Time Warner Cable (NYSE:TWC) recently released its Q2 2012 earnings. Much was expected, including decline in pay-TV subscribers and continued strength of broadband as we discussed in our previous article – Time Warner Cable’s Broadband Growth Should Compensate For Sluggish Pay-TV Business. As has been the case in the past two quarters, the pay-TV losses remained worse compared to its rival Comcast (NASDAQ:CMCSA) if we take into account the overall subscriber base. While Time Warner Cable lost 169,000 pay-TV subscribers, Comcast lost about 176,000 despite having a subscriber base of nearly twice the size of that of Time Warner Cable.
Yet the stock jumped – Why?
The broadband growth compensated for the weakness in pay-TV business and Time Warner Cable’s earnings beat analyst estimates. The company was able to grow its broadband revenue by 7% on account of subscriber gains and ARPU (average revenue per user) increase.  ARPU is improving due to shift toward higher priced tears as customers do not mind paying higher for better download speed as their appetite for internet video increases. This is also being helped by the fact that Time Warner Cable is also allowing its broadband subscribers to get free access to its ever expanding WiFi hotspots.
What also bodes well for the company is that most of the pay-TV losses were concentrated in analog base. The losses should come down as digital transition completes, similar to what we expect for Comcast. Furthermore, the growth in triple-play bundles seems to bode well for the future. The company saw 54,000 net additions for triple-play bundles including TV, broadband and voice which implies a growth of 40% over Q2 2011.  Triple-play customers tend to be more sticky and this bodes well for the future. In fact this triple-play growth helped boost VoIP connections as well.
Broadband and pay-TV are Time Warner Cable’s main businesses constituting close to 40% each to its value. While broadband seems to be doing good, future prospects for pay-TV seem to be better even though current performance is dismal. We are in process of updating our price estimate for Time Warner Cable in the light of recent earnings and will have an update ready soon.
Our current price estimate for Time Warner Cable stands at $83, implying a discount of more than 5% to the market price.Notes: