Q2 2020 Comcast Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Comcast second quarter 2020 earnings Conference call at this time, all participants on the listen only mode.
As noted this conference call is being recorded well now turn the call over two senior Vice President Investor Relations Ms. Marci Ryvicker. Please go ahead Ms Ryvicker.
Thank you operator and welcome everyone.
Joining me on this morning's call provide detailed review of our result.
Three analysts' questions, Brian Roberts and my cabin.
Steve Watson, Josh and Jeremy Derek.
The first are free to fly to which contains our safe Harbor disclaimer I remind you that this conference call may include forward looking statements subject to certain risks and uncertainties. In addition, during this call we will refer to certain non-GAAP financial measures. Please refer to our 8-K and trending schedules for the reconciliations of non-GAAP financial measures to GAAP.
I'll turn the call over to Brian Roberts, Brian.
Thanks, Marcy I'd like to start by wishing all of you well I hope that you are safe and show Lin for it feels like a new normal at least for the balance of this year.
None of it shows a perfect crystal.
We don't know the path this virus might take.
Really not be proud or power teams across Comcast cable nbcuniversal on sky or together managing our business.
Response has been extraordinarily fast and effective.
Our products and brands continue to resonate strongly with our customers across all segments.
Geography.
This combined with the unwavering efforts of our employees produce second quarter financials, and highlight the strength and resilience of our company.
Starting with expended.
The core of the company was fantastic results continue to be fueled by our best in class broadband business, which experienced record low churn for yet another quarter well connects remained healthy.
The consistency of these results confirmed that our strategy and corresponding investments are working.
We offer differentiated products.
Services had a fantastic customer experience.
Which we are delivering even more efficiently.
Considering that NBC, you and sky are facing certain pressures that are momentary and unique because some of their businesses.
I think we're performing incredibly well.
By the theme park in theater closures and most sports having been pause we continue to transact and more importantly, we're innovating as we position. These businesses for continued market leadership and the returned to strong long term growth.
From a broader perspective.
Comcast is truly in an enviable position.
We have an amazing portfolio of companies that are each successfully taking advantage of your bobbing ecosystem together, creating complementary capabilities.
Algae platform and a global footprint.
All of this is led by extremely flexible and robust broadband network, which is the foundation of our connectivity centric relationship with residential and commercial customers.
Heavily supports our other services, including video application and mobile.
With NBC, you and Sky, we have some of the most valuable global content, whether its news entertainment we're sports.
We're leaning into streaming.
The starch with what is now are valuable one third ownership position in Hulu.
This enhanced with Peacock our own AD supported service, whose nationwide launch earlier this month exceeded our high expectations.
In fact as of today, we already have 10 million sign ups.
With these and many other drivers of growth.
So excited about where we're headed.
Well, our second quarter results were better than we previously forecasted.
The reality is the only represent a 90 day snapshot.
Months ahead, there is going to be a lot of noise. If you will into quarterly numbers, which will not be unique to Comcast.
As usual, we will continue to be transparent so as to help you navigate the near term complexities of our business.
But we also want to provide a deeper understanding into what I believe is the underlying strength of our company how we're managing each business for the long term beyond the effects of cobot.
With that reason.
We have changed to format this call and if they ask Dave Jeff and Jeremy.
Comment in more detail about their plans for the future.
Specifically, how they intend to tackle both the different challenges and opportunities that lie ahead.
They will then be followed by Mike who will take you through our second quarter results.
As you'll hear.
Playing offense working together like never before and using our combined capabilities.
Ill or brands talent or technology or investment grade balance sheet.
To ensure that we remain a leader in our markets that we deliver superior long term value for shareholders.
I'd like to start with Dave.
Thank you, Brian and good morning, everyone first of all I'm extremely proud of the entire team and how we're working together to handle that pandemic.
Employees have been nothing short of a remarkable moving quickly and effectively to a new way of working and we continue to execute at the highest level.
The investments we made over the years, particularly in broadband proving themselves out whether it's the network, which is performing extremely well when reliability is even more important.
For our digital tools, which have been instrumental during this time of need.
Our focus remains on broadband as we continue to keep people connected and informed as evidenced by EUR 323000 high speed Internet customer additions this quarter.
This was the best second quarter in 13 years.
It does not even include over 600000, additional high risk or free Internet Central's customers.
Still receive our service, but were not included in reported results.
Only count these customers once they are in paid status.
We are committed to finding new ways to help all of our customers.
Especially those hardest hit during these challenging times, we extended our 60 day free Internet essentials offer.
We are keeping our one and a half million out of home public Wi Fi hot spots available for free through the end of this year.
In addition, our assistance programs allow us to work closely with those customers, having trouble paying their bills.
We're pleased with how all this is going and believe our approach has been the right one for us and for our customers.
Cobot 19 is of course, having a significant impact on small and medium businesses as well.
But we've seen some modestly positive trends.
Actually in terms of new Connex as markets open up across our footprint.
Throughout it all we kept our focus on how to position our businesses when for the long term.
Cited for the future will come out of this even stronger.
Let me outline our top three areas of focus right now.
Our number one priority remains broadband.
Only 50% of the homes and businesses and our footprint, taking our data product.
There is plenty of room for growth as we continue to gain share of an expanding market.
We are optimistic about the runway ahead.
We will continue to invest in our broadband network to ensure we have great reliability as well as product innovation.
It's much more than speed, our customers find value in our gateways the management and control the X five enables.
Average with our X by pods and most recently flex.
We took the creative energy that we focused on video and have applied it to broadband.
We've got the best product and best innovation engine out there and we're leaning in.
We're also very focused on customer retention in our churn remains at all time lows, but new products like mobile and flex, we give our customers additional opportunities to find even more value in our data service and drive retention to record levels. Additionally, on a conductivity side, we feel very good.
At about the future growth and business services.
We are taking care of our existing customers and continue to take share.
We're still the challenger with a great products said.
Marketing and sales strategy.
Customer care, we are in great position to win.
Second.
We will continue to lean into our digital applications and raise awareness with our customers.
