) reported its Q2 2012 financial results recently. The key
takeaways include the possibility of pay-TV subscriber turn-around
in the future and continued strength and tremendous success of the
company's broadband business. As far as NBCUniversal is concerned,
it is the cable networks and broadcasting business that matter, and
they saw a decline in profits due to higher programming costs and
lower licensing revenues.
We have increased our price estimate for Comcast to
based on the above mentioned trends.
See our complete analysis for Comcast
Pay-TV Losses Continue, But Future Could Be
Comcast lost 176,000 net pay-TV subscribers in the recent
quarter bringing its full year losses to 213,000. Q2 tends to be
seasonally weak quarter and higher losses were expected. Despite
losing 176,000 net pay-TV subscribers, Comcast did better compared
to Q2 2011 losses which implies that trend is improving for the
company. What is further interesting to note is that Comcast now
has close to 21 million digital TV subscribers implying that close
to 95% of its pay-TV subscriber base is on digital platform. Since
a substantial portion of subscriber losses was concentrated in the
analog base, we expect a better future for the company as it
approaches complete digital transition.
Furthermore, even though losses continued, pay-TV revenues grew
due to increase in ARPU (average revenue per subscriber). The
increase in ARPU can be attributed to adoption of HD/DVR services,
video-on-demand, Xfinity Streampix service and general rate
increases to combat rising programming costs. The company now has
close to 11.2 million HD/DVR subscribers which implies a
penetration of 54% in its subscriber base. As the digital base
expands, it will become easier for the company to market these
advanced services that require digital platform. We expect HD/DVR
penetration to continue to increase in future, amounting to close
to 70% by the end of our forecast period.
Comcast's strategy is now going to be innovation. Its recent
expansion of X1 digital platform that combines the TV viewing,
recording and on-demand experience within a single platform is an
example of the same. The company seems to be getting basics right
by improving customer service and going forward, its pay-TV
business success will depend upon how it enhances the user
experience and gives the term
its true meaning.
Broadband Remains Strong
Comcast gained 156,000 broadband subscribers in the recent
quarter, bringing its total net additions for this year to 594,000.
Given that Q2 is seasonally weak for cable business, the healthy
subscriber gain demonstrates the strength of Comcast's broadband
business. The growth comes as customers drop their DSL services to
upgrade their internet connection to broadband, which is faster.
) is leader in DSL internet services and has seen a consistent
decline in this subscriber base. What helps Comcast is that
AT&T's U-Verse service is only present in a fraction of its
footprint thereby making it easier for the company to convert these
DSL customers to its own subscribers.
Besides subscriber gain, Comcast has managed to improve its
broadband ARPU (average revenue per user) as its subscribers
continue to adopt high speed tiers. Given the increased demand for
video streaming over the internet, subscribers do not mind paying
more for faster speeds. This bodes well for Comcast and other cable
companies such as Time Warner Cable (
) and gives them an edge over the satellite companies.
NBCUniversal Investing More
NBCUniversal's profits declined this quarter. This was partly
due to a relatively bad performance of its movie business and
reduction in profits from media networks (cable and broadcasting)
due to higher programming fee and lesser licensing revenues. As far
as investors are concerned, they should be worried about media
networks which account for more than 80% of NBCUniversal's profits.
Although performance wasn't that great this quarter, NBCUniversal
is investing more in original programming and sports (Olympics
2012) in order to boost its ratings in the future. This might
squeeze short-term profits but will be beneficial in long-run.
Cautionary Note To Investors
Improvement in pay-TV and strength of broadband are going to be
primary drivers of Comcast's stock, and the reason to invest in the
company. However, investors should not forget that the telco
footprint is still low and is likely to increase in the future. For
example, currently the companies such AT&T and Verizon (
) are present in 40% of Comcast's footprint and this proportion has
increased over the last year. There is no doubt that telcos are
gaining pay-TV and broadband subscribers at a brisk pace and as
their footprint increases, cable companies including Comcast might
feel competitive pressure that could hurt their growth. Telcos have
an edge over cable companies as they can bundle their wireless
services as well.
Our price estimate for Comcast stands at $37
, implying a premium of little under 10% to the market price.
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