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Q2 2023 Comcast Corp Earnings Call

EVENT DATE/TIME: JULY 27, 2023 / 12:30PM GMT

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JULY 27, 2023 / 12:30PM GMT, Q2 2023 Comcast Corp Earnings Call

CORPORATE PARTICIPANTS

Brian L. Roberts Comcast Corporation - Chairman & CEO

David N. Watson Comcast Corporation - President & CEO of Comcast Cable

Jason S. Armstrong Comcast Corporation - CFO

Marci Ryvicker Comcast Corporation - EVP of IR

Michael J. Cavanagh Comcast Corporation - President

CONFERENCE CALL PARTICIPANTS

Benjamin Daniel Swinburne Morgan Stanley, Research Division - MD Brett Joseph Feldman Goldman Sachs Group, Inc., Research Division - MD

Craig Eder Moffett MoffettNathanson LLC - Co-Founder, Founding Partner & Senior Research Analyst Jessica Jean Reif Ehrlich Cohen BofA Securities, Research Division - MD in Equity Research

John Christopher Hodulik UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group and Telco & Pay TV Analyst

Jonathan Chaplin New Street Research LLP - US Team Head of Communications Services Philip A. Cusick JPMorgan Chase & Co, Research Division - MD and Senior Analyst Steven Lee Cahall Wells Fargo Securities, LLC, Research Division - Senior Analyst

Vijay Jayant Evercore ISI - Senior Manager Director

PRESENTATION

Operator

Good morning, ladies and gentlemen, and welcome to Comcast's Second Quarter Earnings Conference Call. (Operator Instructions) 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 Comcast Corporation - EVP of IR

Thank you, operator, and welcome to our second quarter 2023 earnings call. You'll first hear from Mike Cavanagh and Jason Armstrong, then Brian Roberts and Dave Watson will join us and be available for Q&A.

I will now refer you to Slide 2 of the presentation accompanying this call, which can also be found on our Investor Relations website and which contains our safe harbor disclaimer.

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 schedule issued earlier this morning for the reconciliations of these non-GAAP financial measures to GAAP.

With that, I'll turn the call over to Mike.

Michael J. Cavanagh Comcast Corporation - President

Thanks, Marci, and good morning, everyone. I'm very pleased with our second quarter results, which, again, demonstrate that our focused efforts to invest and innovate in businesses that offer significant revenue growth, while we carefully manage the contiguous areas with structurally lower growth, is paying off.

Total revenue grew 2% and the six growth priority areas we have outlined: residential broadband, wireless, business services, theme parks, streaming and premium content creation in our studios, grew nearly 10% year-over-year and now represent 55% of total revenue. This revenue growth, combined with careful management of margins across all businesses, generated mid-single-digit EBITDA growth and double-digit earnings per share growth.

Looking further into the future, we expect to continue to drive significant growth in these areas and to continue to identify and invest in organic growth opportunities across our strong portfolio of businesses. We are also very clear-eyed about the challenges that we and our competitors face in other business lines and have established thoughtful plans, which will enable these businesses to continue to

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JULY 27, 2023 / 12:30PM GMT, Q2 2023 Comcast Corp Earnings Call

meaningfully contribute both financially and strategically.

Importantly, the net effect of this approach is a path to sustained future revenue growth for the company in total, driving strong earnings and free cash flow growth - for what I expect to be many years to come. Significantly, we have, by far, the strongest balance sheet among our core competitors, which allows us to continue to invest for growth, while returning substantial capital to shareholders through both dividends and buybacks, which will drive excellent free cash flow and earnings per share growth.

Now let me call out a few highlights from the quarter. For the first time in the company's history, we generated over $10 billion in quarterly EBITDA. And while the diversification of our businesses means there were several significant contributors, I would highlight three that stand out to me in the quarter and reflect the consistency of our investments and the resulting durability of our growth profile.

The first is broadband ARPU growth of 4.5%. Stepping back, I am confident we have a winning hand in convergence. We're the largest broadband provider with a high-quality, ubiquitous network and the most cost-efficient upgrade path to higher speeds. In addition, we can compete effectively in wireless with a capital-light approach and a very strong value proposition for our customers. We also have a long history of consistently surrounding our products with industry-leading features and capabilities, ranging from the coverage and control aspects of our WiFi experience, to content aggregation through our X1 and Flex platforms, which is how we have been able to achieve near record low levels of churn and grow ARPU consistently quarter after quarter.

This second quarter's 4.5% growth was no exception and is a testament to our ability to appropriately balance rate and volume, to effectively segment the market, and surround our broadband product with industry-leading products and capabilities. The broadband market remains highly competitive, but we have and will continue to invest to sustain our position as a market leader.