We had been on a great path, but with the current environment. This gave us an opportunity to accelerate that.
We integrated Rx entity assistant and to help and support online.
Built new capabilities and entry points across the unassisted ecosystem and the result of our efforts is that consumer awareness and use of our digital applications are at all time highs and are having a meaningful impact on the business.
Driving record achievements across many key operating metrics, including customer call in rates digital interactions and turn to name a few.
We've seen more than a 15% increase and the percentage of transactions that we can complete digitally.
I'm also particularly pleased with the progress we've made in our NPS scores.
Which have seen a dramatic improvement over the last few months well exceeded our own aggressive targets.
Hitting our highest scores in the company's history.
Incredible acceleration, we drove in the last few months has set us up very well for the future.
As far ahead of our plans.
This transformation will allow us to continue to take unnecessary cost out of the business, while delivering a better experience for customers.
Third.
Video is still a core product and component of our packaging.
And its platform is strategically important to us.
We will continue to evolve our strategy around video.
But our goal is to always enhance the long term value of the customer relationship.
Some customer segments that is done with a great video package at a great value with X one voice remote and all of the innovation, we put into making that a great product.
But we're not subsidizing video for those that don't value it from us.
We're very focused on maximizing the EBITDA per customer relationship and lifetime value of each customer.
Or others that means offering them the best broadband service with the flex platform.
So they have the brains and power behind X one to navigate the streaming video they choose.
In both cases, we're adding to the customer experience, helping reduce churn on the broadband product and cementing a deeper relationship.
The launch of Peacock and Hulu on X, one and flex as well as swing on flex are all part of doing just that enhancing the value through our technology and bringing choice to our customers.
Mike will go through the more detailed financial results are from what I see today the trends at work as we remain focused on conductivity and not chasing unprofitable video together with a consistent disciplined on expenses give me confidence in our long term ability to drive margins higher.
Margins may ebb and flow depending on programming renewal cycles, but the factors at play.
All moving in the right direction.
At the same time I don't see any changes in the capex intensity trajectory.
Even as we continue to innovate and make the appropriate high return investments in our network.
We've proven once again, how important that investment is.
Our network rose to the challenge, but the surgeon traffic this spring we.
We will continue to invest to stay ahead of demand.
Differentiate our services.
With that I turn the call over to Jeff.
Thanks, Dave.
The effects of the pandemic have obviously influenced every single business at Nbcuniversal, but given the circumstances Im pleased with our results for the second quarter.
At the moment NBC Universal is really the tale of three cities with parks film and television all facing very different any unique challenges.
Let me briefly comment on each one.
Starting with theme parks, where the financial impact has been the most significant an immediate and the operational challenges the most daunting.
As you know by March we had shut down all of our theme parks along with construction of our theme park in Beijing, a month or earlier.
The team working with local government authorities have been working hard to get us back open.
We were able to resume construction in Beijing in April and remarkably we remain on budget and on track to open in mid 2021.
In Florida, we opened in early June with industry, leading protocols in place at significantly reduce capacity.
And in Japan, we opened with similar protocols and capacity a few days later.
While attendance in both locations is much lower than our typical summer levels, we're still doing better financially than if we were closed.
And even more importantly, our guest satisfaction scores are at record highs.
Unfortunately, a park here in California remains close with no timetable at the moment to reopen.
As is typical in past downturns the road back will be gradual and bumpy, but I'm confident that this business will return to its historical levels of financial performance.
In the meantime, we're continually adjusting our cost base and capital spend including pausing development of our Epic Universe project in Florida for example, until the future becomes more certainty.
Now, let me turn into a film business.
In some ways. The film business has been impacted as dramatically as our theme park business as we completely shut down production and stop releasing films in March.
Due to the timing of revenue and expenses and the film business. However, the financial effects are not as immediate.
In fact, since we're not spending as much money on production or marketing and continue to enjoy revenues from past years slates. The immediate financial impact is actually positive.
But obviously, making in releasing films as our life blood. So it's anything but positive and negative financial effects will be felt in coming years, particularly 2021.
Fortunately our strong management team in film has been pioneers in getting our production up and running again, we started several films, including Jurassic World in the UK and the past few weeks and continue full steam ahead on our important animation slate.
And of course, they've also been pioneers and pursuing new distribution models, our release of tools World Tour and King of Staten Island, and other titles on premium video on demand exceeded our expectations and a significant positive impact in the quarter and led to our groundbreaking partnership that we signed with AMC earlier this week.
We've always believed that provide can be a compliment rather than a replacement for robust theatrical release and I commend Adam Aaron at AMC for his vision that together, we can build a new more attractive business model for us both.
Finally, let me spend a few minutes on our television streaming businesses as you could see in our results, even though scripted television production ceased in March so more to film.
Our talented alternative in late night teams have continued to find ways of getting us fresh content.
Well the advertising market was hit hard is coming back more rapidly than we anticipated heavy upfront is now in full swing.
We believe we can get our scripted production going again later this summer and when combined with sports that are returning we will have a full schedule of fresh and compelling programming on our various platforms in the fall.
Our newest group now under the leadership of Cesar Con day has been a real source of pride for us in the past few months.
Networks, not just NBC, MSNBC and CNBC, but also Telemundo and our local stations have not only generated strong ratings, but have provided a critical lifeline tour viewers isolated at home I want to thank our brave journalists report from the office at out in the field.
Finally, it has said this crisis these tend to accelerate and exacerbate trends that are already happening and that is certainly true in the television business or viewership is rapidly shifting from linear to nonlinear.
A few months ago, we combined our television and streaming businesses under Mark Lazarus, which will allow us to more rapidly shipped our resources and investment from linear to streaming.
Mark is finalizing a new structure that will demonstrate the unique way we intend to manage this business going forward, we will announce the structure soon.
The most important development for NBC Universal in the second quarter was our launch of Peacock and we cannot be more pleased.
We launched in Comcast homes back in April and nationwide two weeks ago, and we've already surpassed 10 million sign ups.
Not only are more people signing up than we projected but they are watching more frequently and engaging much longer than we projected.
