Comcast Corporation 2016 Q2 Form 10-Q Summary
Business context and reporting period
Combined quarterly report filed July 27, 2016 by Comcast Corporation and wholly owned NBCUniversal Media, LLC. The filing covers the three and six months ended June 30, 2016, with comparisons to the same periods in 2015. Comcast operates through Cable Communications and NBCUniversal’s Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks segments.
As of June 30, 2016, Comcast Cable had 28.1 million customer relationships, including 22.4 million video, 24.0 million high-speed Internet and 11.6 million voice customers. Cable Communications generated 65% of consolidated revenue and 78% of consolidated operating income before depreciation and amortization for the six months.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Revenue | $19.269 billion | $18.743 billion | 2.8% increase |
| Operating income | $4.066 billion | $4.105 billion | 1.0% decrease |
| Operating margin | 21.1% | 21.9% | Down approximately 80 basis points |
| Net income | $2.080 billion | $2.175 billion | 4.4% decrease |
| Net income attributable to Comcast | $2.028 billion | $2.137 billion | 5.1% decrease |
| Diluted EPS | $0.83 | $0.84 | Decrease |
| Operating income before depreciation and amortization | $6.455 billion | $6.266 billion | 3.0% increase |
| Metric | Six months 2016 | Six months 2015 | Change |
|---|---|---|---|
| Revenue | $38.059 billion | $36.596 billion | 4.0% increase |
| Operating income | $8.155 billion | $7.995 billion | 2.0% increase |
| Operating margin | 21.4% | 21.9% | Down approximately 40 basis points |
| Net income | $4.304 billion | $4.316 billion | 0.3% decrease |
| Net income attributable to Comcast | $4.162 billion | $4.196 billion | 0.8% decrease |
| Diluted EPS | $1.70 | $1.65 | Increase |
| Cash flow from operating activities | $9.383 billion | $8.834 billion | 6.2% increase |
| Capital expenditures | $4.156 billion | $3.697 billion | 12.4% increase |
Q2 EBITDA margin, based on operating income before depreciation and amortization, was approximately 33.5%, compared with 33.4% in the prior-year quarter. Six-month EBITDA margin was approximately 33.7%, compared with 33.4% in 2015.
At June 30, 2016, cash and cash equivalents were $4.665 billion, compared with $2.295 billion at December 31, 2015. Debt had a carrying value of $55.6 billion and an estimated fair value of $64.4 billion. Available capacity under consolidated revolving credit facilities, net of commercial paper and letters of credit, was $7.1 billion.
Material changes versus the prior comparable period
- Cable Communications revenue increased 6.0% in Q2 and 6.3% for six months. High-speed Internet revenue increased 8.6% and 8.1%, while business services revenue increased 17.0% and 17.2%, respectively.
- Cable Communications operating income before depreciation and amortization increased 5.7% in Q2 and 5.3% for six months, despite higher programming, technical support and customer service costs.
- Video customer additions improved to 49,000 for the first six months, compared with a loss of 77,000 in the prior-year period. High-speed Internet additions increased to 658,000 from 587,000.
- Cable Networks revenue and operating income before depreciation and amortization increased 4.7% and 8.3% in Q2, respectively, primarily from higher distribution revenue.
- Broadcast Television revenue increased 17.3% in Q2 and 3.7% for six months. Six-month results benefited from the absence of prior-year Super Bowl costs, although the prior-year period included $376 million of Super Bowl revenue.
- Filmed Entertainment revenue declined 40.4% in Q2 and 26.4% for six months, reflecting weaker theatrical and home-entertainment results compared with the strong 2015 releases, including Furious 7 and Jurassic World.
- Theme Parks revenue increased 47.0% in Q2 and 51.8% for six months on an actual basis, primarily due to the 51% acquisition of Universal Studios Japan. On a pro forma basis, revenue increased 10.6% and 10.2%, respectively.
- Consolidated interest expense increased to $732 million in Q2 and $1.435 billion for six months, primarily due to higher debt outstanding.
- Share repurchases totaled approximately $2.4 billion for the first six months, covering approximately 40 million Class A shares. Management expected approximately $2.6 billion of additional repurchases during the remainder of 2016, subject to market conditions.
Cash flow, capital structure and liquidity
- Six-month operating cash flow of $9.383 billion exceeded capital expenditures and cash payments for intangible assets of $4.893 billion.
- Investing cash flow was negative $5.828 billion, including $4.156 billion of capital expenditures, $737 million of intangible-asset purchases, $211 million for real estate acquisitions and construction, and $580 million of investment purchases.
- Financing cash flow was negative $1.185 billion after $2.551 billion of debt repayments, $2.385 billion of share repurchases and $1.281 billion of dividends, partially offset by $4.753 billion of borrowings.
- Comcast issued $1.43 billion of senior notes in May 2016 and issued additional senior notes in February and March. It also established a new $7.0 billion Comcast revolving facility and a new $1.5 billion NBCUniversal Enterprise revolving facility, both due in 2021.
- The quarterly dividend was $0.275 per common share, following a 10% increase in the annualized dividend to $1.10 per share.
Guidance, outlook, risks and unusual items
- Management expected the 2016 annual effective tax rate to be 37% to 39%, absent tax-law changes or significant changes in uncertain tax positions.
- Management stated that liquidity and capital requirements were expected to be met through operating cash flow, existing cash and investments, available credit facilities and future financing.
- Programming expenses were expected to continue increasing, potentially pressuring Cable Communications margins. Management intended to offset the pressure through revenue growth, particularly in high-speed Internet, video and business services.
- Comcast agreed to acquire DreamWorks Animation for approximately $3.8 billion, or $41 per share. The transaction was expected to close in 2016 subject to international regulatory approvals and customary conditions. July debt proceeds were intended to fund the acquisition and general corporate purposes.
- Q2 2016 included a $116 million operating expense related to the elimination of substantially all liabilities associated with certain insurance obligations.
- Six-month 2016 other income included a $108 million pretax gain from the sale of The Weather Channel product and technology businesses. The prior-year period included a $252 million share of a Weather Channel goodwill impairment, as well as other sale and settlement gains.
- Comcast contributed $429 million to Atairos during the first six months and had committed to fund up to $4 billion at any one time, subject to specified offsets.
- Principal risks include intense competition, changing consumer viewing behavior, advertising-market weakness, rising programming costs, content acceptance, regulatory changes, cyber and technology disruptions, acquisitions, labor disputes and international operations. The filing reported no significant changes to the risk factors in the 2015 Form 10-K.
- The company was subject to patent-infringement lawsuits and other ordinary-course claims. Management did not expect the ultimate liability to materially affect results, cash flows or financial position, but noted potential effects on time and reputation.
Most important facts for an investor to verify
- Whether the DreamWorks acquisition closed as expected, its final purchase accounting and its effect on leverage and cash flow.
- Post-acquisition debt balances, refinancing activity and remaining revolving-credit availability.
- Progress in high-speed Internet, business services and video customer growth, including the effect of pricing and cord-cutting.
- Whether programming-cost inflation continues to outpace Cable Communications revenue growth and compress margins.
- Performance of the Filmed Entertainment slate and sustainability of Theme Parks growth after normalizing for Universal Studios Japan.
- Actual 2016 tax rate, share repurchases, dividends and capital-expenditure requirements versus the stated expectations.
- Final outcomes and potential costs of litigation, insurance obligations, regulatory approvals and other contingencies.