Time Warner Cable (NYSE:TWC) will report its Q3 2012 earnings on October 31 and, as always, pay-TV subscriber losses and broadband gains will be the main focus. We expect pay-TV subscriber losses to continue but come down compared to Q3 of 2011 as well as Q2 of 2012. While the year-over-year improvement will be driven by improved service and a relatively better economic environment, the sequential improvement will result from Q3 being seasonally stronger than Q2. In addition to this, growth in the broadband business due to subscriber and ARPU gains will drive Time Warner Cable’s overall profits. Unlike Comcast (NASDAQ:CMCSA), TWC managed to grow its overall margins in 2011 despite the rising programming costs.
Business services (including TV, broadband and digital phone) will see substantial growth in the upcoming quarterly results but their overall impact on the company will be small due to a relatively small revenue base.
Pay-TV Subscriber Losses To Reduce
Time Warner Cable lost 169,000 subscribers last quarter, and we expect this figure to come down in the upcoming results.  What bodes well for the company is that most of the pay-TV losses were concentrated in its analog base. The losses should come down as the digital transition completes, similar to what we expect for Comcast. Furthermore, growth in triple-play bundles is a positive factor. The company saw 54,000 net additions for triple-play bundles including TV, broadband and voice in the last quarter, which implied 40% growth over Q2 2011.  Triple-play customers tend to be more sticky and this bodes well for the future. In fact, this triple-play growth will help boost VoIP connections as well.
To augment its traditional pay-TV service, Time Warner Cable has also been making some of its channels available for streaming to its subscribers. However, its streaming arsenal still pales in comparison to other competitors.
Broadband To The Rescue
Cable companies such as Time Warner Cable are in an advantageous position to leverage the trend of broadband adoption and grow their subscriber base. Customers prefer to receive all of their services from a single provider as this works out to be cost-effective and convenient – a single bill for all services. This gives Time Warner Cable an advantage over pure-play companies. Furthermore, given that Time Warner Cable’s cable network is much more extensive and widespread than telecom operators’ fiber optic networks, the company has the opportunity to capture broadband subscribers before telcos can reach them. Additionally, the company’s focus on large, upscale markets such as New York and Los Angeles puts it in a good position to market its high-end broadband tiers.
As a result, we expect the average revenue per user (ARPU) and subscriber growth to continue for Time Warner Cable’s broadband division which should more than compensate for the slow pay-TV growth.
Our price estimate for Time Warner Cable stands at $88, implying a discount of more than 10% to the market price.Notes: