Comcast Corp - Class A (CMCSA) — Q3 2019 Earnings Call Transcript

Thank you, operator, and welcome, everyone. Joining me on this morning's call are Brian Roberts, Mike Cavanagh, Steve Burke, Dave Watson, and Jeremy Darroch. Brian and Mike will make formal remarks; and Steve, Dave, and Jeremy will also be available for Q&A. As always, let me now refer you to Slide 2, which contains our safe harbor disclaimer and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, in 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. With that, let me turn the call over to Brian Roberts for his comments. Brian?

Thank you, Jason, and good morning, everyone. We delivered strong operational and financial results in the third quarter with each of our businesses contributing to our company’s growth. Together, we surpassed 55 million customer relationships, grew pro forma EBITDA by 7%, delivered 16% growth in adjusted EPS, generated significant free cash flow and paid nearly $1 billion in dividends while further strengthening our balance sheet. Our results in the quarter and over many years are evidence that our strategy is working. From my perspective, 4 things stood out as we wrapped up the quarter: our incredible strength in broadband; the enduring popularity of our premium content; our strong global footing just 1 year after the Sky acquisition; and how the combination of these things puts us in a unique position to compete, including in the streaming market. Starting with Broadband. It goes without saying the utility and demand for high-speed and reliable Internet access are ever increasing. We see this in our customers' behavior, monthly data usage more than doubled in the last 3 years and our power users are connecting nearly 20 devices in their homes daily. That's great. It enables us to further differentiate ourselves from the competition, hence more customers continue to choose Xfinity. The Cable team has done a tremendous job redefining broadband by expanding the basis of competition beyond speed to also include coverage and control. With these 3 pillars, speed, coverage and control, our xFi experience is resonating with customers. And with Flex, we just added a fourth pillar, streaming, designed to meet the growing needs of customers who only consume video over-the-top. Flex enables these streamers to quickly and easily search, access and enjoy content across their favorite apps on the TV using our award-winning voice remote. It's a wonderful product, and now we are providing it to our broadband-only customers for free. And at Sky, we plan to follow a similar playbook by using xFi to differentiate the experience for our broadband subscribers in Europe, starting with next year's launch in Italy. So our strengths and ongoing innovation are translating into record-breaking results. Cable added 379,000 broadband customers, the most for a third quarter in 10 years. This drove our best total customer net additions on record for any quarter, contributing to a 3.4% year-over-year increase in customer relationships. And we’re also increasing the value of our relationships. EBITDA per customer relationship grew 3.2%. And what is even more impressive, our net cash flow per customer relationship grew 13%. Moving beyond broadband, our content continues to resonate with consumers. NBCUniversal has the largest TV viewership share of any major media company in the U.S. and one of the leading film businesses in the world. In Europe, Sky is the number 1 sports and entertainment brand. And these strengths continued in the third quarter. NBC plays number 1 in prime time among adults 18 to 49 for the sixth consecutive 52-week season. Telemundo was number 1 in Spanish-language weekday prime for the third consecutive season. Overall household viewership of Sky-branded channels increased 10% in the quarter, led by sports. And Sky’s highly acclaimed Chernobyl received 10 Emmys, which bodes well for our newly created Sky Studios. On top of all this, the teams at NBCUniversal and Sky are jointly producing and delivering content. For example, we've greenlit our first coproductions, shared over 1,000 hours of sports content and are creating a global news channel. In fact, it's hard to believe that we have owned Sky for only a year. Our company is strategically stronger today than we were a year ago. Sky brings 24 million customer relationships in Europe, including the 482,000 net additions in the last 12 months, plus additional premium content and exclusive sports all anchored by a leading European brand and an outstanding team. In what are tough macroeconomic conditions, Sky is doing a great job. Finally, our recent announcements on Peacock and Flex are terrific examples of how our combined company is working together and well positioned to compete. With our leading scale in distribution and premium content, along with our focus on innovation, we can continue to produce superior products like these for our customers and deliver strong financial results for our shareholders. So all in all, we had a great quarter, led by broadband. And it also demonstrates what a fantastic set of businesses and leaders we have that positions us well for the future. Mike, over to you.

Thanks, Brian, and good morning, everyone. I'll begin on Slide 4 with our third quarter consolidated results. As a reminder, we completed our acquisition of Sky in the fourth quarter of 2018. Our reported results include Sky from the acquisition date, while pro forma results include Sky as if the transaction had occurred on January 1, 2017. Also, one housekeeping item on Peacock, our forthcoming streaming service. Similar to our approach with Xfinity Mobile, during its start-up phase, we will report Peacock's results in the Corporate and Other segment. So now, let's move on to today's results. On a reported basis, revenue increased 21% to $26.8 billion, and adjusted EBITDA increased 17% to $8.6 billion. On a pro forma basis, revenue was consistent with the prior year and adjusted EBITDA increased 7.4%, reflecting growth across all 3 businesses. As Brian mentioned, adjusted earnings per share grew 16% to $0.79. And free cash flow was $2.1 billion, bringing the year-to-date total to $10.9 billion, an increase of 3.7% compared to the first 9 months of last year. Now let's turn to our segment results, starting with Cable Communications on Slide 5. Cable delivered excellent results driven by our connectivity-centric strategy and highlighted by strong performance in three key metrics we use to run the business: growth in total customer relationships, EBITDA per customer relationship and net cash flow per customer relationship. Overall Cable revenue increased 4% to $14.6 billion in the third quarter, led by the increase in total customer relationships as well as higher ARPU. Total customer relationships increased 3.4% year-over-year to $31.2 million, including 309,000 customer net additions, the best on record. This growth was driven by 379,000 high-speed Internet customer net additions, the highest third quarter net additions in 10 years. We've added 1.3 million broadband customers over the last 12 months. Overall, our connectivity businesses, residential broadband and business services, continue to drive the growth at Cable. Our revenue in these businesses collectively reached $6.7 billion in the quarter, up 9.3% year-over-year. With broadband as the foundation of our customer relationships, we utilize additional products and services in a manner that profitably helps us attract and increase the lifetime value of the overall customer relationship. Video is still an important profitable component of most of our relationships, but we continue to be disciplined and are not chasing unprofitable subs. Total video subscribers declined by 2.8% year-over-year to 21.4 million. Xfinity Mobile is another important contributor to our growth as we pair it with broadband to provide our customers with a great wireless experience that helps them save money. We added 204,000 net customer lines in the third quarter and reduced our quarterly adjusted EBITDA losses at Xfinity Mobile to $94 million, an improvement from a $178 million loss in last year's third quarter, reflecting our progress in scaling and further improving our operations. And as Brian mentioned, Flex is another great product we'll use to add more value to our broadband-centric customer relationships. Moving now to Cable expenses and margin on Slide 6. Total Cable expenses increased 2.3% year-over-year, reflecting strong cost management even as we increased customer relationships by 3.4%. Programming expense was flat, reflecting the timing of contract renewals and a lower volume in video. Non-programming expenses increased by 3.6% year-over-year but were relatively flat on a per-customer basis. We delivered outstanding growth in customer relationships and also improved our NPS scores while reducing total agent-handled calls by 15% and lowering truck rolls by 10% year-over-year. Together, the growth in our connectivity businesses, the improvement in our performance at Xfinity Mobile and our ongoing focus on cost management, resulted in Cable adjusted EBITDA growth of 6.7% and margin expansion of 100 basis points to 39.8%. We continue to expect EBITDA margin improvement for the full year 2019 to be slightly above 100 basis points compared to the 2018 margin of 38.7% based on our strong performance year-to-date and our outlook for continued year-over-year margin improvement in the fourth quarter. Cable capital expenditures in the third quarter decreased 6.7% to $1.8 billion, leading to capital expenditure intensity of 12.4%, primarily reflecting lower spending and scalable infrastructure and line extensions, partly due to the timing of plant construction and other network investments. However, as we said, consistent with the broader shift in our business toward connectivity, we will continue to invest in our network to stay firmly ahead of our customers' high and increasing expectations and to further enhance our leading competitive position in broadband. We now expect Cable CapEx intensity for the full year 2019 to improve by at least 150 basis points compared to the 13.8% in 2018, driven partly by timing of network investment as well as decreased CPE spend as video subscribers decline and the rate of our deployment of X1 has moderated. This is an upgrade to our prior guidance of at least 100 basis points of improvement. In summary, we're very happy with the team's strong performance. In the quarter, we delivered 3.4% growth in total customer relationships and 3.2% growth in adjusted EBITDA per customer relationship, which, coupled with the decrease in Cable capital intensity, drove a 13% increase in Cable net cash flow per customer relationship. We continue to see the benefits of consistently investing in our network, innovating to deliver the best-in-class products, services and experiences and increasing our operational efficiency. We believe our approach will continue to strengthen our leading competitive position and drive profitable growth. With that, I'll turn to NBCUniversal's results on Slide 7. NBCUniversal EBITDA increased 1.6%, reflecting expected difficult studio comparisons in TV and film. Cable Networks revenue decreased 2.8% to $2.8 billion, and EBITDA was flat at $955 million primarily due to a 27% decline in content licensing and other revenue, reflecting a challenging timing-related comparison to last year. As we noted last quarter, our studio benefited from the considerable level of programming licensed to third parties in 2018. Offsetting some of this decline