Jason Armstrong - Senior Vice President, Investor Relations Brian L. Roberts - Chairman and CEO Michael J. Angelakis - Vice Chairman and CFO Stephen B. Burke - EVP; CEO, NBCUniversal Neil Smit - EVP; President and CEO, Comcast Cable.
Ben Swinburne - Morgan Stanley Craig Moffett - MoffettNathanson Jessica Reif Cohen - Bank of America/Merrill Lynch John Hodulik - UBS Phil Cusick - JPMorgan Vijay Jayant - ISI Group Brett Feldman – Goldman Sachs. Marci Ryvicker - Wells Fargo Jason Bazinet - Citi.
Good morning, ladies and gentlemen, and welcome to Comcast’s Third Quarter 2014 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 call over to Senior Vice President, Investor Relations; Mr. Jason Armstrong. Please go ahead, Mr. Armstrong..
Thank you, operator, and welcome everyone. Joining me on this morning’s call are Brian Roberts, Michael Angelakis, Steve Burke and Neil Smit. Brian and Michael will make formal remarks, and Steve and Neil will also be available for Q&A.
As always, let me now refer you to Slide two, which contains our Safe Harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, in this call we will refer to certain non-GAAP financial measures.
Please refer to our 8-K for the reconciliation of non-GAAP financial measures to GAAP. With that, let me turn the call to Brian Roberts for his comments.
Brian?.
Thanks Jason and good morning everyone. Our third quarter results continue our optimism and momentum in 2014. Our businesses are well positioned and producing strong financial results. During the third quarter we grew operating cash flow by 7% and increased free cash flow to $2.5 billion. And year-to-date operating cash flow has increased more than 8%.
There were several significant achievements across the company. In Cable, we generated solid revenue and operating cash flow growth each of which was over 5%. Highlights include a notable improvement relative to the prior year in both broadband and video subscriber results.
In fact, our video subscriber result was the best for the third quarter in seven years and our 315,000 broadband net adds was the best third quarter result in five years. Additionally, strong growth in business services allowed us to surpass a $4 billion annualized revenue run rate in that segment.
At NBCUniversal operating cash flow increased over 13% thanks to a continued turnaround in broadcast the opening of the Wizarding World of Harry Potter, Diagon Ali in our Orlando theme park, some good successes in film along with consistently strong cash flow production from our Cable networks.
As we look at our key initiatives, that will drive future growth through a number of exciting developments in this quarter. Starting with NBCUniversal, our third quarter results are a great example of how the investments we’ve made in the businesses are paying off and positioning us well for the future.
In broadcast NBC continued its momentum throughout the summer ending the full 2013, 2014 season ranked number one among adults 18 to 49 which was the first full season win we’ve had in 10 years.
Now the new fall season has just begun and NBC is off to another strong start ranked number one in the same demo through the first several weeks of the season. The team has done a great job making NBC vital and profitable once again.
In Film, Lucy was the world wide success in the third quarter, infact while 2014 included a smaller slated universal, we’ve had some great successes as – films so far this year achieved the number one slot at the domestic box office, and we continue to invest for an exciting slate in 2015.
With our Cable Networks ratings have been under pressure industry wide as the market continues to be very competitive with more original programming and time shifted viewing than ever before.
However, Cable Networks continue to contribute very strong cash flow with NBCUniversal and we have a diverse portfolio of channels with entertainment sports and news. USA was number one Cable Network in the third quarter and is on track to be the most watched Cable Network for the ninth consecutive year in total viewers.
Brave and Sci-Fi are now top ten networks as well. And CMBC is the fastest growing network in prime time among adults 18 to 49 and 25 to 54. As we have said before our Cable Networks are generally under monetized compared to our peers, which gives us a strong relative positive for future growth.
In Parks, as I mentioned we opened a new Harry Potter attraction in Orlando, which combined with added hotel capacity led to a record summer attendance and a record labor day. The new attraction is off to an amazing start driving double digit per capita growth and a significant lift in premium park-to-park ticket sales.
Even more encouraging our guest satisfaction has been overwhelmingly positive with scores well above 90%. Our confidence in the parks has led us to a recent announcement in which we agreed to form partnership in China where over several years we will be developing a park in Beijing. Expect more on this in the future.
So Steve Burke and the team at NBCUniversal have made great progress so far in 2014. Turning to Cable communications, Neil Smith and the team once again delivered strong results and in an environment with plenty of room for distraction they clearly remain focused and are executing at a very high level.
Consumers viewing and consumption patterns and the competitive landscape are evolving at a very rapid pace as evidenced by the recent announcements over the past week. We understand content company’s attempts to look for new ways to grow their businesses.
We believe we have been a leader in working with content owners with our development of TV Everywhere, X1, Cloud DVR, light packaging and streaming amongst other things. With our breadth of content right both in and out of the home, and on notable devices along with our investment in new platforms and user interfaces.
Comcast Cable is uniquely positioned to continue to innovate and lead this evolution. A good example of this is our new XFINITY on campus product we launched during the third quarter with six schools with several others currently in trial.
The service lets college students watch live TV and On Demand content on the IP enabled devices including laptops, tablets and smartphones while on campus. With this younger generation more and more viewing is happening away from the traditional TV set and we’ve evolved our product and services to better engage with them.
At the same time, we continue to aggressively deploy our X1 and Cloud DVR technologies in our broader subscriber base. We believe our X1 operating platform offers customers an unrivaled experience. We recently surpassed 5 million X1 boxes deployed, a significant achievement in a such a short time frame.
