Comcast reported higher second quarter earnings, but the results showed that the pay TV business wasn’t getting any easier for operators.
Video subscribers were down, but the drop was small—a fact Comcast execs credited partly to its X1 operating system.
The quarter was also tough on the TV operations at Comcast’s NBCUniversal unit, with cash flow down for both broadcast and cable and cable ad revenues down 3%.
Comcast's net income rose 7% to $2.1 billion, or 84 cents per share, compared to $1.99 billion, or 76 cents per share, a year ago. A big boost came from the performance of Universal Pictures films and the Universal Theme Parks.
Revenue rose 11.3% to $18.7 billion.
The results were in line with Wall Street forecasts.
The TV business has been concerned about cord cutting and other ways in which the pay TV universe has been shrinking. Comcast's earnings showed that its number of subscribers fell, but by a relatively small amount.
The nation's biggest cable operator lost 69,000 video customers in the quarter, which is about half the number of video subscribers it lost a year ago and the smallest second quarter loss in nine years. Comcast now has 22.3 million video customers. At the same time, it added 180,000 high-speed Internet customers for a total of 22.5 million and increased broadband revenue by 10%.
"In cable, our investments in customer experience, a faster X1 rollout, and our leading broadband network are all paying off. We grew overall customer relationships, added broadband customers and reduced our video losses in half," Comcast CEO Brian Roberts said during the company's earnings call with analysts. "In short our goal is to make customer service and the customer experience our best product, and our customers are responding to these efforts. Churn is down in every category: video, data, voice and home security."
The company is accelerating the rate at which it is rolling out X1. X1 net additions were up 10% from the first quarter and up nearly 35% compared to last year, according to Michael Cavanagh, Comcast's new senior executive VP and CFO. "X1 accounted for about 50% of our second quarter video connects and X1 customers now represent nearly a third of our total triple play customers," he said.
Comcast is looking to license X1 to other operators. It is in trials with Cox and Shaw, with a "number of other companies expressing interest," Roberts said.
Comcast also recently announced a new product aimed at cord cutters called Stream, which includes HBO and local broadcast stations.
"The stream product is an extension of a couple of things. One we have a college product, university product that we're very excited about and is doing well, that it's attracting to younger consumers," said Roberts. "We have a broadband product… and what can we do with the mind shift of selling people broadband and then introducing them to video, whether they are university students or someone that wants a different kind of product and maybe not even set-top box but a way to get started with all their mobile devices."
Roberts said Stream would be in only a couple of markets this year, so it wouldn't produce meaningful results in the near future. "But it's very exciting to be able to have a range of products and then to have a platform to upsell consumers from," he said.
Second-quarter program expenses increased 9.6% reflecting higher sports programming costs and increases in retransmission consent fees as well as an impact from the pay per view fight in the quarter, Comcast said. The company expects program expense growth for the full year 2015 to grow at a similar level to 2014's growth of about 8%, Cavanagh said.
At NBCUniversal, operating cash flow rose 19.4% to $1.7 billion and revenue increased 20.2% to $7.2 billion on the strength of movies including Furious 7 and Jurassic World. Operating cash flow was down 3.7% to $231 million at its broadcast TV unit and revenue was down 0.2% to $1.8 billion. Ad revenue was slightly higher.
At the cable networks, operating cash flow was down 4.6% to $872 million, with revenue down 1% to $2.5 billion. Ad revenue was down 3%.
NBCU CEO Steve Burke said the company had a "great" upfront in a market that was probably down overall in terms of volume.
"It was a challenging time for the industry and we ended up with our volume up. We gained share," Burke said. "We talked a lot about the monetization gap. We closed some more of the monetization gap for really the second time in a row and despite the fact that I think overall industry volume was down ours was up and our CPMs were right at the top for both NBC and the big cable networks."
Analysts were generally pleased with Comcast's results.
"In the face of a rapidly changing ecosystem, Comcast showed its a share gainer in its core cable businesses – video/broadband/commercial – and that its diversified portfolio at NBCU is helping that business grow despite advertising industry headwinds," said Ben Swinburne, analyst at Morgan Stanley.
Craig Moffett of MoffettNathanson Research said "Universal's film studio and theme parks may never be the center of gravity at a company as large as Comcast, but, well... if you'll forgive the pun, for now at least, the Universal tale is wagging the dog. Universal's movie studio is in the midst of an epic hot streak. So much so, in fact, that it is overshadowing Universal's theme parks... which are themselves enjoying an epic hot streak."
"Although there is often acquisition risk with Comcast, comments from CEO Brian Roberts on today's earnings call indicate that the company is indeed focusing on fundamentals," said Tom Eagan of Telsey Advisory Group, who rates Comcast as his top pick in the industry.
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