Time Warner Cable Q1 Earnings: Record Subscriber Growth; Management Mum On M&A Activity

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Time Warner Cable

Time Warner Cable (NYSE:TWC) reported its first quarter earnings on April 30th. The subscriber numbers were very positive for the company. Time Warner Cable (TWC) added 315,000 high-speed data subscribers in what was the company’s best quarter in terms of subscriber additions since Q1 2007. [1] The company also registered its first quarterly increase in its pay-TV subscriber base since  Q1 2009. Additionally, TWC experienced their best quarter ever in terms of net subscriber additions in residential customer relationships, residential triple play and voice.

The company’s overall revenues increased by 3.5% to $5.78 billion for the quarter, but missed the consensus estimate by a slim $50 million. [1] The company’s business services segment continued to outperform with 17% revenue gains, driven by growth in the high-speed data and voice segments. We expect this uptrend to continue in the near term due to higher demand for bundled packages, especially for small and medium sized enterprises. Capital Expenditures increased by 36%, primarily due to the company’s investments in improving network reliability, upgrading older equipment and expanding its network. [1]

Additionally, TWC’s management refused to talk about any M&A activity in detail. [2]  Comcast (NASDAQ:CMCSA) recently announced the termination of its merger agreement with TWC due to severe regulatory pressure. [3] Charter Communications (NASDAQ:CHTR) has consistently expressed interest in acquiring TWC and Charter’s CEO Thomas Rutledge will reportedly meet with TWC’s counterpart Rob Marcus soon to discuss a possible deal. [4]

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See our complete analysis for Time Warner Cable

Pay-TV Subscriber Base Registers First Quarterly Increase Since 2009

We estimate that the pay-TV business contributes around 30% of TWC’s stock value. The pay-TV subscriber base grew by 30,000 subscribers during the first three months of 2015. [1] This is the first instance of quarterly growth in the subscriber base since 2009. However, pay-TV revenues stood at $2.56 billion for the quarter, down 1% from the prior year quarter. [1]

The pay-TV industry in general has been losing subscribers consistently in the last few years amidst fierce competition from alternative platforms in a saturated market. However, the pace of decline for TWC has been much higher than its peers. This can be attributed to lower customer satisfaction and frequent blackouts of various networks in the past. The company was able to stem the rate of decline in 2014 and has actually added subscribers in Q1 2015. It will be interesting to see if it can maintain this trend. This task will be extremely difficult as costly pay-TV bills are inducing customers to either drop their connection or shave the existing plans. For instance, popular cable networks such as ESPN and TNT have seen more than 4% decline in penetration over the past four years. [5] More and more people are embracing lower cost options, including free programming and online video services such as Hulu, Netflix and Amazon Prime. TWC has also not shown any inclination to pursue cost efficient skinny-bundles, similar to those introduced by rival Verizon. The company has stated that it does not want to be a pioneer on this initiative, but will be a fast follower if the trend catches on. [2]

High speed Data Continues On its Merry Way

We estimate that high-speed data segment contributes close to 47% to TWC’s stock value. The segment’s residential revenues increased by 9% to $1.7 billion while its business services revenues jumped 23% to $376 million during the quarter. [1] This can be attributed to continued growth both in ARPU and the subscriber base. The ARPU for residential high-speed data segment increased approximately 3.2% to $47.82 in Q1 2015. The high-speed internet business has remained the leading growth factor for cable companies for quite some time now. There is a boom in demand for high-speed internet in the U.S. due to a growing need for speed and connectivity. Currently, high-speed internet penetration in the U.S. homes stands at 73%, leaving enough room for growth. [6] In the long run we estimate high-speed internet will penetrate over 95% U.S. homes. This will benefit the cable industry in particular as it accounts for approximately 60% of the U.S. high-speed internet market. ((3 MILLION ADDED BROADBAND FROM TOP PROVIDERS IN 2014, March 5, 2015, Leichtman Research Group))

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Notes:
  1. Time Warner Cable’s SEC Filings [] [] [] [] [] []
  2. Time Warner Cable (TWC) Robert D. Marcus on Q1 2015 Results – Earnings Call Transcript, April 30, 2015, Seeking Alpha [] []
  3. COMCAST/TIME WARNER CABLE/CHARTER TRANSACTIONS TERMINATED, April 24, 2015, Comcast Press Release []
  4. Charter, Time Warner Cable CEOs to meet next week to talk deal: Source, 29 April 2015, CNBC []
  5. Pay TV’s New Worry: ‘Shaving’ the Cord, The Wall Street Journal []
  6. The State of the Internet, Akamai []