was a 1.6% increase in distribution revenue, reflecting the ongoing benefits of previous renewal agreements, partially offset by subscriber losses that have moderately accelerated, driven by increased satellite losses and slowing virtual MVPD growth. Lastly, advertising revenue was consistent with last year's result as the strong pricing environment was offset by audience ratings declines. Broadcast revenue decreased 9.1% to $2.2 billion, and EBITDA increased 5.1% to $338 million due to challenging comparisons in advertising and content licensing, more than offset by healthy growth in retrans and lower programming and production costs. Advertising revenue declined 12% primarily reflecting a difficult comparison to last year's results, which included Telemundo's broadcast of the FIFA World Cup. For the remainder of the year, we have a positive outlook on the ad market with the start of the NFL season and the return of original entertainment programming as well as the benefit from higher upfront pricing. Content licensing declined 17%, reflecting a challenging comparison to last year's results due to the timing of delivery of content under our licensing agreements. Retrans revenue increased over 10% to nearly $500 million. Lastly, on the expense side, lower programming and production cost were primarily driven by costs associated with the FIFA World Cup in the prior year. Filmed Entertainment revenue decreased 6.2% to $1.7 billion, and EBITDA declined 8.7% to $195 million. While the Fast & Furious spinoff, Hobbs & Shaw, delivered strong results in the quarter, it was a tough comparison to Jurassic World: Fallen Kingdom and a higher number of films in last year's third quarter. Despite experiencing a crowded box office so far in the second half of this year, we currently expect healthy growth in full year Film EBITDA over 2018 results. Looking ahead to 2020, we believe we can achieve even better results as our strategic slate includes 3 major animated sequels and another installment in our Fast & Furious franchise. Theme Parks revenue increased 6.8% to $1.6 billion, and EBITDA increased about 1% to $731 million. These results reflect higher attendance as well as an increase in operating costs. The higher attendance was due, in part, to severe weather and natural disasters that negatively impacted attendance in Japan in last year's third quarter. While the parks business is subject to some ebbs and flows, we are pleased with our summer launches of Jurassic World in Hollywood and our Hagrid-themed Harry Potter coaster in Orlando. And we remain bullish on our growth opportunities with Super Nintendo World opening in Japan in 2020 and domestic launches thereafter, our new Beijing park opening in 2021 and our recently announced fourth gate in Orlando, Universal's Epic Universe. Moving on now to Sky results on Slide 8. As a reminder, I will be referring to our pro forma results as if the Sky transaction had occurred on January 1, 2017, and growth rates on a constant currency basis, consistent with what's reflected in our earnings release. Revenue at Sky increased 0.9% to $4.6 billion, reflecting growth in direct-to-consumer and content revenue, partially offset by lower advertising revenue amid continued macro weakness in European markets. Direct-to-consumer revenue increased 1.9% to $3.8 billion, benefiting from customer growth, but partially offset by decline in average revenue per customer. In the third quarter, customer relationships decreased by 99,000, following record streaming growth in the second quarter related to Game of Thrones and the debut of the highly acclaimed Sky Original, Chernobyl, both of which were exclusive to Sky Atlantic. Year-to-date, Sky added 317,000 customer relationships, and we expect to return to customer growth in the fourth quarter. Content revenue increased 15% to $315 million, reflecting increased monetization of our original programming slate and the wholesaling of sports programming. Investment in sports continues to be a key differentiator. Audiences viewing tentpole sports programming are increasing, with household viewership on Sky Sports channels up 21% year-over-year, reflecting great starts to the Premier League, Serie A, Bundesliga as well as broadcast of the Cricket World Cup in The Ashes. Advertising revenue declined by 14% to $446 million, largely reflecting the impact from a change in legislation resulting in certain gambling advertising restrictions in the U.K. and Italy as well as advertising market weakness across all territories. Pro forma EBITDA at Sky increased 46% to $899 million. Excluding certain nonrecurring items in both periods, growth would have been in the mid-teens on a constant currency basis. For the full year, at today's currency rates, we expect Sky's reported EBITDA will be close to $3.1 billion. Wrapping up on Slide 9 with free cash flow and capital allocation. For the third quarter, we generated $2.1 billion in free cash flow and paid $955 million in dividends. Free cash flow in the third quarter was largely impacted by the timing of Sky Sports rights payments, which are heavily weighted to the start of the new soccer season. Year-to-date, we generated $10.9 billion in free cash flow. In the third quarter, we monetized a substantial portion of the minimum floor value we negotiated for Hulu, which brought in $5.2 billion in proceeds. In addition, starting in 2024, to the extent that total equity value in Hulu is worth more than the total floor value of $27.5 billion, we will realize our share of that upside. Since the Sky acquisition, we continue to make very good progress in our deleveraging efforts. Year-to-date, we have paid down roughly $11 billion of our consolidated net debt, ending the third quarter at 2.9x net leverage, down from 3.3x at the end of 2018. We expect to meet our commitments to the rating agencies by year-end 2020. As a reminder, the rating agencies make certain adjustments in their leverage calculations that can add up to 0.25 turn to our leverage ratio. In closing, our results today highlight the strength and consistency of our company's overall performance, and we couldn't be more pleased with our strategic and financial position. Looking ahead, we remain confident in our ability to continue executing on our long-term growth strategy and to deliver value to our shareholders. So with that, I'll turn it back to Jason to lead our Q&A.

