Comcast Corporation 2017 Q1 Form 10-Q Summary
Business context and reporting period
Comcast Corporation, including its wholly owned NBCUniversal subsidiary, filed a combined unaudited Form 10-Q for the three months ended March 31, 2017. Comcast operates through Cable Communications and NBCUniversal, whose principal segments are Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Comcast reported 28.9 million total customer relationships at quarter-end, including 26.8 million residential and 2.1 million business relationships.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $20.463 billion | $18.790 billion | Up 8.9% |
| Operating income | $4.530 billion | $4.089 billion | Up 10.8% |
| Net income | $2.647 billion | $2.224 billion | Up 19.0% |
| Net income attributable to Comcast | $2.566 billion | $2.134 billion | Up 20.2% |
| Diluted EPS | $0.53 | $0.43 | Up $0.10 |
| Adjusted EBITDA | $7.032 billion | $6.367 billion | Up 10.4% |
| Cash flow from operations | $5.656 billion | $5.399 billion | Up 4.8% |
| Capital expenditures | $2.078 billion | $1.885 billion | Up 10.2% |
Consolidated operating margin was approximately 22.1%, compared with 21.8% in the prior-year quarter. Adjusted EBITDA margin was approximately 34.4%, compared with 33.9%. Cable Communications revenue increased 5.8% to $12.912 billion and Adjusted EBITDA increased 6.3% to $5.198 billion, with a 40.3% segment margin versus 40.1% in Q1 2016. NBCUniversal revenue increased 14.7% to $7.868 billion and Adjusted EBITDA increased 24.4% to $2.017 billion.
Within NBCUniversal, Filmed Entertainment revenue increased 43.2% and Adjusted EBITDA increased 120.6%, benefiting from films including Fifty Shades Darker, Sing, Split and Get Out, as well as the inclusion of DreamWorks Animation. Cable Networks Adjusted EBITDA increased 16.8%, Broadcast Television increased 13.4% and Theme Parks increased 6.1%.
At March 31, 2017, Comcast had cash and cash equivalents of $4.022 billion, total assets of $182.479 billion and total debt with a carrying value of approximately $61.8 billion. Long-term debt, including the current portion, totaled approximately $61.785 billion. Available capacity under consolidated revolving credit facilities, net of commercial paper and letters of credit, was $7.4 billion. NBCUniversal had $915 million of commercial paper outstanding; Comcast had no commercial paper outstanding.
Cash used in investing activities was $3.794 billion, including $2.078 billion of capital expenditures, $416 million of intangible-asset purchases, $216 million for acquisitions and $1.062 billion for investment purchases. Cash used in financing activities was $1.141 billion, after $996 million of share repurchases, $657 million of dividends, debt repayments and net short-term borrowing repayments. Ending cash increased by $721 million to $4.022 billion.
Material changes versus the prior comparable period
- High-speed Internet revenue increased 10.1%, supported by customer growth, higher service tiers and rate adjustments. Residential high-speed Internet customers increased to 23.224 million.
- Business services revenue increased 13.6%, while voice revenue declined 3.6% and Cable Communications advertising revenue declined 6.3%, primarily because of lower political advertising.
- Cable Communications programming expenses increased 11.7%, principally because of contract renewals, retransmission consent fees and sports programming costs.
- NBCUniversal Filmed Entertainment benefited from stronger theatrical performance and DreamWorks Animation; the acquisition contributed $3.8 billion of purchase consideration in 2016, although its Q1 2017 revenue and net income contribution was not material.
- Interest expense increased to $755 million from $703 million, primarily because of higher debt outstanding. Other income declined year over year because Q1 2016 included a $108 million gain related to The Weather Channel transaction.
- Comcast adopted new share-based compensation guidance. The adoption reduced Q1 2017 income tax expense by $139 million and increased diluted EPS by $0.03. It also increased operating cash flow by $385 million and reduced financing cash flow by the same amount.
- The Board increased the share-repurchase authorization to $12 billion. Comcast repurchased approximately 20.4 million shares for $750 million during the quarter and expected to repurchase an additional $4.25 billion during the remainder of 2017, subject to market conditions. The quarterly dividend was increased 15% to $0.1575 per share.
Guidance, outlook, risks and unusual items
Management stated that it expects to meet liquidity and capital requirements through operating cash flow, existing cash and investments, available credit facilities and future financing. Comcast expected its 2017 annual effective tax rate to be 35% to 37%, absent changes in tax law or significant changes in uncertain tax positions.
Comcast expected to launch its wireless phone service on a small scale in mid-2017 for qualifying residential high-speed Internet customers. The initiative is expected to require success-based working capital, including handset and equipment procurement.
After quarter-end, Comcast acquired the remaining interests in Universal Studios Japan for approximately $2.3 billion, funded with cash and commercial paper borrowings. Comcast also agreed to acquire $1.7 billion of spectrum in the FCC auction, while NBCUniversal agreed to relinquish certain broadcast spectrum licenses and receive $482 million of proceeds. The related license book value was $144 million.
Key risks include intense competition; changing consumer viewing and distribution behavior; pressure on advertising markets; increasing programming costs; content acceptance and production-cost risks; loss or unfavorable renewal of distribution agreements; regulation; cybersecurity and technology disruptions; execution risk associated with acquisitions and wireless service; labor disputes; and international operations.
Comcast disclosed a Sprint patent lawsuit involving its voice services. Sprint seeks approximately $950 million in damages plus interest and may seek enhanced damages. Trial on four remaining patents was scheduled for late October 2017. Comcast believes the claims lack merit, cannot estimate a possible loss range and does not expect the matter to materially affect consolidated financial position, although it could materially affect results or cash flow for an individual period.
The filing states that the unaudited interim results are not necessarily indicative of full-year results. Revenue-recognition guidance effective January 1, 2018 is not expected to materially affect financial position or results, but will change the timing of certain installation, commission and content-licensing revenue. Lease guidance is effective January 1, 2019, and its impact remained under evaluation.
Most important facts for investors to verify
- Whether high-speed Internet and business-services growth offsets video, voice and advertising pressure.
- The sustainability of NBCUniversal’s Filmed Entertainment improvement and the performance of DreamWorks Animation.
- Programming-cost inflation and its effect on Cable Communications margins.
- Debt growth, interest expense, commercial-paper usage and financing of Universal Studios Japan and spectrum purchases.
- Actual share repurchases and dividend payments compared with the stated 2017 capital-return plans.
- The financial and operational results of the planned wireless phone service launch.
- Developments in the Sprint patent litigation and any related settlement or damages exposure.
- The final accounting effects of the revenue-recognition, financial-assets and lease standards.