And now we are rapidly rolling our Cloud DVR which allows customers to stream it download DVR recordings out of the home to any device, as well as stream live TV to any device in the home. In Wi-Fi, we continue to extend our reach.
A scale of our efforts in Wi-Fi is attracting new partners in further enhancing its reach and enhance the value that we provide to Comcast subscribers. We’ve recently announced an agreement with Liberty Global where subscribers of the two companies will gain access to each others Wi-Fi networks.
For Comcast customers, the deal provides access to more than 2.5 million Wi-Fi access points in various countries in Europe. This is a terrific new benefit that we are excited to provide our customers with additional reach and capabilities in the years ahead. Finally, I want to spend a minute on our overall customer experience.
Our customers deserve the best experience every time they interact with us. While we have made progress, we need to do a better job in ensuring consistent excellence in our interactions. When the moment of customer orders new service to the installation, to the way we communicate and respond to any issues.
Over the last few years we’ve been incredibly focused on product innovation and delivering great content and technology experiences. So now it’s time to leverage those capabilities to deliver truly exceptional customer service.
The way we interact with our customers on the phone, online, in their homes is just is important to our success as any other products that we provide. Put simply, customer service should be our best product. That’s why I’m really pleased with our recent appointment of Charlie Herrin to lead our customer experience initiatives.
For those who have not had the opportunity to meet him, Charlie in his most recent role led the design team behind the development of X1 and he spearheaded the company’s initiative to deliver a consistent user experience across platforms. Charlie in his team received the 2011 Emmy Award for outstanding achievement for the XFINITY, TV iPad app.
A 2013 Emmy Award to the X1 user interface. We are all excited for Charlie in his new role and are committed to improving in this critical area. Let me conclude with some brief comments on our pending acquisition of Time Warner Cable. This is an important and exciting time as we focus on gaining regulatory approval for our transactions.
We are very encouraged by the recent shareholders approvals on each side of this transaction as both our and Time Warner Cable shareholders boded overwhelmingly in favor of the merger. Shareholders see it the same way we do.
And its opportunity to give customers access to higher broadband speeds, a more extensive content line up and what we believe is the industries best operating platform in X1 and in the process create more value.
As I mentioned earlier, there is a lot going on with a lot of opportunities for distraction, but our teams on both sides of the business remained focused and are executing at a very high level and I believe it’s evident in these results. So let me now pass this to Michael to cover the third quarter results in greater detail..
Good morning, and thank you, Brian. Let me begin by briefly reviewing our third quarter consolidated financial results starting on slide four. Overall, we are very pleased with our third quarter performance which reflects consistent execution and sustainable profitable growth.
For the third quarter, consolidated revenue increased 4% to $16.8 billion and operating cash flow increased 7% to $5.7 billion, reflecting healthy organic growth in our Cable business and an exceptional performance at NBCUniversal.
These results include $77 million of Time Warner and charter transaction related cost during the third quarter of 2014, which is a similar amount to the $74 million of costs associated with the termination of a pension plan in the third quarter of last year. Excluding both of these items, operating cash flow growth would remain at 7%.
Year-to-date consolidated revenue increased 6.9% to $51 billion and consolidated operating cash flow increased 8% to $17 billion.
However, for compatibility purposes if we exclude $1.1 billion of revenue related to the Olympics in the first quarter, $138 million of year-to-date transaction related cost in the pension termination cost in 2013, our consolidated revenue increased 4.6% and our consolidated operating cash flow increased 8.3%.
Earning per share for the third quarter increased 52.3% to $0.99 per share versus $0.65 per share in the prior year, however when you exclude favorable tax adjustments in a transaction related cost I just mentioned our normalized EPS increased 12.3% to $0.73 per share.
Year-to-date, our earnings per share increased 33.7% to $2.46 per share versus $1.84 per share in the prior year, again, excluding the tax adjustments gains on sales and acquisition related items our normalized year-to-date earnings per share increased 19.9% to $2.17.
Free cash flow for the quarter increased 26.7% to $2.5 billion and free cash flow per share increased 28.4% to $0.95 per share. This growth was primarily driven by increases in consolidated operating cash flow, improvements in working capital and lower cash taxes which were partially offset by increased capital expenditures.
For the first nine months of this year, we generated $6.5 billion of free cash flow, a decrease of 8.2% over the same period in 2013. Year-to-date free cash flow per share has declined 6.8% to $2.46 per share. Now let’s review the results of our businesses in more detail starting with Cable Communications on slide five.
Our Cable Communications business continues to execute well delivering solid financial and customer growth in the third quarter. Cable Communications revenue increased 5.2% to $11 billion driven by continued strength in high speed internet and business services as well as higher advertising revenue due to political spending.
Total revenue for customer relationship increased 4.2% to $137 per month reflecting rate adjustments the higher contribution from business services and increasing number of customers taking multiple products.
At the end of the quarter, 69% of our customers subscribed to two or more products and 36% subscribed to three products compared to 34% in the third quarter of last year. In addition to solid financial growth, we continue to deliver strong customer metrics.
We increased total customer relationships by 82,000 in the third quarter more than three times the net additions versus last years third quarter. Our X1 TV everywhere and On Demand platforms are clearly best-in-class, while X1 is still a relatively small portion of our overall video base its contribution is having a positive impact.
Our X1 net adds continue to accelerate and accounted for more than one third of our video connects in the quarter, and we once again reduced our video customer losses. In the third quarter we lost 81,000 video customers, a 36% improvement from last years third quarter and the best third quarter customer result for video in the past seven years.