Thanks, Mike. Regina, let's open up for Q&A, please.

I want to just follow up on some of your comments on streaming, both from a Cable and an NBC perspective. For Brian or Dave, how are you guys thinking about Flex? What does that mean for the business over time in your view? And how do you think about investing in the X1 platform going forward? Obviously, the video business is going through a transition, but you've invested a lot of money into that platform. It's done well for you. I'm just curious how you're thinking about the product evolution there and how important it is to Comcast Cable. And I'll just ask to Steve on Peacock and sort of the NBC strategy, how are you thinking about content exclusivity and sort of the volume of original programming that you want to see over time? And when you look at some of the numbers out there for talent and showrunners from the Apples and Netflixes of the world, what is your reaction? Do you view this as healthy or irrational? Or how do you see yourself navigating this spending landscape?

So it's Brian. I'll quickly hand it over to Dave, and then we'll hear from Steve to follow your questions. I'm very pleased with our innovation team and the pivot we made a few years ago, focusing on broadband in addition to video, which I believe was the right decision. This focus has led to the creation of the xFi brand, which now represents much more than just internet speed. Specifically, we're launching a free box for broadband-only customers across our entire platform, regardless of whether they have our gateway. There are exciting innovations ahead for that platform, which will unfold over time. The key takeaway is that our team, along with our ability to recruit and retain top talent for our technology, is exceptional, and I'm really satisfied with our progress. Dave?

Thank you, Brian. Yes, Ben, Flex is an excellent example of how we are utilizing the innovation capabilities of X1 that we've had for a while. We will continue to ensure that relevant content is accessible and delivered through both X1 and Flex. The scale we have with X1 allows us to make efficient use of this platform alongside Flex. Our aim with Flex is to enhance the value offered to broadband customers and those who stream, providing a fantastic option for customers seeking an integrated experience. We often see various standalone apps available as alternatives, but what we provide to our customers is a superior streaming experience with Flex, fully integrated. The content can be accessed through the voice remote just like with X1. We are excited about the innovation focus that has positioned us well with Flex. As Brian mentioned, we will be moving forward very soon.

Steve?

We announced the name of Peacock and a number of shows that will be available on the service about a month ago. It’s important to note that our approach with Peacock differs from the strategies adopted by Netflix and others following its model. We are focused primarily on leveraging our existing ecosystem and engaging in significant AVOD activities. This strategy should lead to a considerable reduction in investment since we expect to achieve profitability much faster than a subscription-based service. Additionally, we are capitalizing on our strengths as part of a company with 55 million video customers and the largest provider of television advertising in the U.S. Our content will include a combination of originals, exclusive acquisitions like The Office, and a variety of nonexclusive offerings. We will continue selling to other companies, including distributing our movies into the premium window rather than pulling them exclusively from premium platforms like HBO or Sky. Our approach is unique and well-suited to our company's strengths. This is a fascinating time as everyone re-evaluates their strategy, and we are very optimistic. We plan to launch in April and will use the Olympics to give us a boost after the launch, adding significant content throughout 2020. I'm very pleased with the progress our team is making on the technical side. The product is impressive, distinct, and something we will all take pride in when we launch in April.

