion | $51.043 billion | $47.731 billion |
| Operating income | $3.745 billion | $3.414 billion | $11.117 billion | $9.916 billion |
| Net income | $2.633 billion | $1.778 billion | $6.596 billion | $5.167 billion |
| Net income attributable to Comcast | $2.592 billion | $1.732 billion | $6.455 billion | $4.903 billion |
| Diluted EPS | $0.99 | $0.65 | $2.46 | $1.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $12.302 billion | $11.679 billion |
- Q3 revenue increased 4.0%, operating income increased 9.7%, and Comcast-attributable net income increased 49.7% year over year.
- Nine-month revenue increased 6.9%, operating income increased 12.1%, and Comcast-attributable net income increased 31.7%.
- Approximate operating margin was 22.3% in Q3 2014 versus 21.1% in Q3 2013; nine-month operating margin was 21.8% versus 20.8%.
- Approximate Comcast-attributable net margin was 15.4% in Q3 2014 versus 10.7% in Q3 2013; nine-month net margin was 12.6% versus 10.3%.
- Cash and cash equivalents were $4.547 billion at September 30, 2014, compared with $1.718 billion at December 31, 2013.
- Capital expenditures were $5.196 billion for the first nine months, up from $4.593 billion, primarily reflecting investment in customer equipment, the X1 platform, Cloud DVR and network capacity.
- Debt had a carrying value of $48.4 billion and estimated fair value of $54.4 billion. Available capacity under consolidated revolving credit facilities was $6.4 billion.
- Comcast declared quarterly dividends of $0.225 per share and repurchased $2.25 billion of common stock during the first nine months.
Segment Performance and Material Changes
| Segment | Q3 2014 revenue | Year-over-year change | Q3 2014 operating income before D&A | Year-over-year change |
|---|---|---|---|---|
| Cable Communications | $11.041 billion | 5.2% | $4.464 billion | 5.1% |
| Cable Networks | $2.255 billion | 0.7% | $868 million | 1.8% |
| Broadcast Television | $1.770 billion | 7.7% | $142 million | 318.0% |
| Filmed Entertainment | $1.186 billion | (15.2%) | $151 million | (20.3%) |
| Theme Parks | $786 million | 18.7% | $402 million | 16.9% |
- Cable Communications growth was led by high-speed Internet revenue, up 9.6%, business services revenue, up 21.0%, and advertising revenue, up 12.3%. Video revenue increased only 1.0%, while video customers declined by 81,000 during the quarter.
- High-speed Internet customers increased by 315,000 and voice customers by 68,000 during Q3. Total customer relationships increased by 82,000.
- NBCUniversal nine-month revenue increased 9.5% and operating income before depreciation and amortization increased 22.6%. Results benefited materially from the 2014 Sochi Olympics.
- Broadcast Television nine-month revenue included approximately $846 million from the Sochi Olympics; Cable Networks included approximately $257 million. Excluding Olympics-related revenue, NBCUniversal growth was lower.
- Filmed Entertainment declined in Q3 because the prior-year period benefited from stronger releases, including Despicable Me 2. Nine-month segment operating income nonetheless increased because of a smaller film slate, lower marketing expense and lower film-cost adjustments.
- Theme Parks benefited from higher attendance and per-capita spending associated with new attractions, including The Wizarding World of Harry Potter—Diagon Alley.
- Fandango was reclassified from Cable Networks to Filmed Entertainment beginning in 2014; prior-period amounts were not adjusted because management considered the effect immaterial.
Cash Flow, Debt and Liquidity
- Nine-month operating cash flow was $12.302 billion, up from $11.679 billion. Film and television production spending and related working-capital timing reduced operating cash flow relative to operating performance.
- Investing cash outflow was $6.080 billion, including $5.196 billion of capital expenditures, $735 million for intangible assets and $477 million for acquisitions.
- Financing cash outflow was $3.393 billion, including $3.172 billion of debt repayments, $2.250 billion of share repurchases and $1.676 billion of dividends, partly offset by $4.182 billion of new borrowings.
- Comcast issued $2.2 billion of senior notes in February and $2.0 billion in August 2014. NBCUniversal Enterprise had $910 million of commercial paper outstanding at September 30.
- Management stated that operating cash flow, cash and investments, available credit facilities and access to external financing should satisfy current and long-term liquidity needs.
Guidance, Outlook, Risks and Unusual Items
- Management expected the 2014 annual effective tax rate to be 31% to 33%, absent changes in tax law or further changes in uncertain tax positions.
- Q3 income tax expense was reduced by $724 million from a reduction in accruals for uncertain tax positions and related interest. This materially contributed to the year-over-year increase in net income and is not representative of recurring operating performance.
- Comcast expected to repurchase approximately $750 million more of shares during the remainder of 2014 and intended to repurchase an additional $2.5 billion through the expected closing of the Time Warner Cable merger, subject to market conditions.
- The Time Warner Cable merger was approved by both shareholder groups in October 2014 but remained subject to regulatory and customary closing conditions, with closing expected in early 2015. Time Warner Cable shareholders were expected to receive approximately 24% of Comcast’s outstanding common stock at closing.
- Related Charter transactions contemplated a net disposition of approximately 3.9 million video customers through a SpinCo spin-off, system exchanges and a cash sale. These transactions were subject to regulatory, financing, shareholder and other conditions.
- Key risks include competition from satellite, telephone and online providers; changing consumer behavior and cord-cutting; rising programming and sports-rights costs; advertising volatility; content acceptance and film performance; regulation; cybersecurity and technology disruptions; labor disputes; and execution risk related to the Time Warner Cable and Charter transactions.
- Antitrust and other litigation remained pending. A proposed comprehensive settlement of 23 antitrust cases was withdrawn in October 2014. Management did not expect the cases to materially affect consolidated financial position, but stated that a resolution could be material to results or cash flows for an individual period.
- The filing states that there were no significant changes to previously disclosed risk factors or market-risk disclosures, and that disclosure controls and internal controls were effective.
Most Important Facts to Verify
- Whether the Time Warner Cable merger and related Charter divestiture transactions closed on the expected timetable and under what final regulatory conditions.
- The recurring earnings impact of the $724 million tax benefit and the sustainability of the reported net-margin expansion.
- Video customer trends, including the effect of competition, pricing and the revised methodology for counting customers in multiple-dwelling units.
- Programming, sports-rights and content-production cost growth relative to revenue growth.
- Post-transaction leverage, debt repayment requirements and the effect of planned share repurchases and dividends on liquidity.
- Olympics-related revenue and expenses, film-release timing and other seasonal or unusual items when assessing normalized performance.