Technologies work seamlessly and the service is improving on a daily basis.
Much of our strong programming coming in January including the exclusive rights to the office, we feel very encouraged.
So obviously didnt expect my first six months on the job to be anything like this with basically the whole company working from home in large parts of our business not operating.
But if there is a silver lining has been in the performance of our talented leadership team from the beginning may the difficult and bold decisions required by this unprecedented time.
As a result of their work I'm confident we will come out the other side of this position very strongly.
Now, let me turn it over to Jeremy.
Thank you, Jeff Sky code with 19 has certainly pose near term challenges to our business.
The delay of sports pressure on DTC sales.
Micro environment for advertising.
The strategies, we've implemented manage through the crisis approved incredibly successful.
We will do a lot customers hosing subscriptions, we made the most sense, especially for those on sports products that tend to be sold separately and this resulted in retention of 99% about total customers.
95% Abbas full space.
From a long see throughout the quarter remained at record levels and viewership on skies branded channels with significant.
Sky Cinema, Skype basic tunnels and sky needs increased 29% year on yet.
Our head of free to implement channels in Scott Holmes.
Schools, we tend to screen, we've achieved some of the highest speeding levels, we've seen in 10 years, especially in football.
Also reducing operating expenses, while still maintaining good momentum in our key initiatives.
The Sky key which is now in close to 50% of customers homes over 10 percentage points higher you have on yet.
And the successful launch of Sky broadband in Italy, utilizing cone cost X slight technology.
We closed the quarter looks stronger than we started with employees spoken culprits and in the field returning to work safely and DTC sales starting to improve.
Sports package upgrades are on track without plan.
We are outperforming in non linear advertising.
We continue to face we assumed coded related challenges as the linear TV advertising market remains depressed.
The pubs and clubs sector slow to recover.
Working closely with customers and we're encouraged by consistent month to month improvement in that segment.
We're operating well try to period.
And as you continue on this path to recovery, we've got one priority.
Thats to draw revenue base restarts sustained growth.
That's a good we'll focus on building on trading momentum across both TV in communications will continue to deliver our strategic phones, the Sky Q Sky Studios and broadband in Italy.
The lower cost through restructuring of our operating model.
The remaining contract renewals judicious in line.
Even ahead of offline.
We're also implementing indeed leaner operating model for the business, which will be more centrally lag.
All of this will be on could buyout business in the UK will come from a combination of growth in our existing direct to consumer brands as well as new market opportunities.
In the UK Sky TV business remains very healthy as we also the strongest aggregation platform.
Strange of content and the most cenovuss has and flexible probably experience in the market.
In addition on Nite TV screening business is well set to continue to deliver strong growth.
Adding new pay TV customers as well as increasingly selling more content is through our existing base.
Hi, good bond, which is already the NIM, but to ASP in the UK significant opportunity for continued growth.
With partnerships and strong brand over the coming yes.
On used business Sky mobile is no EBITDA positive onethree as off the launch and we expect to increase profitability as we continue to scale.
Makes it this year will W broadband products businesses in the UK has a full launch in Twentytwenty War.
And we have zooming shed this adjacent $15 billion addressable market.
We already have skull strong brand recognition.
Fully leveraging the talent experience the capabilities in cone cost successful business services Division.
In Continental Europe markets remain less developed with strong growth potential and while we have good market positions.
In both generally indirectly we will significantly broadening our offering of content by rolling out the trouble portfolio, that's being developed in the UK.
The rollout ruled on Italy benefiting from the exabyte partner ecosystem from Comcast will provide a strong standalone profit opportunity as well as leveraging our ability to cross sell.
I will hold on TV services more effectively lists markets.
Postpone dependent by the trust at Sky brand.
We've already achieved good success with this approach in the UK.
Nicolas all of our markets, we're executing a range of opportunities to increase our efficiency and control costs.
Turning to enhance our products and services, especially as part of the broader Comcast.
Our UK business will continue its disciplined cost structure.
We've held SGN eight slots for the past five years old advanced automation digital and advanced analytics.
Alongside this we are right sizing what does prove to be too high a call space and sport. This mill being supported by the growth we've seen in subscribers.
We'll be more selective with the school Wi Fi and don't bar.
For example, auditing exclusive formula one in Germany, which will unlock a new segment. The schools funds that we have been previously served.
Recently, we competed important new agreements with discovery and Sony at attractive terms, we renewed our vendors, we got contract materially lower cost.
We launched new Sky entertainment channels to strong customer approval.
We introduced simplified packaging and pricing in Germany.
All of these will deliver the important benefits to the business longer term.
In total the significant operational changes we have on board.
Combined with what is already extremely strong brand and market position sheet twentytwenty, but it was on the cost to more than double our EBITDA all over the next several years.
We don't expect to get that overnight.
But our goal is a whole based and opportunities the whole already either in market today oral already well advanced.
Whether that be important development concentration organizational change.
Well positions and we're looking forward to executing the opportunity we help before us.
With that I'll turn the call of its Mike.
Thanks, Jeremy and good morning, everyone.
Now I'll review, our second quarter 2020 results and offers through commentary on the current conditions in our businesses with the caveat that circumstances around us remain fluid and therefore, our outlook is subject to change at anytime.
Beginning on slide four with our consolidated results.
Revenue decreased 11.7% to $23.7 billion.
Adjusted EBITDA decreased 9.1% to $7.9 billion.
Free cash flow generated in the quarter with $6 billion.
Adjusted earnings per share decreased 11.5% 69 cents.
Second quarter financials reflected strong results in cable, which are more than offset by declines at nbcuniversal as well as an increase in corporate and other losses.
To peacock costs in severance and restructuring costs related to organizational changes that NBC universal and an increase in eliminations due to the licensing of content between Nbcuniversal and Peacock.
Excluding the severance and restructuring costs consolidated adjusted EBITDA would have declined in the mid single digit range.
Now, let's turn to our business segment results, starting with cable communications on slide five.
For the second quarter cable revenue was relatively flat at $14.4 billion, while EBITDA increased 5.5% to $6.2 billion and EBITDA less capital increased 11% and $4.4 billion.
