The Contribution Of Advertising To Time Warner Cable’s Overall Revenues Will Decline In The Coming Years

Time Warner Cable (NYSE:TWC) gets a share of advertising time from some of the media networks. The company sells this time either nationally or to regional advertisers. The segment revenues have been on an uptrend over the past few years driven by robust ad spending. The figure stood at over $1 billion in 2013 and an estimated EBITDA margin of 37% for Time Warner Cable translated into segment EBITDA of $375 million, representing 5% of the company’s overall EBITDA. ^[1]

While the overall advertising trends are improving, it may still not help the cable company. Currently, television accounts for 40% of the overall ad spending. ^[2] However, the trends in advertising marketplace are shifting away from television and moving towards Internet. While Time Warner Cable will continue to see steady growth in advertising revenues and EBITDA, its contribution to overall EBITDA will come down to 4% by the end of our forecast period. On that note, we discuss below the growth in company’s advertising income, our forecasts and estimates and trends in the advertising marketplace.

We estimate revenues of about $23 billion for Time Warner Cable in 2014, with Non-GAAP EPS of $7.72, which is in line with the market consensus of $7.45-$8.13, compiled by Thomson Reuters. We currently have a $123 price estimate for Time Warner Cable, which is at about 15% discount to the current market price.

See our complete analysis for Time Warner Cable

Advertising Revenues Are Growing, Led By Robust Ad Spending

Time Warner Cable’s advertising income declined from $898 million in 2008 to $702 million in 2009. This can be attributed to the recession and the macroeconomic situation in the country during the post recession period. The ad spending was cut down during that period. However, post 2009, the company has seen a steady growth in advertising revenues. In 2013, the revenues declined slightly as compared to 2012, which benefited from the Olympics and political ad spending driving the company’s advertisement revenues 20% higher. In the first nine months of 2014, ad revenues stood at $795 million, representing a 7% growth over the prior year period. ^[1] We estimate the advertising revenues to grow steadily at an average annual rate of 5% in the coming years and be north of $1.50 billion by the end of our forecast period. Time Warner Cable is the second largest cable operator in the U.S. and this gives the company more negotiating power than its peers such as Cablevision or Cox Communications, since it has wider reach and a bigger subscriber base. As a result, the advertising slots it gets are for a longer duration and are in better time slots. Consequently, advertising revenues are higher than some of its peers.

The company’s proposed merger with giant Comcast (NASDAQ:CMCSA) is awaiting an approval from regulatory authorities. If that is approved, the combined entity’s advertising revenues will be over $3.50 billion in 2015. The combined entity will be in an even better position to negotiate the slots, duration and ad pricing due to its massive size (approximately 30% share of the overall pay-TV market). However, the overall contribution of advertising in the company’s revenues and profits will come down in the coming years led by a higher growth at the company’s broadband operations and trends in the television ad spending.

Overall Advertising Is Growing But Share Of Television Is Declining

Advertisement pricing has picked up since the recessionary period of 2008 and 2009. The overall U.S. advertising market is growing and advertisers are willing to shell out more money. Television still remains the biggest medium for advertisements and content owners as well as cable operators will benefit from this broad level improvement. Television currently accounts for close to 40% of all advertising and it is expected to drop to 37% by 2017, according to a research by ZenithOptimedia. However, this downturn will primarily be due to a rise in ad spending at other platforms and television ad spending will continue to grow by 3% annually until 2017. Meanwhile, Internet display ad spending is growing at an average annual rate of 18% and is expected to continue to grow at same pace in the coming years. ^[2] Accordingly, cable operators may face a tough time in the coming years as advertisers shift their focus on other advertising mediums. This can also put some pressure on the ad pricing. Cable ads are usually much cheaper than the broadcast local stations ads as they capture a limited audience and are generally rotator spot ads, in which the advertiser does not know exactly when and where the commercial will be aired. However, any change in advertising revenues will have a very little impact on the company’s stock price as the segment contribution is very low at around 5%, according to our estimates.

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1. Time Warner Cable’s SEC Filings [↩] [↩]
2. Executive summary: Advertising Expenditure Forecasts December2014, ZenithOptimedia [↩] [↩]