Comcast Corporation
Q1 2020 Earnings Call Transcript

Published: 30 Apr 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Good morning and welcome to the Comcast First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded. I will now turn the conference over to Senior Vice President, Investor Relations, Ms. Marci Ryvicker. Please go ahead.

[Marci Ryvicker:]

Thank you, operator and welcome everyone to our first quarter 2020 earnings call. Joining me are Brian Roberts, Mike Cavanagh, Dave Watson, Jeff Shell and Jeremy Darroch. Given these extraordinary times, we have slightly changed the format of this morning’s call. Brian and Mike will spend a bit more time than usual in their prepared remarks to provide as much color and visibility as possible on all of our businesses as well as update you on how we are managing our customers and employees through COVID-19. We will then use the time remaining to answer as many analyst question as we can. Before we begin, I refer you to Slide 2 which contains our Safe Harbor disclaimer. I 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 refer to our 8-K and trending schedules for the reconciliations of non-GAAP financial measures to GAAP. With that, I turn the call over to Brian Roberts. Brian?

[Brian Roberts:]

Thank you, Marci and good morning everyone. These are truly extraordinary times. And on behalf of all of us at Comcast, our hearts go out to everyone who has been impacted by this terrible disease. I would like to echo our thanks to the thousands of heroes on the front lines. Society today is being challenged like never before in our lifetime and I couldn’t be more proud of our company, our employees and our leadership teams across Comcast Cable, NBCUniversal and Sky for making a lot of tough, fair, and I believe best decisions for our customers and our organization. I truly believe that when we look back at this unprecedented time we will be reminded of the strength of our employees, the resilience of our business and the important role our services played in our customers’ lives. COVID-19 has created a tremendous amount of uncertainty and financial strain for people and businesses around the globe. Every company is different and few are immune to this dynamic. Comcast is no exception. We have businesses like broadband, which had the best first quarter net adds in 12 years and continued its sales momentum in April and then we have businesses like theme parks as well as television and film production, which will be under substantial duress, because we must shelter in place. On today’s call, we will discuss our first quarter performance and provide as much information as we can about the future. But perhaps the most important thing we can do is give you a sense for the guiding principles we are using to run our business during this pandemic and share some of the important decisions we have made to help move our company forward. First, how are we supporting our most important asset, our people? We saw the virus in China and then in Italy and Europe, and it gave us a real sense of urgency as to how quickly decisions had to be made and required us to change procedures almost instantaneously across the globe to get ahead of this crisis. It is this global perspective that has helped us immensely as you will hear. The first thing we needed to do was protect our employees, especially on the frontlines.

[Mike Cavanagh:]

Thanks, Brian and good morning everyone. I first want to echo Brian’s sentiments on the terrible impact COVID-19 is having on society, and I sincerely wish all of you well in these very difficult times. Now I’ll review our first quarter 2020 results in which the effects of COVID-19 only impacted us toward the end of the quarter. As a result, I will try where possible to offer some commentary on the current conditions in our businesses, but please understand that circumstances are changing rapidly in this environment, making it impossible to offer anything but highly caveated commentary. That said I will do my best to be as informative as possible and get at the many questions I know you have for us. Beginning on Slide 5 with our consolidated results, revenue decreased 0.9% to $26.6 billion. Adjusted EBITDA decreased 4.9% to $8.1 billion. Free cash flow generated in the quarter was $3.3 billion and adjusted earnings per share decreased 6.6% to $0.71. First quarter financials generally reflected strong results in cable, which were more than offset by NBCUniversal and Sky.

[Marci Ryvicker:]

Thanks Mike. Carmen, let’s open up the call for Q&A, please.

[Operator:]

Thank you. Your first question will come from the line of Benjamin Swinburne with Morgan Stanley. Please go ahead with your question.

[Benjamin Swinburne:]

Thanks, good morning. Two questions. And thank you for all the color this morning. Realizing these are unprecedented times, I’m curious if you could talk about some of the maybe longer-term structural changes you expect to come out of this across your businesses. Obviously, a lot of this stuff is temporary. But as you step back from the day-to-day managing of the company, what are you seeing in terms of opportunities or changes you make to how you invest in the business and sort of your priorities for the company? Be interested in your thoughts there. And then, second, along the lines of sort of structural changes and opportunities to test new models, without getting into the controversy around Trolls World Tour, I’d love to just hear how you’re thinking about the film business in a post-COVID world because the numbers out of that one film seem pretty interesting. Curious on your conclusions on sort of what you take from that experiment, so to speak, and how you address the theatrical business longer term? Thanks a lot.

