Comcast Corporation (CMCSA) Earnings Call Transcript & Summary

This webcast presentation is for Bank of America clients only. If you are a member or representative of the press or media, please disconnect now. And now I would like to turn the call over to our moderator.

Good morning. I'm not sure if you guys can see me. But okay, great. Well, welcome to our 2020 Annual Media Communications & Entertainment Conference. Sorry, we're not in Los Angeles, but it is a pleasure to begin and do this virtually. We welcome Jeremy Darroch, Group Chief Executive of Sky, which of course, is a major division of Comcast. Jeremy, it's a pleasure to welcome you to our conference.

Thank you.

So let's get started. You've been at Sky since 2004. You've been CEO since 2007. During that time, you've seen Sky and the industry undergo very significant changes. And this year, you've had to manage the company through a pandemic and historic economic downturn. So let's start with the basics. Can you give us an update on how Sky is performing through the crisis, including a recap of your efforts to date?

Sure. I think, Jessica, I mean, you said it at the start, having run Sky through a whole variety of environments and significant industry change over this period, I think as you go into it, one of the things I've learned about Sky as a business is we're a very resilient business. And so when things happen, actually, I'm typically less worried about the business sometimes than others. Now having said that, a pandemic is, as we've seen, is totally new territory, I think, for all of us. And of course, it means that the year hasn't panned out as we'd anticipated. I think you go back then to the sort of fundamentals of the business. So we focus on 2 things: We focus on our customers. More than anything, we're basically a business that's architected around customer insight and customer relationships. And then we focus very much on protecting our people. So what does that mean? Well, it meant that we stood down our retail stores and stopped putting people into customer's homes very, very early. But at the same time, we transitioned all of our huge customer service estate to really focus on retention. We accelerated and stood up our digital services, and they took on a lot of the load of managing customer service and are proving to be very resilient. And actually, we're going to build upon that going forward when we come and talk a little bit about some of our operating objectives. We help customers, when sports basically went away, paused their subscriptions. But we had a very clear plan to bring those back, and that's basically happened since then. So as a consequence, our business is very stable. We've maintained 99% of all of our household relationships. We've run the business without sports, and it's been fine. Nearly 5% of our sports base is here, and we've brought the sports customer base -- paying base back well. We made -- we kept progressing the big, strategic initiatives we've laid out last year. So we've continued to make very good progress with Sky Q, which is our next-generation box platform that's growing well. We've launched broadband in Italy. We've completed another -- a number of major rights renewals: the likes of Sony, Discovery come to mind; the Bundesliga, which is a very big one for the German business. So I'm pleased -- very pleased with where the business is now. The goal now is really to get the -- step the business back progressively through the balance of the year, so we can exit 2020 in good shape and on course for our plan for the next few years. But I think the business is on track as we sit here today.

Great. You've stated that Sky is on a path to more than double EBITDA over the next several years. Can you outline the steps you plan on taking to get there, particularly your plans to grow revenue in each of Sky's geographies and also, specifically, the time frame to reach these goals? Is it coming more from expense? Or is it coming from revenue?

