Time Warner Cable (NYSE:TWC) recently reported its Q3 2013 earnings. The revenues grew by 3% to $5.5 billion, led by 14% revenue growth in the broadband business. The company lost 306,000 pay-TV subscribers in the quarter.  The growth in broadband was driven by the higher average revenue per subscriber. However, the pay-TV subscriptions continued to decline at a higher rate primarily due the recent blackout of CBS (NYSE:CBS) networks for 32 days in a few markets. A similar trend in pay-TV subscriptions was noticed in the recently reported results of Comcast (NASDAQ:CMCSA) (Read - Comcast Repeats Solid Growth In Broadband And NBCUniversal).
TWC’s business services segment continued to outperform with 20% revenue gains, driven by the growth in broadband and voice subscribers.  Going forward, the company should continue to see robust growth in its broadband business due to the increasing demand for higher speed and connectivity. However, taming the pay-TV subscriber losses remains a key challenge for the company. The stock has climbed more than 20% since June this year, which is partly due to the speculation over a merger with Charter Communications.
Pay-TV Subscriptions Continue To Decline
The pay-TV business contributes around 45% to Time Warner’s value, according to our estimates. The cable industry has been losing video subscribers for quite some time now. SNL Kagan in a recent report stated that the U.S. cable TV industry lost 1.8 million subscribers over the last 12 months.  This can be primarily attributed to the fierce competition from telcos and rise of alternate video platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN).
TWC witnessed a 5% y-o-y drop in pay-TV revenues to $2.6 billion due to decreases in pay-TV subscribers and premium network revenue.  TWC in particular has been losing more subscribers as compared to its peer Comcast. In the third quarter, the primary reason for such a huge drop in subscribers was the blackout of CBS networks in three markets. CBS is a very popular network with millions of viewers and telecasts some of the top ranked shows such as Under The Dome and National Football League. It was expected that many of the 3.2 million viewers, who were unable to watch their favorite programs would have vented their frustration over the cable company, either by cord-cutting or cord-switching. While TWC says they got a better deal after the feud with CBS, it is clear that the content owners have an upper hand in such disputes and it is the operators who bear the pain. 
Broadband Subscriber Trend Surprises
While TWC’s broadband revenues jumped 14% to $1.46 billion for residential services, the company witnessed a decline of 24,000 broadband subscribers.  Broadband has remained the leading growth factor for the cable companies, and the decline came in as a little surprise. The management stated that the impact of the disputes with media companies bled over into broadband and voice segment, as they lost some double-play and triple-play customers. ((Time Warner Cable Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Oct 31, 2013))
There is a boom in demand for broadband in the U.S. as there is a growing need for speed and connectivity. Currently, broadband has penetrated into 72% homes and there is still much room left for growth, and this will benefit the cable industry in particular as it accounts for 58% of the U.S. broadband market.  Given the surge in broadband demand and end of key disputes, we expect TWC to gain broadband subscribers in the near term.
Poor Results Drive The Stock Upwards
Despite bleeding pay-TV subscribers and losing broadband customers for the quarter, the markets gave a thumbs up to TWC’s stock. This can be attributed to the speculation of a possible bid from Charter Communications. Liberty Media, which owns 27% of Charter, has been vocal about its goal of leading the consolidation in the cable industry. Liberty has made it clear that it can wait for TWC’s results to deteriorate further.  The market appears to be expecting a deal, which would consolidate the cable industry and help TWC to compete better with the mammoth Comcast. It will be interesting to see how events unfold going forward and how far does TWC’s stock run in anticipation of a bid.Notes:
- Time Warner Cable’s SEC Filings [↩] [↩] [↩] [↩]
- Cable TV Providers Hit by Continued Subscriber Erosion, The Hollywood Reporter, Sep 3, 2013 [↩]
- Time Warner Cable Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, Oct 31, 2013 [↩]
- Faster & faster! The US now has 82.4 million broadband connections, Gigaom, May 21, 2013 [↩]
- Down Is Up for Time Warner Cable, The Wall Street Journal, Oct 13, 2013 [↩]