Cable’s show of shows – plenty to smile about in Chicago
There were many moments of levity at this year’s Internet and Television Expo, still known to most as the Cable Show. Brian Roberts debuted Comcast’s voice activated X1 remote during his Day One keynote. In his demo, he included three interesting clips (amateur video here):
1. He searched a quote from the movie “Forrest Gump”: “My momma always said life was like a box of chocolates – you never know what you’re going to get.” Perhaps a bit of reflection on Comcast’s recent experiences with the federal Communications Commission.
2. He searched a running scene from “Forrest Gump”: “Running on Empty” by Jackson Browne. Perhaps a reflection of how the company feels about its former merger partner Time Warner Cable, or how it feels about the FCC as a whole.
3. He prefaced the last part of the demo “the folks in the lab have been doing some amazing stuff” and asks the X1 remote to “Show me the Comcast/Time Warner Cable merger.” One of the many explosion and fireball scenes from “Furious 7” shows up (see picture). Roberts quipped “That pretty much sums it up. We really are moving on.”
It’s easy for Comcast to display some humor after posting exceptional first-quarter results (full results here): 9% year-over-year growth in cash flow from operations, $3.2 billion in consolidated free cash flow, 6.3% growth in cable revenues (including 10.7% growth in high-speed Internet and 199,000 growth in total customer relationships), and 21.4% annual growth in business services. NBC Universal had a 4% revenue decline against the success of the Sochi Olympics in 2014. Excluding Sochi and this year’s Super Bowl, consolidated revenue increased slightly more than 7% for NBCU, but operating cash flow was very strong for NBCU and for Comcast as a whole. The second quarter of 2015 will include revenue from the aforementioned “Furious 7” which currently stands at $335 million.
Comcast had a strong quarter with high-speed Internet, growing 407,000 net new connections in the quarter. To put their growth into perspective, Comcast + Time Warner Cable grew 722,000 new high-speed Internet subscribers in Q1. AT&T’s broadband subscriber base grew 69,000 (440,000 U-Verse less 371,000 DSL losses), and Verizon’s broadband base grew 41,000 (133,000 FiOS growth less 92,000 DSL losses). That’s 6.6 new Comcast/TWC additions for every AT&T/VZ broadband net addition. Given these figures, it’s likely that cable enjoyed another quarter of 90%-plus share of decisions. That’s the main reason so many were smiling in Chicago this week.
Sprint’s long, long road to recovery
Sprint announced earnings on Tuesday (full details here) and managed to retain its third-place crown, as measured by postpaid subscribers and overall service revenues. Sprint is hanging on to third place with declining postpaid services revenue, trailing in prepaid service revenue – approximately 195,000 customers or $11 million in revenue moved from prepaid to postpaid at T-Mobile US thanks to its Smartphone Equality initiative – and dead even on total revenue in the quarter (although T-Mobile US’ figure includes a $112 million one-time hit from the Data Stash initiative).
Few doubt that T-Mobile US will be able to clearly claim the No. 3 spot for service revenue – it grew $482 million year-over-year while Sprint decreased by $627 million over the same period – by the end of the year. Given T-Mobile US’ increased subscriber guidance (+550,000 using the midpoint of the ranges provided), a figure that we think is low due to the carrier’s entry into the business market as well as continued LTE expansion, it’s likely it could end up with 1 million to 1.5 million more postpaid subscribers at the end of 2015. If Sprint turns on the tablet sales spigot, this number could be much smaller, but the churn and gross add trends are currently not Sprint’s friend.
The questions on Sprint’s quarterly conference call focused on Sprint’s anticipated “massive” densification of its network to improve data speeds and coverage. Sprint announced that it expects to have accrued capital expenditures of $5 billion in 2015, a figure that implies lower capital expenditures for the remainder of 2015. T-Mobile US expects to spend $4.4 billion to $4.7 billion in cash capital expenditures over calendar year 2015, a figure that implies much higher capital expenditures throughout the rest of the year.
In responding to the question about capital spending on increased densification, CEO Marcelo Claure stated that the $5 billion figure “mainly contemplated what we are doing right now with our 2.5 GHz deployment. … you really don’t see it [the next generation network which includes massive densification] coming to much effort [in fiscal 2015], only toward spending in 2016.”
While plans could change, it appears that Sprint’s capital intentions are “steady as she goes” for the next nine months. The remainder of 2015 is going to be difficult for the company. Capital budgets will be constrained as network demand increases, driven not only by industry growth, but by the large 20 GB buckets Sprint currently advertises. In the post-Vision (Sprint’s previous network initiative) era, trailing fourth-quarter accrued capital spending has been averaging between $5.2 billion and $5.6 billion. How the company accommodates network coverage (from 280 million LTE POPs) and data augments (Verizon cited 54% annualized data growth) and minimal in-building coverage remains to be seen.
In a question on postpaid phone losses, Claure said that Sprint’s “consumer business was mainly positive.” Without trying to read too much into this comment, I think it says that Sprint’s business net adds are dragging down overall postpaid phone growth. While in most cases business revenue has lower revenue per connection, losing share within an account (or losing an account entirely) can be very costly (to the extent that employee discount plans were tied to the business customer, and the account was lost in total, there could be collateral losses over time).
Finally, Sprint announced this week that it would be offloading in-airport data traffic to Wi-Fi provider Boingo in 35 airports. This relationship will leverage Boingo’s HotSpot 2.0 initiative (additional information in the news release here). While this will improve the customer experience in many airports where Sprint has historically suffered with relatively low data speeds, it will also free up more carrier spectrum to be used for improved voice coverage. To get an idea of the “before” picture, check out the latest RootMetrics ratings at New York’s LaGuardia and Chicago’s Midway airports.
Bottom line: Sprint has a very long road to recovery. Here’s the current situation:
- Postpaid retail phone net adds continue to be negative, led by persistent losses in business accounts. Tablets allow for positive overall retail postpaid net adds, but at a $30-$40 lower average revenue per connection.
- Network coverage, while growing, will be fed by a smaller capital budget of $5 billion. This will be a challenge, considering LTE coverage objectives and customer data growth. The long-term remedy will not be seen by most customers until 2016.
- Prepaid retail net additions are going to be under pressure given recertification results from the Assurance Wireless product line. In the second quarter of 2014, that was the primary reason cited for its 542,000 prepaid customer loss. This will not impact EBITDA significantly, but will widen the retail prepaid gap between Sprint and T-Mobile US despite strength from the Boost brand.
- Churn is improving, calls to care are down and employee morale is up.
- The company burned more than $900 million in cash in the quarter.
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