So sure. So it's a reasonably simple plan from where we are. Now I'd say at the outset, none of it is particularly predicated on a lot of kind of new revenue streams that we haven't already got in market today or actually a big turnaround in the performance in either Italy or in Germany. That, hopefully, will come through later. So the way I think of it is really 4 building blocks: The first building block is the sort of COVID recovery plan. We've essentially had 3 pressures on the business, which is sports subscriptions pricing, advertising and our hospitality business. So we call it the pubs and clubs business here, which is under stress. Bringing that back to where it was, I think we're through the first of that. Obviously, we've got advertising where the market is improving in Q3, but we need to see that come through. And then I think the hospitality sector will take a little bit longer. We're working with our customers there very closely. So there's the sort of step back from COVID as one chunk of that. The second is quite a lot of change we're planning and running through in our operating model. This was really -- we had this in train before COVID. You can imagine that transforming Sky from being a successful public company to being a fantastic operating division gives us a lot of opportunity about what we focus and importantly, what we don't do. So we are centralizing a lot of our product development and technology, our channel management, basing a lot of that around our U.K. business. And then allowing our businesses in Germany and Italy and elsewhere to really focus on what they need to do really, really well locally. And that will deliver a big chunk of savings on the back of that. You can sort of see what we've done in the past. It's been a part of the Sky story to reduce our operating costs considerably as a percentage of sales, but I think there's good progress still ahead of us. The third bit of it is really our programming cost line. Well, there are quite material changes that are going on. A lot of that is enabled by our product set now in Sky Q, in particular, which gives us so many more options around the programming that we have, how we can showcase that, how we can provide that for a longer period of time for customers. And so as a consequence of that, we can be a little more choiceful around where we spend our money and where we don't. So a good example of that might have been our renewal with Disney this year, where we essentially took what was, in the past, a pretty high fixed cost base focused either on Sky Cinema or a declining Disney channels portfolio. And we've turned that into an à la carte app, which is a sort of pass-through of revenue but has released a lot of cost in our base that we can deploy elsewhere. So we've got so many more options now around where we choose to spend, and that means that our programming costs will reduce again as a percentage of sales over the next few years, and that will release capacity through the P&L. And then the final piece of it is really maintaining growth. It's really maintaining our course and speed just in the U.K. So the U.K. is performing very well, very consistently. Its base is very stable. We're hitting record levels of loyalty from our customers. So provided we maintain that growth rate in the U.K., that will provide good growth, which will close out profit growth over the next few years. And we've really got sort of 3 priorities there. First of all, in our core TV business with Sky TV, getting the dividends from investments from Sky Q, which will flow through, maintaining that level of customer loyalty and stability, which I think is there. We can see good potential in our second brand in the U.K. That's NOW TV. That's an over-the-top streaming service that essentially is a vehicle for all of Sky's channels and allows us to get to new headroom to serve other customers differently and well. And we're starting to make good progress there as we accelerate ARPU growth, increase takeup and it's very complementary to Sky. And then thirdly, we continue to see good opportunity in the broader comms business. Our broadband business, which is the #2 business in the U.K., is still only in less than half of our -- all of our homes. So there's good headroom to grow in our home base. We know a lot of Sky customers want to aggregate their services with Sky, so we'll continue on that trend. We've -- we're just getting going in mobile. In mobile, we've got a very good agreement with Telefónica. We've got about -- mobile is in about 12% of our base today. We don't see any reason at all why we can't grow that to a much higher proportion of the Sky base. It's already EBITDA-positive, so it's just a case of leveraging that over the next few years. And then finally, we're going to enter the business segment for broadband. That's a big segment here in the U.K., not a segment we've particularly focused on in broadband to date. It's one of the things that's been enabled actually by being part of the Comcast group. So we can see that come through. So there's really sort of 4 building blocks to that, all broadly about the same. Now over and above that, we see good opportunity still in both Germany and Italy. We've got specific plans there, but we're not predicating doubling of EBITDA from where we are today on those. Hopefully, they will come through later and can take up more of the load as we get through the next phase. But we've not set a specific date and time frame. We said over the next few years, and we'll work through that. I would -- hopefully, growth will be reasonably consistent through that period. But it's very clear. Most of it is in place. Now we just need to get on and execute it.

Right. I mean you only disclose customer relationships. Can you help us understand the mix of your customer base in each of the -- your main countries, U.K., Germany and Italy? And what could drive customer growth in normal times?

It's really best to sort of do that by market, I think, really. So if you take the U.K., that's our most developed market. In many ways, it's the sort of model for what we're trying to do elsewhere. Got about 13 million households, retail households through Sky in the U.K. and we have about 3 million distributor households where we sell essentially Sky's channels through others. So we're in about 16 million homes, essentially anchoring their TV experiences in all of those homes. Our broadband business is about 6 -- slightly over 6 million in the U.K. A little bit half of those homes take broadband, as I said, and a bit -- a little bit over 10% now take mobile from us, and that's growing very well. We've got the most -- the broadest range of content, the most developed content business in the U.K. of all of our markets. So traditionally, we had movies, sports, news. And we've added to that a very significant entertainment offering that covers everything from high scripted drama, factual nature programming, history, kids, the arts. And essentially rounds that out and means pretty much in a household, Sky becomes the core to your pay-TV viewing. So we want it to be the service that you must have around, which everybody else can orbit. In Italy, less developed. We've got about 5 million homes in Italy. We really only play in the TV segment in Italy today, both traditional Sky, but also NOW TV in Italy. We have a very strong share in that segment. And as a consequence, we have a very, very powerful brand in Italy, that's very well-known, and I think has got the capacity to do more and to go to other places. Our challenging issue is really more to sell. And so we're launching broadband in Italy because that will give us another big leg of growth much the same as we developed in the U.K. We see a lot of similarities to the U.K. and Italy. And on the back of launching broadband here in the U.K., that really became a real accelerator to our basic TV business as well. We'd hoped over time, both of those things will happen in Italy, and that's starting to roll through now. And in Germany, we've got about 5 million households as well, again, split over traditional satellite, distribution over cable and OTT. We found Germany harder going over the last few years. Our plan really in Germany for growth is built around 3 or 4 things: first of all, getting our -- more of our best products into more customers' homes, and we're accelerating that; increasing our marketing spend, particularly above the line because our brand is probably too small today, and we need to resonate much more; broadening our content offering away from sport, where we've been overinvested, and much of that is in place and as we broaden out and offer more of a whole home service in Germany, that will lead to good growth, we think; and then finally, we're changing their operating model quite a lot. So we see an arc of growth, if you like, that's very much anchored off the U.K., is supported by headroom in all of our markets and in our base of homes to sell more into those homes. And on the back of that, we amplify that, we think with pricing and also cross-sell and upsell. So the rate of growth, which is -- it should be consistent, I think, over the next few years as we step back from COVID, and we're sort of broadly in line with what we've been able to deliver in the past.