High-speed internet also delivered impressive subscriber results. We added 315,000 new customers during the quarter, an increase of 6% year-over-year and the best third quarter results in five years as we continue to differentiate our product with speed enhancements and the fastest in-home Wi-Fi with our advanced wireless gateways.
Over 50% of our high-speed data customers now have one of those new wireless gateways. We also continue to grow our voice customer base this quarter, albeit at a slower rate than last year, adding 68,000 new customers in the quarter.
This slow down in net additions was a result as we focus on double play during the back-to-school season as well as X1 availability that was more focused on triple play customers last year making for a difficult comparison.
As we review the product categories in more detail, video revenue increased 1% reflecting modest rate adjustments in an increasing number of customers taking advanced services partially offset by a decline in pay-per-view revenue to the results of events compared to last years third quarter.
High-speed internet revenue increased 9.6% during the quarter making again the largest contributor to cable revenue growth driven by continued growth in our customer base, rate adjustments and increasing number of customers taking higher speed services.
At the end of the quarter, 50% of our residential high speed customers now receive speed of 50-megabits or greater, as we continue to increase the speed included in some of our bundle plans. With regard to voice, revenue decreased 0.5% for the third quarter, as the growth in customer base was offset by a modest decline in ARPU.
Moving on to business services, third quarter revenue increased 21% to $1 billion and was again the second largest contributor to cable revenue growth in the quarter. This rate of growth is especially impressive given that business services is now a $4 billion run rate business.
The majority of that revenue is generated by small businesses with less than 20 employees, but the contribution from mid-sized businesses is rapidly increasing and have accounted for close to 40% of business services revenue growth in the quarter.
Cable advertising revenue increased 12.3% primarily reflecting an increase in political revenue for November's mid term elections. Excluding the impact of political, our core cable advertising increased 3.1%. We expect advertising growth to remain strong in the fourth quarter, again, driven by political revenue given the upcoming elections.
Please refer to slide six. Third quarter cable communications operating cash flow increased 5.1% to $4.5 billion, resulting in a stable margin of 40.4% compared to 40.5% in the third quarter of 2013. Included in these results is a legal settlement that negatively impacted operating cash flow and reduced this growth rate by 40 basis points.
This is a strong financial performance as we effectively manage higher programming cost, and increasing advertising marketing and promotion expenses and absorbed additional expenses to support the deployment of X1, Cloud DVR and wireless gateways across our footprint, as well as a continued expansion of business services and XFINITY Home.
Programming expenses increased 7.1% in the third quarter, slightly below our original estimates, but nonetheless reflecting increases in retransmission consent fees, higher sports programming costs, and step-ups related to certain long-term agreements.
We are pleased with the management of these cost year-to-date and while we expect fourth quarter programming expense growth to accelerate, we continue to expect our full year program expenses to increase slightly lower than the 9% to 10% we had forecast at the beginning of the year.
In addition, advertising, marketing and promotion expenses increased 9.1% for the third quarter, reflecting higher overall media spend and continued investment to more effectively target customers and enhance our competitive position in both our residential and commercial businesses.
We continue to experience modest expense growth in our customer service and technical operations as we rapidly deploy X1, Cloud DVR, wireless gateways and XFINITY Home across our base. And as Brian said earlier, we are not only focused on offering the best most innovative products, but we want to support them with a superior customer experience.
We are effectively offsetting these increased expenses with an improving product mix as we add more high-speed data in business service customers and upgrade existing customers to higher level of services such as HD DVRs, and faster internet speeds, as well as we implement modest rate adjustments.
Overall, our cable group’s third quarter and year-to-date results clearly demonstrate that we are executing well and competing effectively with our innovative products and services that provide a great value to our customers.
We are focused on improving the customer experience, having best-in-class innovative products and continuing to deliver strong financial and customer results. Now lets move on to NBCUniversal’s results which are highlighted on slide seven.
NBCUniversal has also executed very well, delivering double-digit operating cash flow growth in both the third quarter and on a year-to-date basis. In the third quarter, revenue increased 1.2% and operating cash flow grew 13.3% driven by strong results at Broadcast Television and Theme Parks. Now let's review the individual business segments.
For the third quarter cable networks generated revenue of $2.3 billion, an increase of just under 1% driven by a 5.1% increase in distribution revenue. If we adjust for the closure of the Style Network, distribution revenue would have increased 7%.
This revenue increase was partially offset by a 4.6% decline in advertising revenue as increases in price and volume were offset by a decline in ratings. When adjusted for the closure of Style and the movement of Fandango from cable networks to our film group, advertising revenue would have declined 1%.
Cable networks operating cash flow increased 1.8% to $868 million, reflecting higher revenue, and relatively flat overall expenses. As higher sports programming cost, including our relationship with Philadelphia Phillies and the launch of English Premier League on NBC Sports Network were offset by decreases in marketing and other operating expenses.
With regards to our broadcast television segment, third quarter revenue increased 7.7% to $1.8 billion driven advertising revenue growth of 4.4%, increased retransmission consent fees and higher content licensing revenue.
The growth in advertising reflects the rating success of our primetime summer lineup on NBC, as well as our continued strong performance in late night. As a result, we finished the summer rank number one, extending our number one status for the entire year.
With the first few weeks of the fall broadcast season now behind us, we are all off to a strong start and optimistic about our 2014 and 2015 schedule. Broadcast’s third quarter operating cash flow increased $108 million to $142 million reflecting higher revenue and a slight increase in programming expenses.