Cable communications revenue was impacted by adjustments in crude for customer Rx and fees.
Excluding the impact of accrued customer our ascend fee adjustments cable communications revenue would have risen by 1.4% with no corresponding impact to EBITDA.
We generated 217000 customer relationship net additions in the quarter.
43% increase year over year, and the best second quarter on record with strength driven by our high margin connectivity businesses.
Together residential high speed Internet and business services generated 323000 broadband customer net additions.
Which excludes over 600000 additional high risk for free Internet essential to customers.
We'll receive our services and marks the best second quarter results in 13 years.
High speed Internet revenue increased 7.2% to $5 billion.
Excluding the impact of accrued Rs and fee adjustments for the customers taking bundled services.
Hi speed Internet revenue would have been up close to 9%.
Business services revenue grew 3.6% to $2 billion. Despite a 24000 net loss in customer relationships this quarter, which was within our expectations of the impact from covert 19.
Turning to video revenue declined 3.2% to $5.4 billion with higher rates more than offset by a 477000 loss in video subscribers.
Excluding accrued Rs entity adjustments.
Revenue would have declined by 1.2%.
And video ARPU would have grown by 4.1% year over year.
Wireless revenue increased 33.9% to $326 million driven by 126000 additional lines.
Resulting in 2.4 million total lines as of quarter ends.
These results reflect the significant impact of our decision to close the majority of our retail stores during the second quarter and the interest of keeping our customers and employees today.
Advertising revenue decreased 30% to $428 million, reflecting reduced advertiser spend due to covert 19.
Turning to expenses.
Communications second quarter expenses decreased 4% with programming expenses down 5%, primarily as a result of the accrued Rs and fee adjustments.
Without these adjustments programming expenses would have increased by 1.5%.
Non programming expenses declined 3.4% due to a slowdown in business activity directly resulting from coated.
In addition to the implementation of a longer term cost efficiencies.
Cable communications EBITDA grew by 5.5% and margin reached 42.8%, reflecting 230 basis points of year over year improvement.
While accrued Rs entity adjustments had no impact on EBITDA, they did impact our margins.
Excluding the impact of accrued Rs and fee adjustments.
Margins would've expanded by 170 basis points year over year.
Cable capital expenditures decreased 8.9%, resulting in capex intensity of 10.1%.
And improvement of 90 basis points year over year, driven by lower spending on customer premise equipment.
Partially offset by higher spending on scalable infrastructure, which continues to increase due to our ongoing investment in the network.
I'll now touch a bit on what we're seeing so far in the third quarter.
We're very pleased that residential high speed data net ads are off to a solid start in July.
We expect residential high speed Internet revenue growth to accelerate from that of the second quarter as we benefit from the high subscriber contribution we experienced in the first half of the year combined with a lesser impact from our proactive response to covert 19.
While we anticipate third quarter of business services revenue growth will moderate as a result of the subscriber losses, we experienced in the second quarter.
We're already seeing sequential, albeit modest improvement in net additions.
On the video side, we expect subscriber net losses in the third quarter to be somewhat similar to what we saw in the second quarter, resulting primarily from lower kinex due to a combination of several factors.
Just a lingering effects of the rate increases we took at the beginning of this year. The overall economic pressures, resulting from covert 19.
And our limited ability to perform in home installations.
Turning to our outlook for expenses and margins.
Programming costs, we continue to expect underlying increases in the second half of 2020 as a result of anticipated programming or renewals, which will be somewhat offset by potential additional rs and fee adjustments in the third quarter.
I remind you that accrued Rs and fee adjustments should have no impact on our overall EBITDA results.
For a non programming costs, we expect year over year declines to moderate in the second half of the year as business activity starts to pick up.
Given our first half results combined with our outlook for the back half of this year. We now expect full year cable EBITDA margins to improve by up to 100 basis points year over year versus our prior guidance of up to 50 basis points of year over year improvements.
We also expect our full year capex intensity to improve by up to 100 basis points year over year versus our prior guidance of approximately 50 basis points of improvements.
Now I'll turn to NBC Universal is results on slide six.
Revenue for the second quarter declined to 25.4% $6.1 billion, while EBITDA was down 29.5% to $1.6 billion.
Cable networks revenue was down 15% $2.5 billion as a 15% decline in distribution revenue and a 27% decline in advertising revenue.
Somewhat offset by 23% increase and content licensing and other which includes transactions with peacock.
Distribution revenue was adversely impacted by crude Rs and fee adjustments.
Without such adjustments distribution revenue would have declined in the low single digit range.
Second quarter cable networks, EBITDA grew 3.5%, primarily due to the shift to sports rights amortization costs into the third quarter.
Turning to broadcast revenue declined 1.6% to $2.4 billion as the 28% decline in advertising revenue more than offset the 9.2% growth in distribution and other which was driven by retrans and the 59% growth in content licensing, which again includes.
Transactions with Peacock.
Second quarter broadcast EBITDA grew 20% as declines across the majority of our cost base related to the general slowdown in business activity and specific savings initiatives, we're able to fully offset the lower revenue.
Film revenue in the second quarter declined 18% due to the closure of theaters in pseudonymous throughout the pandemic, which was partially offset by about 20% growth in content licensing due to the success of RP Vita titles.
EBITDA for the quarter grew 25%, primarily due to lower advertising marketing and promotion expense.
Theme parks generated revenue of $87 million and an EBITDA loss of $399 million.
Late in the quarter, both Universal Orlando Resort, and Universal Studios, Japan reopened with the appropriate safety protocols and associated attendance restrictions, while Universal Studios Hollywood remains closed.
Now, let's move to Scott results on slide seven.
As a reminder, I will be referring to skies growth rates on a constant currency basis, consistent with what's reflected in our earnings release.
For the second quarter Sky revenue decreased 12.9% to $4.1 billion, while EBITDA was relatively flat at $749 million.
As expected our results were impacted by the postponement of a significant number of sporting events.