[Brian Roberts:]

Okay. Well, this is Brian. Let me begin and pass off to some of my colleagues to help with those questions. I think that the long-term priorities of the company are we’re looking at this whole pandemic in sort of phases. First phase is how do you stay operating and give customers great service, protect your employees, some of the things I said in my opening remarks. I think the second phase is where we’re all hoping that we’re getting into right now, and you’re maybe a bit ahead of us, is getting back into some form of going to the office, some form of normalcy. And then the third is kind of probably where your question is headed, what you see on the "other side." And a lot depends on how that second phase really pans out. I think for me, the priorities have sharpened our focus on taking advantage of the disruptions and where can we reexamine whether it’s cost structures, revenue opportunities, innovation and in each of our businesses. Starting with broadband maybe we start with Dave. Why don’t you take a crack at that answer? And then Jeff, why don’t you talk about the film business?

[Dave Watson:]

Thanks, Brian. So there I think there are a handful of things certainly broadband-related when you think about structural opportunities going forward. But even before that, I’d start with the amazing work that the team did in taking 90% of our call center agents and getting them to work from home. So whether or not that stays at that level, we don’t know. We’ll figure out the right balance going forward. But there has to be a structural benefit in being able to figure that out very quickly and effectively. I think from a broadband standpoint, the process we had already been investing strong product road map around self-install capability, but we’ve enhanced it with the drop-and-go capability. We leave the SIK kit, provide telephonic and chat support, and those are going to be benefits that I think we’ll have going forward. And most certainly, as Brian talked about, our digital tools, a very strong road map there between xFi, My Account and the Xfinity Assistant, the chat capability, these things are game changers and provided, I think, a nice uptick during this period, but I think a lot of that will be sustainable.

[Brian Roberts:]

Before, Jeff, you pop in, I want to welcome you to this call, obviously, under tremendous unique circumstances. But you’ve been with us forever, listened in on a lot of these calls. But come at it with both your maybe broader view of life and specifically, the film question.

[Jeff Shell:]

Yes. So, thank you, Brian and hello everybody. I will just echo, Brian, what you just said. I’ve been in the company for a long time and been in a lot of our businesses, and it’s an honor to run this. And I think, longer term, as we come out of this, we couldn’t be better positioned. So I’m happy to be here and happy to be part of this team. So Ben, on the PVOD question, I spent a big chunk of the last decade in the film business, and there’s no question that theatrical is someday again going to be the central element to our business and the film business, which is how people made their movies and how they expect their movies to be seen. But the flip side is the majority of movies, whether we like it or not, are being consumed at home, and it’s not realistic to assume that we’re not going to change that this part of the business isn’t going to change like all parts of the business is going to change. So as you mentioned, we’re in a current unprecedented environment. We had a number of films, including Trolls that were ready to go, that we had worked very hard on and invested a lot of money in, and we really had a choice. Do we delay those movies to a time when we think the theaters are going to be back open again? We did that with Fast and Minions. We sell them or move them to streaming. Some of our other competitors have done that. Or do we try something new to preserve kind of the premium nature of movies? And that’s how we came up with the PVOD offering. And I couldn’t be first of all, I would say I couldn’t be more pleased with Donna Langley and her team, how they executed. The numbers, as you mentioned, are really interesting. It provided consumers with a product that they desperately needed at home, particularly if you have a bunch of seven-year-olds and five-year-olds running around. And it was good for our employees. We kept them working on something. And it gave us an ability to make some money on something that we’re proud of. The question is when we come out of this, what is going to be the model? And I would expect that consumers are going to return to the theaters, and we will be a part of that. And I also would expect that PVOD is going to be part of that offering. In some way, it’s not going to be replacement, but it’s going to be a complementary element, and we’re just going to have to see how long that takes and where that takes us.

[Marci Ryvicker:]

Thanks, Ben. Carmen, next question please.

[Operator:]

Your next question is from the line of Jessica Reif with Bank of America Securities. Please go ahead. I’m sorry, one moment. Not sure what happened with the queue, she just disappeared from the queue. Would you like to go to the next question?

[Marci Ryvicker:]

Yes, please.

[Operator:]

Your next question will be from Doug Mitchelson with Credit Suisse.

[Doug Mitchelson:]

Thank you so much. I guess first question would be on sports. Investors have a lot of questions on sports, in particular whether you have to pay the leagues and whether you have to pay the sports networks when they do not have sports on the air. And I think regional networks sports networks are well understood. So the investor focus is on national sports networks. I know these are a sensitive sort of subject area, but any commentary around that? Obviously, the Olympics are also already understood. And then I think I have a question on wireless actually, which is with T-Mo and Sprint getting approved and closing another viable MVNO partner, obviously very different from what your Sprint MVNO could have offered. To the extent you were trying to improve on your Verizon MVNO terms, DISH is starting early efforts to build out, CBRS and C-band auctions are coming up, it feels like the company has some important decisions to make on wireless strategy this year. I’m wondering if this crisis has impacted those decisions at all, whether there’s an increased bar for cost of capital internally or based on how you see customers using wireless during this crisis and its relative importance to Comcast? Thank you.

[Brian Roberts:]

Well, let me start, Doug. On sports, depending on which part of the ecosystem you’re in, as you said, regional, national, U.S. or international, there’s not a connection necessarily to all the contracts all synced in one way or the same. They’re all very individual. And based on the nature of the season versus the playoffs, it obviously gets even more complicated. So our focus at the moment is trying to work with each of our various leagues, where, I think, ultimately, the answers to some of these questions reside. The leagues have to decide are they going to be playing, what happens to the future if they’re just starting a season or the current one that got disrupted. And as I said, I think we’re seeing encouraging movement all over the world, including in the U.S. And so I think it’s very much top of mind. We if we are able to get clarification, then we can give that to our customers. It works differently in Europe than it does in the U.S. So I don’t know that we have any more to add to the information that we gave in the remarks, but our main focus and hope is that there’s an awful lot of effort being spent to get back quickly and safely, and I’m hopeful that that’s going to happen. But Dave, why don’t you talk about anything else on sports but particularly maybe on wireless?

[Dave Watson:]

I think you covered it well in sports. On wireless, Doug, we continue to like our current approach. Even in this moment, we see that all the major areas that we’ve been focused on around broadband churn yes, there’ll be a little bit of impact on retail through this period, but between Bring Your Own Device, new device launches, we continue to be real pleased with the trajectory of the wireless business. As to opportunities, spectrum and/or the relationship, we like our relationship, current one that we have. We’re always going to be staring at ways of making improvements to it over time, but the fundamentals are very good. And in regards to spectrum, nothing new to report. We will be opportunistic if it makes sense to our business. Overall, the third objective is to be profitable at scale, and we feel very comfortable with where we’re going.

[Marci Ryvicker:]

Thanks, Doug. Next question please.

[Operator:]

And we have Jessica Reif with Bank of America Securities. Please go ahead.

[Jessica Reif:]

Hi. Sorry, I think the operator disconnected me. So I apologize if this question was asked. But on I know I came back on something with sports, but Sky and NBCU are still paying for sports. And obviously, there’s nothing on. So I’m just wondering how you are thinking about contracts as they come up, what will you get in return? How does this position you for the next round? On Peacock, you said it was a great start for the first three weeks. Can you give us color on what you are seeing? And why not change rollout plans? I mean all the elements seem to be in place for a direct-to-consumer service in this environment, everyone’s home. And given the targeted advertising, it just seems like the perfect opportunity. And finally, I’m not sure if maybe we missed this, but have you said I haven’t seen much on costs going forward. Do you feel like your businesses are right-sized for the current environment and what’s going on affects so many of NBCU businesses, theme parks, film, TV, etcetera? Thank you.

[Brian Roberts:]

So let me Jessica, welcome back to the call. We did talk about sports a little bit. So but let me ask Jeremy since Sky Sports is a separate subscription, for those that aren’t familiar with it, it’s a different business approach. And people have paused the subscription, which is, I think, a very intelligent approach. And what we’re seeing there is let me ask Jeremy to talk about that. And then why don’t we take your two questions on Peacock and costs in general, which I think are and ask Jeff to comment when Jeremy’s finished.

