Comcast Corporation (NASDAQ:CMCSA) Q4 2022 Earnings Call Transcript

Comcast Corporation (NASDAQ:CMCSA) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good morning, ladies and gentlemen, and welcome to Comcast’s Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time all participants are in listen-only mode. Please note that this conference call is being recorded. I will now turn the call over to Executive Vice President, Investor Relations, Ms. Marci Ryvicker. Please go ahead, Ms. Ryvicker.

Marci Ryvicker: Thank you, operator, and welcome, everyone. On this morning’s call are Brian Roberts, Mike Cavanagh and Jason Armstrong, who are also joined by Dave Watson, Jeff Shell and Dana Strong, Brian and Mike will make formal remarks, while Dave, Jeff and Dana will also be available for Q&A. Let me now refer you to Slide 2, which contains our safe harbor disclaimer and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, during this call, we will refer to certain non-GAAP financial measures. Please see our 8-K and trending schedules for the reconciliations of these non-GAAP financial measures to GAAP. With that, let me turn the call over to Brian Roberts for his comments. Brian?

Brian Roberts: Thanks, Marci, and good morning, everyone. I’m really proud of how our team executed throughout 2022. We achieved the highest levels of revenue, adjusted EBITDA and adjusted EPS in our company’s history. And we returned a record $17.7 billion of capital to shareholders through both our recurring dividend, which we just increased for the 15th consecutive year and robust share repurchase activity. We did all this while accelerating investment in key growth initiatives, which are showing great progress, particularly our broadband network as we transition to 10G but also in Xfinity Mobile, Peacock and our theme parks. I attribute all this success to the incredible talent across our organization, who work collaboratively to ensure we are constantly evolving and innovating so that our customers have the absolute best experience with us at every point of interaction.

What also sets us apart is our very strong balance sheet, which, when combined with the cost actions we have taken this past quarter, position us to perform well no matter what the macro environment might bring. I want to start with cable, where our financial performance both for the year and the fourth quarter confirm that we are striking the right balance between rate and volume in residential broadband, and we plan to continue to do so in 2023. At Xfinity Mobile and Comcast business remain strong growth drivers and we have successfully identified the appropriate mix between cutting costs to drive efficiencies and investing for our future. We have always maintained an intense focus on providing the absolute best products and experiences, which comes down to having the highest capacity, most reliable and most efficient broadband network.

Our evolution to 10G and the unique way we are pursuing this through DOCSIS 4.0 is a huge benefit for our customers across the entire footprint that they will all have access to an entire ecosystem built around multi-gigabit symmetrical speeds, some as early as this year. It’s also great for the company investors as our transition to a virtual software-based network infused with the marvelous AI capabilities will not only provide tangible benefits when it comes to operating and capital expenses, but it will enable us to innovate faster than ever before, solidifying our leadership position in broadband, which is extremely important given what is certain to be continued increases in demand for both speed and usage. In fact, we continue to see signs of this today.

Our residential broadband-only customers are now consuming nearly 700 gigabytes of data every month, and customers on our Gigabit Plus products now comprise one-third of our broadband subscribers. In addition to creating more value from our current customer base and further penetrating the total homes and businesses that we pass today, another great opportunity is for us to extend our networks to homes and businesses in the U.S. that do not have the ability to receive our services. To that end, we increased our passings by 1.4% or $840,000 in 2022, and we expect to accelerate in 2023, where we are aiming to add around 1 million while still maintaining the same CapEx intensity level we achieved in 2022, reaching nearly 62.5 million by the end of the year.

We are taking a disciplined approach, and we’ll only pursue those areas that have a return profile similar to what we have been able to historically achieve. Wireless is playing an integral part of our overall strategy at cable, and it’s an area where we continue to shine. This past quarter was another record in net line additions, bringing us to over 5 million total lines in just five years. Only 9% penetration of our current base of residential broadband customers, we have plenty of runway ahead, and we’re just getting started in offering wireless to our commercial segment, which is another great example of how we are selling more products into our existing base of business customers. When you combine our broadband network, WiFi overlay and MVNO with Verizon, we are in the best position to win in convergence.

We have a leg up on our competitors with a capital-light strategy that does not involve customer or network trade-offs. At NBCUniversal, we are seeing some great momentum in Peacock and parks. And across all of NBCUniversal, our intellectual property is really resonating. We had the number 2 studio in terms of worldwide box office in 2022, fueled by a strong slate, including Jurassic, Minions, Nope, Ticket to Paradise, Puss in Boots, Black Bone, Halloween, which have also had great carryover success to Peacock through our Pay-One window and select day and date releases. And our box office momentum continued into the first quarter with M3GAN, so all in all, a really strong film slate. Peacock ended the year with over 20 million paying subscribers, more than double where we started.