Yes, postponement with the primary driver of the 6.7% decline and direct to consumer revenue and the 36% decline in content revenue.
Additionally, the lack of sports on the year contributed to the 41% decline in advertising revenue.
It was also impacted by a weak macro environment as well as the change in legislation relating to gambling advertisements in the UK in Italy, which we will begin to lap in the third quarter.
Looking ahead customer trends are improving as home installation activity has restarted and sports have returned.
And as Jeremy mentioned, we're able to successfully retain the vast majority of our total customer base, including those who take sports.
That said, we continue to monitor the overall linear TV advertising market and our pubs and clubs sector, which are likely to remain under pressure for the remainder of this year.
We continue to experience shifting of sporting events, both football and non football, but is likely to create near term volatility in our quarterly results, particularly on the cost side.
While we expect revenue declines to moderate as we move through the year.
Words rights amortization will be highest in quarters that air the most events.
Given us slightly later return of European football than we originally expected.
The shift of other sports programming later into the year. We now expect that the majority of the expense impact will occur over the next two quarters.
Importantly, we were able to secure rebates related to this disruption to our sports programming.
Which will benefit from over several years.
We have also resumed the investment activity that paused as result of covert 19, such as acceleration of Sky Q the launch of broadband in Italy and expansion of our Sky Entertainment channels.
Based on our current visibility, we now expect Sky EBITDA for the third and fourth quarters combined declined roughly 60% year over year with a more significant decline in the fourth quarter.
Wrapping up on slide eight with free cash flow and capital allocation.
Free cash flow was $6 billion in the quarter, an increase of 40.5% or $1.7 billion.
Year over year comparison is affected by the covert 19 related delay in tax payments from the second quarter two the third quarter of 2020.
Consolidated total capital, which includes capex as well as software and intangibles.
Creased, 4.2% and the second quarter to $2.7 billion, primarily driven by declines a cable as well as that NBC.
Finally, we continue to remain committed to our long standing balanced capital allocation approach of maintaining a strong balance sheet.
Investing organically for profitable growth and returning capital to shareholders through a strong commitment to our recurring dividend and eventual return to share repurchases.
With that I'll turn it back to Marcy, who will lead the question and answer portion of the call.
Thanks, Mike Dorsey Wright to open at the conference from on Prem.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then Denby number one on your Touchtone phone.
To be removed from the Q.
Please press the pound.
You are use any speaker phone you may need to pick up the handset before press in the numbers. Once again, if there any questions Press Star then the number one on your Touchtone phone.
Our first question comes in the line that's been Swinburn from Morgan Stanley.
Please go ahead.
Good morning, Thanks for all the color this morning very helpful.
Two questions, Dave you talked about more than just speed being the driver for the data success I wanted to ask really about slacks, because it's sort of an interesting product that leverages, both your investments in connectivity and video.
What does that products doing in the market today, maybe you could share with us what does that business look like to you over the course of time is so what sort of the roadmap to make that a more substantial driver.
The overall business.
And then for Jeff.
What are the implications of this premium video on demand agreement with AMC and what I mean, but that is obviously it's helpful. During the call that period to have this flexibility, but is this a big benefit to the film business and NBC long term and do you need more than just the U.S. and AMC to make it to maximize the benefits. Thank you.
Both.
Hey, Ben This is Dave I'll start off and then handed over to Jeff.
So as you said the broadband.
We think we've redefined what great broadband is and.
It goes beyond speed.
And it's helped our momentum I think quite a bit for many quarters now.
We've grown.
And it's everything's changed here the fundamentals I think if this repositioning of the category that hasn't changed. So we're good at market is growing were taken share across the board.
And in addition to speed, we're very focused on coverage control and as you said now with streaming and flex. So we made it simple so you're very straightforward value proposition with flex included with the broadband relationship and we're using it.
Again to remind everyone in a targeted basis to go after the streaming segment, but we're not bashful about leading with it to the segments. So.
It is very much part of the broadband experience.
And it's still early.
That said in my earlier comments that it really does it to resolve to the innovation.
Around X one with all the capability the voice remote.
Medidata integration that takes oldies.
Different apps and combines dumb and makes it easier for the consumer.
So what's orally.
We're not giving out to specifics in terms of the actual monthly users, but I would tell you it's very encouraging.
Customer feedback.
Just in terms of the experience has been really strong.
And so we look at this has.
Very broad platform.
That helps this particular segment as we segment the different base. So I think it's a catalyst for for broadband.
We designed it to I think help broadband retention early results point towards that and we do think the way that we define success over time will be engaged flex users people that are just.
On it and using it and for those customers that are very active consumption is very good on this platform and we will act as a substantial offset to some of the video losses. So we're real pleased with this to artiflex more to come over time.
Thanks, Thanks, Dave Let me jump in on the on the question on the AMC deal done So couple implications I think long term.
We've always believed that there is a segment of the population out there are growing segment on population out there that just doesn't go to movie theaters and.
This structure with AMC allows us to take advantage of people, who do go to movie theaters 17 days you exclusivity at minimum four theaters, but very soon after in the same marketing window, we can tap into that very large audience that that doesnt go to movie theaters, but right. Now is just going to ask fun to watch movies. So.
And thats within the kind of the marketing window of the giant marketing we spend traditionally on on movies that going to theatrical. So we think that structure allows us to tap into that incremental revenue stream, allowing MC to share in a little bit and other exhibitors and at the same time preserve that theatrical window, which is so critical to the.
To the film business as you mentioned its U.S. only although we have.
We have.
Deal with AMC, the look into other international territories, and obviously this is going to be.
Territory by territory.
Type of look at this we still need theatrical need different business models and other markets.
Shorter term one of the implications of this I'm, hoping is that we currently are stuck in a bit of the chicken in the situation on theatrical business where.
Movie Studios like ours don't want to release movies into theaters, when we will have only a smattering of feeders open.
We need a pretty robust amount of theaters open to justify our spend with the flip side is exhibitors can open a bunch of theaters that they don't have any new movies, we put in them.
Drilled library movies are not going to drive people to movie theater. So we think this model.