[Jeremy Darroch:]

Thanks, Brian. Yes. So we’ve broadly stepped into sports customers, as Brian said, and have paused many of our sports customers’ subscriptions. We unbundled sports. So we thought that was a very sensible way to manage in an environment where essentially the sports season’s gone away for now. That, of course, means that the level of cancellations we’ve had in sports is de minimis. So we think that positions us well to bring customers back when the sports season resumes. In terms of negotiations with sports rights holders, we are talking pretty much to everybody at the moment. That covers a range of things, but firstly, how do we get sports back, which I think is in everybody’s interest. So we’re working with rights holders, with governments around what we can do to create a safe environment so that sports can come back. The assumption is that sports does come start to come back over the summer, as Mike talked about. And then in terms of the future on sports renegotiations and new contracts, I mean, the principle is that our my approach doesn’t need to change because we start with value, and the value that we see, we bid against that value in a disciplined way. One of the advantages I think about the way sports are sold in Europe is that, typically, we’re on shorter cycles. The average cycle will be three, perhaps four years. So that does give us the opportunity. While we think there’s some form of reset that’s required and we see a different we take a different view in terms of value to get, by the way, obviously, we’ll we’re thinking about that all the time but particularly at the moment, and we’ll reflect that in due course.

[Brian Roberts:]

Jeff, why don’t you take Peacock?

[Jeff Shell:]

Yes. Let me jump in. Jessica, let me take Peacock and then go to costs. So on Peacock, it’s very early, Jessica. We’re three weeks in or so not even three weeks in, so I’m reticent to make any conclusions. But our goals on launching first with Comcast were twofold

[Marci Ryvicker:]

Thanks, Jessica. Carmen we will take the next question.

[Operator:]

Your next question is from the line of Craig Moffett with MoffettNathanson. Please go ahead.

[Craig Moffett:]

Hi, thank you. Two questions, if I may. One, on the cable side of the business, what are you seeing with respect to small/medium business in your business services segment? And how should we think about the exposure of that segment in particular to the crisis? Have share shifts continued? And is that perhaps enough to offset the pressure that those businesses are likely to be feeling. And then in the Sky business, if you part of the strategy, I think, for that business has always been to try to grow the OTT platform in Europe given the strength of that brand. Is there a way that you can accelerate that transition now just given that they’re experiencing a lot of the same lockdowns that we are here to try to sort of build the lifeboat, if you will, for the traditional distribution business? And actually, if I could squeeze in just one simpler and more technical question on theme parks, just can you give us an idea of what the breakeven occupancy or attendance rate would have to be when you reopen in order to be profitable?

[Brian Roberts:]

Okay. That has touched on all parts of the company. So why don’t we start with you, Dave, on SMB and business services, and we’ll go over to Jeremy. And then maybe, Mike, you take the parks question, if you want, or Jeff?

[Dave Watson:]

Got it, Brian. Craig, so this is what we are experiencing right now is primarily, as you noted an SMB issue. In a number of businesses where Mike mentioned earlier, where we have paused their accounts, there is no question, there has been an uptick, an increase. But the rate of that increase is declining. And so you take that, it’s not a huge number but it’s we’re working with our clients to stay very focused on that. There will be some impact for sure as we go into Q2. But overall, to counter, as you referenced, in SMB, we’re still the challenger with around 40% or so penetration. So there the fundamentals of SMB are still very good, and there’s penetration upside. We’re going to go after it. And we still are getting a fair amount of connect business even during this period. So our team’s on it. We’ve had to redeploy folks. People that were out working in communities are now doing driving demand in other ways. And it’s and we’re getting some effective responses. So we’ll stay on that. I think that last point before I turn it over is, over the last decade plus since launching, we started off with SMB, still the primary part of our business. But we have most definitely materially diversified to midsized and enterprise business now. So these segments are really important for us right now, will be in the future. That’s where most of the penetration upside is. So really proud of our Bill Stemper, the business services team, great local operations that have moved on a dime to handle a lot of this at this moment, but we certainly are planning for multiple scenarios. We’ll work with our small business clients. We want to be a partner with them, getting them through it. And so I am optimistic coming out of it, and we’ll be there for them when that happens.