Second is our parks, which continues to be such a great story for us. Our teams have consistently introduced new and innovative attractions, leveraging both our owned or licensed IP. We opened Super Nintendo World at both Universal Hollywood and Japan, which helped drive the record results in the quarter.

Later this summer, we will be opening a new Minion land in Orlando and we look forward to Donkey Kong in Japan next year, as well as starting the previously announced kids-theme park in Texas and the Halloween Horror experience in Las Vegas. And I couldn't be more excited about the opening of Epic Universe in Orlando in 2025.

Third is the strength of our film studios, and in particular our animation business. Super Mario Brothers crossed over $1.3 billion in worldwide box office to date making it the second highest grossing animated film ever. This is another incredible achievement by Illumination and Chris Meledandri.

We also invest in successful franchises like FAST, highlighted by the successful launch of the latest installment with Fast X during the quarter. Of course, we just released Oppenheimer, which grossed about $180 million this past weekend, to a tremendous acclaim from critics and movie goers alike. Oppenheimer is such a powerful and impactful movie, and we at Comcast, couldn't be more proud to work with Christopher Nolan to bring such an important movie to audiences globally.

We have the very best roster of creative partners, and these innovative filmmakers enable us to invest in a strategic slate, which is one of the keys to our continued box office success, where we remain #2 in box office year-to-date.

All of these results and accomplishments - from broadband differentiation to studio leadership, to our part success - are a function of our focused leadership team, commitment to innovation, strong balance sheet and disciplined approach to capital allocation.

As I look at our company, I am extremely bullish on the durability of growth drivers we've invested in so consistently and in our continued ability to invest and deliver through a variety of businesses and economic cycles.

This was also my first quarter with direct responsibility for NBCUniversal. As I observed in a note announcing some organizational changes a few weeks ago, NBCU is a very special place with tremendous opportunities ahead. I could not be more impressed with the

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JULY 27, 2023 / 12:30PM GMT, Q2 2023 Comcast Corp Earnings Call

depth of talent and particularly with our leadership team. And I am very confident that the new streamlined organization we have just put in place and which has been very well received, will help us move even faster and make even better decisions.

As you know, NBCU operates a diverse array of businesses, each with leading market positions. In addition to film and parks, which I referenced earlier, we have the #1 TV portfolio by total audience, and our TV studio is award-winning and prolific. We're the #1 most watched news organization in the U.S. And sports continues to be a huge driver with the NFL, NASCAR, golf, Premier League, the World Cup on Telemundo, including the Women's World Cup going on right now, Big 10 starting this fall, and the Paris Olympics coming up next year.

I am also confident that we have the right strategy for the future. We produce premium content through our studios, distribute it through our TV networks, Peacock and third parties, and further monetize this content with our theme parks and consumer products.

In streaming, we launched Peacock as an ad-supported model that is an extension of our existing business. We set out a plan, which we have adapted as needed, and Peacock is strong and growing. We gained 2 million paid subscribers in the second quarter, going from 22 million to 24 million paid subscribers. This growth was largely driven by conversion of Comcast subs to paying relationships, which started in June, and we're very pleased with the results so far.

Without a doubt, consumer trends, such as cord cutting and new competitors, particularly from the technology sector, present challenges for us. And we are facing an uncertain macro environment, which continues to pressure linear advertising, but I firmly believe that we have the business strategy, management depth and financial strength to emerge as long-term winners and value creators as the landscape evolves at NBCUniversal and across the company.

Another challenge in the near term are the writers and actor strikes. We remain committed to reaching a fair deal as soon as possible so we can get back to doing what we do best, which is making great content together.

With that, let me turn it over to Jason.

Jason S. Armstrong Comcast Corporation - CFO

Thanks, Mike, and good morning, everyone. We had a really strong second quarter. And to take you through it, I'll start with our consolidated results on Slide 4.

Revenue increased 2% to $30.5 billion, while adjusted EBITDA grew 4% to $10.2 billion, a record level, driven by continued operating leverage at our high-margin Connectivity & Platforms business as well as strong growth at studios and theme parks. We grew adjusted earnings per share by 12% to $1.13 and generated $3.4 billion of free cash flow, while returning $3.2 billion of capital to shareholders.

Our healthy level of free cash flow in the quarter includes the significant investments we're making to support and grow our businesses in six key growth areas: our connectivity businesses, including residential broadband, wireless and business services connectivity, theme parks, streaming and premium content in our studios. Taken together, these areas generated more than half of our total company revenue in the quarter and grew nearly 10% year-over-year, consistent with the first quarter.

