How Are Time Warner Cable’s Pay-TV And Broadband Operations Trending In 2014?

-3.12%
Downside
210
Market
203
Trefis
TWC: Time Warner Cable logo
TWC
Time Warner Cable

Time Warner Cable (NYSE:TWC) has seen a steady growth in 2014, primarily led by continued growth in its broadband operations. Looking at the first three quarters, the company’s revenues stood at $17.02 billion, up 3% over the prior year period. The operating income was flat at $3.41 billion. [1] While the company is seeing solid growth in its broadband operations, it is unable to tame the pay-TV subscriber losses. The company has frequently blacked out many networks in the past and it has paid the price by losing subscribers in numbers. While Time Warner Cable’s arguments in such disputes are justified over the steep price increases by the content owners, the high demand for their programming gives the content owners the upper hand. We wonder if the cable company can tame the subscriber losses in the near term, given the rise of alternative video platforms, which is further adding to the woes of pay-TV operators. The company is awaiting an approval for a $45 billion merger with cable giant, Comcast (NASDAQ:CMCSA). The FCC has recently paused the review of the proposed merger until January 12th 2015 to review documents that Time Warner Cable did not make available upon original request. [2]

See our complete analysis for Time Warner Cable

The Company Continues To Lose Pay-TV Subscribers

Relevant Articles
  1. Time Warner Cable Q1 Review: High-Speed Data Leads Revenue Growth, Company Gains Pay-TV Subscribers
  2. How Are Time Warner Cable’s Revenue & EBITDA Composition Expected To Change By 2020?
  3. What Has Led To A ~20% Increase In Time Warner Cable’s Revenues & EBITDA In The Last Five Years?
  4. How Has Time Warner Cable’s Revenue Composition Changed In The Last Five Years?
  5. How Much Can Time Warner Cable’s Revenues Grow Over the Next Five Years?
  6. What’s Time Warner Cable’s Fundamental Value Based On Expected 2016 Results?

We estimate that the pay-TV operations contribute close to 40% to Time Warner Cable’s stock value. The cable company has been losing pay-TV subscribers for years now. The overall subscriber base has come down from 13.3 million in 2007 to 11 million currently. [1] This can be largely attributed to a combination of market saturation, fierce competition, delays in the transition to a digital platform and the increased focus of providers on acquiring higher-value subscribers. Things may worsen for the cable company in the coming years as more and more people embrace lower cost options, including free programming and online video services such as Hulu, Netflix and Amazon Prime.  In sum, pay-TV penetration may decrease in coming years.

During the first nine months of 2014, the company lost 587,000 residential pay-TV subscribers and it was able to increase the average monthly subscription fees by a mere 1% as compared to the prior year period. [1] We estimate the company’s pay-TV market share to decline to 10.3% in 2015 as compared to 11.1% in 2013. This will result in a subscriber base of 10.70 million and an estimated monthly subscription fee  of $70 will translate into pay-TV revenues of $9 billion. An estimated EBITDA margin of 37% will result in $3.33 billion EBITDA, representing close to 40% of the company’s overall EBITDA for 2015. This does not take into consideration Time Warner Cable’s merger with Comcast. If we consider the merger, the subscriber base of the combined entity will be around 30 million.

Broadband Leads The Growth For Cable Company

We estimate that broadband business accounts for more than 40% of Time Warner Cable’s stock value. The company has seen rapid growth in this segment in recent years. From less than 8 million subscribers in 2007, the company’s broadband subscriber base increased to over 12 million currently. During the first nine months of 2014, the company added 67,000 broadband subscribers. During the same period, the company also saw a 7% growth in the average monthly subscription fees. [1]

The increasing need for speed and connectivity is driving broadband growth in the U.S. The higher penetration of smartphones and use of multiple devices are aiding overall growth. 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 believe these factors will continue to drive broadband growth for cable operators such as Time Warner Cable. We also note that there is enough room left for broadband to penetrate in the U.S. Currently, broadband coverage is around 70% and it is estimated to reach more than 90% in the long run. [3] We estimate broadband subscribers to be north of 13 million and monthly subscription fees to be close to $57 by 2015. This will result in revenues of $7.77 billion and an estimated EBITDA margin of 37% will translate into EBITDA of $3.20 billion, representing more than 35% of the company’s overall EBITDA.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Time Warner Cable’s SEC Filings [] [] [] []
  2. FCC pauses review of Comcast-Time Warner Cable merger, USA Today, Dec 23, 2014 []
  3. Broadband Internet Penetration Deepens in US; Cable is King, IHS Technology, Dec 9, 2013 []