So a couple of questions. Just continuing on Peacock, can you talk about the ramp-up in spend? And is that the reason why there was such a big swing in working capital in this quarter? And then within Peacock, can you talk about the marketing plans within and outside the ecosystem and how confident you are in the advertising per sub that you guys have talked about? And then different subject with Telemundo. Given the growth in ratings, excluding the World Cup, have you closed the revenue gap versus your ratings? And then the last question, on Cable, a number of your 10-year contracts are expiring in the next year. I don't know if you could talk about expectations for step-up in costs, but maybe how you're thinking about the next rounds of negotiations. What are the key considerations, especially as programmers roll out their own streaming options?

Jessica, it's Mike. I'll just jump in ahead of Steve on the working capital. Working capital this quarter, primarily the change is Sky, both the inclusion of Sky versus prior year together with the second half of the year, particularly third quarter is when football rights payments across Bundesliga, Serie A and Premier League kick in. So that's what's going on in working capital. Pleased with working capital and free cash flow, obviously, for the year-to-date, but lumpiness in working capital.

In terms of the Peacock spending and marketing plan, we'll stay quiet on the details for competitive reasons until a month or two before the launch. Telemundo has been a significant success for us. As Brian mentioned, we've surpassed Univision, which was once considered impossible due to their lead. We've outperformed Univision in prime time for the past three years and are making notable advancements in daytime programming. However, we still have not closed the revenue gap regarding retransmission consent, which leads to your next question about the cable channels. Many of our deals are set to expire in the next 12 to 24 months, with channels like Telemundo making significant progress. MSNBC is also performing well, consistently outperforming CNN by a substantial margin, despite CNN having a considerably higher affiliate fee. You can anticipate real progress on this front, but we won't provide specific numbers until the negotiations are finalized.

And the question from the cable operator perspective.

Jessica, Dave. So yes, so we won't comment in future time periods, but it's clear that a couple of years where it's going to cycle, we've had lower cost increases in programming. Certainly recognize that in future times there, that could change and have more headwinds. But a couple of things. One, the whole landscape is evolving and changing. For those that go directly to the consumer, that is game-changing. We all know that. I think the key thing we talked a little bit before, X1 is strategically important to us. It just gives us flexibility and either the customer has choice, a ton of choice on different platforms to find content. And we want to be a great platform for all the content that makes sense for our customers. So we're going to be disciplined as we approach all these matters, and we're going to use data to understand the real value. And to the extent that it is available on other platforms, we'll consider all those things.

Maybe a couple of questions, more for Steve on D2C. First of all, will the Peacock product be bundled with Flex? And maybe more broadly, have you been surprised at how promotional the landscape has been on the D2C side thus far? And as you look out into 2020, do you think that all these launches and the uptake and, frankly, how aggressively these things have all been priced will have an incremental impact on the traditional ecosystem in terms of both viewership and subscribers?

Flex presents a significant opportunity for Peacock, which will take a leading role on the platform. Dave might want to elaborate on this further. This is not just a chance for Peacock; it's also an excellent opportunity for Flex to deliver popular NBC shows, like The Office, to consumers without any extra charge for broadband or cable subscribers. Regarding the broader ecosystem and the competitive promotional efforts, it's not surprising to me. The three largest media companies—Disney, Time Warner, and NBCUniversal—are all launching their streaming services, creating an urgent and aggressive moment in the industry. I expect this trend to continue until we see a natural slowdown and market consolidation, leading to a more rational environment. Right now, consumers are making important choices about apps and viewing habits, and it's crucial to be proactive in ensuring that your service stands out as one of their top options.

John, this is Dave. Just one other comment in the importance of Peacock to Flex and Cable, I think it's enormously important and a showcase on why it really matters how we work well together to make the experience even better. So we are very much going to be active and promotional, but we're very extremely focused on the experience, and it happens when the two teams are working so well together.

Regarding broadband, could you share if there were any unusual factors influencing the quarter? We often get asked about the sustainability of subscriber growth in broadband. An update on DSL subscribers, the coverage area, and your competition with fiber, as well as any potential for increased broadband penetration, would be valuable. On the wireless side, there's been ongoing interest. Do you have any insights on your MVNO and the advantages you might gain as your subscriber base and revenue in relation to Verizon increase? Additionally, we've received many questions about strand mounts. If you've conducted any testing, your thoughts on their effectiveness and whether they could benefit the wireless network partner would be appreciated.