So coming into this year, there was a big focus on your Sky Q investment. Can you give us an update on that -- on your progress there? And when should we begin to see a positive impact on financials?

So we like Sky Q, and we chose to really push hard with Sky Q for 2 really fundamental reasons: I mean the first thing is you should know is customers love it. They love it as a product. They use it more. So viewing typically goes on by something like 20% roughly in a household that takes Sky Q. It's a great vehicle and an easy vehicle for us to present the full breadth of what we serve to customers in a more compelling way. Loyalty goes up. So as a consequence of that, churn comes down. And so that's a good sign, which we like as well. I think it gives us great strategic flexibility around those content relationships I was talking about before. So Sky Q can be a mixture of an older -- your channels business, on-demand and recorded programming. We got something like, I think, 40 apps now on Sky Q. So it's our ability to decide how we distribute is much more flexible. Unsurprising, therefore, we love it because the financial profile from Sky Q is very strong. The investment now is on a customer-by-customer basis. So it's very much leveraged to success. We can see clearly returns that we get from customers through either larger and better loyalty. We can grow our advertising revenues more. And typically, customers will spend something between 5% and 10% more in terms of ARPU on Sky Q versus a standard customer. So we're rolling that through where our goal is to be at about 60% penetration broadly this year but then for it to continue to grow over the next few years. And those returns really will come through the plan. I think through this year, we'll have been through the bulk of the investment to get Sky Q into more houses. And that, of course, will help fuel the plan and deliver consistent growth over the next few years. Importantly, though, there's no sort of major investment we need to make in Sky Q to leverage that. That's pretty much done that now. We just need to roll it out customer by customer.

How does NOW TV compared to OTC products in the U.S., what's your strategy for NOW TV? And does NOW TV expand your customer base? Or do you see satellite customers switching to the service?

So NOW TV is an OTT-delivered app. It's essentially a -- predominantly a vehicle for all of Sky's channels that allows us to grow and open up new segments of the market that are emerging in a way that's complementary to the traditional Sky service. So we can think of customers who don't want to make a regular commitment, certain parts of the country where it's difficult to get a satellite-enabled service in place, certain segments, of course, we can see that are emerging and growing. It complements what we do with Sky very well. So a lot of our customers continue to like the peace of mind of a service like Sky, they like the idea of bundling services still. Remember, pricing in Europe is very, very different than you'll see from other services in the U.S. But it allows us to give a lot more freedom to those customers who don't want that. So we'll sell today something like 4 monthly passes. We sell Sky Sports, Sky Entertainment, Sky Movies, Sky Kids. We sell a daily Sports pass. And all of these are very attractive from an ARPU point of view. They're not lower-priced in that sense. Actually, if you start to aggregate more passes, you'll quite quickly spend more than you would spend with Sky. The job of NOW TV is really to grow our penetration. We're growing our usage of customers who are taking more passes from us, so we're growing there. We think we can scale NOW TV well. It doesn't particularly cannibalize Sky. It probably is a little bit more in acquisition because, of course, Sky was going after those markets on its own. Now, NOW TV is competing there, but it doesn't cannibalize Sky to any great extent in the home. And it just gives us more choice, a greater portfolio, more flexibility. And I think an important thing to remember in Europe as well is that pay TV is a very considered purchase. So there are good free-to-air offerings. So we know that customers research before they buy, and therefore, providing more of the choice over time just gets you more of the share. So we like having the flexibility of 2 brands that can sell alongside each other of essentially the same cost base. And NOW TV has very good marginal economics that sit well with Sky. And we do similar things in both Italy, in Germany, largely off the back of what we're doing here in the U.K.

How has being part of Comcast -- being part of that Comcast umbrella benefited Sky?

