Comcast Corporation (CMCSA) Earnings Call Transcript & Summary

Great. Well, good morning, everybody. Welcome to the Comcast fireside chat at the Goldman Sachs Communacopia and Technology Conference. My name is Michael Ng. I cover media, cable, telco here at the firm. And it's my privilege to introduce Jason Armstrong, who is the Chief Financial Officer at Comcast. We have about 35 minutes for today's presentation. But first and foremost, thank you so much for being here, Jason.

Mike, thanks for having me.

To start off, Comcast recently announced plans to spin off NBCUniversal and Sky from connectivity and technology. Could you talk a little bit about what drove that decision? How might the strategy at each entity differ after the separation?

Yes. Thanks, Mike. Well, it's great to be here. It's a little bit of a homecoming. I used to be in your seat for several years and understand the amount of work that goes into this conference. So thank you, thank Goldman for hosting this. Thanks for inviting us to come present. You're right. It's been a busy year at Comcast, in particular, busy summer. We announced late June, an intention to separate into 2 different businesses. And we spent -- we've spent a decade plus building 2 strong businesses. More recently, as you look at sort of the competitive dynamics, the end markets, strategic positioning, investment requirements, there's a little bit of divergence in terms of what these 2 businesses are focused on. And so decision to separate them. I think along with that decision, there's certainly opportunities on the other side, but let me just rewind the clock what went into that decision was sort of us saying we got to answer several questions on the viability of these companies as stand-alone businesses. So first was, could we put leadership teams in place. I think we've answered that question already. Mike Cavanagh, Michael Angelakis, running the 2 -- in position to run the 2 businesses. I've had the pleasure of knowing both of them for a long time. Michael Angelakis has hired me way back when from Goldman 12 years ago at Comcast. He was the CFO and Vice Chairman at the time, deep operating background on the cable side, sort of always been an infrastructure guy and then had the privilege of working with Mike Cavanagh for over a decade. He deep background at JPMorgan, CFO background. In this role -- in the roles that they're going to play in the businesses. So NBC, Mike Cavanagh has spent the last period of time as President, co-CEO of Comcast, and really has kind of been running NBC for the last 3 years. So a very natural transition into that role. Michael Angelakis, a long period of time at Comcast. Before that, Providence Equity always sort of an infrastructure investing style. So sort of an operator but with an investor lens, I spent the last several years in private equity as well. So really interesting lens to bring into the business but deep operating experience on the cable side. So that's leadership. If you look at the top level and then we've rounded out the teams sort of around those 2, then you get into how well positioned are these businesses. If you look at the connectivity and sort of technology side, as you mentioned, we're a scaled leader in broadband. We're a challenger in wireless, fastest-growing sort of scaled wireless company with a long ways to go. We're the only business services company at scale that's growing with a massive amount of room to go, which I'm sure we'll talk about in enterprise, which we're excited about. And then if you shift over to the content side of the business, and you look at sort of the strength of the portfolio there, depth of IP, depth in the Experiences segment, you sort of step back and say it's a -- you've got a top 3 studio, you've got a top 2 global experiences business. You have a streaming business that's mostly domestic focused, but has now made its way to profitability and the future is bright. And so that was an important milestone. And so it sets both businesses up well. Next question we had to answer was, as we separate balance sheets, could you separate them and have strong characteristics around each side, which I think will easily check that box. Our intention is both companies will have strong investment-grade balance sheets. And now it's about the execution phase of that. So with the leadership teams in place, we're often running sort of building all the things that we have to put in place to separate. Obviously, we've given a target of sort of middle of next year and don't see any issues with that. We're off and running towards it.

Great. That's a fantastic overview. I'm sure we're going to hit all those topics in our session here. But to start off, let's talk about broadband competition. Cable broadband is certainly seeing some competition at the high end from fiber on the value side from fixed wireless. You have satellite and Starlink becoming a more meaningful part of the market. I was wondering if you could just characterize the competitive dynamics in each of those segments and talk a little bit about how Comcast is doing to -- what Comcast is doing to strengthen its position?