We'll actually allow.
Movies that come back to theaters wanted to save a lot more quickly.
Then they would have been the and the current environment. So those are just to some of the implications I just want to think this Brian.
But I think you were touching on obviously of critical so to subjects here.
The company's really trying to lean into streaming and we already I think somewhat uniquely position to to this and waste different you. Obviously were very EBITDA focused company I know in new ways to build new businesses and enhance our strong.
Cash flows spend so if you look at what you just heard.
Next is all about helping broadband, but we've been able to put peacock.
Very important part of it now we're going to have more streaming of films, we use now TV.
Technology from Sky.
Ready streaming relationships so.
We want to remain relevant to customers, so that user interface or the answer on flex allows you to.
Dream across many.
Properties that aren't Comcast content, or NBC, universal or sky content.
We think to best.
Face around.
That same team is part of that team is helping build now peacocks mismatched trauson other people so.
Im pretty excited that as the world's transitioning.
Japan is the center of making a lot of that possible.
Now, we can build on a whole bunch of content and interfaces.
We do that in a way that customers really enjoy and that's what's been happening so far.
Thanks, Brian.
Thank you next question. Please our next question comes from Doug Mitchelson from Credit Suisse. Please go ahead.
Thanks, Thanks, so much a question for Dave and Jeff as well, Dave on the 600000 subscribers that were at risk were free Internet and central customers I'm trying to understand how much of that was to Q activity versus that bucket at the end of March already having some customers in it because it certainly looks like a strong twoq quarter.
Maybe was even stronger if a lot of that 600000 was potential to Q activity and then for Jeff I I wanted to follow up further on on you bought obviously a hot topic today does a new more attractive business model for Universal if you're able to get the rest of the theater companies on board meeting Youll make more movies for theatrical release.
We're just make more money on the same number of movies that you release, even sort of lock in your business model in your incentive to invest what you invested in movies and any further thoughts on the 70 day window I think thats, what surprised a lot of folks I.
I think a lot of us we're focused on 30 day window.
Are you confident that the theater business will be healthy enough to provide your movies, particularly your blockbusters enough distribution in the future given the risk on 70 day window pushing a lot of.
Movie view into the home. Thank you so much.
Hey, talk Dave and ill start getting handed over to Jeff.
So 600000 customers reflects a.
Combination of free Internet essential as customers and our reserve.
That we set up for the high risk customers that are in a non pay status, but are still receiving.
Service so.
There to answer your question there is some of that happened in Q1.
It rolled into Q2.
And.
Probably a bit more in Q2 in Q1 for sure and to clarify is what we said Mike said early in the remarks, we're only going to count these customers when they convert to paying status. So we are very good operational plan, we're going to constantly work with customers throughout.
Including these customers. So it's early to predict the conversion rate.
But thats, just a little bit more perspective on that base.
It's Mike I'll, just jump in Doug I think that number the 600 was call it roughly a third.
The size at the beginning of the quarter.
Great.
Let me let me jump in this is Jeff, Yes, let me jump in on Peabody, Hey, Doug.
So what's happening with the movie movies are obviously critical across our whole distribution channel that movies movie consumption on Peacock. For example has been higher than we thought it would be and really across all of our platform. So as as things transition as Brian talked about the screaming movies are life by the problem is that.
Over the last couple of years, it's been more increasingly difficult to generate the same returns over the first couple of Windows and that has put a lot of pressure on our model. So we believe that this new model in the U.S. and hopefully other places will restore some of those economics for us to allow us to probably not make more movies, but the key bar.
Production levels in the same as they've been in the past.
Well the same time remember AMC and hope we other exhibitors, we'll be sharing in the.
New revenue stream, which will hopefully keep their business a little healthier because that are under a lot of stress right now.
On the 17 days.
That is 17 gazes means the Monday after the third weekend is when movies will be available on Peabody at a minimum it's important remember that thats a minimum so.
I fully anticipate some movies will stay in theaters exclusively a lot longer than 17 days, if we're having a good theatrical run and some movies for example, king the Staten Island. The Judd Apatow is a perfect example, the kind of movie the can can arrive in this kind of model because it would do well theatrically but for most people watching it at home.
As another option and that would be a movie that 70 days, probably a normal time would be the right.
In times of 17 days is just a minimum when we can toggle that based on the type of movie.
Thanks, Doug Turkey next question please.
Our next question comes from Jessica Reif, Ehrlich with Bank of America Securities.
Thank you.
Thanks, Jeff Jeremy and maybe Brian.
Jeff Peacock successfully launching without the Olympics can you talk a bit how you guys will tell you will use the Olympics next year.
Peacock on the.
On the AMC deal just one last question, how does that change the longer term windowing for.
Like when will they come to Peacock and do you have any change in the losses of $2 billion over the first two years.
And then moving onto Jeremy you mentioned TV production plans on this seems like there's been a lot of activity at Sky can you just talk a batch kind of your longer term goals do you need to buy or can you just built internally and finally pan sorry for some of the questions but.
One additional changes were mentioned into three divisions is there anything that you think you need from a corporate perspective any areas that you need to pivot in the business.
Covidien 18 seems to be Great times, you just look strategically that.
With the business should go up in the longer term and how you can change and thank you.
Thanks, Jeff, Jeff I'll start and.
Maybe may maybe handed over so.
The Olympics right now it is a bit of a bomb or because we wouldn't be in Tokyo right now under normal circumstances. So so it's a total bummer for our company that we don't have the Olympics right now, but in stock at for Peacock, it's a bit of a silver lining.
For next year and you've got to remember we not only will we have the Olympics in.
In the summer of 21 on can be and Tokyo, but then we'll have the Winter Olympics seven months later in Beijing. So we have two Olympics.
And Mark Lazarus and people like when their team are currently working not lots of different things that we can do to innovate on those Olympics and use the peacock.
Product, which by then will be even more distributed to do some really innovative in cool things on the Olympics. So in addition to promoting promoting it obviously, so I actually.
Very excited and I think would be caught successful launch this year without the Olympic having the Olympics back to back.