Thanks, Doug. Let me begin with broadband. I'm very happy with the quarter and the solid performance we've had in broadband all year. This quarter continues that trend of strong results. We've experienced over a year of net customer growth exceeding 1 million. The factors driving this growth have remained consistent. The market is expanding, and there is still potential for increased penetration. As Brian mentioned, our focus has evolved. Our innovation efforts are now strongly aimed at enhancing broadband. It's crucial for us to differentiate our product, which combines speed, coverage, control, and now streaming with Flex, all integrated with xFi. This gives us a distinct offering in the market. One of our strengths is our unwavering dedication. While other companies may shift focus, we have consistently prioritized providing an excellent broadband experience, which is our competitive advantage. Our innovation efforts are concentrated on the aspects I've noted. The competitive landscape remains unchanged, and the activity levels in segments like Internet Essentials have been normal. We've witnessed strong performance across all geographic regions and segments, demonstrating robust growth. It's also important to highlight that we are not only gaining market share but also achieving strong financial results. Residential broadband average revenue per user is up 4.2%, and overall residential broadband revenue has increased by 9.3%. This reflects significant growth in both areas, which positions us well for the future. Regarding wireless, we are exploring various options and maximizing the use of our infrastructure. We are continuously analyzing and testing ways to offload data in different scenarios. We evaluate the trade-offs between pricing, volume, and data usage on our MVNO network versus offloading to our own network. We will keep testing and monitoring these opportunities closely and will be proactive when the right situations arise. More updates will follow, but we are considering this seriously.

Two questions. First, we've seen video subs decline at an accelerated pace for a while now. Can you just comment on who you're losing? And do you have any visibility into when video levels out? And are you at a point where you maintain those core customers who really appreciate the bundle? And then secondly, on Sky, what's driving expected customer growth in the fourth quarter? So we're still new to this asset. Can you remind us why Sky was down in the first couple of quarters of the year? Any seasonality we should think about? Anything in particular?

We begin with video and want to emphasize that our main goal at Cable is to increase the number of customer relationships and enhance their lifetime value. We analyze our video customer base and aim to grow profitable media relationships. Some customers are on lower-end, promotional packages, and we strive to retain them. However, if we cannot serve this segment profitably, we will transition them to a broadband-only relationship. This strategy explains the differences in our video results. Additionally, we achieved a record addition of 309,000 customer relationships in the third quarter, ending with a total of 31 million, which is a 3.4% increase year-over-year. EBITDA per customer relationship improved by 3.2%, and net cash flow per customer relationship rose by 13.2%. We have successfully navigated this transition and remain committed to ensuring our video offerings are profitable in key segments. For those segments, we will continue to bundle with broadband and maintain a disciplined focus on this approach.

Yes, regarding the fourth quarter, I’d like to start with video. Christmas consistently remains our largest quarter for video in Europe. It's important to remember that we typically have lower penetration in our markets. The idea of upgrading to Pay TV with Sky for Christmas continues to resonate strongly with us. While this isn't as pronounced as it was in the past when our business was more heavily skewed, it still holds significant importance. As a result, our business is rapidly shifting its focus to Christmas. We will be heavily promoting Sky Q in particular over the next quarter. Sky Q, which I believe is the best-quality app-based TV experience in Europe by a significant margin, currently represents about 40% of our business, and we believe we can increase that number substantially. This will be a central part of our strategy. Additionally, our programming lineup is changing. At the end of summer, we focus on fall, and the beginning of the football season is vital for us. We've had a strong lineup this summer, so our emphasis will shift towards entertainment, Sky Studios, and our original content. We have a series of Sky Originals launching in the coming weeks that we plan to strongly support. In terms of cinema, we still maintain a robust position in our cinema offerings. Outside of television, both broadband and mobile remain stable. I'm particularly pleased with our progress in mobile, where we are now recognized as a service leader among all mobile operators. Therefore, I anticipate solid growth from our commerce business over the next 13 weeks. Mobile, particularly with handsets, remains a strong product for Christmas, and we will support that as well.

Great. I would just add that, from my perspective, for the first 9 months of the year, I think Sky added in the last 12 months running close to 400,000 subs, I think, Jason or Jeremy? So I think it's tough economic headwinds over there. We read about it everyday, and uncertainty is never your friend in business climates, and there's an awful lot of uncertainty. But we're really pleased, I certainly am, with Sky 1 year later, what it's done for the whole company, giving us all the plans that Steve and Dave have been talking about. It's completely integrated. And Jeremy and his team, I think, are executing great. Jason?

Thanks, Marci. Next question, please?

