Time Warner Cable Earnings Grow 12% On Continued Broadband Growth

Time Warner Cable (NYSE:TWC) recently reported its Q2 2014 earnings with 12% growth in profits to $1.89 per share. The revenues grew by 3% to $5.73 billion, led by 13% growth in the residential broadband business. The company added 67,000 broadband subscribers, representing the best second quarter in the past four years. ^[1] The growth in broadband segment was in part driven by the higher average revenue per subscriber (ARPU), which increased by 10% to $46.92.

On the pay-TV front, the company lost 152,000 residential subscribers. This was on expected lines as second quarter is seasonally low quarter for pay-TV operators. Cable giant Comcast (NASDAQ:CMCSA) also lost 144,000 subscribers in the second quarter (Read More – Comcast Earnings Grow 15% On Good Broadband Growth).

TWC’s business services segment continued to outperform with 22% revenue gains, driven by the growth in broadband and voice segment. The segment EBITDA also jumped 26% to $409 million. ^[2] 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.

See our complete analysis for Time Warner Cable

Broadband Continues To Grow Strong

We estimate that broadband contributes over 35% to Time Warner Cable’s stock value. The residential revenues increased by 13% to $1.61 billion while the business services jumped 24% to $331 million during the second quarter. ^[2] Broadband has remained the leading growth factor for the cable companies for quite some time now. There is a boom in demand for broadband in the U.S. as there is a growing need for speed and connectivity. Currently, broadband penetration in the U.S. homes stands at 75%, leaving enough room for growth. ^[3] In the long run we estimate broadband will penetrate in over 95% U.S. homes. This will benefit the cable industry in particular as it accounts for 59% of the U.S. broadband market. ^[4] Accordingly, we expect TWC to continue to add broadband subscribers in the near term and be north of 12 million by the end of 2014.

Pay-TV Subscriber Base Shrinks Further

The pay-TV business contributes more than 40% to Time Warner Cable’s stock value, according to our estimates. During the second quarter, pay-TV revenues declined by 5% to $2.55 billion as compared to the prior year quarter. Pay-TV ARPU improved slightly to $76.43 as compared to $75.32 in the prior year period. ^[2]

Despite good performance of broadband business, overall residential services segment EBITDA declined by 0.4% to $2.19 billion. This can be attributed to a combination of lower video subscribers and higher programming cost per video subscriber, which increased by 11% to $38.29. ^[2] Time Warner Cable is not the only pay-TV operator losing video subscribers. This trend has been visible across the board with cable companies amid fierce competition in a saturated market. We expect this trend to continue in the near term and accordingly estimate the company’s video subscribers to decline to close to 11 million by end of the year.

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1. Time Warner Cable’s (TWC) CEO Robert Marcus on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Jul 31, 2014 [↩]
2. Time Warner Cable’s SEC Filings [↩] [↩] [↩] [↩]
3. The State of the Internet, Akamai [↩]
4. NEARLY 1.2 MILLION ADD BROADBAND IN THE FIRST QUARTER OF 2014, Leichtman Research Group, May 20, 2014 [↩]