And we added over 5 million paid subscribers in the fourth quarter alone. Our success was broad-based, fueled by some of the films I just mentioned but also sporting events like the World Cup, NFL, Premier League, several new originals and our exclusive next-day broadcast of NBC. Looking ahead, and based on our experience to date, we expect our subscriber cadence will follow our content launches, which fall more in the second half of 23. And we continue to see positive trends in engagement churn and ARPU. Mark Woodburry had a fabulous first year as our CEO of the Parks business, and we hit a number of new records this past quarter. It was the highest fourth quarter EBITDA for the entire segment, led by Orlando and Hollywood, and Japan had the best EBITDA performance since 2019.

This was driven by attendance that for us surpassed pre pandemic levels at all three parks. While attendance at our Park in Beijing was significantly impacted by COVID in 2022, we are seeing some exciting demand to start the year. Given the excellent returns we have generated to-date, we continue to seek ways to expand our parks. I’m really excited about our two recently announced extensions. First universal park designed specifically for younger audiences near Dallas, and the first year around horror entertainment experience in Las Vegas. These are new innovative ways to utilize our substantial IP, including from DreamWorks and Illumination, while also extending our brand, both of which had helped fuel growth in all of our parks. Our linear video business, we are managing subscriber declines by taking a disciplined approach to our cost base.

We are continuing to invest in our global technology platform, and you will see a number of announcements from us in the weeks and months ahead. For example, in 2023, we will launch one global user interface for Sky Glass, Xfinity, X1, Flex, XUMO, at our U.S. and International partners. Every entertainment customer around the world will get the same Emmy award winning voice controlled experience. This scale not only brings us operational efficiencies, but it also puts us in the enviable position when it comes to conversations with distributors, OEMs, programmers, app developers and talent. At Sky, we are managing through the macro economic challenges in Europe. While staying intensely focused on retention and continuing to provide our customers with the best entertainment and connectivity experiences.

We’re seeing some encouraging results. In the UK, Sky Glass had the top selling UHD TV model. Sky mobile is the fastest growing mobile provider, surpassing three million lines. And we are narrowing the gap between us and the current number one broadband provider with Sky Broadband, now sitting at over 6.5 million subscribers. Wrapping up, our consistently strong financial performance, healthy balance sheet, record high return of capital of shareholders underscore how the scale capabilities and talent across our company enable us to successfully execute our long term growth strategy. I’m convinced we are on the right path and that we have the right team to capture our many opportunities and overcome whatever challenges happen along the way. So before handing over the call, I want to congratulate Jason Armstrong, recently promoted to Chief Financial Officer, succeeding Mike Cavanagh.

Could not be more confident and the leadership team’s ability to continue to drive us forward and create more value for our shareholders. Mike, over to you.

Mike Cavanagh: Thanks, Brian. And good morning, everyone. First, I’d like to just say that it’s been a pleasure serving as CFO of Comcast for the last seven plus years. And I couldn’t be prouder to have Jason be my successor. Knowing that with Jason, the financial leadership of our company is in proven and expert hands. Since Jason didn’t take over as CFO until early in the new year, I will handle the CFO portion of this call and hand it over to Jason for the first quarter call in April. So now I’ll begin on Slides four and five to discuss our consolidated 2022 financial results. Revenue increased just under 1% to $30.6 billion for the fourth quarter and 4.3% to $121.4 billion for the full year. Adjusted EBITDA decreased 4.9% to $8 billion for the fourth quarter, and increased 5% to $36.5 billion for the full year.

The quarterly results include severance expenses booked in each of our businesses, totaling $638 million, which is $541 million higher than the prior year period. Including this increase, adjusted EBITDA increased 1.5% in the fourth quarter, and 6.6% for the full year. Adjusted EPS increased 6.5% to $0.82 of share for the fourth quarter and 13% to $3.64 for the full year. And we generated $1.3 billion of free cash flow for the fourth quarter and $12.6 billion for the full year, while absorbing increased investments in Peacock and theme parks, as well as higher working capital as content creation normalizes post COVID. Now let’s turn to our business segment results starting with Cable Communications on Slide six. Cable revenue increased 1.4% to $16.6 billion, EBITDA increased 1.5% to $7.2 billion and cable EBITDA margins improved 10 basis points year-over-year to 43.5%.

