Broadband Will Lead The Growth For Time Warner Cable In Q3

Time Warner Cable (NYSE:TWC) will report its Q3 2014 earnings on October 30th. We expect continued growth in the broadband operations driven by rising residential and business demand for high-speed data services. In the recent past, the company has seen rapid growth in its business services segment with revenue growth of 23% in the first half of 2014. ^[1] We expect this uptrend to continue in the near term, driven by higher demand of bundled packages especially for small and medium sized enterprises.

We are eager to see how pay-TV subscriber additions trended in the quarter. The company lost 152,000 subscribers in the previous quarter, marking its best Q2 for this metric in the past three years. ^[1] Triple play bundling helped Time Warner Cable reduce the subscriber churn in the previous quarter.

Recently, Comcast (NASDAQ:CMCSA) posted its earnings for the third quarter with strong gains in its broadband operations. It added 315,000 new broadband customers during the quarter and lost 81,000 pay-TV subscribers as compared to 127,000 it lost in the prior year period (Read More – NBCUniversal Boosts Comcast’s Q3 Earnings). We expect similar results for Time Warner Cable with continued growth in broadband and lower pay-TV subscriber churn.

See our complete analysis for Time Warner Cable

Continued Growth In Broadband

The broadband business has done well for Time Warner Cable over the past few years, benefiting from rising demand for high speed Internet. In the previous quarter, the company added 67,000 broadband subscribers, representing the best second quarter in the past four years. ^[1] The use of multiple devices and higher penetration of smartphones is aiding the overall demand for high-speed Internet. Smartphone penetration has seen rapid growth from 54% in December 2012 to 72% in June 2014. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. Video streaming, for instance, requires high data volumes which explains why the reliance on fixed networks is far greater than that on mobile carriers.

We expect Time Warner Cable to continue to gain broadband subscribers in the near term primarily driven by its triple play bundles. Separately, the company inked a deal with Netflix (NASDAQ:NFLX) under peering arrangements. ^[2] While the financial details of the deal are not known, it will aid the overall revenue growth for the company. We estimate broadband revenues will be north of $7.7 billion (including the business services segment) and command an EBITDA margin of around 37%, generating EBITDA of over $2.8 billion for 2014.

Pay-TV Subscriber Losses Will Decline

We estimate that the pay-TV operations contribute close to 40% to Time Warner Cable’s stock value. The cable company 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. This also led to a net decline of 166,000 subscribers for pay-TV industry in 2013. Moreover, rising pay-TV bills are making customers either drop their connection or shave the existing plans. For instance, popular cable networks such as ESPN and TNT has seen more than 4% decline in penetration over the past four years. ^[3] This reflects ‘cord-shaving’ where customers are opting for lower priced packages. We are eager to learn how the pay-TV industry trends in the near term and if Time Warner Cable manages to tame its subscriber losses in 2014.

The pay-TV subscriber base has dropped from 13 million in 2009 to 11 million in 2014. We believe Time Warner Cable will continue to lose pay-TV subscribers in the near term, albeit at a slower pace. The company has also added NBCUniversal programming to its TV Everywhere app. ^[4] The availability of more content on TV Everywhere will further help it reduce subscriber churn in the near term. Accordingly, we estimate that by the end of 2014, the pay-TV subscriber base will be around 11.1 million, translating into pay-TV revenues of over $9 billion. An estimated EBITDA margin of 37% will translate into EBITDA of $3.34 billion for the year.

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1. Time Warner Cable’s SEC Filings [↩] [↩] [↩]
2. Netflix now paying Time Warner Cable for faster speeds too, The Verge, Aug 19, 2014 [↩]
3. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal, Oct 9, 2014 [↩]
4. Time Warner Cable to Make NBCUniversal Sports, News and Entertainment Programming Available on a TV Everywhere Basis, Business Wire, Aug 13, 2014 [↩]