Yes. I think -- no doubt, it's a competitive environment. I think you're hearing that from everybody. It's competitive in broadband, it's competitive across conversions as well. So as we step back and look at broadband, we're in the fortunate position of we're 1 of 2 wires into the home. Our long-term view despite sort of competitive intensity right now has been and continues to be that a wire wins, right? There's going to -- we think there'll be 2 wires in the vast majority of homes, but wired technologies win. If you think about the ability to increase speeds over time, if you think about lowest latency, if you think about lowest marginal cost upgrade, all those sort of bring you back to you want a wire in the home. Saying that fixed wireless has emerged as a new competitor. They are several years into taking share. Wireless companies have all devoted a set amount of capacity to say we've got excess capacity, how do we soak up that capacity? Let's put some in the fixed wireless market. And so that continues. I think you're seeing around 1 million subs a quarter or so if you add up the totality of fixed wireless. I think the leadership position and the composition within that's changing a little bit. You've seen a couple of decelerate, but then one is accelerating. So the total picture sort of still looks the same. But every one of those companies is in search of a wire into the home and would rather put traffic across the wire then they would fix wireless. They're telling you that by their actions, right? And so long term, it sort of validates the strategy for us around wire into the home. But for now, it's competitive. And so fixed wireless continues to be a pressure on subscriber additions. That's no different from the past several years. Satellite looms out there as a potential threat. I would reiterate what we said on the second quarter call, not really seeing it yet, but there's no complacency around it. I think we'll see it over time. And in particular, in rural and maybe deep suburban markets, it may be a better option as a competitor than we've faced historically. So that's something we're bracing for. Fiber wouldn't -- certainly not the last category, maybe it should have been the first, but that's the long-term competitor in our view. And so if you look at fiber making its way into our markets. Historically, we would see overbuild of kind of 2% to 3% per year, that's accelerated in the last couple of years. It looks more like 4% or 5% at this point. That's nothing new. That's -- I think that's well known probably to this group. You've seen a lot of fiber competition modified funding into fiber companies really accelerating that. I think one of the things that is new, we mentioned this on the second quarter call that we were starting to see a rational competition. It popped up a little bit in the second quarter. I would tell you it's continued into the third quarter. So when we see fiber pricing, stand-alone fiber pricing, in the $30 to $40 range for 1 gig, when we say rational, that's what we mean by a rational. That to us is not a rational price point. When a company like that has to sit in front of this room and say, $1,500 to go build out a household, $2,000 rural markets, substantially more than that. And that's -- the economic case for that is built on ARPU of this and penetration of this. $30 to $40 as a starting point on a gig product, which is your flagship product and higher speed than fixed wireless is not a rational price point, right? And so as we look at it, we think we've been incredibly rational in our approach to the market. We think as you look at broadband and wireless and think about the converged opportunity over time, our entry into broadband, we got lucky, quite frankly. We, for 60 years, had plant that was allocated to video and [ coax ] cable into a household and could naturally transition that plant from video into broadband and do it in a high-capacity way. So we're off and running, obviously, on that. We have been for 20-plus years, but more recently, taking that plant to multi-gig symmetrical has been the strategy. But that is a several hundred dollars per household transition. Copper to fiber is a potentially thousands of dollar transition. So I point that out because when you see pricing the way we've seen pricing, that's -- you'd really question, I think, returns, especially on a stand-alone basis. So if you look at that, our intention and our goal and what we think we'll do this year is -- on a year-over-year basis, we do think full year will improve our broadband subscriber losses. I think quarters are going to look different within that. This particular quarter, I don't think will improve year-over-year. So the pressure we've seen, in particular with the rational fiber pricing is going to cause that. But as we step back, incredible hand to play, I know we'll get into wireless. We're incredibly bullish on wireless and sort of the hand we have to play there.

Great. And if I could just follow up on the comment as it relates to competitive broadband pricing. What do you think ultimately happens there? Does the industry return to a more rational pricing environment over some period of time? It was interesting to hear that I kind of spilled over into the current quarter?