These results include $345 million of severance expense, which is $305 million higher compared to last year’s fourth quarter, excluding severance cable EBITDA increased 5.8% and cable EBITDA margin improved by 190 basis points to a record high of 45.3%. These strong results also included the impact of Hurricane Ian in Southwest Florida, which resulted in the loss or severe damage to many homes we serve in this market. Excluding the hurricane impacts, we would have added approximately 4000 broadband customers versus the 26,000 loss we reported. And we estimate that we would have lost approximately 36,000 customer relationships versus the 71,000 we reported. Overall, our broadband customer results in the fourth quarter were fairly consistent with the prior two quarters, reflecting lower levels of new customer connections, offset by churn which remained well below 2019 levels.

Now let’s discuss cable financials in more detail. Cable revenue growth of 1.4% was driven by higher broadband wireless business services and advertising revenue, partially offset by lower video and voice revenue. Broadband revenue increased 5.4% driven by growth in ARPU and in our customer base when compared to last year. Broadband ARPU increased 3.8% year-over-year, when adjusting for some COVID related customer credits last year. This organic ARPU growth is similar to the growth we’ve generated over the last couple of quarters and is consistent with our strategy. We are focused on optimizing our customer relationships by consistently adding more capabilities, services and value, so as to provide the best broadband experience, which has and should continue to deliver broadband ARPU growth.

The elements of growth this quarter include increased rate, attaching more customers to higher tiers, as well as other services. We expect ARPU growth will continue to be the primary driver of our residential broadband revenue growth in 2023. Wireless revenue increased 25%, mainly driven by service revenue, which was fueled by growth in customer lines. We added 1.3 million lines in 2022, including 365,000 lines in the fourth quarter, which is our highest number of net additions for any quarter on record. Business Services revenue increased 4.6%, which includes the results of Masergy in both this quarter and in the prior year period, as we lap the closing of this acquisition at the beginning of the quarter. Revenue growth was primarily driven by rate, including customers taking faster data speeds, higher attach rates of our advanced products, and rate increases on some of our services.

Photo by Erik Mclean on Unsplash

Advertising revenue increased 9.1% driven by strong political revenue, partially offset by the absence of advertising revenue that is now part of XUMO, our joint venture with Charter. Adjusting for those items, cable advertising revenue decreased 1.6%, reflecting decline in our local core advertising business, partially offset by solid growth at our advanced advertising business. Video revenue declined 5.6% driven by year-over-year customer net losses, partially offset by ARPU growth of 5.8%, due to a residential rate increase we implemented at the beginning of 2022. And last, voice revenue declined 13% primarily reflecting year-over-year customer losses. Turning to expenses. Cable Communications fourth quarter expenses increased 1.4%, reflecting higher non-programming expenses, which included the $305 million in higher severance costs, partially offset by lower programming expenses.

Programming expenses decreased 5.9%, reflecting the year-over-year decline in video customers partially offset by higher contractual rates. Non-programming expenses, which again include $305 million and higher severance costs, increased 5.6%. Excluding severance, these expenses were flat compared to last year, reflecting an increase in bad debt as we return to more normalized pre pandemic levels an increased technical and product support expenses driven by growth in our wireless business. These were offset by a decline in marketing and promotion and customer service expenses due to lower activity levels, efficiencies in running the business, and improvements we continue to make in our customer experience. Our focus on growing our high margin connectivity businesses, coupled with our focus on increasing operating efficiency and cost controls, drove strong EBITDA growth and margin expansion in 2022, excluding the higher severance expense, we grew full year EBITDA by 5.7% and increased EBITDA margins by 110 basis points to 44.8%.

We believe that our disciplined approach to running the business, including the benefits from our cost reduction efforts this quarter, positioned us to drive higher profitability, and further expand margins, both in 2023 and thereafter. Now, let’s turn to Slide seven for NBCUniversal. Starting with total NBCUniversal results, fourth quarter revenue increased 5.9% to $9.9 billion, and EBITDA decreased 36% to $817 million, including $182 million of severance expense in the quarter, excluding severance EBITDA decreased 22%. Media revenue increased 2.6% to $6 billion, mainly driven by Peacock, which nearly doubled its revenue to $660 million and Telemundos broadcast of the World Cup. Advertising revenue increased 4%, reflecting an incremental $263 million from the World Cup, as well as strong growth at Peacock and a healthy contribution of political advertising, partially offset by a decline in linear advertising.