Now let's turn to our individual business results, starting on Slide 5 with Connectivity & Platforms. As I get into these results, I'll refer to year-over-year growth on a constant currency basis.

Revenue for total Connectivity & Platforms was flat at $20.4 billion. Our core connectivity businesses: domestic broadband, domestic wireless, international connectivity and business services connectivity - increased 7% to over $10 billion in revenue, while video advertising and other revenue declined 7% to $9.8 billion. Our strategy continues to incorporate a strong focus on investing in and driving growth in high-margin businesses, while protecting profitability in businesses with secular headwinds through disciplined cost management. This resulted in 170 basis points of margin expansion for Connectivity & Platforms in the second quarter, while margins for our domestic legacy cable business improved 240 basis points, reaching a record high of 47.3%.

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JULY 27, 2023 / 12:30PM GMT, Q2 2023 Comcast Corp Earnings Call

Diving deeper into the details. First, I'll unpack connectivity revenue growth. Residential connectivity revenue grew by 8%, reflecting 4% growth in domestic broadband, 20% growth in wireless and 26% growth in international, while revenue for business services connectivity grew 4%. Domestic broadband continued to be led by very strong ARPU growth, which increased 4.5% for the second consecutive quarter. As we have said before, our goal is to protect ARPU by retaining the appropriate balance between rate and volume and to serve our customers' constant demand for more from our network.

We continue to see the use cases for better and faster Internet increase. Demand for higher speeds is increasing, as is average network consumption, and our customers are hanging more devices off our network in their homes. The average monthly data usage for a broadband customer that doesn't take video from us is nearly 700 gigabytes and continues to grow. In fact, this is nearly 70% more than the average usage from the comparable quarter in 2019 pre-pandemic.

Additionally, nearly 3/4 of our broadband customers are now on speed plans of 400 megs and above. That's up from less than 50% last year, and less than 20% in 2020. We plan for our network and product capabilities to stay far ahead of demand, so that we maintain our position as a market leader delivering the best broadband possible. To that end, our transition to DOCSIS 4.0 is progressing well. We're more than halfway through the year and have implemented our mid-split technology to 25% of our footprint and are on target to complete 1/3 of this build by year-end, with the first commercial launch of DOCSIS 4.0 in just a few short months.

We're also hard at work when it comes to expanding our footprint. We've grown our homes and businesses passed by 1.5% year-over-year to 61.8 million and we are on pace to meet or exceed our goal of 1 million new homes and businesses passed for 2023, with future footprint expansion remaining a high priority.

Growth in domestic wireless revenue was due to higher service revenue, driven by continued strong momentum in customer lines, which were up 1.4 million or 30% year-over-year, to 6 million in total, including the 316,000 lines we just added in the quarter. This marked the seventh consecutive quarter of more than 300,000 line additions.

We continued testing some new converged offers in the quarter and we're encouraged by an increasing mix of new customers to Comcast, and we'll continue to experiment with different offers over time. With just 10% of our domestic residential broadband customers taking our mobile offering, we have a big opportunity and long runway ahead for growth in wireless.

International connectivity revenue grew to $1 billion, a record high and demonstrates the strength of the Sky brand and the ability to leverage a leadership position in video and extend that to connectivity with significant success. Broadband, which accounts for 2/3 of international connectivity revenue, continued to grow at a mid-teens level, benefiting from both an increase in customers and ARPU compared to a year ago. The remainder is wireless revenue, which tends to have more variable growth due to handsets, which contributed to the higher growth rate this quarter.

Finally, on business services connectivity, revenue increased 4%, reflecting stronger growth in enterprise and mid-market and a slight deceleration in growth from small business, where we are seeing a bit of macroeconomic pressure. The strong revenue growth overall in our connectivity businesses was offset by declines in video due to customer losses since last year as well as declines in other revenue, reflecting similar dynamics in wireline voice.

And finally, in advertising, which was impacted by lower political revenue in our domestic markets and the macro environment. Connectivity & Platforms total EBITDA increased 4% to $8.3 billion, and as I mentioned a moment ago, an adjusted margin that expanded 170 basis points. This is driven by the mix shift to our high-margin connectivity businesses, coupled with very strong expense management. In fact, every line of expense was down year-over-year, except direct product costs, which are success-based and directly associated with the significant growth in our connectivity businesses.

Further unpacking our Connectivity & Platforms EBITDA results between residential and business, residential EBITDA grew 4%, with margin improving 180 basis points to reach 38.9%, again, highlighting our favorable mix shift, while business EBITDA grew 5%, with margin improving 40 basis points to reach 57.7%.

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