• by Diane Mermigas , February 18, 2011

As the new majority owner of NBC Universal, Comcast's best days of Comcastic financial growth could be behind it.

Comcast's blow-away financial performance at the end of 2010 as the country's dominant pure-play cable operator might not be repeated -- in light of the uncertain cash demands and ROI of some of its newly acquired NBCU assets, as well as serious challenges to its core cable distribution business. Recently re-energized Wall Street investors don't see this coming, and Comcast executives won't talk about it, but there is plenty at stake. Comcast's recently reported financials only tell part of the story.

Comcast reported better-than-expected fourth-quarter revenues of nearly $10 billion, up 7% from the prior year, and a 20.8% rise in income to more than $1 billion -- excluding NBCU, which it officially acquired Jan. 28.

Comcast's record free cash flow, which sizably beat estimates to hit $1.1 billion in the fourth quarter and was $5.4 billion for all of 2010, eventually may be tapped to support NBC program production and exclusive sports rights, as well as planned stock buybacks and dividends. NBCU's free cash flow is earmarked to fund Comcast's creeping five-year buyout of General Electric's 49% stake in the company.

Comcast also raised $13 billion of new attractively priced, tax advantage debt to fund the initial transaction.

What Comcast has yet to address is how the cyclical, often unpredictable performance of broadcasting, film and theme-park businesses could adversely impact future revenues and earnings. Losses may not be fully offset by even the most draconian cutbacks, leaving Comcast no choice over time than to dip into its own free cash flow. NBCU will be self-funding up to a point.

Although it is consolidating its assets with NBCU, Comcast Cable (which includes corporate) and CEG will be managed as two separate balance sheets with separate pools of cash flow and funding capacity. CEG will generate about 21% of the combined entity's overall revenues and 11% of total earnings, with the remainder coming from Comcast's cable system operations.

Early analyst estimates call for equity-free cash flow to rise from about the combined Comcast-NBCU $5.9 billion in 2011 to $6.4 billion in 2014. (As a stand-alone cable entity, Comcast's equity free cash flow would have grown from an estimated $5.3 billion to $5.5 billion in 2014.)

The combined company's forecasted earnings will modestly increase from an estimated $18.4 billion in 2011 to $20.2 billion in 2014. Still, that's not bad for a cable giant starting out with 51% controlling interest and only $10.7 billion in equity value of the newly merged Comcast Entertainment Group.

CEG will see about 41% of its overall revenues and 80% of its earnings generated by its combined cable networks. Programming was 6% of revenues and 3% of earnings at a stand-alone Comcast. NBCU's USA, CNBC, MSNBC, Syfy, Bravo, Oxygen, Chiller, Sleuth, mun2 and Universal HD will collectively contribute 66% of CEG's revenues, according to estimates from Bernstein Research analyst Craig Moffett.

Comcast officials say their top priority is "maintaining the strong momentum and focus of the cable channels," which contribute 80% of NBCU's operating profit. Comcast has promised but has yet to detail how it will execute on a "growth opportunities road map," while growing and protecting the crown jewels of NBC News.

The NBC and Telemundo broadcast networks and TV stations will generate only about 10% of CEG earnings and 32% of its revenues. Universal-led film operations will contribute 24% of total CEG revenues and 5% of earnings, while theme parks generate only about 3% of revenues but 5% of earnings, Moffett estimates. The long-term outlook for broadcasting revenues is generally negative and low single digits even for the cable networks.

At issue is whether Comcast's disciplined top executive can manage the mounting unknowns plaguing their core cable business and NBCU's operations without eroding its free cash flow halo. "If Comcast is required to fund future NBCU obligations with funds from its core cable operations, it might not be able to return capital to shareholders," observes Citigroup analyst Jason Bazinet. Comcast won't be presenting pro forma estimates for the combined company until it reports first-quarter earnings this spring.

Comcast Chairman and CEO Brian Roberts told investors he aims to establish "a foundation for an NBC broadcast turnaround," which even under the best of circumstances has cost prior owners hundreds of millions in failed series.

Comcast President and COO Steve Burke, who oversees the new NBCU operations, concedes that NBC's turnaround could take three to five years, during which time NBC could likely continue to spend well over $3 billion annually producing and acquiring content -- only a fraction of which will ever pay off. Comcast executives left analysts with the impression that they will aggressively manage NBC's broadcast costs and not go for broke bidding on the next round of Olympics.

Scale in content and distribution helps to amortize costs, but it's no guarantee of hits or avoiding huge losses. With the real growth shifting to digital, Comcast is juggling challenges coming from over-the-top and out-of-home mobile competition just as NBCU is wrestling with streaming video.

Like other major cable operators, it is hustling to stay a step ahead of over-the-top video services from Netflix to Google TV against a precipitous drop in video subscribers. What Comcast and other cable operators don't talk about is how Internet Protocol initiatives will be their industry's single biggest cost, strategic and operations focus over the next decade to stay digitally competitive.

Given Comcast's and other cable operators' falling capital costs, "going IP shouldn't break the bank," says Credit Suisse analyst Stefan Anninger, but the devil is in the details. It's all about stemming subscriber defections on any front and noting what in-house service they'll pay for.

While being able to tap and maneuver its huge content library of news and entertainment for use on any platform or device should be a major plus, Comcast also must now absorb the cost (and losses) of developing winning programming and upgrade to a more advanced IP platform. It all gives new meaning to Roberts' recent quip, "It's not just about cable anymore..."