Moving to filmed entertainment as expected, third quarter revenue declined $213 million or 15.2% to $1.2 billion reflecting a decline in theatrical revenue primarily due to the strong box office performance of Despicable Me 2 in the third quarter of 2013.
This was partially offset by an increase in content licensing revenue due to a larger number of strong titles compared to the prior year.
Third quarter operating cash flow decreased 20% to $151 as the lower revenue was partially offset by a decrease in the amortization of film cost and reduced advertising, marketing and promotion expense due to a smaller film played.
Our Theme Park had a remarkable third quarter as revenue grew 18.7% to $786 million, reflecting higher guest attendance and per capita spending driven by the successful opening of Orlando's Harry Potter Diagon Alley on July 8.
We are off to a strong start with record attendance levels per capita increases, the significant lift in park to park ticket sales. In Hollywood the April opening of the Despicable Me Ride continues to drive strong attendance and also per capita increases.
Third quarter operating cash flow increased 16.9% to $402 million reflecting higher revenue, and an increasing operating cost to support the new attractions. Let’s move to slide eight to review our consolidated and segment capital expenditures.
In the third quarter, capital expenditures continue to track our plan and increased 13% to $2 billion compared to the third quarter of 2013 driven primarily by increased investments at cable and a modest increase at NBCUniversal.
At cable communications, third quarter capital expenditures increased $212 million or 14.8% to $1.6 billion, equal to 14.9% of cable revenue versus 13.6% in the third quarter of last year.
The increase primarily reflects additional investment as we launched our Cloud base initiatives higher spending on CPE, as continue to deploy the X1 platform in Cloud DVR as well as our continued investments in network infrastructure to increase our network capacity.
Year-to-date cable communications capital expenditure have increased 13.7% to $4.3 billion representing 13% of cable revenue. We continue to be very pleased with our X1 rollout. We accelerated our X1 net additions in the third quarter compared to the second quarter and recently hit a milestone of having $5 million XI boxes deployed to our customers.
As the deployment expands, the customer benefits have continued, more customers subscribe in the DVRs and take an additional outlets, there was an increased video on demand usage and we continue to see reduced churn levels among these customers.
As originally planned, we anticipate that cable CapEx spending will accelerate in the fourth quarter and as a result we continue to expect at full year cable capital intensity will increase to approximately 14% of cable revenue compared to 12.9% in 2013.
Third quarter capital expenditures at NBCUniversal increased only a $11 million to $295 million, primarily reflecting increased investments in Theme Parks as we continue investing in new attractions, including the completion of Harry Potter in Orlando and the ongoing development of Harry Potter as well as the Fast & Furious attraction in Hollywood.
Year-to-date NBCUniversal CapEx has increased $77 million to $884 million. We continue to expect that NBCUniversal's 2014 capital expenditures remain relatively stable compared to 2013s level. Please refer to slide nine.
As I mentioned earlier, we generated consolidated free cash flow of $2.5 billion in the third quarter, an increase of 26.7% as growth in consolidated operating cash flow, improvements working capital, and lower cash taxes were partially offset by higher capital expenditures.
For the first nine months of the year we generated $6.5 billion in free cash flow, a decrease of 8.2% over the first nine months of 2013 and year-to-date free cash flow per share has decreased 6.8% to $2.46 per share, primarily reflecting increased working capital in the first six months of the year as we increased our production spending in preparation for a larger 2015 film slate.
We are executing on our 2014 financial plan and year-to-date we have increased our return of capital to shareholders by 33% to $3.9 billion, including share repurchases totaling $2.3 billion and dividend payments totaling $1.7 billion.
Now turning to our acquisition of Time Warner Cable and our related transactions with Charter, we received overwhelming support from our shareholders this month was more then 99% of the votes cast approving our merger with Time Warner Cable.
We also have strong momentum at the state and local level, having received consents from more then 90% of the 2500 plus franchising authorities covering more then 7800 franchise areas and communities. We remained very focused on regulatory approvals, as well as our integration planning. We continue to expect the merger to close in early 2015.
As we have mentioned before, we plan to repurchase an additional $2.5 billion of stock before we close the deal and we anticipate that the additional share repurchase will be split between the fourth quarter of 2014 and the close of the deal in early 2015.
Overall, we are very pleased with the operational and the financial progress we have made during the first nine months of 2014. And we are focused on continuing this momentum. We believe our strong focus on execution will continue to generate profitable organic growth and continue to yield positive results.
We are progressing with the integration planning of the Time Warner Cable merger and Charter divestitures. We remain very excited about the opportunities these transactions bring to Comcast and the value they create for our customers and our shareholders. Now let me turn the call over Jason for Q&A..
Thanks, Michael. Regina, let’s open up the call for Q&A please..
Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from the line of Ben Swinburne with Morgan Stanley. Please go ahead..
Thank you. Good morning. I have two questions although they are related; Brian as there is obviously lot of focus on Time Warner's announcements last week about an HBO over the top launch.
And I don’t know if you comment on that specifically and if not, maybe just broadly, philosophically how do you and how does Comcast look at the idea of bringing product to market for your consumers that moves the – the content distribution model outside of what we historically think of as the TV bundle into a –maybe more either Internet bundled service or even a direct to consumer model.
Is that something you think make sense for the industry for Comcast and its customers, do you view that as being a less elegant solution than X1. And then I had a sort of question on the same lines for Steve around time-shifting and streaming and its seems like we're seeing an acceleration in behavioral shift.