Next year in early 2002 is really great for Peacock.
Just on your other question on Peacock, we don't anticipate.
Wouldn't peacock or otherwise windows changing down the road down the line. After this kind of theatrical Peabody window on and I think that the pickup losses that I think Mike has outlined in the previous earnings call. Our were right exactly within that range. So we don't anticipate anything different in the next two years.
I think over to Dave or Germany now.
Well keeping.
So just introducing.
TV production.
If you talk to it goes like US with will tell you three things. So those are aligned sky to make all the free content. That's available in Europe, just better than anywhere else and just make that whole experienced by the which is what we do the second thing our alliance guiding due.
Discount in the world.
Sales in that fashion.
Best content internationally.
Bring that bring that to me and then thirdly, and this is becoming more and more important element sky to create unique European content and stories Thats unique to mine marketable to Europe and to make exclusive to its own platform Thats, what I will tell us when it gets calling hole and sometimes that can be local sports with increasingly is now becoming our own.
Pretty slow cleanser time, which is why we think Sky studios is so important.
Locals, who business one point of view, we can play change will not only can decide relatively low we shift investment over time to optimize both the customer experience, but also our financial returns.
I'm very confident that we got all the capabilities.
Required to build up to ourselves I think being pulled his group and being alongside NBC you.
And just team.
Really call bottoms up and we're starting to accelerate how we work together, but I think we got all the fact is a production in place and we'll just intend to do more and overtime as we start to pivot away from other content will invest mall.
Our own originate content, but that will be funding financially in enhancing as we do that.
Okay, and finally on that question.
Hi, I'm really pleased with.
First of all clicks leadership during this.
And the team that reports to him and many others at corporate.
For how well we've handled.
Well, the uncertainties and our balance sheet.
Strength and liquidity or.
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Really really speak for themselves and Barry.
Satisfied there I think the restructuring.
We're hearing about is about the businesses as Jeff and Jeremy both talked about.
I think to reinforce how well our broadband business is performing and the cable company. We're always looking ahead can we.
Reduce expenses and could we be more efficient and how we run the company Thats definitely.
Well, we stop a mine, but I think we have all the parts I think we're taking advantage of this transition some parts of it are uncomfortable for sure but for the most part or company is.
Getting.
Better and I think going to be one of the purchase one of the winners of.
New age and a lot of that is.
Giving customers more flexibility to and see what they want and as Jeremy just said this is happening all over the world.
I'm really pleased with how well it's been put together and we.
I wanted to everybody on this call here, even more detail from the three operating businesses. So you can see how will that working together and how they are tackling challenges ahead corporate we're helping.
Create the environment for that to happen hope that answers your question.
Thanks, Jessica directly next question please.
Our next question comes from Craig Moffett from Moffett.
Hi, Thank you.
Two questions if I could both on the cable side first.
Yeah I'm sure you saw that charter announced that they would participate in the audio at auctions I Wonder if you can just talk about.
Is there any appeal to you have participating in the either the guardiola.
Our DLF auctions as a way to expand your ROE your rural footprint or simply just doing more edge out to grow your subscriber base or your footprint faster and then second when would you just drill in a bit to the business services segment.
Share with us.
Some of what's going on with respect to volume's and.
In particular is the what's going on with respect to customer bankruptcies versus.
Fewer new share gains and and then what's going on with pricing just to get a sense of the commercial segment and what we have to look forward to.
Sure take Craig Dave here so.
I think as people.
No we decided not to participate in this round of rural digital opportunity fund.
And the main reason was in this rounder relatively few adjacent rural areas to offset the additional regulatory costs associated.
With the auction, including submitting to HPC sat status.
In many states where bids are successful. So however at the same time, we've continued to pursue as you mentioned the edge expansion.
To new areas, Yes, if you go back and you look at expansion, which includes edge extensions, but also.
Areas pockets within our footprint, we've increased more than 2 million.
Passing.
And so thats resulted in its helping us with the customer relationship growth in a number of things so.
Yes.
We're very focused on.
The logical efficient expansions will continue to address opportunities and rural as as they come up over time so.
In business services, yes.
Switching gears there we are.
We are seeing encouraging trends mentioned earlier and small business, particularly in the states that have reopened.
The customer losses that we incurred in Q2, yes, we're absolutely within our expectations and the good news is that.
Yes that level of losses has moderated and connex are rebounding.
So I'd say overall, we are encouraged with the current activity and when you break it down a little bit further and you look at well what segments within SMB are impacted you have bars and restaurants that were part of the mix, but they're not to me.
Jordi not close to the majority.
We have a very bills tempur and his team have done a really nice job over the years building a robust diverse small business customer base. So as people come back I think we're really well positioned.
Local operations the region level.
That are ready to help our clients out.
And so it will cut across the board so it's.
We're still the challenger as I said before we're going to help customers when they come back and again that connect level of activities. What we're focused on and we do think just to clarify.
The subscriber losses that we incurred during the second quarter.
Have a more meaningful impact on the financials as we move.
To the back half a year and as Mike mentioned earlier revenue is likely to moderate a little bit.
From the growth we saw in Q2, but we're really pleased with rebounding connex.
Thanks, Frank commencing next question please.
Our next question comes from Phil Cusick.
Morgan.
Please go ahead.
Hi, guys. Thanks.
Mike can you talk more about how we should think about sports and our us and amortization in third quarter across the business, including why the Arsone hold backs.
Broadband ARPU.
We've had some questions here and you mentioned Threeq you as well why shouldn't call that flow back in the third quarter and then for Peacock can you put the 10 million subs into context, what does that mean for for and they use and how should we think about licensing in broadcast and cable nets going forward as relates to peacock. Thanks, guys.
So I'll start another guy this can chime in so I'll take this sports in two different pieces just on the RF Sen impact.
So we expect that we'll be getting some monies back from some of the sports leagues based on games played or not played in the U.S. and when that does happen. We as we've said, we'll pass that back along to customers. So we've accrued for that on on the revenue line not billing people and we'll get that back on the.
