X1 licensing deals silver lining for grim Comcast Q3 cloud

Comcast glazed over its poor third quarter performance with news that X1 subscribers can now watch 1,200 hours of Netflix content in 4K UHD after launching its first 4K-capable DVR earlier this year. This new viewing experience will reach 125,000 less households compared to the previous quarter, as the Comcast subscriber balance continues to tip away from TV towards broadband.

The latest losses leaves Comcast with 22.4 million pay TV subscribers, 21.34 million of which are residential, performing worse even than Charter which posted a quarterly decline of 104,000 subscribers – quadruple some analyst expectations.

Comcast’s biggest loss of cable TV customers for three years, accelerating from a 34,000 sub loss in Q2, was accompanied by unhealthy revenues at NBCUniversal, declining 12.7% to $8 billion, including a 30.9% revenue decline in its Broadcast TV segment and in Cable Networks, where revenue was down 11.5% for the quarter to $2.6 billion.

A lifeline for Comcast in the quarter, and a trend we expect to see much more of going forward, is that X1 licensing agreements helped boost revenues – coming from deals with Rogers Communications, Shaw Communications and Videotron in Canada, plus Cox Communications in the US. X1 licensing helped grow Comcast’s Other revenues 7.8% to $712 million, still clearly a drop in the ocean but an important business going forward.

These licensing deals bring more than just a lump sum payment, deploying X1 outside of its footprint brings Comcast additional revenue opportunities in advertising and media distribution – pushing content such as movies and games to purchase for download. Comcast has been vocal about driving deployments of its cloud platform, but it seems to have gone quiet lately.

Videotron is the latest to be building an IPTV service based on X1 technology, hoping it can achieve the same customer growth seen by Shaw after implementing the white-label platform, adding 13,000 cable subscribers in its latest quarterly results, the Canadian operator’s first cable TV growth since 2010.

Rogers decided to license the cloud-based X1 platform at the end of last year and scrap its own IPTV service which had been in development for five years, taking a $525 million hit in the process. The launch of Rogers’ new X1-based service is delayed until early 2018.

Video revenue in Comcast’s Cable Communications segment climbed 4.2% to $5.8 billion. Total revenue slipped 1.6% to just shy of $21 billion on net income of $2.65 billion, growing 18.5% year on year.

Residential video customers actually declined by 134,000 in the quarter, with a small addition of 9,000 on business services bringing the operator’s TV net loss to 125,000. Comcast says 57% of residential video customers have signed up to X1, amounting to 12.16 million subscribers, rising from 9.64 million in Q3 2016 when X1 penetration was 45%. It aims to grow this to 60% by the time the year is out.

Comcast said in the last quarter it had shipped 13 million X1 voice remotes, of which 8 million have been rolled out in the last year. That must be close to 14 million by now, although there was no mention of voice remotes in Comcast’s latest filing, which makes for an extra 840,000+ devices, which might be explained by quite a few homes having more than one voice remote.

Comcast CEO Brian Roberts praised the company’s performance outside of pay TV, in its Filmed Entertainment, Theme Park and Cable Networks segments, which is strange because these businesses all come under the NBCUniversal umbrella – one of Comcast’s worst performing segments primarily due to the revenue shrinkage in Broadcast TV to $2.1 billion. Theme Parks contributed $1.5 billion in revenue, up 7.7%, the only NBCUniversal arm to grow in the quarter. Roberts seems to be focusing on that fact that the NBCUniversal EBITDA was up 6% to just under $2.3 billion.

Roberts said, “The cash flow of the company – which is, I think, the main metric that we judge ourselves by – was up 5% across the company for the first nine months. Now a majority of that cash flow comes out of the broadband business. These are the best three quarters we’ve had at NBCUniversal since we bought the company, Universal may have the best cash-flow year in its 100-plus year history.”

Comcast’s High-Speed Internet revenue jumped 8.9% to $3.7 billion, adding 214,000 subscribers to total 25.5 million.

Meanwhile, Charter CEO Tom Rutledge said on his company’s earnings call, “There’s an enormous pressure that comes out of the total price of content, plus there’s an enormous ability for people to receive free content because of the way content distributors are securing their product so ineffectively. As a result, you’ll see continuing pressure on video.”

Charter posted a revenue rise for Q3 of 4.2% to $10.5 billion but with net income down a worrying 74.6% to $48 million, which the company attributed to increased amortization as it raced to turn the Time Warner and Bright Hose Networks plant digital from being partly analog. It still has a way to go there and so this may continue for a few quarters yet.