Comcastic Quarter Proves Power of X1
A stellar quarter and continuing growth trends are validating the long-term corporate strategy at Comcast, including the company's focus on its X1 video platform, vertical integration with NBC Universal and investments in its commercial services business.
Comcast Corp. (Nasdaq: CMCSA, CMCSK) posted revenue for Q3 of $21.3 billion, an increase of 14.2% over the year-ago quarter, and earnings per share of $0.92, up 15% on the year. Analyst forecasts had the numbers lower, with a consensus revenue prediction of $21.15 billion and EPS number of $0.91.
Without a doubt, the prize numbers on the cable side of the business are Comcast's video and data subscriber additions. The company added 32,000 video customers in the quarter, compared to a loss of 4,000 in Q2. The MSO raised its Internet customer number by 330,000 subs, taking Comcast north of 24 million Internet subscribers in total.
Those numbers don't come cheap. Comcast CEO Brian Roberts made special note to emphasize the capital expenses that go toward ensuring customer and revenue growth. The cable business increased its capex spend by 10.4% in the quarter to $2 billion, reflecting the cost of deploying new X1 customer premises equipment, but also, as Roberts put it, an "investment in scalable infrastructure to increase network capacity."
The network capacity investments come as other cable and telecom operators nationwide are also pumping up their fiber deployments. The broadband race is dominated by a need to market gigabit speeds, accommodate the Internet requirements of the business market and prepare for next-generation wireless services. (See Why Cable Is Upgrading Networks Now.)
For Comcast, capex as a percentage of cable revenue reached 16.3% in the third quarter. However, Roberts also predicted that overall capital intensity for the year will remain flat compared to 2015 at a rate of roughly 15%.
Even as the broad financial trends for Comcast paint a rosy picture, the more interesting insights emerge through a closer look at operational details.
Comcast's X1 video platform is now in nearly 45% of the company's video customer households, and it's responsible for both new subscriber additions and reduced churn. That's not surprising given past quarterly reports, but Roberts did reveal some additional tidbits in this quarter's earnings call. First, he highlighted Comcast's progression toward an all-IP video experience, noting that the transition is likely to be complete in the next couple of years. That progress includes the introduction of Comcast's first WiFi-only set-top box, the Xi5, which requires only an HDMI cord and a power cable for set-up.
Specifically, Roberts pointed to the ease of installation with the Xi5, saying that "the onboarding of that box is so different" compared to every other set-top the company has ever deployed. According to the CEO, a new customer can be up and running with video service in under three minutes with self-installation. Ultimately, that could make a substantial difference not only for the consumer experience, but also for Comcast cable truck rolls.
Roberts also noted that there continues to be interest from other cable companies in licensing X1. So far, Cox Communications Inc. in the US and Shaw Communications Inc. in Canada are X1 licensees, but Roberts said today, "We've had others requesting to use the platform." (See Comcast Boasts Global Plans for X1.)
On content and vertical integration
Given the recent rush by pay-TV providers to buy up content -- including AT&T Inc. (NYSE: T)'s bid for Time Warner Inc. (NYSE: TWX) -- Comcast looks prescient today with its purchase of NBCUniversal LLC back in 2011. For one, the ownership of a major broadcast network helps Comcast offset some of the programming costs it has to pay out to other companies -- an amount that continues to rise. In the third quarter, Comcast's programming costs were up 11.4%, and the company believes they'll end up climbing just over 10% for the full year.
For another, content ownership gives Comcast greater control over its video destiny, something Roberts alluded to in referring to the increased competition coming from new over-the-top video providers.
"I think we all have a healthy degree of skepticism," said Roberts with regard to the future successes of new OTT video entrants. He added that new players may create some additional distribution opportunities for the NBC business, but that he doubts any new service will "create millions and millions of subscribers any time soon."
On wireless services
The big question mark for Comcast in the near future is wireless services. The cable company has a lot of established infrastructure to support wireless connectivity, but it has never before succeeded with a mobile offering like the one it plans to launch next year. (See Comcast Will Go Wireless in 2017.)
Asked if Comcast thinks it will be able to succeed in the mobile industry through the activation of its MVNO agreement with Verizon Communications Inc. (NYSE: VZ), Roberts declined to comment on specifics. However, the CEO did say, "We fundamentally believe we can make money for shareholders with a wireless option." That assumption includes the availability of Comcast's WiFi network today, but also the costs that get baked into a new mobile service, including the need for mobile phones.
On business services
Now at an annual run rate of well over $5 billion, Comcast's commercial services business continues to grow. That's good news overall, but given that the growth rate is slowing, it may also be one cautionary note in the company's third-quarter report. Business services revenue increased 15.5% to $1.4 billion in Q3, compared to 17% year-over-year in Q2. Earlier percentage increases reached up to the 18%-20% range.
The continued success of Comcast's commercial services business is crucial to protecting the company's overall margins, so the growth rate will be an important number to watch. Even as the rate has slowed, however, Comcast continues to make inroads in new commercial markets. The company noted in its earnings report that small-to-medium-sized businesses are still the majority of its commercial customers, but also that it recently signed on new enterprise customers, including a large financial institution and a large healthcare company.
On Xfinity Home
Comcast's smart home services don't get a lot of attention when compared to its other business lines, but the company did give a nod to Xfinity Home in the latest earnings call. Noting that the company had announced a milestone of more than 500,000 Home customers two years ago, Comcast Cable President Neil Smit said that the business has grown significantly since then. Unfortunately, Smit did not get more specific with actual subscriber numbers.
Smit did say that about 55% of Xfinity Home customers are new to Comcast, and about 60% of those subscribers receive a quadruple-play bundle of services. It appears that when Comcast can add smart home customers, they act as a growth engine for the rest of the business.
Word of warning, though. Without actual numbers, it's impossible to guess the actual impact of Xfinity Home. The smart home sector is one area where the future for Comcast is less than clear.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading