Comcast: Peacock Flocks And Broadband Broadsides, Creating A Mixed Earnings Report

Summary:

• Comcast’s earnings report had a lot of surprises in it compared to expectations – but only some of them were good.
• After three years of waiting, Peacock finally broke through, with the in-house streaming service adding 5 million subscribers in a single quarter.
• Broadband competition continues to intensify and the impact was even worse than feared, with growth declining 80% compared to a year ago. 2023 may be even worse.
• Sky’s improvement seems largely illusory, and the theme parks and wireless growth are largely baked in, although further wireless upside is still possible.
• Linear Video is collapsing, not just at Comcast but industry-wide, and this may pose a further headwind as NBCUniversal’s cable networks may well lose more profits than Peacock will gain.

Before market open today, Comcast (NASDAQ:CMCSA) released its Q4 and full-year earnings report. While I have been reporting on developments within specific divisions of the company throughout 2022, I will now take a company-wide birds-eye view for the first time since a similar analysis when the 2021 numbers came out.

Altogether, Comcast’s report was rather surprising, and emphasized the accelerating rate of change in American media as the linear bundle transitions to the new world of streaming. Unfortunately, only some of these surprises were to the upside.

Peacock Finally Flies

The biggest surprise to the upside in the report was Peacock, Comcast’s much maligned streaming service. I defended Peacock longer than most, noting that with its productions disrupted by Covid right as Peacock was launching, it might take a little while longer than normal to find its feet. But even I was losing faith as it trudged through 2020, 2021 and then finally 2022 all without achieving a major breakthrough in the marketplace. In my last few articles I finally more or less threw in the towel and joined the naysayers, though I was still less negative than others.

So, of course, now is when Comcast finally manages to kick it into high gear. Comcast reported a truly breakthrough 5 million net subscriber additions to Peacock in Q4 alone, bringing its total count to 20 million, more than double where it was a year ago. Almost half of Peacock’s 11 million 2022 net additions thus came just in Q4.

Even better, Comcast’s count of Peacock paid subscribers does not include Xfinity-sponsored Peacock Premium subscribers – though presumably it does include them if they upgrade to the ‘Premium Plus’ ad-free tier – so Comcast’s Peacock is actually doing an even better job of attracting customers than that. With just under 30 million households subscribing to Comcast’s broadband Internet, the Peacock service is appealing enough for roughly 1 in 3 households that are not eligible to get it for free to pony up the cash for it.

Broadband Still Taking Broadsides

That broadband business, however, is more concerning. Yes, Comcast is now just under 30 million total subs for broadband, which is a remarkable number by any standards and by far the largest in the country. However, it is also almost exactly where it was a year ago.

Last year, I discouraged being caught up in Comcast’s “remarkable” 1.3 million subscriber net adds during the year because as impressive as the number sounded, it had in fact been cut from a 1.6 million projection prior to the launch of T-Mobile’s (TMUS) and Verizon’s (VZ) fixed-wireless broadband services. On this basis, I calculated that Comcast might see its broadband growth cut in half in 2022, which could pose a substantial headwind to the stock since broadband is now the key Comcast business division, more so than Sky or theme parks – and far, far more than traditional linear-TV, even though that last still represents Comcast’s largest non-broadband revenue source.

It turns out, my bearish prediction was far, far too optimistic. Actually, Comcast’s net loss of 26,000 broadband subscribers in Q4 means that for the year it added only 230,000 residential broadband subscribers – a decrease of roughly 80% compared to 2021.

As I noted in my article last month, there is little reason to think this number will improve much in 2023 or indeed any of the subsequent years. T-Mobile and Verizon have ample capacity to continue growing and they also have multiple pathways to reducing data intensity of their customer base in the unlikely event that capacity does start to become a problem. Indeed, the problem may even get worse – Verizon never misses an opportunity to remind us that it only has a small fraction of its C-Band FWA spectrum up and running right now and that it expects to do even better at broadband once the entire 160 MHz is up and running.

Comcast Counter-Attack

At least they are delivering a few broadsides of their own to these new entrants who are stealing their bread-and-butter. The best news for Comcast may have been in wireless, where it remains strong. Net growth for the year clocked in at 1.3 million and the total customer base is now over 5 million. Considering that Comcast, Charter (CHTR) and Altice (ATUS) all basically confine their wireless operations to their own customer footprints, the combined “Cable Wireless” company is now over 10 million subscribers – more than DISH Network’s (DISH) Boost Mobile – and, more importantly, still growing strong.

Capital Expense Coming?

The only warning flag here might be the data sippers ceiling. Comcast’s reseller agreement with Verizon almost guarantees it a continued viable and profitable wireless business, but to step beyond data sipping packages and begin to compete in the unlimited data segment Comcast almost certainly will need to begin substantial capital expenditures on a wireless network of its own, instead of just reselling Verizon capacity it must pay for by the gigabyte.

That could get expensive. DISH Network is regularly the subject of speculation that it won’t be able to finish building its wireless network before it runs out of money, despite veritably liquidating its traditional satellite-TV division to fund it. As Verizon’s CAPEX ramp up just from the 4G/5G transition has shown, wireless networks are expensive.

Clear Growth Runway

Even so, Comcast management seems to have a pretty clear path to growth. Management has made clear that it intends to leverage its Verizon deal by essentially building opportunistically. Ordinarily, wireless networks are an all-or-nothing deal. No one wants to own a cell phone that only works in one or two cities of the country, so you have to build enough towers to blanket the whole country in your signal.

With the Verizon deal, Comcast has options, though. As it continues to add customers, it can monitor its network for areas of high-density data usage and essentially calculate mathematically whether its own towers in a given area would save it enough in Verizon-supplied gigabytes to produce a positive return, and it can then build only those towers which increase profit. There will also be a bit of a flywheel effect to it – as it builds towers and saves money, it can reinvest back in growth, increasing density still further and making more towers profitable and starting the cycle all over again.

Despite the potential for higher CAPEX going forward, Comcast’s prospects in the wireless sphere still seem reasonably bright.

Odds And Ends

The other divisions were less noteworthy. Theme parks remain strong and wireline voice connections continue to decline, but these were both expected. Comcast management tried to get everyone excited about its Sky acquisition – which like DIRECTV for AT&T (T) has been a disaster – by noting broad customer net additions across the entire Sky footprint.

But this left out that to achieve those gains EBITDA in the division was actually lower than it was a year ago. We all remember that AT&T tried this same “trade profits for subscribers” approach as well and it didn’t end well. Satellite is a dying business, and the idea that you’re going to “make it up on volume” has frankly been sufficiently disproven by now that I will simply refer you to my past articles on the subject.

Frankly, I’m not sure Comcast investors should be penciling in any significant profit from Sky in the long-term picture.

Linear Bundle Is Not Sick, It’s Dying

The only other significant thing of note might be the Video division, where Comcast still runs a linear-TV operation – remember those? – and like I said, it’s still a major revenue driver for the company. It is, as I’ve noted in the past, no longer a significant profit driver, so investors understandably focus on it less and less.

However, even with management’s growing indifference to its fate, it was still shocking to see the headline figures today. Comcast reported that it lost a staggering 2 million linear video subscribers in a single year – a drop of over 11% of subscribers in a single year. This follows a 1.7 million subscriber drop in 2021. All told, in two years, Comcast’s video business has shrunk a jaw-dropping 20%.

Like I said, Comcast doesn’t actually make money on distributing video, but this number still matters in a way because it does make money off of its cable networks in the NBCUniversal media business. While it’s no skin off Comcast’s nose if a video sub leaves Comcast and goes to DIRECTV or even YouTube TV, it does matter if that sub leaves the linear bundle altogether and those cable networks lose a subscriber.

The Final Redoubt Falls

Comcast Xfinity was long one of the last bastions standing of a stable video business. Two short years ago it still had 19.1 million of the roughly 22 million video customers it had a decade ago. A decline, to be sure, but a rather powerful retention under the circumstances. Now, it has lost more subs in the last two years than it lost in the nine before that.

If Comcast cannot keep a viable linear video business going, then almost certainly no one can. This means that the end of the linear bundle may well now be accelerating closer and much faster than anticipated. It’s a potential headwind to the NBCUniversal division, if not the Cable Communications division, despite management’s professed indifference.

The Great Hulu Question

As I said, at the time this article went out Comcast management hadn’t yet spoken on the earnings conference call. As such, the one thing we don’t know anything more about yet is what effect the combination of accelerating Peacock growth and declining cable prospects will have on Comcast’s intentions with regards to Hulu.

Management seems to be doing more than the obligatory cheerleading when it says that it wants either a much higher price for its Hulu stake or even just the opportunity to acquire the thing itself. At the time, the idea was that Hulu could take the place of Comcast’s underperforming in-house streamer, but Peacock no longer looks quite so adrift.

This is another factor for investors to weigh – Comcast is either about to get a $10-$15 billion cash infusion or about to take on a $20-$30 billion debt burden increase, which is an incredibly wide variance – but there just isn’t much I can say about this issue until we hear from management.

Investment Summary

Altogether, Comcast remains a mixed bag. A powerful media business – apparently with a more successful streamer than we thought – and a growing wireless opportunity is married to a profitable but increasingly stagnant, and perhaps even vulnerable to decline, broadband business and what I still believe to be nothing less than a dying satellite division. The Peacock upside surprise is certainly to be welcomed, but the ever-stronger headwinds in both the broadband and video sides of the cable business are cause for something more than mere pause, but still something less than outright alarm.

The speed with which things are changing in the media/telecom space makes projecting even more uncertain than usual. But right now I expect that Comcast will continue to confront the necessity to either cut prices or lose subscribers in its broadband division, either of which will pressure cash flow. My Peacock optimism is somewhat restored… but it also seems increasingly likely that it will replace, rather than supplement, the profits of NBCUniversal’s cable networks. And it may not replace them completely so there may be headwinds in the Media division as well.

Despite the lower entry price than a year previously, the decline in Comcast stock seems no more than what is warranted given the increasing challenges. I rate it a Hold and will not be opening a position.

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Disclosure: I/we have a beneficial long position in the shares of TMUS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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