Time Warner Cable (NYSE:TWC) will report its Q2 2013 earnings on August 1, and the focus will remain on the company’s efforts to revive its pay-TV business and its continued success in the broadband segment. During the last quarter, the company added 131,000 broadband subscribers, and also witnessed a 10% growth in ARPU primarily due to the price increases and a greater percentage of customers opting for high-priced tiers.  We expect the company to continue adding more broadband subscribers as the residential and business demand for high-speed data services continues to grow on the back of increased use of multiple devices and higher penetration of smartphones. We also expect the pay-TV subscriber losses to continue, albeit at a slower rate. The company lost 118,000 pay-TV subscribers in the last quarter, as many of its customers shifted to telcos and satellite companies. We believe that a similar trend will be visible when the company releases its Q2 2013 earnings.
A Shift Away From Triple Play Bundling
Increased competition and the availability of online video streaming from Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have put immense pressure on the traditional pay-TV operators such as Time Warner Cable. According to our estimates, pay-TV is the biggest business for the company, constituting roughly 50% of its value. During the last quarter, Time Warner Cable stated that it has changed its strategy away from triple play bundling and is now focusing on customer retention through personalization. In order to do so, the company will provide customers with premium offerings such as faster Internet or premium television channels based on their interests rather than trying to push for bundled options with voice services.  We believe this is a good move for the company as it will not only help it retain customers, but also aid its ARPU growth. However, unlike Comcast’s (NASDAQ:CMCSA) Xfinity, Time Warner Cable lacks a well-developed platform for television streaming. Given the increased penetration of smartphones and user’s desire to access the content remotely, it is essential for the pay-TV operators to provide such services to customers.
Time Warner Cable is concentrating on broadband services, especially for the business segment, which has become a major growth driver for the company. The broadband business constitutes roughly 30% of the company’s value. The demand for broadband has been booming in the U.S. and more than 94% of households have access to broadband with speeds of 10 Mbps or higher.  Earlier this month, the company decided to increase its Internet prices. While the exact growth in pricing is not known yet, it appears that on an average, the retail price of stand-alone Internet service will rise as much as $3 a month.  This will boost the company’s broadband ARPU, but it will be reflected only from the next quarter.
Time Warner Cable has been focusing on improving its broadband services. For the month of June, the company jumped two spots in Netflix’s ISP Speed Index as it delivered an average Netflix streaming speed of 2.05 Mbps.  However, the average Internet speed in the U.S. is much higher at 8.6 Mbps, according to a research by Akamai.  Time Warner Cable has been rebranding itself as a major broadband provider and is aggressively penetrating in the commercial business segment. The company is boosting cloud-computing services including delivering IP-based Ethernet services over fiber. Going forward, it would be interesting to see if Time Warner Cable manages to capture a greater broadband market share by focusing on higher Internet speeds.
Our price estimate for Time Warner Cable stands at $89 is roughly over 20% discount to the market price.Notes:
- Time Warner Cable’s SEC Filings [↩]
- Time Warner Cable Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, Apr 25, 2013 [↩]
- Broadband is booming in America, UPI, Jul 19, 2013 [↩]
- Time Warner raising price of Internet service, Syracuse, Jul 25, 2013 [↩]
- TWC Climbs in the Netflix Streaming Rankings, Multichannel, Jul 9, 2013 [↩]
- Broadband Speed Is Increasing, But US is Falling Behind, PCWorld, Jul 23, 2013 [↩]