If we exclude the World Cup, advertising revenue declined 5.6% reflecting softening in the overall advertising market, distribution revenue increased 3.8% reflecting growth at Peacock driven by increases in paid subscribers, which more than doubled compared to last year, as well as higher contractual rates at our networks partially offset by linear subscriber declines. Media EBITDA was $132 million in the fourth quarter including a $978 million EBITDA loss at Peacock, reflecting the cost of new content, such as our exclusive next-day broadcast and Bravo content, our robust lineup of Pay-One titles, day and date releases like Halloween, NFL Premier League and the World Cup. Peacock’s full year EBITDA loss of $2.5 billion was in line with the outlook we provided a year ago.

And for 2023, we expect Peacock losses to be up modestly to around $3 billion. As we’ve said previously, we believe 2023 will be peak losses for Peacock and, from there, steadily improve. Excluding Peacock, Media EBITDA in the fourth quarter decreased 13%, reflecting the lower revenue and fairly flat expenses despite the higher costs associated with broadcasting the World Cup. Looking to the first quarter. While we remain focused on managing costs, we expect underlying Media EBITDA, excluding Peacock, to continue to be impacted by the top line pressures at our linear networks. Moving to Studios. Revenue increased 13% to $2.7 billion driven by growth in content licensing and theatrical revenue. Content licensing was up 16% driven by the benefit of our carryover titles and the acceleration in film windows as well as healthy growth in television licensing.

Theatrical revenue increased 47% due to the success of recent releases, including Ticket to Paradise, Puss in Boots, Violent Night and Halloween Ends. EBITDA increased $109 million to $160 million for the quarter, reflecting the higher revenue partially offset by an increase in marketing and promotion expense, reflecting the size and timing of this quarter’s theatrical slate as well as the corresponding higher programming and production costs. At Theme Parks, revenue increased 12% to $2.1 billion, while EBITDA increased 16% to $782 million, our highest level of EBITDA on record for our fourth quarter. These results were driven by growth at our parks in the U.S. and Japan partially offset by our park in Beijing, which was negatively impacted by COVID-related restrictions.

At our U.S. parks, we continue to see strong demand with attendance and guest spending up year-over-year and with Orlando and Hollywood both delivering record high EBITDA for the fourth quarter. Universal Japan continued to rebound since capacity restrictions were lifted at the end of March and delivered strong year-over-year EBITDA growth in the quarter. Now let’s turn to Slide 8 for Sky. Reported results were meaningfully impacted by currency translation due to the strengthening dollar, but I will speak to Sky’s results on a constant currency basis. For the fourth quarter, Sky revenue was relatively consistent compared to last year at $4.4 billion. Direct-to-consumer revenue was also consistent compared to last year, reflecting growth in the U.K. driven by wireless and broadband revenue offset by declines in Germany and Italy.

On a customer basis, we added 129,000 customer relationships in the quarter with positive additions across all three territories, the U.K., Italy and Germany. These net additions were driven by streaming, broadband and wireless customer additions and reflect our team’s strong execution in a challenging macroeconomic environment across Europe. Rounding out the rest of Sky revenue, content revenue increased 6.5% driven by licensing our entertainment content, and advertising revenue decreased 9.6% primarily driven by lower revenue in the U.K., reflecting the timing of the World Cup and the macro environment. Turning to EBITDA. Sky’s EBITDA decreased 15% to $340 million, including $89 million of severance expense, which is $53 million higher compared to last year’s fourth quarter.

Excluding severance, EBITDA declined 2% compared to last year, reflecting an increase in direct network costs driven by growth in our residential mobile and broadband businesses and higher other expenses, which were mostly offset by lower programming costs due to the timing of sports programming as four weeks of EPL games were paused during the fourth quarter to accommodate the World Cup. However, we will incur higher sports costs in the first half of 2023, reflecting the higher number of games as the season is extended and the remainder of the games which were paused are now played. Now I’ll wrap up with free cash flow and capital allocation on Slide 9. As I mentioned previously, in 2022, we generated around $12.6 billion in free cash flow while absorbing increased investments in Peacock and Theme Parks as well as higher working capital as content creation normalizes post COVID.