You continue to see, I think, slightly more than 100 basis points of margin expansion in Cable Communications this year. I believe you've done 100 basis points or more every quarter so far this year. So I'm wondering, are there going to be any headwinds in the fourth quarter that prevented you from improving that outlook? And maybe just to be more specific, it does look like the technical and product support cost did grow a bit more quickly in the third quarter. I was hoping you could give us some insight into that. I think maybe your MVNO costs are in there. And then just the last accounting question on this. As Flex penetration grows, will we see that in OpEx or CapEx?

So Brett, it's Mike. I'll start. We expect to see an improvement of more than 100 basis points in our margin, as we've mentioned. In the fourth quarter, we anticipate healthy year-over-year margin growth in Cable. However, keep in mind that it will be compared to a political quarter as well. Despite that, we anticipate strong margin growth in the fourth quarter for Cable, which will contribute to the overall performance for the year.

Brett, Dave. Regarding Q3, it’s typically busier due to back-to-school activities, which is positive as we welcome the kids back. Mike discussed Q4, emphasizing the importance of the fundamentals concerning non-programming expenses that positively affect margins. We will maintain our focus on the connectivity business, which includes business services and residential broadband, as it improves margins. We are making significant strides in serving customers through digital means and intend to continue pushing in that direction as we see it as a strong opportunity; we're just getting started. Additionally, we are committed to maintaining cost control. I anticipate these fundamentals will persist. As Mike mentioned, although the fourth quarter presents tougher political comparisons, we still expect robust growth moving forward.

Think of Flex as capital expenditure. As previously mentioned, we do not provide multi-year guidance. However, we project an improvement in capital intensity of over 150 basis points for this year, and we anticipate that this trend will continue. I don't believe the Flex initiative will alter that outlook.

If I may make two points. First, regarding wireless, there are several upcoming spectrum auctions, including CBRS next summer, and CBNZ mentioned millimeter waves. Can you share some insights on your spectrum ownership? Considering these three options, do you foresee a potential for more formal participation, particularly to manage some of the traffic from your MVNO to your hotspots or your own network? Secondly, regarding your CapEx, both line extension and scalable infrastructure have decreased year-over-year. I recall that in the past, you mentioned timing issues. Should we anticipate this trend to continue declining steadily, or is that not the case?

In terms of wireless and spectrum, we remain opportunistic and will explore every option available. There's not much more to add on that front, but we consistently examine different possibilities. Additionally, I want to reiterate that we are actively seeking models that can effectively utilize our infrastructure. I believe we are well-positioned regarding cable infrastructure and are committed to leading the exploration of various options through testing. We will assess future opportunities as they arise. Regarding capital expenditures, we are making significant progress in enhancing our CapEx efficiency and are on track for at least a 150 basis points reduction this year. We will continue to invest where necessary in our connectivity business while also achieving savings, particularly as video customer premise equipment is not a major growth driver for us. Moving forward, I expect these fundamentals to persist.

It's Mike. I would just add that those particular scalable infrastructure and line extensions are more about timing, third quarter versus looking at it over a 12-month period rather than quarterly.

One, and then if I can, I guess, two follow-ups. So one, Mike, to just follow up on what you just said. It sounds like there's some push-out on the network CapEx side, expand on that a little bit. And then a follow-up for Jeremy on Sky. Can you break down the drivers of local revenue decelerating? Looks like the DTC revenue is fairly consistent in local, but ad revenue was down a lot. I know there's some issues around sports, and content sales were down as well. What if there was a onetime hit versus being more permanent? And then just one other question. Growth in parks has been volatile around storms and maybe competitive issues, and you aren't opening gates like you had been once. How should we think about the underlying growth at the parks business?

So Phil, it's Mike. Not too much to add to what I've said thus far on Cable CapEx. I mean I do think hard to look at one quarter to the next to the next. The network, we're happy to invest in the network as usage of the network keeps going up and want to continue to stay ahead of customer expectations. So expect that's very healthy CapEx going into the network, but it just is a little lumpy. I wouldn't say things are pushed out so much that it follows its own timing based on what folks in the field are doing. And so stepping back up, we are getting more efficient on capital intensity 2 years in a row now. This year, heading towards the 150 basis points of intensity improvement year-over-year. And as I said, we don't get into multiyear guidance, but I think the expectation of the ability to scale the network, scale the business and what’s going on in CPE gives us confidence that those trends ought to continue. And again, that's despite the opportunity we have with Flex.

