Time Warner Cable Q4 Preview: Broadband Growth Will Compensate For Loss Of Pay-TV Revenue

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Time Warner Cable (NYSE:TWC) will report its fourth quarter earnings on January 29th. The company had earlier lowered the revenue guidance for the year primarily due to its Los Angeles Dodgers regional sports network failing to gain carriage with major Pay-TV operators. [1] We expect the company’s Pay-TV subscriber base to continue to shrink in this quarter and beyond. In contrast, we expect steady 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 approximately 23% for the first nine months of 2014. [2] We expect this uptrend to continue in the near term, driven by higher demand of bundled packages especially for small and medium sized enterprises.

See our complete analysis for Time Warner Cable

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Pay-TV Subscriber Losses Will Decline

We estimate that the Pay-TV operations contribute close to 39% 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 by the third quarter of 2014. [2] 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. 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 can be justified over the steep price increases by the content owners, the high demand for their programming gives the content owners the upper hand.

But the company has been able to slow the pace of the decline somewhat in 2014. The company’s subscriber base has declined by around 370,000 for the first nine months of 2014, which is significantly less than the 616,000 subscribers the company lost for the same period a year ago. 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 10.8 million, translating into pay-TV revenues of $8.9 billion. This forecast takes into account 2% growth in average monthly subscription fee (ARPU). It must be noted that ARPU declined by over 1% in 2013.

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.

Broadband Will Continue Its Strong Growth

We estimate that the 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 and its broadband subscriber base is around 12 million as of September 2014, as compared to less than 8 million in 2007. The company added 67,000 broadband subscribers during the last three quarters. During the same period, the company also saw a 7% growth in the average monthly subscription fees. [2] We expect revenue for the whole year to grow by 12% and come in at around $7.78 billion, fuelled by continued growth in the subscriber base as well as the average monthly subscription fees.

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. due to a growing need for speed and connectivity. 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, in part driven by its triple play bundles.

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Notes:
  1. Time Warner Cable’s (TWC) CEO Robert Marcus on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 30, 2014 []
  2. Time Warner Cable’s SEC Filings [] [] []