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Investment Overview for Time Warner Cable (NYSE:TWC)
WHAT HAS CHANGED?
- High-speed data leads the growth charge for Time Warner Cable
With the decline in the pay-TV industry, Cable companies have looked upon their high-speed internet businesses to drive growth in the past few years. A growing need for speed and connectivity is fueling the demand for high-speed internet in the United States. Time Warner Cable continues to capitalize on this demand for high-speed internet. In what was a record full-year subscriber performance, the company’s high-speed data segment added 1 million new subscribers in 2015 and took its total residential subscriber tally to just under 13 million. The growth in the subscriber base was accompanied by a 2.5% increase in ARPU, which resulted in the segment’s residential revenues growing by 9.3% to $7 billion.
- Pay-TV subscriber retention improving
Time Warner Cable has been able to slow the pace of decline in its subscriber base in 2015. The company actually added 32,000 subscribers during the full year 2015, the first instance of annual growth since 2006. The company’s 2015 performance is a marked improvement over its performance in previous years, when it lost 408,000 and 833,000 subscribers during 2014 and 2013, respectively. Much of the reduction in the pace of subscriber decline can be attributed to TWC’s strategy of triple play bundling. The company management had stated on a previous earnings call that 80% of the video subscriber base opt for the full bundle. This bundling helps reduce the subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiency and economies of scale.
Time Warner Cable is the second largest U.S. cable operator, providing consumers and businesses with pay-TV, broadband, and digital voice (VoIP) services. The company primarily makes money through monthly subscription fees for its services, advertising carried on some of its channels, and on-demand and pay-per-view programming.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Time Warner Cable's value that present opportunities for upside or downside to the current Trefis price estimate for Time Warner Cable:
Time Warner Cable Broadband Subscriber Fees: We estimate this figure to grow in the coming years and be close to $80 by the end of our forecast period as compared to $56 in 2015. However, there could be an upside of more than 15% to our price estimate if this figure were to be north of $100 in the coming years, driven by the rapid growth in the broadband market. On the other hand, there could be downside of more than 15% to our price estimate, if the company is unable to raise the prices amid increased competition in the broadband market.
Time Warner Cable Pay-TV Subscriber Fees: We estimate this figure to grow from $68 levels currently, to $81 by the end of our forecast period. However, there could be a 10% upside to our price estimate if Time Warner Cable can raise its subscription prices, and the average fees stands around $100 by the end of our forecast period. On the other hand, there could be downside of a similar order, if the company fails to pass the rising costs on to its customers, and the subscriber fees stays range-bound around current levels.
For additional details, select a driver above or select a division from the interactive Trefis split for Time Warner Cable at the top of the page.
We believe cable TV (pay-TV) is the most valuable segment, followed by broadband. This is primarily due to following reasons:
High number of subscribers
Time Warner Cable has just under 11 million residential pay-TV subscribers and around 13 million broadband subscribers, currently. Going forward, we expect that broadband subscribers will continue to grow, while the pay-TV subscribers will remain more or less stagnant in the long-term.
High monthly subscription fees
There is quite a difference between fees per subscriber for Time Warner Cable's pay-TV, and broadband subscribers. Time Warner Cable is making on average $68 per month from its pay-TV subscribers, compared to $56-57 per month for broadband subscribers. This $68 figure excludes on-demand and DVR services, and the fees would be much higher if they were included.
Migration to digital platform
Time Warner Cable has shifted to a digital platform from the analog platform used earlier. It has benefited by migrating customers to digital services, since it frees up significant delivery bandwidth, by eliminating the analog service. Moreover digital services offer higher profits for Time Warner Cable, compared to analog TV services.
Merger with Charter Communications
In May 2015, Time Warner Cable and Charter Communications entered into a definitive agreement to merge. Charter is a leading internet communications company and one of the largest cable operators in the U.S. As per the deal, Time Warner Cable shareholders will receive $195.71 per share, pegging Time Warner Cable’s enterprise value at $78.7 billion. The deal is currently under regulatory review by the FCC.
Increasing Competition with Telecoms, such as AT&T and Verizon
AT&T's U-Verse and Verizon's FiOS are fiber optic TV services that have gained traction in some geographic areas. We expect competition in this space to result in declining subscription prices for both telecom and cable operators.
Online video services, such as Netflix, emerging as a potential threat
Time Warner Cable's on-demand services are increasingly facing competition from online streaming companies, such as Netflix and Hulu. Netflix has been able to grow its subscribers at a rapid pace. The company has been consistently adding to its movie and TV show catalog. There is some evidence currently that services such as Netflix are encouraging people to cut their cable cords, and this phenomenon may emerge as a more serious threat, over time.
Trefis Forecast Rationale for Time Warner Cable's Pay-TV Market Share
This represents Time Warner Cable's share of the U.S. pay-TV market. The pay-TV market refers to cable TV and satellite TV.
Pay-TV viewers have to subscribe to a connection from one of the operators and pay for the service on a monthly basis. The contracts are usually time-bound.
Time Warner Cable is the second largest cable provider in the U.S. (behind Comcast), with more than 11% of the U.S. pay-TV market share as of 2015. The company's market share has declined over the past few years and the slight increase in 2012 can be attributed to acquisition of Insight Communication. Going forward, we expect market share to continue to decline albeit at a slower pace.
Trefis considered the following factors for its forecast:
- Intense competition in the pay-TV market
- Time Warner Cable faces intense competition from other pay-TV companies such as Comcast, DirecTV, Dish Network, AT&T, Verizon etc. As a result it has consistently lost pay-TV subscribers over the past few years.
- The U.S. cable market is more or less saturated, with limited scope for expanding subscriber base.
- Acquisition is the easiest way to gain market share but FCC is unlikely to view any significant acquisition favorably
- In an intensely competitive operating environment, the easiest way to gain market share is by acquisition.
- Nevertheless it is going to be difficult to make a major successful bid in the pay-TV service business.
- Time Warner Cable's proposed merger with Comcast was called off in early 2015. However, that does not rule out a merger with other industry players.
- Loss of analog subscribers
- Most of the company's subscriber losses are concentrated in its analog base. As these subscribers migrate to digital platforms, they are exploring multiple options.
- This trend is likely to continue for several quarters as Time Warner Cable has a higher proportion of its subscribers on analog platforms, compared to its rivals such as Comcast.
Back to Company Overview
- Time Warner Cable's efforts & other developments
- Over the course of the past few quarters, Time Warner Cable has made some efforts towards improving its service. The company launched streaming apps on iPad & android devices to enable live streaming of its programming, and offered cheaper programming packages to target value conscious customers.
- Furthermore, the telcos have reduced their pace of expansion of fiber optic services and that should help Time Warner in the future. In fact, Time Warner is co-marketing its products with Verizon while the latter focuses more on wireless service.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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