Yes, Jeremy here. Regarding revenue trends and ad revenue, I would say that approximately one-third is related to the TV market. Advertising markets in Europe are experiencing pressure, with declines of mid-single digits or perhaps slightly more year-on-year. This situation contrasts with what we're currently observing in the U.S. The remainder can largely be attributed to changes in gaming legislation in the U.K. and Italy, and how it has impacted Germany. We are likely feeling a greater effect due to our strong sports business as the leading sports entity in Europe. This situation is expected to improve over the course of the year. In terms of content sales, we see a year-on-year increase. The progress in content sales, as we begin to commission more of our own content, is encouraging. Although there is a quarter-on-quarter decline, it is not due to any structural issues, just some irregularities. As we continue to grow, we hope that these inconsistencies will lessen, but currently, we are experiencing a bit of that.

So in terms of the Theme Park business, 6 years ago, we made about $1 billion in the Theme Park business, and now we're at about $2.5 billion. So theme parks have been, historically, one of the fastest-growing parts of our portfolio. And we have a lot to look forward to. We're opening Nintendo in Japan, in Osaka, in our theme park in Osaka, which is very close to the headquarters of Nintendo in Kyoto. And then if you go out into 2021, roughly 18 months from now, we open in Beijing. And Brian and I were there last week with Tom Williams, who runs our theme parks. It's going to be a spectacular park, and we're really looking forward to that. And we recently announced we're doing a fourth gate in Orlando in 2023. So we think the Theme Park business is a great business for us, and we're going to be making the investments to try to grow cash flow aggressively in the future.

I have two questions for Dave. First, I want to follow up on the discussions regarding wireless. Offloading traffic from your own network or the MVNO agreement with Verizon onto your small cells will require eSIM programming. I'm assuming you have tested this feature given the inclusion of eSIM in the new iPhones. Can you share how confident you are in managing traffic between your small cells and the Verizon network based on eSIM programming? My second question is about the commercial services business, which is now approaching 14% of your Cable revenues. Can you provide an update on your penetration levels across the various segments of business services and where the current growth is occurring? Are you starting to gain market share in the enterprise sector, or is it still largely focused on small and medium businesses?

We're currently testing the eSIM and dual-SIM capabilities on both iOS and Android platforms. We see this as an opportunity and will continue to explore it, particularly as it relates to our offload strategy. Any changes in our business model or planning that might occur could lead to a positive economic outcome for us, although it's still early in the process. We believe combining dual SIM with our cable infrastructure presents promising prospects. Regarding business services, this area is crucial for our growth and has been generating nearly $8 billion in annualized revenue that contributes positively to our margins. The market opportunity has expanded to approximately $50 billion when we consider new product offerings, including WiFi, security cameras, cell backup, and SDWAN. We’re still in the early stages with these products and will remain focused on this growth potential. As for penetration across our three segments, there's still room for growth in all of them. The SMB segment is somewhat more mature, but there are still opportunities for expansion. In the mid-market and enterprise spaces, we're currently operating in the high single digits and successfully acquiring key clients, indicating strong upside potential. I believe we hold a competitive advantage across every segment due to our superior products and services, effective local delivery, and competitive pricing. Overall, I’m confident in our position compared to incumbents in the market.

We are going to launch a broadband business offering in the U.K., marking our first significant entry into that segment. The initiative will be directed by our market-based team, with someone from that team likely leading the business here. Our goal is to expand from the residential market into the business services market and replicate some of the success we’ve experienced in the United States. This will represent a major new segment for us to pursue in the U.K., and as we become established in Italy, we will aim to replicate this effort there as well.

Yes. I just want to say that's a great point, Jeremy. With Matt Strauss transitioning from Flex to Peacock, technical leads and finance, along with the new senior marketing team coming to Cable from Sky, the integration is one of the real highlights and makes the company unique in this conversation. Regarding the wireless point, I want to emphasize that the trend is very supportive of our capital-light approach to wireless. We're gaining scale and learning the realities of a new business effectively. The advancements in technology, innovation in handsets, and discussions around spectrum are all positive for our direction. We've experienced this with Sky, as at a certain scale, many want to compete for relationships with us. Overall, I'm really pleased with the team, and we've given the leader of our mobile area additional responsibilities. There's a lot of good momentum across the board.

Yes. The capital-light approach that Brian mentioned is effective. We are seeing positive results and improved broadband retention. We are attracting new customers through various sales channels and are on track for sustainable economics. I am very pleased with our current situation, and we plan to be opportunistic moving forward.

Okay. Thank you, Mike. And with that, we'll wrap up the call. We want to thank everybody for joining us today. Regina, back to you.