Comcast reported strong Q4 results. The company reported $8.0 billion of revenue, up 14% year-over-year and beating the Street’s $7.9 billion consensus. EPS came in at 20 cents per share, beating the Street’s 19 cents per share estimate. Net income increased 54% y/y to $602 million. Free cash flow almost tripled to $1.0 billion. Shares are up almost 8%. Release.
Key points: Softer economy “made it hard to grow,” but execs say they now “better understand the effects of slower housing trends and a weaker economy.” Digital phone service still leading growth — Comcast now the fourth largest residential phone company in the country. Comcast added 604,000 net subcribers during the quarter, up 18% from 510,000 during Q4 2006. But growth slowed sequentially. Customers’ average monthly bills increased 10% year-over-year to $104.77. And the company said still has no (public) plans for the wireless spectrum it bought in 2006. Management doesn’t expect political ad revenue to be meaningful until second half of the year. And Comcast is working with other cable companies on interactive ad platform.
Conference call notes:
– 43% of revenues came from areas other than traditional cable service, up from 32% 5 years ago.
– Revenues to grow 8%-10% this year.
– Capex to decrease to 18% of revenue from 20%.
– At least 20% growth in consolidated free cash flow.
– Disciplined with approach to acquisitions. Won’t invest in anything stupid. Not buying Yahoo or Sprint.
– Things slowed down in 2nd half relative to expectations. Business changed as economy and increased competition made it hard to grow. We now better understand the effects of slower housing trends and a weaker economy.
– Going all-digital in about 20% of markets in 2nd half of 2008. Will send all content digitally while keeping 20-30 analogue tier. Can use bandwidth for up to 150 HD channels, etc.
Live conference call notes, joining mid-call:
9:07 Joining the call. Priority: returning value to shareholders. Today, announced dividend of 1/3 of FCF and net income. Expect it to increase over time.
9:09 Lots of investment in 2007. Cable capex $1.5 billion in qtr, $6 billion full year. Capex continues to be growth and revenue driven. Direct impact of sub. replacement and growth, set top boxes seen in CPE and scalable infrastructure investments, and make up 70% of capex. More than half is CPE.
9:10 Installed 2 set top boxes on avg. for every digital customer added in 2007.
9:13 Regarding growth capex, this 65%-70% of allocation is by far largest component of annual investment, and is driven by growth.
9:14 More than $900 million spent on HD and HD boxes. Based on investment and incremental cash flow, we think we’re doing a good deal. More than 30% after tax IRR. Risk of execution marginal, return in excess of avg. 8.5% weighted cost to capital. Will provide more transparency of capex and returns in future. We think capex as % of revenue peaked in 2007. Total capex expected to decline to 18% of revenue in 2008. Assuming a decline in core residential capex despite increase in avg cost per set top box, reflecting higher cost of cablecards/separate security. Investing in bandwidth enhancing projects like going all digital in certain markets.
9:16 Focused on maintaining investment grade rating. Today, that means leverage ratio of 2.5x to 3x.
9:18 Over last 3 years, have returned $8 billion thru share repurchases. Intend to complete current authorization of $6.9 billion by end of 2009 in addition to 25 cents per share dividend.
9:19 Q&A to begin. Two exhibits on IR site: How to arrive at maintenance capital, and pro-forma numbers including Insight.
9:20 Happy valentine’s day from Jessica Reif Cohen! Why don’t expect political advertising? Customer service initiatives? We and other cable companies getting together to lay foundation for truly national interactive advertising platform. One of the most exciting upsides that we have in the business. Putting $50 million to $70 million into this. Going to be real in ’09 and ’10. Political advertising won’t have impact until second half of the year. In terms of marketing and customer service, think we have a “fighter’s budget.” All-digital, DOCSIS, etc. Budgeting to “come out swinging.”
9:22 With less housing velocity, seeing less churn? Expect continued margin expansion next year? More FCF growth? Margin expansion: clearly expanded margins in ’07. Making meaningful investment in marketing/advertising/customer service. With regards to EBITDA guidance, looking at between 8% and 10%, when translate that from capex into FCF, many other items related to taxes, interest expense, think we’re being realistic with guidance. FCF has many factors to it and we’re monitoring very carefully. Didn’t mention switched broadcast video: About 15% of country to be budgeted to be lit up for switched digital video during 2008.