Yes. I think no crystal ball. But I can tell you what we're doing is, we think, a rational approach to the market. If you look at our approach to broadband, you mentioned this A year ago, we sort of started on a new journey, right, the pricing and packaging journey and how do we go to market. We were -- it was an honest assessment of where are we good, where are we bad? Because, by the way, fixed wireless has probably taken more share than we thought. We got satellite coming and fiber is encroaching our territory. And so let's go sort of rewrite the playbook a little bit and organize it into different categories. So -- and it's through a consumer mindset and a consumer lens. What do they care about? They care about network product experience or simple categories. So on the network side, I think we're incredibly well placed, right? We have multi-gig symmetrical, that's the path we're on, DOCSIS 4.0, FDX, the full duplex and this is a lot of jargon here, but simplistically, multi-gig symmetrical in every home, which matches where fiber is. And by the way, that's with 20% of our plant allocated to data. 80% allocated to video. So anybody questioning sort of the viability of our plant longer term and speeds we can ultimately offer, I would tell you, we're not in that camp. We're multi -- we can match fiber already with 20% of our plan allocated to data. So long runway there. I feel completely comfortable in what we're doing on the network side. On the product side, we actually rate incredibly well. We're #1 in our footprint in terms of WiFi reliability, which is, you ask consumers what they care about, that's number one, right? There's sort of price value, et cetera, but the first thing they'll say is I want my WiFi to work. I want the wire to work into the home and then I want coverage inside of the home, I want everywhere covering and want it to be incredibly reliable. We rank #1 there. But on the product side, we sort of said how can we go extend that, right? And this is largely how we're competing is how can we add more value to the consumer. And so whether that's wireless, where we've got an interesting path in. We've accelerated that with free lines that we do monetize over time. It's not free forever. It's free for a year, but that's an awareness thing. We're competing more at the high end with our premium unlimited plans. We've just launched the Shield product, which is sort of a relaunch of our home security product that it will have several different flavors associated with it. And the most basic layer is what you have in your home right now is a gateway that if you opt in as a consumer, which is your choice, but it is a motion control sensor in your home. So if you want some basic level of home security through that, it's not all the bells and whistles, but it's a basic level we can offer for free, right? You just opt into it. Nobody else is matching that. I think increasingly, you'll see us competing with, here's a free camera, right? And we want to drive you to our app, we want you engaging with our app, we want to see what's going on with your home, add that to motion control and you start to add more value into the bundle. Last category is experience. And that's the one where I think a year ago, we sort of said we need to make improvements here. Whether it's the pricing and packaging construct, which the history of this was -- if there were teaser rates and then 2 years later, 1 year later, you have a pretty big step up, that used to work in the industry when that was the way the industry competed. That's not the way the industry competes at this point. So we had to really rewrite the rules around that. And then we had to get into the experience layer and say, okay, where are the deficits? So are we handling calls on time? Are we getting to customer resolution? It's a more competitive environment, hence, you can't have pain points in the system. And I think that's been a journey for us. We've invested quite a bit in that. We're, I think, still on that journey. But we -- between internal investments and then externally, we said, who's best-in-class out there, and we use external partners. So between Google, Cresta, Sierra, got a number of them in the system at this point and it's about how do you get the best IBR possible? Let's say you have incoming calls into a call center, how do you route them as quickly as possible to get to resolution, how you take the unassisted and agentify that. So customers come in, they actually don't want to talk to somebody. They want to be able to handle a problem pretty quickly and do it on their own. We're doing a lot of work there. And then for customers that end up talking to an agent, which we still have a lot of agents out there and to the extent people want to go talk to an agent, we want to get them better as quickly as possible. But how do you agentify our own agents, right, and have them really have tools that are better than what they've had before. So we've done a lot through that. I think I would tell you, as we articulated this journey last year, we said these investments are going to cause sort of temporary pressure on EBITDA. They're going to dilute broadband ARPU a little bit because free wireless lines inside a bundled construct dilute broadband ARPU and it dilutes convergence ARPA a little bit. Convergence ARPA is something we're really focused on at this point, but we'll start to come out of this, right? And so we said in the second quarter call, I'd reiterate it here, we'd expect to have modest improvements in the EBITDA trajectory. Starting in the third quarter, we'd expect the same, by the way, on broadband ARPU, expect the same on convergence ARPA as well, we'll be showing sort of sequential improvement. So I think as you step back, we're competing rationally. We're competing along the lines of where we think our strongest playbook is. And again, back to the returns point, we enter into the market with strong returns on both sides of the convergence equation because we have a plant that's capable of multi-gig symmetrical that's been in existence forever with cheaper upgrades than anybody else had. And we have a path into wireless that is no towers, no spectrum. It's an incredibly capital-light path. It gives us a lot of flexibility.