I think -- look, I think at it's sort of most fundamental level, I think Sky and Comcast are very, very similar. So we sort of have similar ethos as a business. I actually think the cultures of the business, the mindset of the teams, I'm being struck at how similar they are. And we essentially wake up every morning and think about the same things and have the same problems and opportunities. Sky, in some respects, is lots smaller with the combination of Cable and NBCU. But that sort of covers that full suite of opportunities and challenges. So as a basic sort of a jumping-off point, it's -- we're very similar. And I think that's one of the reasons why the businesses immediately integrated very well. There's a sort of patchy history, I think, of U.S. corporates coming over to Europe. Some of those have gone well and some not so. And I think the way that the broader Comcast team have landed here has been really exemplary. Our initial focus then is, in terms of then how we leverage that, was very much in terms of cost. How do we do things smartly together, procurement, bring these together and leverage savings? That secured initial chunk of benefit that we're after, that will continue to grow as we do more and get better along. I think now we're sort of thinking much more about capability. I'd see capability broadly in 3 areas: I think there's opportunities in areas like product, there's areas in content, and there's definitely areas of people development and broadening our people, giving them better career opportunities and moving them around, particularly our top people, to become more international over time. And just as well bringing that to life. If you looked at product, therefore, what does that mean? Well, we've launched a global voice control platform. We stood that up in about 9 months. That's -- basically, we took the Xfinity Voice platform and rolled it back into Sky and Sky Q, in particular. We've doubled our voice control in Sky Q over that period. We're now turning it into a multi-territory, multi-language platform, all anchored off Dave Watson's business in the U.S. We're well developed on an IP video platform for the globe. At the heart of that was NOW TV, which we rolled into Peacock but we'll extend that into the likes of X1 and Flex and Sky Q. So we'll have one global IP video platform, which means we can go faster, we can be more consistent over time and leverage it quicker. We're developing that over 3 countries today, which gives us greater resilience. We're well advanced in a global IP hardware product or products that's based upon RDK from Compass. But also Sky's ability in hardware design and sort, which is something we've let out, I think, for a long period of time. So both of the businesses bringing their expertise to bear. So we can start to see now in an area like that, which is very significant over the long term, real opportunities to grow the capability of the business for all of our benefit. Now that doesn't mean we're trying to run strategy centrally or we're trying to figure out things from afar. We're being smart, I think, about how we do that. But I think we'll see more and more of those opportunities over time. And I'm certainly convinced that Comcast is a really good home for Sky at this stage of our development.

As you mentioned, Sky successfully launched broadband in the U.K., and you're now the second largest provider. What's the market opportunity going forward?

So I think it flows into a number of buckets, as I talked about. And certainly, the first bucket is just with our existing base of homes. I mean less than 50% of our homes take Sky Broadband. I don't see any reason why that can't be greater. I think over the last few years, we've tended to focus elsewhere, and we're getting back to that. We've gone quite quickly from start to being the strong #2 in the U.K. We're not just a reseller. We've got our own core broadband network built around the canal system in the U.K. and that's important because, of course, when you get to things like optimization of the network, backhaul capacity, where you innovate and where you don't, it gives us a very complete picture of what we need to do. So I think continuing to grow into our base of homes is opportunity one. Extending broadband into the business sector would be opportunity 2. We've got quite a sizable business organization today. We've got something like 40,000 business customers in the video business, but we've never really pushed in broadband. We've always had, I think, probably other things to do, and that's been our focus. One of the things that Comcast have brought, because they've got a very big broadband business, B2B business, is to really help us with that. So we've brought leadership over to help us here. And so we think we can attack the business market over the next few years, big markets, $12 billion or $13 billion. So there's plenty of room for us to go into. It's a market we like because we can disrupt. We have got no business to protect. And as I said, we've got a big base of clients already that we can start with. And the goal really is to prove that out in '21, if we're successful to get our foot on the gas. And then 2 other ideas that will flow from that. Well, the U.K. has been a laggard in full fiber. So only about 6 million homes in the U.K. of 26 million are at full fiber. We're now hoping that will accelerate. BT are talking about getting in 20 million homes over the next few years. And we're seeing the likes of Liberty and Vodafone, CityFibre all seeking to make investments. I think as the strong #2, we will be really important in that journey because I think people know that Sky can help make that market. And we have guaranteed supply from BT. So supply side, we're in a good place. And then we just launched recently, NOW Broadband. So off our second brand, we've launched a broadband service there. And so once again, we can have 2 brands in that marketplace, and that just gives us greater flexibility from a trading point of view to optimize and profitably grow. So we're not done with broadband here. That's going to be a big part of the business here in the U.K. for the next few years.