9:24 SME: Came in a little under budget in 2007. Equipment ready to go from multi-line perspective? What seeing where there’s FiOS and U-Verse competition? Any colour there? SME: More capital intensive. Impatient that not ramping faster. Other cable companies have commercial business much bigger than ours. Putting a lot of attention. Hired 2100 people in the business. Phone launched in addition to data. Hard to tell how much ramp/capex, but that biz has very high returns. FiOS and U-Verse: No question Verizon is real and is taking some subscribers from us. We believe we’re taking a multiple of subs from them on phone size than they do on video. Gaining penetration. Even in FiOS areas, still continuing to expand Internet and phone businesses nicely. Head on head we think we’re competing fine. Less than 10% of homes passed have FiOS. Much less of a competitive effect from AT&T’s U-Verse. Hard to tell where they’re gaining customers. Satellite also strong competitors. Very competitive video marketplace. Doing very well with phone, when we get into interactive advertising, it’s all going to be a good story.
9:29 Able to re-price subs after $99 triple play? Churn? Reset about $20, harder to get now that economy is softer. Some people only want to pay $99, with slower speed Internet can offer them that. Still shooting for $20, majority of customers do stay with us.
9:31 Philosophical view between buyback and dividend: Why buyback more vs. dividend? Looked at a bunch of factors. Payout of FCF, etc. We tried to have a meaningful start. $750 million a year. Also wanted to buy the stock in an accelerated fashion which we also announced today. Payout basis both on FCF and net income. Hopefully can increase as we go forward.
9:34 On basic video business: Penetration dipped below 50% by end of year. Likelihood of future price increases given competitive environment? AWS auction spectrum? In our video business, the major cost we all have to bear is programming, and those prices are going up. Hard to imagine business not having retail price increase given that. I don’t think notion that price increases are a thing of the past is in our thinking. More broadly: We’re in 5 businesses now. Video, voice, data, commercial, and advertising. Video is one of the five, happens to be biggest of five. One of components of video is basic. Used to be all there was, but not any more. Much fairer to look at revenues and FCF. Because other parts of business are growing well, I think balances out what’s happening with basic subs. HD, DVR, etc. And that’s why we’re constantly trying to improve HD, VoD, etc. Can’t control all behaviour of competitors. Wireless: Nothing’s really changed in wireless. Focus remains on finding a way to extend our services, some sort of mobility, compelling features w/ incremental revenue growth. AWS spectrum gives long term flexibility. What SpectrumCo is doing, need to have it cleared. Strategy has not changed. We’re studying what’s the best way to utilise that, if at all. Not seeing an impact on wireless business from wireless business in 2007 or 2008.
9:38 Not going to give precise sell-in levels, but HSD, Phone, Triple play all higher than current penetration levels. 27% penetration, lot of markets with sell-in levels of 40% to 50%. Concerned that basic sub is building block. But we have millions of subs that take HSD, phone alone. Really is a real opportunity when you take 24 million subs that don’t take video from us that we can go to. Can offer phone/HSD to satellite customers, etc. Even though HSD business maturing, if we end up getting to 40% penetration of homes, 6-7 million customers possible. 4-5 more years of growth. With phone we’re just getting started. Cox and CVC have penetration up to 40%-50% in some areas. Last year, we sold a lot of hi-def DVRs, another incremental revenue stream; that’s how we were able to get ARPU over $100.
9:41 Last question: Bad debt expense? First 9 months of year tick-up of bad debt. In Q4 come down a bit as instituted some more collection/credit screening processes, on top of it. As you sum it up, appreciate the patience, we took a little more time in laying out a comprehensive strategy. Good analysis of what happened in ’07, a lot of time spent preparing ’08 plan. Plan allows us to focus on, in addition to revenue and cash flow, resume FCF focus on growing that significantly at a fast rate, allows us to instantly return capital to shareholders while focusing on building the business from long-term shareholder growth, good returning projects, think this a good plan, excited about the year.
9:44 Call ends.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.