Great. And then maybe just expanding a little bit more on wireless, obviously, an important part of the connectivity strategy. You talked about some of the free line cohorts maturing into paid lines and premium unlimited. I was just wondering if you could give us a little bit of a postmortem on the wireless strategy and how it's been deepening customer relationships to date?

Yes. Wireless is an enormous opportunity for us. And I think that's -- it's no secret when you hear satellite companies start to talk about how do we get into the wireless market. It's because the addressable market is massive. And that's not just from a revenue perspective, it's from a profitability perspective as well. And so we see it the same way. We think we've got an advantaged position of getting in because as we look at it, we have 65 million households with 30 million customer relationships, that's really our right to sell into -- we're selling wireless into existing relationships. We offload at a much higher rate than a traditional wireless company and we're only selling into our own customers, which gives you an acquisition cost advantage. So you stack that all up and you go through a P&L all the way down to sort of free cash flow, which is what we really care about, and where do you have advantages versus disadvantages in wireless, I would say gross margin, probably disadvantage, right? But as you start to get below that acquisition cost advantage, capital intensity, huge advantage. So get all the way down, this is a strong return business for us that we really like, but it's also a business where as we stare at different pockets of growth, and we as a company right now, we've really used sort of the separation as a catalyst for both sides. Partially, it's about spinning off NBC and they're going to be launched in -- off on their own and great things to come say and tell the market. But for the remaining cable co, this is a -- it's also a forcing function, right? Let's -- how many things can we go reinvent, where are the pockets for growth that we can just be more agile, more focused. And so there's a lot of different things out there we're looking at. But the big one that sits right in the middle, the biggest far and away the largest addressable market is wireless. And so when you look at the wireless market, you studied this -- I've studied as an analyst for a long time, too, it's a great market, right? It is 0.8%, 0.9% churn. That's the first stat I would look at, right? It is incredibly sticky customer relationships. What that usually means in a business is massive back books, right, and overpriced back books. That's a huge opportunity for us. It's not easy to peel customers away. Everyone in this room probably -- if I have to pull you on a family plan, it's tough. Everybody sort of staggered in terms of handsets and EIPs, and when they got on different programs and every family member looks different, but that's not insurmountable, right? So I think increasingly, we're making our way into that business. If you look at what we've done recently, we've sort of said we have to solidify the foundation because our right to sell is a happy broadband customer. That's who we're selling on top of. We have to build awareness. That's what free lines were about, but it's free for a year, right? And then we're converting you. And so the early progress on that has been -- we're pretty maniacal about we give a free line, does someone activate it and does their usage start to build towards the 12-month mark when they're going to convert into a paying line. The beauty of when you convert into a paying line is you're converting at a rate that's still a substantial discount to where the market is. So if you like us, there's no reason to leave. So what we've seen so far is 70% plus of customers on free lines converting into paying lines. At the same time, we've really driven the premium unlimited business wireless, which is sort of newer to us. I think a fair critique historically was who can cable companies really go after and who subscribers are they stealing I think competitors of ours would have said, hey, they play in the lower end of the market, they definitely play in prepaid. We're fully playing in postpaid at this point. If you look at full data allotment, handset availability, international roaming plans, there aren't really big differences. And so 40% of our incoming subscribers are now premium unlimited subscribers. That was 30% last quarter, it was substantially lower than that the quarter before. So really starting to make some good progress there. And converge benefits over time. As we look at the total convergence portfolio that we have, we're coming into wireless. They're coming into broadband. We sit there at $85 for a converged ARPA per household that we serve and wireless is up at $150, $160, $170. So to us, there's an enormous amount of room to run there, but we had to get a few things right, which we're starting to make a lot of progress on.

That's exciting. And you certainly don't have your fair share in wireless yet.

Correct. We're 7% penetrated amongst our homes. That is not our fair share.