[Jeremy Darroch:]

Thanks. Jeremy here jumping in. The answer is yes, Craig. It will form a bigger part of our mix. It’s another string to our bow, if you like. But we’ll do that in complement to our main services as well. Sky Q, which had been a priority for us, as you know, going into this year, one of the slightly frustrating things as it was going really very well at the start of the year, slightly had to take a step back because of the crisis. But it reminds me of the strength of our platform. But we can push hard on OTT, all of our streaming services. We’re already providing Sky Q directly over fiber in Italy. And all of these provide us with good alternatives and different ways to get to customers in this environment.

[Mike Cavanagh:]

And lastly, it’s Mike on your parks question, Craig. It’s something well short of typical. Seasonally through the year, we’re operating at typical seasonal levels, which are, for the most part of the year, well below full capacity anyway. And so then versus typical, I would guess that we’re breaking even and certainly when we get to sort of 50% of typical, which will be well below capacity on average. And I think another point would just be versus the number I gave for $500 million in second quarter loss if the parks are closed for the full quarter, as Jeff said, if they’re closed longer, there’s ability to flex and do more and change that long-term rate if we are staying closed. But on the other side of that, if we open and have lower attendance, at the lower end because our priority is going to be to make the parks safe, and so we’re not going to push for attendance. But at pretty low levels of return attendance as things ramp up, we’ll be in better shape than were the parks to be closed.

[Marci Ryvicker:]

Thanks, Craig. Next question please.

[Operator:]

Your next question is from the line of Philip Cusick with JPMorgan. Please go ahead.

[Philip Cusick:]

Hey guys. Thanks. Number one, can you think through the puts and takes to cash flow this year versus last? I know there is a lot of differences between the timing of cash going out the door and some of the amortization, especially at NBC. And then second, Comcast is taking pride in keeping leverage low to take advantage of disruption opportunities. I understand not buying stock next year, but would you consider buying assets if things come to market at distressed levels or is de-levering from here still your top priority? Thanks.

[Mike Cavanagh:]

So I’ll take that. It’s Mike, Phil. So in terms of puts and takes on cash, as I said, for total capital spend, we’ve got we’re down 5%, 5.2% in the first quarter with declines across all businesses. And I think the natural that will naturally be where we expect the full year to be, which would be sort of modestly down in 2020 versus 2019 across all of our businesses for the host of reasons, some things just getting slowed down, some things getting paused like Epic Universe. So in any event, total capital is down modestly for the year. And then on working capital, it’s the toughest one to predict, lots of volatility and unpredictability in it. But that said, my commentary there was that we’d expect to be roughly flat for the full company, best I can tell as we’re sitting here now. And that’s really on the back of increases that we’ll see in the cable business this year. We got an extra payroll period. We’ll do political ads in the fourth quarter that don’t get paid until the until we’re in the first quarter 2021, etcetera. So and then just a little bit of expected slowdown in consumer payment is why working capital will be up year-over-year in cable, and that offsets declines at NBCU and Sky, which is caused by slowdown in production typically in the TV and film businesses and a little bit of impact on sports. But I’d caveat that one. As we continue conversations with especially with sports-related partners like the Olympics, etc., those numbers could change over the course of the year. But those are the various puts and takes. And then on leverage ratio, it’s important to us that we get back to the leverage ratio commitments we gave to the rating agency. That continues to be a top priority. I think obviously we’re going to be delayed in getting there because of the pressure on EBITDA that comes from COVID particularly related to parks. So it will take time for those to ramp back up. And I think our focus as Brian said, we’ve got lots of opportunity in our existing businesses, and that will be priority number two. And I would never say we wouldn’t be taking a look at things that are sort of inorganic opportunities but the bar would be pretty high.

[Brian Roberts:]

Yes. I just would only add that definitely that last part, our focus is the businesses we’ve got. We feel we’re in a wonderful position. Again, as I think about the timetable, we know parks are going to reopen and we know sports is going to get back. So these are a temporary hit. And I think being home and watching sports, I think, is pretty safe. And that’s going to return pretty quickly to a great business. And then I look at the majority of the company being broadband in people’s homes and people who are spending more time in their homes, and that’s not going to change quickly. And that’s a great opportunity to develop new products and relationships and deepen those relationships. So as we’ve looked at it, as we talked as a team, I don’t think we would trade positions with anybody. We like our company. We like our hand, and we are going to be focused on improving from here

[Marci Ryvicker:]

Thanks, Phil. And we have time for one last question.

[Operator:]

The last question will come from the line of John Hodulik with UBS. Please go ahead.

[John Hodulik:]

Okay, great. Following up on those latest comments on high-speed data, obviously, great numbers even without connect America and the free subs. Can you talk a little bit about the strength there in terms of is it share gains given the ease of self-installation? Or are you guys seeing penetration gains in sort of wiring up what were previously wireless-only customers, given the need for the work-from-home environment? And then I think you guys gave some sub guidance on the video side and some revenue guidance on the high-speed data side. But can you talk about how you expect the sub trends to sort of play out through the course of the year and whether you think the trends you’re seeing now are sort of more related to the outbreak or could you see some secular strength and some follow-through given the demand for connectivity?

[Brian Roberts:]

So I’ll start. Dave, I think you can help on that. But I think the we think we have a superior product, and we’ve been investing in our network. We’ve had a focus we’ve seen a shift coming in customers’ behaviors. We saw this and really put our emphasis on innovating in broadband, whether it’s speed, coverage, control of various things that xFi stands for the brand itself. And I think a lot of this was happening before there was COVID, and the momentum has been terrific. And Dave and his team, I think, are really, really all over it, and we’re very pleased, both from product side, service side and marketing and consumer perception. And so why wouldn’t this be continued at some level? You then have to put that in the face of huge economic shifts in the country and just temper in that regard as to we don’t know what the economic outlook looks and the slope of recovery. But in terms of focus, I don’t think there’s a better focus that we could be having than Dave and the team’s. So Dave, why don’t you talk a little more about that?

[Dave Watson:]

Thanks, Brian. John, so as Brian said, this has been our top priority, continues to be our top priority going forward. And our mission has been to redefine what great broadband is, and Brian hit it. It’s we’re investing, and we have a really great product road map that really hits on all of it, speed, coverage control and now streaming with the addition of Flex and all the content that comes with it. So in this moment, robust, reliable network that can consistently handle this uptick in data consumption as well as all the devices with the WiFi coverage in the home, we have invested and built the network that can stand up to this moment, and it’s going to be important going forward. So and we’re not standing still, but we’re going to continue to improve the value of broadband. And I mentioned introducing Flex that comes with our included in our broadband service, and this is focused for the broadband-only segment. And Jeff mentioned Peacock already. This comes with Peacock comes with Flex. High levels of engagement with content, it’s a great video addition to the broadband service. So but to your main point, John, even in this environment, you have lower move activity that’s suppressing some of the activity, but there are many sources of new broadband share opportunity. And we continue to compete for share from the primary competitors. That’s a big source of business even right now that we take share from folks, we just have a better product and that’s proven out and people need it right now, and we’ll continue to. There’s still a lot of DSL. There is some nevers, never broadbands out there. You had mentioned mobile-only. People are finding you need broadband. And I think once they experience what xFi is, I think we’re optimistic about them staying with it. So along with historic record churn, I think we’re proving right now that we can attract new business for broadband as we go forward. So you look at the 477,000 in Q1 that we feel we took out there’s no Internet Essentials in that number. There’s appropriate reserve that we took out for bad debt projections. It’s not material in Q1, but we took it. And we think that going forward, April, as Mike mentioned, is a very good start. It’s impossible to say how things are going to play out through the quarter. But the fundamentals and the momentum that we have, I think we’ve proven that we can drive connects and that we have we’ll maintain solid churn. So I’m optimistic about our momentum as we go into the rest of the year.

[John Hodulik:]

Great. Thanks guys.

[Marci Ryvicker:]

Thanks, John. So that concludes our first quarter 2020 earnings call. Thank you all for joining us this morning, and please stay safe.

[Brian Roberts:]

Thanks, everybody.

[Operator:]

Thank you. There will be a replay available of today’s call starting at 12