Earnings Preview: Broadband Likely Drove Growth For Time Warner Cable In Q2

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Time Warner Cable

Time Warner Cable (NYSE:TWC) will report its Q2 2014 earnings on July 31. We expect steady growth in the broadband operations driven by rising residential and business demand for high-speed data services. The increased use of multiple devices and a higher penetration of smartphones is aiding the overall demand for high-speed Internet in the U.S. In the recent past, the company has seen rapid growth in its business services segment with revenue growth of 24% in the first quarter. [1] We expect this uptrend to continue in the near term, driven by higher demand of bundled packages of broadband and voice, especially for small and medium sized enterprises.

We are eager to see how the company’s pay-TV subscriber losses trended during the quarter given that Comcast (NASDAQ:CMCSA) saw its best second quarter in six years as it restricted subscriber losses to 144,000 (Read More – Comcast Earnings Grow 15% On Good Broadband Growth). Cable companies have been losing video subscribers for several quarters amid market saturation and increased competition from telcos. Moreover, the rise of alternative video platforms and the frequent blackout of various networks have weighed on the subscriber bases of cable companies.

See our complete analysis for Time Warner Cable

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Broadband Growth To Continue

The broadband business has done well for Time Warner Cable over the past few years, benefiting from rising demand for faster Internet service and a decline of DSL Internet connections. In the previous quarter, the company added 269,000 broadband subscribers, the highest since the first quarter of 2008. Broadband revenues have increased at an average annual rate of 12% over the past few years, amounting to $6.92 billion in 2013. The customer base also grew from 7.9 million in 2007 to 11.61 million in 2013. [1] We expect this uptrend to continue in the near term, driven by a growing need for higher speed and connectivity. We estimate broadband revenues to be around $7.53 billion in 2014, representing 8% growth over previous year revenues.

Pay-TV Subscriber Losses Will Decline

Time Warner Cable has experienced significant challenges in retaining pay-TV subscribers over the past few years. This difficulty reflects a combination of market saturation, fierce competition, and increased focus by providers to acquire higher-value subscribers. The pay-TV subscriber base has dropped from 13.3 million in 2007 to 11.4 million in 2013. [1] Last year alone, the company lost 825,000 video customers, primarily due to its dispute with CBS. [2]

So far, the company has been unable to tame subscriber losses. On the other hand, Comcast reported modest gains in pay-TV subscribers in Q4 2013 and Q1 2014 and lower subscriber losses in the latest quarter, which is a seasonally low quarter for the industry. We believe Time Warner Cable will continue to lose pay-TV subscribers in the near term, albeit at a slower pace. We estimate that by the end of 2014, the pay-TV subscriber base will be around 11.3 million, translating into pay-TV revenues of $9.22 billion. This forecast takes into account 3% growth in average monthly subscription fee (ARPU). It must be noted that ARPU declined by over 1% in 2013. If the company is unable to increase its pricing this year, it will translate into revenues of under $9 billion, the levels previously seen in 2007. Note that our revenue estimates do not take into account revenue generated from advanced services such as HD/DVR and advertising and franchise fees. We estimate these revenue streams as separate drivers.

Notes:
  1. Time Warner Cable’s SEC Filings [] [] []
  2. CBS Dispute Weighs Heavy On Time Warner Cable Results, Broadband And Pay-TV Subs Decline, Trefis, Nov 1, 2013 []