Do you have any sense Steve how much leakage in viewer ship you're seeing in comparing the Nielsen ratings to what's actually happening at the customer level, particularly at your cable networks and how do you fix that problem over time?.
Okay, Ben. Thank you. I think I'll start and maybe give Neil a chance to talk a little bit about your first question then we'll kick it over to Steve. I am going to differ talk about any of the specific announcements.
But as I said earlier, I do think its, all companies are trying to figure out how to reach all customers, potential customers and do what's right for their company in their mind. But I do think our existing business model is very strong this quarter, last quarter and probably you know, future quarters will show that many people want these bundles.
But we have experimenting with products like and enrolling out Internet plus where we offer our – one of our best broadband's speeds along with a smaller television package along with HBO. We have a campus product that is very exciting which – where you don’t get box, it’s simply a streaming product right from the get go.
So I think our – both our innovations department, our network and our existing relationships and our relationship with content companies, you put all together and that puts us in a great position to try to reach many consumers and work with each company and try to find the best answer with their content.
Neil?.
Yeah, I think clearly there is some shifting in the ecosystem and we were focused on targeting every customer segment, as Brian mentioned that we were the first to introduce HBO Internet Plus product targeted at the – in millennials together with HBO. We have a great working relationship with them and I expect that continue.
The X1 product actually is driving more linear viewing and we think that also targets everyone, not just millennial group..
So Ben, in beginning of your question you mentioned that the HBO product was then over the top product, I actually don’t think it is, and I don’t think the CBS product is over the top either.
If you define over the top sort of coming over the top the existing distributors and going direct and bypassing existing distributors, I think both HBO and CBS are trying to add to their existing ecosystem.
And if you think about it HBO probably has the most elegant, economically attractive sort of business model, anybody who is ever been in the television business as be interesting and I think challenging for them to go and try to attract new customers into that ecosystem without cannibalizing the existing customers.
The existing customers that are sold through cable and satellite are extremely high margin. So even if they sell at $15 sub, they got to be very – when they go directly to a consumers view the internet, they got to be very careful at cannibalization.
It will be interesting to see how that works, but I don’t think they are saying we're going over the top of the existing ecosystem, I mean, Time Warner was company that really created TV everywhere. I think CBS is the same thing.
CBS is not, I don’t think trying to get their existing ecosystem to move over to a new model, they are trying to Mellanious or new customers and I think that’s we're all trying to do. And that leads into the second part of your question about time-shifting and leakage.
I think the fact of the matter is people have more options to watch quality, professionally produce video then ever before and they are using those options. Whether its DVR, Netflix, Hulu or a variety of other ways to consume this content. A lot of those options are not properly measure; some of those options are not measure at all.
And so what you're seeing I think is a pressure on traditional ratings in both broadcast is been going on for a while.
But now cable, I think some of that is going to get better, I think there will business models that evolve, some of that we've addressed by selling to Hulu and Netflix and Amazon and we make hundreds and millions of dollars doing that. But I think its going to be more, more and challenging.
There was a great article a few months ago where they said that were 88 new television shows launched during the summer and this is in a business that 20 years ago nobody launched a new television show during the summer.
So that competition combined with new technology is making it harder and harder to deliver the kind of ratings that we've all been used to..
Thanks a lot….
Stephen B. Burke:.
:.
Yeah. Thank you very much..
Thank you very much..
Yeah. Thanks, Ben.
Operator, next question please?.
Your next question will come from the line of Craig Moffett with MoffettNathanson. Please go ahead..
Hi, thank you. Two questions, I guess both for Neil probably.
You know first you’ve probably heard a lot of people now more openly speculating about a Wi-Fi first retail offering in wireless, can you just update us on your thinking about that? And then second if I could just follow up to the comment that Michael just made about the overbuild and yet the relatively small video losses, can you expand on that a little bit, does that imply that you are actually gaining share in the places where we are just competing against satellite at this point?.
Sure, Craig. On the Wi-Fi first front we continue to extend our Wi-Fi network both in-home and out of home. We have a total of about 5 million hotspots, the majority of those are in-home but we think it’s a very powerful asset going forward.
We are not, we haven’t clearly identified how to best monetize that asset, but the in-home Wi-Fi usage about half our HSD customers have our high end routers with the highest in-home speeds and they are hiring in more devices everyday and I think they are going to be more connected devices coming and Wi-Fi will be an important aspect of the subscription value.
With regards to the video business, I think there were a number of good things that happened this quarter. One is we targeted effectively what really drove the video number was churn reductions and I think we are getting better customers, we are screening them better and I think also we are bundling better.
We – as Michael said, we went up 200 basis points on double and triple play churn bundles. And so the video business is strong. X1 continues to pull well, it was about 20% of our triple plays now and about 75% of the triple play net adds this quarter.
So and all the metrics around X1 seem to be holding the churn, voluntary churn reductions down about 20%. The DVR purchases are up, the transactional VOD is up 20% so it continues to perform very well..
Should we assume that most of your losses at this point are due [telco] TV or – net your roughly breakeven or you are better than that against satellite at this point?.
I think it depends on the market but we are performing well and we feel against both the telcos and satellite players..
Right. Thank you..
Next question, please..
Your next question comes from the line of Jessica Reif Cohen with Bank of America/Merrill Lynch. Please go ahead..
Thanks. Also two questions, one NBCU one Cable.
On NBCU hoping Steve would comment on either this visit contrast between the broadcasting cable advertising growth, is this all ratings in your view, you mentioned the measurement issues, when does that actually get rid of the measurement of devices and non-linear viewing how much would you attribute this problematic buying some of which obviously will come back and into television and any commentary you can give in terms of share shift within media, some of the money is actually going to digital properties are you seeing a new digital property? So that’s the NBCU question..
That was actually seven questions, but I’ll try to answer them all as one. I think some of it is measurement, you know Nielsen did the sort of put in broadband homes into the denominator and appears to be taking them out now and you know there is some sort of pure math measurement.
I think there is also sort of a feeling that its increasingly difficult to particularly when you are looking at demo ratings 18 to 49 that’s increasingly difficult to get measurement in upscale young homes. So I think there is always a question about that.
But I think the fact of the matter is the next five or ten years in basic entertainment cable as it relates to ratings are going to be much more difficult than the last five to ten years.
And as a side of that, that’s technology and there’s a side of that that’s a lot of new shows and the ability to have your required programming your VP programming which many of these cable networks were built on, when you can get those episodes in other places I think those are going to be tougher businesses than they have been.
We don’t see the advertising number was as it relates to cable was primarily driven by ratings not by CPMs. I do think you are seeing kind of a resurgence of the advertising business as NBC resurges so that explains some of the change there. But our big cable channels particularly when sold as a portfolio are very attractive and very powerful.
I just think its unreasonable to assume that the ratings for those businesses are going to grow if you look over a five or ten year period..
And the digital shifts?.
You know there is clearly a shift to digital; you can’t talk to a marketer or an advertising agency that isn’t talking about shifting dollars to digital. I do think to agree the upfront was a little slower for some people.
We actually had a very good upfront but for some people it was not so good and the question is, is it tentativeness on the part of the advertisers or a shift to digital. I’m in the camp that says it was more tentativeness and keeping flexibility.
The fact of the matter is digital can’t deliver the same kind of emotional attitude adjusting advertising at a 30 second television spot can and I think a lot of advertisers intellectually want to get the targegability and data driven side of digital but they also realize when they have big product to get out into the market that they need television.
So, I think clearly there is a shift to digital, but I think the market is likely to be quite strong and you know the question we always get as is how is scatter? Scatter is just fine. Its steady, and for us because we’ve had our performance at NBC and sell as a portfolio we are seeing very very fine attractive steady trends in the scatter market..
Great.
And then on the Cable question, is just like as I follow up on some of XFINITY comment, you mentioned 5 million set top boxes now, can you talk about where you might be a year from now and you know what are you seeing in terms of usage, is that linear viewing is up, what do you think overall usage and is there a difference in ARPU you already said churn is lower 20% better, but what are the statistics, are you finding from XFINITY?.
What we said publicly is that we will have the X1 boxes to the majority of our customers within three years. And we are I think we are right on track. In terms of the performance date the X1 customers do have a higher ARPU and they have a higher ARPU for three reasons.
One is the VOD buys are great or 20% higher, two is they get almost two times the number of DDRs than the average customer and three is they have more additional outlets, that they are getting, they want to use the system more its getting more usage.
We are seeing more viewing both in linear and On Demand, and I think that’s just because we are making it easier to discover and find that the content. I think that you know we are going to continue to see good results. We continue to refine the product and I haven’t seen any slowdown in the performance metrics..
The only thing I would add is when you look at the triple play sort of the customer life time value of an X1 triple play, obviously given what Neil just said in the low and the reduced churn we do have a pretty done good return on that investment of X1 and we have an improvement in the CLV..
And we’ve opened up the availability from both from the triple play and now double play customers and in retention, so as a wider audience has it available..
Just to state the obvious, we’re very pleased with how stable it is, we’re doing something that’s never been done before, nobody else is doing this I don’t think anywhere in the world right now. And its scaling, we are growing.
We have accelerated already and if we can continue to do things – you know it’s a game changer and to the extent that we can speed up in ways I think it’s our goal but we also want to deliver a great experience with it and it’s a complicated process to get it into the home – working perfectly but want to stay if its fantastic..
Next question, please..
Next question will come from the line of John Hodulik with UBS. Please go ahead..
Okay, thanks guys. I want to focus a little bit more on the lower video churn. First, is that being driven by just increased acceleration or penetration of X1 or are there other factors that are driving that down? And then as you look forward towards the completion of the transactions, move churn has always been a factor in the sub trends.
I mean how would the better clustering that comes from the deal and the swaps affect that factor. I mean can we expect sort of another step down in terms of video churn aside from the X1 issues? And then, Neil, you talked a little bit about the pull through effects on DVR.
But what about broadband? I mean, as we see better churn and better video trends is that going to have a -- do you have a higher attachment rate for broadband with X1 that should help make those trends continue as we have seen recently? Thanks.
Okay, you have a number of questions in there. The video churn was driven, the churn reduction I should say was driven by a few factors. One is X1, this just has a lower churn profile and business is usual boxes.
Second is we are bundling more, so we have 68% in the bundle and so that – then triple played at 36% it reduces the overall churn significantly. And three is I think that some of the new features we are adding in like the electronic sell through where you own the assets and it reduces churn, it could hold you into the system, its very sticky.
So I think there are a few reasons there. And I think we tightened up the credit policies, we are targeting customers better, we are being more effective in our marketing.
Concerning the X1 and its relationship to broadband pull through, I think generally speaking if you got better products and you put them together we’ve got the best broadband product, the best Wi-Fi product and the best video product. I think no matter how you mix them; you are going to get greater pull through.
And we’ve been creatively bundling a number of different offers going after different segments and it’s been working..
And I’ll just comment on the move churn, of course one of the benefits of the transaction is more territory which would hopefully reduce move churn and what we call those jump offs and we’ve looked at that, that’s simply a benefit of the transaction ultimately it will show up in our revenue synergies which we are optimistic on..
Okay..
I just want to say maybe kind of relates to the deal in general but to that point on what are some of the benefits of the transaction you know remember that obviously there is no overlap so we’re not reducing any competition as we’ve made the case.
But products like X1, faster broadband, faster Wi-Fi, now with Cloud we haven’t talked about Cloud DVR and streaming in-home where you don’t need a device like the campus product we have borrow On Demand.
So for those of you in New York or in LA on the call, you know we’ve been really looking forward to bringing this suite of products as fast as possible.
We are doing a lot of work to try to have an integration plan to hit the ground as fast as humanly possible, business service side being able to have more markets and Charlie Herrin was one of the first things he is working on in his new job in customer experience is that move churn question which is to – when you are on the phone wanted to take you all the way to completion so that the move so we can reduce the friction in the system for people who are moving.
So we’re anxious to bring this we think better suite of products to these new markets along with things like internet essentials and offering the whole array of benefits that we have listed in the transaction, but I think it’s the better products and we are working hard to have a plan to do as quickly as possible after close..
Brian, you guys have a -- you guys have said that you will have [excellent] penetration to the majority of your sort of Comcast legacy subs in three years.
Considering the platform is already set and it is stable can you do better than that in terms of the new markets once the deal is closed?.
That’s the stuff we are working on right now. And everybody we – you know I’m not ready to answer that question right at this minute, but Neil has set a very high bar for the team internally to say that’s the game changer.
How fast can we get this suite of products to you know all the markets that are Time Warner Cable but lets just you are in New York, you know in New York and that’s we have to learn a lot about how it operates in New York we are doing that, planning now but we believe we have good road maps to have a satisfactory answer to that question, but we are working on it a huge opportunity with this transaction to bring better products to consumer that we don’t offer any products to right now..
Great. Thanks guys..
Thanks John. Next question please..
Your next question comes from the line of Phil Cusick with JPMorgan. Please go ahead..
Hey guys, thanks. Neil, speaking of drawing more customers into the video ecosystem, can you talk about the success of your on-campus efforts? And the big mix shift this quarter is the double play from triple play. Is that a back-to-school issue or do you think there is some secular sign of a downshift and voice penetration rate? Thanks..
I’ll answer in the reverse. The double play was more a result of the double plays focus was more a result of the back-to-school which is such a big part of our third quarter net add. You know the students are less focused on a fixed line phone and go with wireless alternative.
The other thing that happened last year in the third quarter we launched X1 and it was available only to triple play customers so that drove a lot of phone units during that quarter so the comp was – is difficult.
Concerning the repeat your other question?.
Just trying to think about driving more customers to the ecosystem as you think about back-to-school you’ve been putting in some skinnier video packages, is that certain to draw more people and who might otherwise just gone to broadband..
You know the senior packets is as we look at the audience that we want to target and that were hard responding to certain offers. And we’re always testing offers to find out which package draws the best.
The XFINITY campus product that you mentioned what was great about that is we went to the campus and in many of the campus we offer business services to whether its’ internet or whatever.
And the students wanted to watch television but they wanted to watch it in their dorms on their laptops, so we came up with this streaming solution where we plug into the University network, it’s not seasonal because it’s a bulk deal and you know we are getting standing ovations at these universities.
We’ve got six universities who are currently providing their service to in a number of others in roll out mode now. So, I think its’ a great new products that’s a way of targeting an audience in getting the land yields you know you use to watch in the great – all the great content that’s being produced right now, in a way that’s convenient to them..
That’s great. Thanks Neil..
Thanks Phil. Next question please..
Your next question comes from the line of Vijay Jayant w- ISI Group. Please go ahead..
Thank you. I just want to follow up on the prior question by Neil. It seems that the skinny video packages are having some traction. But I understand that there is some limitations on how pervasive that can be given your contracts that they are widely distributed content providers.
So can you talk about where you are on that lifecycle and how much flexibility you still have? And once you do hit that what can you do next to still keep those customers within the ecosystem? Thanks.
While we don’t disclose our programming content to contract and the penetration requirements but we manage within the realm of those contracts and the offers and we manage out and can control that very closely. But what’s interesting is this Q3 if you take Internet Plus and Blast Plus which were the two lean products we had last year.
And you were to compare Internet Plus and Blast Plus to this third quarter. We actually sold fewer Internet Plus and Blast Plus net adds this quarter than last year. So the mix was a little bit different. And we – ARPU and revenue were a little bit soft than video because that we took pure rate increases this year than the year before..
So let me just say that when you are talking about confidentiality of the programming contracts, Neil let me just use that as a moment to just clarify what I believe happened yesterday with the FCC.
It’s that issue of confidentiality of programming agreements that the FCC and the programmers are debating, and so there is a procedural issue on how to go forward and that’s between them and I don’t believe and we don’t believe has any – the stoppage to respond to that doesn’t reflect any substance of concerns with our transactions.
So we’re not particularly concerned about that development because we believe the FCC is still doing continuing with the staff as working on that substantive review. And even if the clock stopped and this has happened in other transactions as well, but this particular dispute over programming contracts is kind of new.
So we continue to believe that the review will get completed and as we previously said you know and hopefully close sometime early 2015..
Thanks Vijay. Next question please..
Your next question comes from the line of Brett Feldman with Goldman Sachs. Please go ahead. Brett, your line maybe on mute..
