NBCUniversal Earnings Fall, Comcast Warns of Increased Pay TV Sub Losses in 2020

The weak box office performance of 'Cats' contributed to a 49 percent film unit profit drop. Management on its earnings conference call was bullish on the outlook for the Peacock streaming service.

Cable giant Comcast, led by chairman and CEO Brian Roberts, on Thursday reported lower fourth-quarter earnings for entertainment unit NBCUniversal, but minimally higher earnings at European pay TV giant Sky, which the company acquired late in 2018, with a disappointing theatrical start for Cats contributing to a 49 percent decline in film unit profit.

Comcast shares before the market open were trending higher, but the stock dropped 3 percent in the early minutes of trading after management on the earnings conference call warned of increased pay TV losses this year. For 2019, total video customer net losses of 733,000 were up from 370,000 in 2018. Wall Street analysts have noted an acceleration in cord-cutting.

Helping to kick off earnings season for big Hollywood companies, NBCUniversal early on Thursday reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), the profitability metric the company uses, of $2.02 billion, down 4.7 percent from $2.12 billion in the year-ago period.

Film unit profit was down sharply for the quarter to $91 million, "reflecting the volume and strength of releases in last year's fourth quarter," the company said. Releases in the fourth quarter included Cats, which had a lower-than-expected performance, Last Christmas and 1917, while the year-ago period had included Dr. Seuss' The Grinch and Halloween. Universal notified thousands of theaters that they would receive an updated version of Tom Hooper's troubled Cats with "some improved visual effects,"

Benchmark analyst Matthew Harrigan recently lowered his quarterly film EBITDA estimate to $98 million from $131 million "following the abysmal $6.5 million domestic opening for Cats, with another $4.4 million from the initial U.K. and Ireland results taking the global total to just $10.9 million."

Film revenue decreased 21 percent to $1.6 billion in the fourth quarter, "primarily reflecting lower theatrical revenue," which was down 59.1 percent. That was "partially offset by lower programming and production costs," the company said.

Cable networks unit adjusted EBITDA fell 1.4 percent to $1.0 billion in the fourth quarter as higher revenue was more than offset by an increase in operating costs and expenses, while theme parks profit also decreased 4.5 percent to $636 million as higher revenue was more than offset by higher operating expenses. The cable networks division again posted a decline in pay TV subscribers.

The one growth area in the fourth quarter for NBCU was its broadcast unit where adjusted EBITDA increased 14.2 percent to $471 million, "primarily reflecting higher revenue and consistent operating costs and expenses." Higher distribution and content licensing revenue was partially offset by a 1.5 percent decrease in advertising revenue due to lower political advertising.

For the full year 2019, NBCU's EBITDA rose 2 percent to $8.77 billion. It was the final financial update for NBCU for a period led by Steve Burke as CEO. Jeff Shell at the start of this year took over day-to-day operations as NBCU CEO, with Burke serving as chairman until he retires in August.

At Sky, adjusted EBITDA in the fourth quarter rose minimally by 0.4 percent to $765 million amid a 3 percent revenue drop. Total customer relationships increased by 77,000, down from 164,000 in the year-ago period, to 24.0 million.

Meanwhile, at Comcast's cable systems unit total customer relationships increased by 372,000 to 31.5 million in the fourth quarter as the company added 442,000 high-speed internet subscribers, but lost 149,000 pay TV users.

"We delivered strong operational and financial results in the fourth quarter, capping another great year for Comcast," Roberts said. "Our teams at cable, NBCUniversal and Sky continued to execute at a high level, strengthening our leadership position in our markets."

He unveiled a 10 percent dividend increase, the company's 12th consecutive annual hike, saying the decision was "underscoring our confidence in the continued success of our company."

Last week, Comcast and NBCU top executives unveiled their plans for streaming service Peacock, which will launch in April as a product that it hopes will appeal to streaming natives but not necessarily entice existing pay TV subscribers to cut the cord and jeopardize NBCUniversal's $11.8 billion cable business.

Roberts on an analyst call touted Peacock as a streaming service that is "truly differentiated" and “hits the mark for both consumers and advertisers.”

Management on the call said that given price increases planned for 2020 and the continued consumer shift away from traditional video packages, Comcast expects higher pay TV subscriber losses this year than in 2019, emphasizing that it won't chase unprofitable video customers. Executives said for NBCU's cable networks unit affiliate fee revenue growth will be difficult until its next carriage renewal cycle starting in 2021 given the broader cord-cutting trend.

Executives also said the company couldn't keep enough of its Xfinity Flex devices in stock to meet strong demand for the service that targets Comcast’s broadband-only customers and provides access to more than 100 internet video and music services, including Netflix, HBO, YouTube, Showtime, Amazon Prime Video and Amazon Music, and 10,000 free TV episodes and movies. Management said Flex can help fuel further broadband subscriber growth.

Burke on Thursday's call argued that Flex, Peacock and Comcast's broadband business together position the company better than any peer for the streaming world and could allow it to make more money from it.

He predicted that the premium tier of Peacock would be offered for free via many pay TV distributors as early as the end of this year given that various carriage deals are up for renewal. Burke said that “Peacock is a way to make us a better and stronger competitor," allowing it to get 100 percent of the ad revenue for NBCU content viewing.

CFO Michael Cavanagh on the call said that looking at the film unit's 2020 the company was excited about its “outlook for growth.” Roberts said 2019 was the studio's third most profitable year ever and provided "further evidence that our strategic slate approach is working.”

In terms of the theme parks unit, Burke mentioned the planned Super Nintendo World attraction at the Universal Studios Japan theme park as a potential major driver of attendance. Management also highlighted that the company will in 2021 open its largest theme park ever in Beijing, China.

Touching on Comcast's take on acquisitions in his introductory remarks, Roberts on Thursday said the addition of Sky “positions us to better compete in a world where global scale matters.” He said the company feels it has all the elements needed to succeed.

Asked about the benefits of global scale by an analyst, he later called Sky "a unique asset," and he only feels better about having acquired it today. He added that the company now has 55 million global customer relationships in the top markets for the company's key products, saying those provide "exceptional opportunities."

Roberts lauded Burke's contributions to the company as "instrumental," saying he was a “critical component of our company’s growth and success.” About Shell, he said: “I know we are in good hands going forward.”