Fence line, but I think the question that's coming in as why does that affect high speed data revenue growth rates, which we said adjusted for that are up 9% versus the printed number and thats simply accounting revenue recognition rules that when you have.
Products sold in a bundle theres, a formula relative to sort of list price that heska flow through into revenue attribution.
I love it but it's the rules we live by consistently so into effect that we have some rs and rebates coming is what's driving that so hopefully we can take that offline for anybody that wants more details on that that's simply revenue recognition item and on sports amortization as we said.
In both NBC and Sky.
Both impacted by recognizing.
Sports rights amortization expense when events or games are played and so in the case of Sky.
The start of the.
The.
Games, and the proportion of games pushed a little bit back into into the third and fourth quarter relative to what we expected 90 days ago and some of the.
Leasing gains will spill into 2021 against which we have a little bit of rebate expense, but thats. The reason for the combined down 60% for Sky EBITDA in the in the third and fourth quarter is really the movement of football, but then you think about golf and Formula one and all the.
Other events, it's going to be a packed third and fourth quarter. So expense will follow that and basically the same is true for for NBC.
And then on Peacock outlet.
Jeff.
Further but.
As he said we're encouraged by the number of people we have in mind My language.
Giving giving peak I can try or taste I mean, the way we'll measure users over the long term is monthly active users. So these are sign ups. So in due course will start giving some color on.
The activation side, but I think pretty much against every measure that we look at sign ups usage.
Et cetera.
It's it's running ahead of what we hope for in early days.
Yes failed.
Yes, yes, thanks, Mike I don't have anything to add on the RSM side on the peak oxide, Phil it's confusing because it's different in the AD supported world, obviously than the Escalade World and there's really three different metrics. There's there's sign ups. There's monthly active accounts and Theres monthly active users have seen people use all of them monthly active accounts is obviously a household.
Whereas users sometimes there is more than one user per household guidance, we gave a pretty investor day was monthly active accounts on the gains and the $10 million, we're talking about today, a sign ups and the way sign ups kind of convert them a phase is how many people come back and how long do they use it and since a lot of our users are in the last couple.
Weeks as we've rolled out nationally is that it's it's too early to actually convert that but as Mike said on across the board were better than expectations. We didnt expect as many sign ups. We didnt expect people to come back as frequently as are coming back and we didnt.
We expect people to watch as long as they're watching once they come back so were very encouraging early days, but we're very encouraged.
As we look forward and on our Investor day guidance. Thanks.
Thanks, Phil.
Last question.
Our final question comes from John Link.
Yes. Please go ahead.
Great. Thanks, guys.
Let me first for gave on the cable.
Margin side, obviously, great leverage on the non programming costs sounds like there's some cross currents that are related to cogan should we expect.
Some of the benefits that you've seen to continue and and maybe even some acceleration as you get some of those efficiencies that you talked about and then maybe.
Over to flex.
You guys, obviously talked about adding sling TV to the to the to the.
Package, there is still planned I could add other virtual and bbds and given that the cost our price differential versus the traditional product do you expect overtime to that that the availability of the services to add pressure to the traditional video product. Thanks.
Hey, John So on the margin side and non program Prac programming Opex were really now the fundamentals have not shifted there has been an acceleration for sure during the cold period and.
That where there's just a lot of.
Different approaches towards digital.
And things like it's self install kit the tools that were using that are going to I think be long lasting for us we've learned a lot.
Teams have done an extraordinary job and terms of the deployment of the new protocols and the approaches. So I think what we are yet we're seeing an ongoing we sought before coven reduction in reduction in transactional activity and we started digital sometime ago and services.
An acceleration of all of that so we're going to continue to prioritize the.
Net work and key innovation efforts around digital.
So I think that in terms of how you look at margin.
They are still upside and so we see a moment in time, where there's an acceleration and can't comment and completely on the future exactly where that will go but I think the learnings will service well and we're just going to keep at it and as much.
Oil that we can take out of the system in just taking out unnecessary transactions I think that is one of the fundamental.
Yes.
Our is toward margin in regards to the second point on flex in Sling, Let me again remind.
You and everyone that flex in of itself again comes at broadband we're going after the streaming segment.
We use it in a targeted way.
To go after these customers so.
I think there's a fair amount of activity that the streaming segment has that theyre looking at a bunch of options, we want to give customers more choice.
And so.
Our goal is to provide the best video experience I think we are uniquely position.
To participate as Brian said in the streaming world Great broadband.
With with Peacock, but others like tooling and that I think that this is Dan. The first one we'll evaluate on a case by case basis.
Other virtual.
Operators and we'll see how that goes up but we're going to continue to be clear.
Two we're going to invest in X. One we look at X one and Fox has a very broad video platform that for today I think helps us compete as I said.
Certain video segments segments with X, one and most certainly the streaming segment with broadband and flex and partners like Sling and many others. We've added movie that at a whole bunch of people, we look forward to adding CBS all access.
HBO Max later that we've talked about so we're going to have a wide variety of partners that will be on flex and X one.
And for Us.
We are going to break down the segments and still be very focused on providing the best video and broadband platform experience in the market.
I just want to just add.
That I hope you've enjoyed the format of this call, particularly at this time.
We wanted to.
Talk about.
Not only did 90 days, but really how we're running the company I couldn't be we're pleased with the team and the progress and.
We're also thinks we did touch on where.
Some of our social commitments.
Well Theres a lot of just to.
Quality to thought that is gone into how you handle pandemics such as this and how do you positioned the company for the future and try to do the right thing in the moment. So thanks for your support the questions and were available to follow up Marci back to you.
Thanks, everyone that concludes our second quarter 2020 earnings call. Thanks for joining us and we wish you all out.
Thanks.
There will be a replay of today's call starting at 12 P.M. Eastern standard time, It will run through Thursday August six at midnight Eastern time, the dial in number is.
Hey, Fivefive eight fivenine.
056, and the conference I'd number it's 576 by 399, a recording of the conference call will also be available on the company's website beginning at 230 PM Eastern standard time today. This concludes today's teleconference. Thank you for participating.
You may now disconnect.
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