Thank you. Sorry about that, thanks for taking the question. A point of clarification, you mentioned the pacing of the additional share repurchase program.
I am just curious is that at all sensitive to the actual pace of the approval process? For example, does it matter that the FCC has paused there shot clock And then I want to go back to talk about churn. All the things you highlighted, whether it is X1 or increased triple play, those things seem like they're going to continue.
And so it would seem that churn is likely to continue to migrate lower going forward.
Do you think it is reasonable for us to anticipate that as a result of that your video trends will continue to improve on a year-over-year basis, or is there an offsetting factor we need to be taking into account?.
Okay. I’ll take the buyback one obviously. Our view on buyback is really simple. It’s not necessarily co-related to the shot clock or pacing. Our intention is to do the 2.5 billion of additional buyback there.
We had always mentioned and splitted evenly 1.25 billion in the fourth quarter of this year and 1.25 billion in the early parts of the first quarter of 2015. So we are putting finer point on that.
With regards to churn and I’ll let Neil take it, but I think the goal has always been just to continue to improve and I think we’ve improved 14 or last 16 quarters with regards to video..
I think that’s right. It’s been a pretty steady trend and we think that’s because we are putting a better product and I think we’re always managing the balance between units and rate and trying to balance out that equation. And looking for new segments and bringing new products to market and opening up new channels such as the campus channel..
Okay, great. Thanks for taking the question..
Thanks, Brett. Next question please.
Your next question will come from the line of Marci Ryvicker with Wells Fargo. Please go ahead..
I have two questions, one regulatory for whoever wants to take it, and then one for Steve.
So on the regulatory front can you just talk about what is going on in DC? Your thoughts on the potential for [Title 2] either to be at the last mile or at the interconnect? And then secondly for Steve, were you surprised by the HBO or the CBS announcements? Or is this something that you either had a feeling was coming or they gave you a heads up for? Thanks..
I think in terms of the DC question, this is Brian.
We have been pretty consistent and we’re still in the same place which is that we think that broadband innovation and investment are critical to not just our company but to the nations infrastructure and that the best way to have a strong and robust investment cycle as well as real protections where consumers is with section 706 that there is a real consensus among all the Internet service providers and I think the internet community in general that’s strong rules, having an open ended free internet are important and we support that initiative but we don’t want to have a rule set that creates uncertainty and lingering doubt which we believe titled two does.
So that’s our position, I think that’s a position of a number of companies and we you know have been hopeful that that’s how it will resolve itself..
Regarding HBO and CBS selling directly I was surprised, I was surprised by both of them for different reasons.
CBS I was surprised because they have been such a defender of retransmission consent in the traditional ecosystem and been so successful in the broadcast business and HBO because I think its going to be such a challenge for them to not cannibalize what is already a really really good business.
That having been said, we are still early on in the transition to more internet television that I think you are going to see a lot of surprising things. And you know what’s surprising to me is that we are making hundreds of millions of dollars from Hulu and Netflix and Amazon, businesses that we didn’t even think about five years ago.
So I think we all ought to be prepared to be surprised every once in a while but also put everything in perspective and really look at what people’s real motivations are and the challenges.
I don’t think distributing directly to consumers be the internet is an easy thing to do and I think it’s a voyage that if you are successful like Netflix can be a way to create a lot of value but it’s not an easy thing to do..
The one other thing I guess just to add on the back on the regulatory is the interconnection question if there is one is being looked at separately by the FCC and we think that that’s we have supported that and welcomed that with you we are very hopeful that that will show that its our motivation and our practice to be completely transparent and have great products for consumers and poor companies who want to reach those consumers..
Thank you..
Thanks Marci. Regina, just given the time we’ll take one last question please..
Our final question will come from the line of Jason Bazinet with Citi. Please go ahead..
Hi, thanks. I just had a question for Mr. Burke. Given the changes that are going on in the video ecosystem and some of the trends you alluded to going forward for Cable Networks, what adjustments, if any, do you think investors should anticipate regarding your Cable Net portfolio? Thanks..
Well, I think we’re always making adjustments and trying to look at new things, if you take USA for example, we’re going to be investing more in original programming.
We’re not going to put a number of that, because of a lot of it is show dependent but investing in original programming we’re going to try to make that program – we’re changing the lens on that programming, if you went back five years or so you have say, was in the business of creating blue sky procedurals and we’re much more interested serialized slightly edgier content.
I think you could see us taking some of our existing sports that are on other channels and putting them on USA.
So there will be a whole variety of changes and hopefully those changes resulted in a hit and our ability to outperform the rest of the sector I do think that the point that they were make is, that the sector is unlikely to have ratings performance over the next five or ten years, that’s good it was over the five or ten simply because its more competitive and there’s more technological change out there..
But let me just end the call by saying, thanks for as always the good questions and interest in the company. I think, we had a really strong third quarter. I think its reflect the quality of the underlying businesses, the teams are executing well. They’re staying focused which is as we talked about really at a very complicated time.
A lot of momentum at NBCUniversal and in Cable we talked a lot about the innovation and what that’s doing to our results. So I’m pretty really pleased with the team there and what’s happening in the trends.
And the positioning of X1 and ability to take it in-home on other devices, out of the home with TV everywhere, cloud DVR networking, Wi-Fi getting faster and better, bringing that to the Time Warner market the transaction review we’ve now submitted everything that’s been require a lot of the local franchises have been approved.
It’s an exciting time for the company and exciting time for the industry. So good quarter everybody. Thank you..
Operator, we’ll turn it back to you. Thank you..
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