Full year consolidated total capital investment increased 14.2% or $1.7 billion to $13.8 billion due to increased spending at NBCUniversal and Cable partially offset by a decrease at Sky. At Cable, total capital spending increased 8.3% or $695 million with CapEx intensity coming in at 11.4% primarily driven by investments to further strengthen and extend our network. In 2023, we expect CapEx intensity to stay at around 11%, similar to 2022 levels as we aim to accelerate our homes passed growth to about 1 million and continue to transition our entire broadband network to DOCSIS 4.0 over the next few years. NBCUniversal total capital spending increased $1.4 billion driven by parks CapEx increasing $1.1 billion, of which Epic was around $800 million and reflects our continued investment in new attractions like Super Nintendo World at Hollywood and Donkey Kong at Japan.

In 2023, we expect parks CapEx to increase by around $1.2 billion over last year as we continue to build Epic, which we plan to open in 2025 and begin work on our recently announced park extensions mentioned earlier. The required investment to develop these extensions is nowhere near the scale of Epic or Universal Beijing but rather enable us to leverage our already large market opportunity and can serve as a model that contributes to even higher growth at Theme Parks in the future. Working capital was $3 billion for the year, a $1.5 billion increase over last year’s level, reflecting a post-COVID ramp of investment in content creation. Turning to capital allocation. We ended the year with net leverage at 2.4 times and returned a total of $17.7 billion to shareholders, including $4.7 billion in dividend payments and $13 billion in share repurchases.

For 2023, we expect to continue to maintain leverage at around current levels, which I expect will support continued strong capital returns. As we announced this morning, we are raising the dividend by $0.08 a share to $1.16 per share, our 15th consecutive annual increase. This reflects our long-standing balanced capital allocation policy. We’re committed to investing organically in the businesses while maintaining a strong balance sheet and also returning a very healthy amount of capital to shareholders. Thanks for joining us on the call this morning. I’ll turn it back to Marci, who will lead the question-and-answer portion of the call.

Marci Ryvicker: Thanks, Mike. Operator, let’s open the call for Q&A, please.

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Q&A Session

Operator: Our first question comes from Doug Mitchelson with Credit Suisse. Please go ahead.

Doug Mitchelson: Good morning. And thank you. Brian and Mike as well giving your promotion to President, congratulations on that, by the way. And Jason, congratulations on the CFO role. Brian, Mike, since we’re turning to a new calendar year, I wanted to ask for an updated vision for the company and how you see the company evolving over time. As part of that, investors are certainly interested how the company best addresses cable broadband competition and connectivity convergence and media streaming challenges and whether you see notable growth opportunities for the company that would shift allocation of capital as well. So how do you address the challenges and opportunities? And how has the company evolved over the next three to five years? Thanks.

Mike Cavanagh: Thanks, Doug. It’s Mike. So maybe I’ll take a first crack, and then Brian can pile on if he likes. So vision in the next few years, it’s — I think how you think about that requires a little bit of a reflection of where we stand at the moment. So if I look at 2022 and you really reflect on what are truly excellent operating results. So kudos to the people running the businesses deep down into the organization to produce the kind of results we had, record revenues and record adjusted EBITDA. And that’s fundamentally great management discipline, operating discipline, financial discipline in the day-to-day. When you zoom out a little bit, it puts us in a position where we are returning record capital in our industry at 2.4 times leverage, so it allows us the opportunity both of those things in good balance.

To then go at your real question, which is what is our opportunity, what are our challenges and do we have the resources to go after them. And so I’d say there, you heard it in the call, but I’ll recount them, we’ve got an excellent number of organic investments that are going after all the opportunities and challenges that we currently see. Obviously, as others emerge, we’ll go after it the way we usually do. But those are you take the network and Dave can pile in. But we’re on a path to 10G. So DOCSIS 4.0 is going to get us, as we’ve talked about, in a very capital-efficient way to a network that’s going to have symmetrical upstream, downstream in a few short years. We’re going to start rolling that out at the back end of this year. So I think our commitment is to have the best network out there and to put a tremendous amount of services surrounding that network, whether it be WiFi or Flex and the like, as you’ve heard us talk about before.

You heard about the tech platform. Brian mentioned it. We’re going to get to a single global tech platform, integrating all of the build of glass in the U.K., X1 here in the U.S., what we do in Peacock behind a single scaled global tech platform that we can use in many ways. You know about the XUMO partnership that we have with Charter, for example, to take that capability outside of our footprint. And then finally, on the Cable side, it’s a wireless. Wireless, we’ve been at it for five years, have 5 million lines now. We put the investment in along the way, and we continue to do it, but it’s a capital-light approach. And I think that totality is a great set of strategies for how we’re going to drive growth in the cable business looking ahead.